Financial Management
Achieving Financial Statement Auditability in the Department of Defense Gao ID: GAO-09-373 May 6, 2009Since the first financial statement audit was attempted at a major Department of Defense (DOD) component over 20 years ago, GAO and DOD auditors have continued to report significant weaknesses in the department's ability to provide timely, reliable, consistent, and accurate information for management analysis, decision-making, and reporting. DOD has undertaken a number of initiatives over the years, such as the Financial Improvement Initiative in 2003, to improve the department's business operations, including financial management, and achieve clean financial statement audit opinions. However, these initiatives have met with limited success. In 2005, the DOD Comptroller established the DOD Financial Improvement and Audit Readiness (FIAR) Directorate to manage DOD-wide financial improvement efforts and to integrate those efforts with transformation activities, such as those outlined in the Enterprise Transition Plan, across the department. The components report accomplishments and progress against planned corrective actions to the FIAR Directorate for reporting in the FIAR Plan. Congress asked GAO to analyze the department's FIAR Plan to identify any areas where improvements are needed to enhance the plan's effectiveness as a management tool for guiding, monitoring, and reporting on the department's efforts to identify and resolve its financial management weaknesses and achieve financial statement auditability.
In 2004, we reported that DOD lacked a comprehensive and integrated strategic plan with key milestones, measures/metrics, accountability mechanisms, or cost estimates for achieving financial statement auditability. According to best practices, a strategic plan should include the following key elements: (1) provide a comprehensive view of performance, including the establishment of a baseline of current operational functions, capabilities, and performance against which progress toward a defined goal or objective can be measured; (2) align goals and measures with departmentwide goals, and cascading goals and measures to lower organizational levels; (3) establish timelines and demonstrate results; (4) assign accountability for achieving results; and (5) link resource needs to performance. While the FIAR Plan identifies three goals for improving DOD financial information and achieving audit readiness, it does not contain the key elements of a strategic plan that we have previously reported as necessary for successful DOD business transformation. During our review of DOD's September 2008 FIAR Plan, we identified the following areas that the department needs to address to improve the FIAR Plan as a strategic and management tool: (1) clear guidance is needed in developing and implementing improvement efforts; (2) no clear baseline exists against which incremental progress can be measured; (3) linkages between FIAR Plan goals and corrective actions and reported accomplishments are not always clear; (4) clear results-oriented metrics for measuring and reporting incremental progress are needed, and (5) accountability is not clearly defined or assigned and resources budgeted and consumed are not identified. We also identified recent actions the department is taking to begin to address many of the issues we have identified above.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-373, Financial Management: Achieving Financial Statement Auditability in the Department of Defense
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
May 2009:
Financial Management:
Achieving Financial Statement Auditability in the Department of
Defense:
GAO-09-373:
Contents:
Letter:
Results in Brief:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Briefing Slides from the March 11, 2009, and March 27,
2009, Briefing to the Senate Homeland Security and Governmental Affairs
Staff:
Appendix II: Comments from the Under Secretary of Defense
(Comptroller):
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 6, 2009:
Congressional Requesters:
Since the first financial statement audit was attempted at a major
Department of Defense (DOD) component over 20 years ago, GAO and DOD
auditors have continued to report significant weaknesses in the
department's ability to provide timely, reliable, consistent, and
accurate information for management analysis, decision-making, and
reporting. DOD has undertaken a number of initiatives over the years,
such as the Financial Improvement Initiative in 2003, to improve the
department's business operations, including financial management, and
achieve clean financial statement audit opinions. However, these
initiatives have met with limited success. In 2005, the DOD Comptroller
established the DOD Financial Improvement and Audit Readiness (FIAR)
Directorate[Footnote 1] to manage DOD-wide financial improvement
efforts and to integrate those efforts with transformation activities,
such as those outlined in the Enterprise Transition Plan,[Footnote 2]
across the department. The components report accomplishments and
progress against planned corrective actions to the FIAR Directorate for
reporting in the FIAR Plan.
You asked us to analyze the department's FIAR Plan to identify any
areas where improvements are needed to enhance the plan's effectiveness
as a management tool for guiding, monitoring, and reporting on the
department's efforts to identify and resolve its financial management
weaknesses and achieve financial statement auditability. On March 11,
2009 and on March 27, 2009, we briefed your offices on the results of
this work. This letter summarizes the information provided during the
briefing and the attached briefing slides have been updated with
additional information as of April 24, 2009. The full briefing,
including our scope and methodology, can be found in appendix I.
We performed our review from October 2008 through May 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
In 2004, we reported that DOD lacked a comprehensive and integrated
strategic plan with key milestones, measures/metrics, accountability
mechanisms, or cost estimates for achieving financial statement
auditability.[Footnote 3] According to best practices, a strategic plan
should include the following key elements:
* provide a comprehensive view of performance, including the
establishment of a baseline of current operational functions,
capabilities, and performance against which progress toward a defined
goal or objective can be measured;
* align goals and measures with departmentwide goals, and cascading
goals and measures to lower organizational levels;
* establish timelines and demonstrate results;
* assign accountability for achieving results; and:
* link resource needs to performance.[Footnote 4]
While the FIAR Plan identifies three goals for improving DOD financial
information and achieving audit readiness, it does not contain the key
elements of a strategic plan that we have previously reported as
necessary for successful DOD business transformation. During our review
of DOD's September 2008 FIAR Plan, we identified the following areas
that the department needs to address to improve the FIAR Plan as a
strategic and management tool:
* clear guidance is needed in developing and implementing improvement
efforts;
* no clear baseline exists against which incremental progress can be
measured;
* linkages between FIAR Plan goals and corrective actions and reported
accomplishments are not always clear;
* clear results-oriented metrics for measuring and reporting
incremental progress are needed, and:
* accountability is not clearly defined or assigned and resources
budgeted and consumed are not identified.
We also identified recent actions the department is taking to begin to
address many of the issues we have identified above.
Clear Guidance Is Needed in Developing and Implementing Improvement
Efforts:
Although DOD's September 2008 FIAR Plan emphasizes the importance of
activities to identify and correct the department's financial
management weaknesses and achieve financial statement auditability,
further clarity is needed. We found that the FIAR Plan does not provide
clear guidance to DOD components for developing consistent and
compatible FIPs. For example, while the FIAR Plan provides examples of
the types of activities that should occur within DOD components to
identify financial management weaknesses, it is unclear which specific
office or organization within an entity is accountable for performing
these activities or tasks. This delineation of accountability is of
particular importance in situations in which a policy, process and
control, or system is controlled at the department level and is not
within a component's control to change. Additionally, it is unclear
what process or methodology a component should apply to identify and
coordinate FIP efforts with those of other ongoing transformation
efforts within the department or a component such as efforts to achieve
total asset visibility.[Footnote 5] The lack of clear guidance in
developing and implementing improvement efforts can result in premature
or unjustified management assertions regarding the audit readiness of
reported financial information based on inadequate and insufficient
corrective actions taken in support of assertions.
No Clear Baseline Exists against Which Incremental Progress Can Be
Measured:
The FIAR Plan does not establish a baseline of the department's
financial management weaknesses and capabilities--such a baseline could
be used to measure incremental progress toward achieving an estimated
milestone date established for each component and the department. For
example, the FIAR Plan does not identify or outline the department's
and/or key components' current financial management weaknesses and
capabilities in a manner that would facilitate, among other things, (1)
a clear understanding of needed improvements in DOD's or a component's
policies, processes and controls, systems and data, and human capital
that are needed to address these weaknesses and achieve the FIAR Plan's
goals; (2) identification of gaps in planned corrective actions; and
(3) establishment of a realistically attainable date, by component and
at the department level, for achieving financial statement
auditability. The lack of a clear baseline has an adverse impact on the
ability of DOD management and other oversight bodies, such as Office of
Management and Budget (OMB) and the Congress, to understand the status
of improvement efforts and what additional actions are needed.
Linkages between FIAR Plan Goals and Corrective Actions and Reported
Accomplishments Are Not Always Clear:
The FIAR Plan does not establish linkages between its goals and the
corrective actions and accomplishments reported in the plan.
Specifically, it does not clearly define how corrective actions or
accomplishments identified in the plan contribute individually or
collectively within a component or at the department level to address a
defined weakness, provide a financial management capability, or achieve
a FIAR goal. Without better integration of FIAR Plan goals and
corrective actions and reported accomplishments, it will be difficult
for DOD management and other oversight bodies to clearly assess the
sufficiency of corrective actions and reported accomplishments in
addressing the department's financial management weaknesses and
achieving financial statement auditability.
Clear Results-Oriented Metrics for Measuring and Reporting Incremental
Progress Are Needed:
The FIAR Plan does not utilize clear results-oriented metrics to
measure and report corrective actions and accomplishments in a manner
that clearly demonstrates how they contribute individually or
collectively to addressing a defined weakness, providing a certain
capability, or achieving a FIAR goal by an estimated milestone date
established for each component and the department. For example, many of
the corrective actions in the September 2008 FIAR Plan update were
reported as 100 percent complete. However, the FIAR Plan provides no
description as to how these completed actions contributed individually
or collectively to addressing a specific weakness, providing a
capability, or achieving a FIAR goal, including what, if any,
corrective actions remain. The lack of results-oriented performance
measures undermines the department's ability to effectively monitor,
measure, and report progress and hold responsible individuals, offices,
or organizations accountable.
Accountability Is Not Clearly Defined or Assigned and Resources
Budgeted and Consumed Are Not Identified:
The National Defense Authorization Act for Fiscal Year 2008[Footnote 6]
established the DOD Chief Management Officer (CMO) and the military
service CMO positions responsible for efficient and effective business
operations within DOD, including the development of a strategic
management plan covering those operations and procedures to monitor its
progress. Although the FIAR Plan and component FIPs are intended to
improve the effectiveness and efficiency of DOD's financial management
operations, the FIAR Plan does not identify and describe the oversight
roles and responsibilities of DOD's CMO and military service CMOs will
have over the financial improvement efforts occurring within the
department. The recent establishment of a CMO within the department and
its military services was intended to help foster transformation of the
department's business operations, including financial management,
through an integrated approach. The integration of the CMO into the
FIAR Plan's efforts to transform the department's financial management
operations is of particular importance given the need for sustained and
focused leadership. Since its establishment in 2005, the FIAR
Directorate has been led by five different directors. By not defining
the roles and responsibilities of the CMO in achieving the FIAR Plan
goals, the department's financial community may not have the executive
leadership and authority needed to achieve transformation in related
business operations, such as acquisition and logistics, which impact
financial management but are not within the operational control of the
department's financial management community.
Additionally, the FIAR Plan also does not assign accountability for
achieving results to specific offices or organizations within the
department, such as the Property and Equipment Policy Office within the
Office of the Under Secretary of Defense for Acquisition, Technology,
and Logistics and/or at lower levels within a DOD component, such as
the Deputy Chief of Staff for Logistics, Installations, and Mission
Support within the Air Force. Further, the FIAR Plan does not identify
and report on the resources budgeted and utilized to achieve a specific
corrective action, incremental result, capability, or a FIAR Plan goal.
Without formally assigning accountability for results to specific
offices and organizations within the department and understanding the
cost of improvement efforts, DOD lacks assurance that sufficient and
sustainable corrective actions will be taken to address its financial
management weaknesses in the most cost-effective manner.
Recent FIAR Directorate Actions:
The Acting FIAR Director acknowledged that the FIAR Plan does not yet
provide the department with a strategic plan or approach, including a
sequence of key activities and their dependencies, for addressing DOD's
financial management weaknesses and achieving financial statement
auditability. To its credit, the FIAR Directorate is currently in the
process of making improvements to the FIAR Plan and component FIPs that
it believes will collectively begin to address many of the issues we
have identified above. However, the Acting FIAR Director stated that
this will be a long-term effort and its effects on the FIAR Plan will
be gradual. According to the Acting FIAR Director, the goals of these
recent actions are to (1) elevate the level of understanding within the
department and its components of the actions needed to identify and
address financial management weaknesses, and achieve and sustain
financial statement auditability; (2) improve standardization and
completeness of FIP activities in identifying and addressing financial
management weaknesses; (3) aid in defining the sequence of key
activities and their dependencies at the component level, so that the
critical path for achieving financial statement auditability can also
be defined at the department level; and (4) enhance the FIAR
Directorate's ability to guide, monitor, and report on improvement
efforts and incremental progress.
Conclusions:
The FIAR Plan is intended to provide DOD components with a strategic
plan for addressing the department's financial management weaknesses
and achieving clean financial statement audit opinions. Additionally,
the FIAR Plan is intended to provide DOD management, OMB, and the
Congress with an overview of the department's financial management
improvement efforts and incremental progress toward addressing DOD's
financial management weaknesses and achieving financial statement
auditability by estimated milestone dates established for each
component and the department. As acknowledged by the department, the
FIAR Plan does not yet provide the department or its components with
clear and consistent guidance for implementing, measuring, and
sustaining corrective actions, and reporting incremental progress
toward achieving the FIAR Plan's goals. Additionally, specificity is
needed in the FIAR Plan regarding guidance, metrics, linkage of
corrective actions and accomplishments to goals, accountability,
resources, and governance to enhance the ability of the FIAR
Directorate to guide, monitor, and report on the department's efforts
to address its financial management weaknesses and achieve financial
statement auditability.
To its credit, the FIAR Directorate has initiated actions, consistent
with several of our recommendations, to improve the FIAR Plan through
its efforts to (1) standardize component-level FIPs and (2) identify
and address gaps in corrective actions planned at the component level
and improve progress reporting. However, this will be a long-term
effort and its effects on the FIAR Plan will be gradual. These actions
are an important step toward enhancing the FIAR Plan as a strategic and
management tool for improving oversight of corrective actions and the
FIAR Directorate's ability to report on incremental progress to DOD
management, OMB, and the Congress. Because the component FIPs provide
the detailed steps that feed into the FIAR Plan, it is critical for the
FIAR Directorate to have effective management oversight and monitoring
and to ensure reliable reporting of the components' financial
management improvement efforts. Given the importance of financial
management to the department's business operations, the DOD and
military service CMOs should have defined roles and responsibilities in
overseeing and monitoring financial management improvement efforts.
Recommendations for Executive Action:
To increase the FIAR Plan's effectiveness as a strategic and management
tool for guiding, monitoring, and reporting on financial management
improvement efforts and increasing the likelihood of meeting the
department's goal of financial statement auditability, we recommend
that the Secretary of Defense direct the DOD CMO to ensure that the
military service CMOs and the DOD Comptroller's Acting FIAR Director
work jointly, as appropriate, to take the following six actions:
1. Issue guidance to standardize the development of the FIPs, including
their format and frequency, to aid in ensuring the:
* sufficiency of corrective actions through the identification of
performance gaps in corrective actions planned within and between
components;
* sharing of successful methodologies developed and implemented to
address a financial management weakness or achieve a defined
capability; and:
* reliability of progress reporting, including clear linkages and
descriptions of how the corrective action, individually or collectively
contributes to achievement of a defined capability or goal by an
estimated milestone date established for each component and the
department.
2. Establish a baseline of financial management capabilities and
weaknesses at the component level, and ultimately at the department
level, that can be used to:
* obtain a clear understanding of needed improvements in DOD's or a
component's policies, processes and controls, systems and data, and
human capital that are needed to address these weaknesses and support
relevant management assertions (i.e., existence or occurrence,
completeness, valuation, rights and obligations, and presentation and
disclosure) regarding the reliability of reported financial
information;
* identify gaps in planned corrective actions; and:
* establish a realistically attainable date, by component and at the
department level, for achieving financial statement auditability.
3. Establish clear results-oriented metrics within the FIAR Plan and
component FIPs for measuring and reporting quantifiable incremental
results toward achieving defined financial management capabilities,
addressing a specific weakness, and/or achieving FIAR Plan goals by an
estimated milestone date established for each component and the
department.
4. Describe in the FIAR Plan the oversight roles and responsibilities,
if any, of the DOD CMO and military service CMOs over FIAR Plan and FIP
improvement efforts, as appropriate.
5. Assign accountability in the FIAR Plan for achieving results to
specific offices or organizations:
* within the department, such as the Property and Equipment Policy
Office within the Office of the Under Secretary of Defense
(Acquisition, Technology, and Logistics); and/or:
* at lower levels within a DOD component, such as the Deputy Chief of
Staff for Logistics, Installations, and Mission Support within the Air
Force.
6. Provide visibility to DOD management and the Congress, within each
FIAR Plan update, of resources budgeted and spent to address a specific
weakness or achieve specific incremental improvements in the
department's financial management capabilities.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of Defense and
received written comments from the Under Secretary of Defense
(Comptroller), which are reprinted in appendix II. Overall, DOD
concurred with our recommendations and identified specific actions that
are either completed, underway, or planned.
DOD acknowledged the importance of properly allocating and utilizing
resources to address financial management weaknesses. The department
indicated that it has modified the component level financial
improvement plans to begin collecting resource information, but
indicated that it may be cost prohibitive to identify and track
resources related to addressing specific weaknesses. Given the finite
resources available for financial management improvement, we believe
that it is incumbent upon the department to identify and use cost
information where practical in authorizing and prioritizing corrective
actions to ensure that the department's limited business transformation
resources are targeted at those actions that will result in long-term
sustained financial management improvements.
We are sending copies of this report to the subcommittee. We are also
sending copies of this report to the Secretary of Defense, the Deputy
Secretary of Defense/Chief Management Officer, the Under Secretary of
Defense (Comptroller)/Chief Financial Officer, the Under Secretary of
the Army/Chief Management Officer, the Under Secretary of the Navy/
Chief Management Officer, the Under Secretary of the Air Force/Chief
Management Officer, and OMB's Office of Federal Financial Management.
This report is available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov]. Should you or your staff have any questions
concerning this report, please contact me at (202) 512-9095 or
khana@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Key contributors to this report were Evelyn Logue, Assistant
Director; Darby Smith, Assistant Director; F. Abe Dymond, Assistant
General Counsel; Richard Cambosos; Jamie Haynes; and Lauren Catchpole.
Signed by:
Asif A. Khan:
Director:
Financial Management and Assurance:
List of Congressional Requesters:
The Honorable Thomas R. Carper:
Chairman:
The Honorable John McCain:
Acting Ranking Member:
Subcommittee on Federal Financial Management, Government Information,
Federal Services, and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable George V. Voinovich:
Acting Ranking Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Tom Coburn, M.D.
United States Senate:
[End of section]
Appendix I: Briefing Slides from the March 11, 2009, and March 27,
2009, Briefing to the Senate Homeland Security and Governmental Affairs
Staff:
Financial Management: Achieving Financial Statement Auditability in the
Department of Defense:
Briefing to Congressional Requesters:
March 11, 2009, and March 27, 2009 [Updated April 24, 2009]:
Briefing Agenda:
* Introduction;
* Objective;
* Summary of Findings;
* Background;
* Findings;
* Conclusions;
* Recommendations;
* Agency Comments and Our Evaluation:
* Scope and Methodology.
Introduction:
Since the first financial statement audit was attempted at a major
Department of Defense (DOD) component over 20 years ago, GAO and DOD
auditors have continued to report significant weaknesses in DOD‘s
ability to provide timely, reliable, consistent, and accurate
information for management analysis, decision-making, and reporting.
DOD has undertaken a number of initiatives over the years, such as the
Financial Improvement Initiative in 2003, to improve the department‘s
business operations, including financial management, and achieve clean
financial statement audit opinions. However, these initiatives have met
with limited success.
In 2005, the DOD Comptroller established the DOD Financial Improvement
and Audit Readiness (FIAR) Directorate to manage DOD-wide financial
improvement efforts and to integrate those efforts with transformation
activities, such as those outlined in the department‘s Enterprise
Transition Plan, across the department. DOD considers the Enterprise
Transition Plan its department-wide plan for business transformation.
The FIAR Directorate is responsible for preparing the FIAR Plan to
comply with provisions in the National Defense Authorization Act
(NDAA)for Fiscal Year 2002 and subsequent provisions in the
Authorization Acts for fiscal years 2006 and 2007.
The FIAR Plan is the department‘s strategic plan and management tool
for guiding, monitoring, and reporting on the department‘s financial
management improvement efforts and communicating incremental progress
in addressing its financial management weaknesses and achieving
financial statement auditability. The plan is updated and provided to
DOD management, the Office of Management and Budget (OMB), and the
Congress twice a year.
The plan has three main goals: (1) provide timely, reliable, accurate,
and relevant financial information; (2) sustain improvements through an
effective internal control program;[Footnote 7] and (3) achieve
unqualified (clean) audit opinions on DOD‘s financial statements.
To achieve its goals, the FIAR Plan utilizes a bottom-up approach in
which DOD components are responsible for developing and implementing
component-level financial improvement plans (FIP) to identify and
address their financial management weaknesses through sustained
improvements and achieve financial statement auditability. The
components report accomplishments and progress against planned
corrective actions to the FIAR Directorate for reporting in the FIAR
Plan.
[End of section]
Objective:
The Chairman, Acting Ranking Member, and Former Ranking Member on
Federal Financial Management, Government Information, Federal Services,
and International Security, and the Acting Ranking Member, Subcommittee
on Oversight of Government Management, the Federal Workforce and the
District of Columbia, Senate Committee on Homeland Security and
Governmental Affairs, requested GAO analyze the department‘s FIAR Plan
to identify any areas where improvements are needed to enhance the plan‘
s effectiveness as a management tool for guiding, monitoring, and
reporting on the department‘s efforts to identify and resolve its
financial management weaknesses and achieve financial statement
auditability.
Our audit scope and methodology are presented at the end of this
briefing.
[End of section]
Summary of Findings:
The FIAR Plan identifies three main goals for improving DOD financial
information and achieving audit readiness. However, as a strategic plan
for addressing DOD‘s financial management weaknesses and achieving
financial statement auditability, we found that the FIAR Plan does not:
* provide clear guidance to DOD components for developing and
implementing improvement efforts;
* establish a baseline of the department's financial management
weaknesses and capabilities against which incremental progress toward
achieving an estimated milestone date established for each component
and the department can be measured;
* establish linkages between FIAR Plan goals and the corrective actions
and accomplishments reported in the plan;
* utilize clear results-oriented metrics to measure and report
corrective actions and accomplishments in a manner that clearly
demonstrates how they contribute, individually or collectively, toward
addressing a defined weakness, providing a certain capability, or
achieving a FIAR goal by an estimated milestone date established for
each component and the department;
* describe the oversight roles and responsibilities of the DOD Chief
Management Officer (CMO) and military service CMOs over the FIAR Plan
and FIP improvement efforts, as appropriate;
* assign accountability for achieving results to specific offices or
organizations within:
- the department, such as the Property and Equipment Policy Office with
the Under Secretary of Defense for Acquisition, Technology, and
Logistics and/or;
- at lower levels within a DOD component, such as the Deputy Chief of
Staff for Logistics, Installations, and Mission Support within the Air
Force; and;
* identify and report on the resources budgeted and utilized to achieve
a specific corrective action, incremental result, capability, or FIAR
Plan goal.
The Acting FIAR Director acknowledged that the FIAR Plan does not yet
provide the department with a strategic plan or approach, including a
sequence of key activities and their dependencies, for addressing DOD‘s
financial management weaknesses and achieving financial statement
auditability.
To its credit, the FIAR Directorate is currently in the process of
making improvements to the FIAR Plan and component FIPs that it
believes will collectively begin to address many of the issues we have
identified above. However, the Acting FIAR Director stated that this
will be a long-term effort and its effect on the FIAR Plan will be
gradual. According to the Acting FIAR Director, the FIAR Directorate‘s
objective is to:
* improve standardization and completeness of FIP activities in
identifying and addressing financial management weaknesses;
* aid in defining the sequence of key activities and their dependencies
at the component level, so that the critical path for achieving
financial statement auditability can also be defined at the department
level; and;
* enhance the FIAR Directorate‘s ability to guide, monitor, and report
on improvement efforts and incremental progress.
[End of section]
Background:
DOD‘s financial management and related business operations and systems
problems are pervasive, complex, long-standing, and challenging to
resolve.
The nature and severity of DOD‘s financial management problems
adversely affect the department‘s ability to:
* control costs, ensure basic accountability over its tangible assets
and other resources, anticipate future costs and claims on the budget,
measure performance, maintain funds control, prevent fraud, and address
pressing management issues, including supporting the warfighters and
their families; and;
* obtain clean financial statement audit opinions.
To draw attention to the need to address these weaknesses, GAO
designated DOD financial management and business systems modernization
(a key element to successful financial management transformation) as
high-risk areas in 1995. DOD‘s approach to business transformation was
added to the high-risk list in 2005. These areas remain on GAO‘s high-
risk list today.[Footnote 8]
In 2003, DOD began the Financial Improvement Initiative (the department‘
s predecessor to its FIAR effort) with the goal of achieving a DOD-wide
unqualified (clean) audit opinion on its fiscal year 2007 financial
statements.
In 2004, we reported that DOD‘s Financial Improvement Initiative lacked
a clear and realistic plan to make its 2007 unqualified audit opinion
goal a reality.[Footnote 9] Key issues identified included:
* the absence of a comprehensive, integrated plan or strategy with key
milestones, measures/metrics, accountability mechanisms, or cost
estimates;
* limited linkage between component efforts and ongoing business
transformation efforts, such as the department‘s Enterprise Transition
Plan; and;
* the absence of management oversight/monitoring structures and
processes to ensure component efforts resulted in sustained progress.
Key Legislation:
Various statutes[Footnote 10] require the department to:
* improve its financial management systems, processes, and controls to
ensure that complete, reliable, consistent, and timely information is
prepared and responsive to the financial information needs of agency
management and oversight bodies, and;
* prepare and issue audited financial statements.
Key Legislation”Fiscal Year 2002 NDAA, Section 1008:
Section 1008 of the NDAA for Fiscal Year 2002 requires DOD to minimize
resources to develop, compile, report, and audit unreliable financial
statements.
Section 1008 also states that when DOD is able to certify to the DOD
Inspector General (IG) that a financial statement for a fiscal year is
reliable, DOD may expend resources to develop, compile, report, and
audit the statement and the statements of subsequent fiscal years.
Pursuant to the requirements in section 1008 of the NDAA for Fiscal
Year 2002, DOD has asserted in its annual report for the last 7 years
that the department is unable to provide adequate evidence supporting
material amounts in its financial statements.
Section 1008 of the Fiscal Year 2002 NDAA also requires DOD to submit
an annual report[Footnote 11] to defense committees, OMB, the
Department of the Treasury (Treasury), GAO, and the DOD IG:
(1) concluding on whether DOD policies, procedures, and systems support
financial statement reliability, and the expected reliability of each
DOD financial statement; and;
(2) summarizing specific sections of the annual financial management
plan (the FIAR Plan) that:
(a) detail the priorities, milestones, and measures of success that
apply to the preparation of the financial statements,
(b) detail the planned improvements in process that are to be
implemented within 12 months after the date of the report, and,
(c) provide an estimate of when each financial statement will convey
reliable information.
Key Legislation”Fiscal Year 2006 NDAA, Section 376:
Section 376 of the NDAA for Fiscal Year 2006:
* Limited DOD‘s authority to obligate or expend any funds for the
purpose of any financial improvement activity related to the
preparation, processing, or audit of financial statements until the
Secretary submits to congressional defense committees a comprehensive
and integrated financial management improvement plan (the FIAR Plan)
that:
- describes specific actions to be taken to correct financial
management deficiencies that impair the ability of the DOD to prepare
timely, reliable, and complete financial information; and;
- systematically ties such actions to process and control improvements
and business system modernization efforts described in the business
enterprise architecture[Footnote 12] and enterprise transition plan
required by 10 U.S.C. § 2222.
Further, section 376 requires that the Secretary of Defense provide a
written determination that each of the financial management improvement
activities undertaken is:
* consistent with the financial improvement plan submitted; and;
* likely to improve internal controls or otherwise result in sustained
improvements in the ability of the department to produce timely,
reliable, and complete financial management information.
Exception: The limitation regarding the authority to obligate or expend
funds does not apply to activities directed at assessing the adequacy
of internal controls and remediating any inadequacy identified pursuant
to such an assessment.
DOD has provided FIAR Plan updates to the defense committees and OMB to
comply with the requirements of these and subsequent NDAA provisions.
[End of section]
Findings:
Clear Guidance Is Needed in Developing and Implementing Improvement
Efforts:
Although DOD‘s September 2008 FIAR Plan emphasizes the importance of
activities to identify and correct the department‘s financial
management weaknesses and achieve financial statement auditability,
improved clarity is needed to ensure that management assertions
regarding the reliability of reported financial information are
adequately supported.
We found that the FIAR Plan does not provide clear guidance to the DOD
components for developing and implementing consistent and compatible
FIPs. For example, while the FIAR Plan provides examples of the types
of activities that should occur within DOD components to identify
financial management weaknesses, it is unclear:
* which specific office or organization within an entity is accountable
for performing these activities or tasks, particularly in situations
where a policy, process and control, or system that should be examined
is controlled at the department level and is not within a component‘s
control to change, and;
* what process or methodology a component should apply to identify and
coordinate FIP efforts with those of other on-going transformation
efforts within the department or a component such as efforts to achieve
total asset visibility.[Footnote 13]
Moreover, our interviews with FIAR Directorate and military service FIP
personnel found that the department and its components lack a clear and
consistent understanding of how:
* key elements, such as policies, processes and controls, systems and
data, and human capital of a component‘s financial management
operations should be assessed to identify weaknesses,[Footnote 14] and;
* these key elements contribute individually and/or collectively in
providing the audit evidence needed to support management assertions
(including existence or occurrence, completeness, valuation, rights and
obligations, and presentation and disclosure) regarding the reliability
of financial information.
Based upon our review of the FIAR Plan, it appears that clearer
guidance is needed to aid both component and department-level personnel
in ensuring the adequacy and sufficiency of corrective actions taken in
supporting management assertions regarding reported financial
information.
Various FIAR Plan updates have reported that certain component line
items have achieved audit readiness and were approved for audit by
component management and the FIAR Directorate. However, subsequent
efforts to validate management‘s assertions indicated that approval was
not warranted and audit readiness would not be achieved until a much
later time.
According to the Acting FIAR Director, the department is increasing its
role in assessing the adequacy of a component‘s basis for asserting
audit readiness prior to approving resources to validate a component‘s
audit readiness.
For example, in its June and September 2006 FIAR Plans, the FIAR
Directorate reported the following accomplishment: ’Air Force had
corrected its financial deficiencies for Fund Balance with Treasury
(General Fund) and has been approved for audit.“
However, it was subsequently determined that the Air Force did not
fully consider all the associated requirements for asserting to the
reliability of its Fund Balance with Treasury (General Fund) line item.
According to the Acting FIAR Director, the Air Force has developed a
plan to begin addressing these weaknesses. In the department‘s
September 2008 FIAR Plan, DOD reported that Air Force‘s Fund Balance
with Treasury account will not achieve audit readiness until 2013.
Additionally, the June 2007 FIAR Plan reported that DOD‘s ’military
equipment baseline valuations were correct, that all military equipment
that should be capitalized has been valued, and that DOD owns and has
rights to all capitalized military equipment.“ This assertion was made
despite several sources of information, including an internal
verification and validation study[Footnote 15] and DOD auditor reports,
[Footnote 16] which contradicted the basis for this assertion,
including the department‘s ability to sustain its baseline valuation.
Efforts are currently under way at the component level to address the
shortcomings in the department‘s initial efforts to establish and
sustain a military equipment valuation baseline.
Current estimates in the September 2008 FIAR Plan state that
auditability of military equipment will be achieved in 2014 for the
Army and the Navy and in 2016 for the Air Force.
No Clear Baseline Exists against Which Incremental Progress Can Be
Measured:
The FIAR Plan does not establish a baseline of the department‘s and/or
key components‘ current financial management weaknesses and
capabilities in a manner that would facilitate:
* a clear understanding of needed improvements in DOD‘s or a
component‘s policies, processes and controls, systems and data, and
human capital that are needed to address these weaknesses and achieve
the FIAR Plan‘s goals;
* identification of gaps in planned corrective actions; and;
* establishment of a realistically attainable date, by component and at
the department level, for achieving financial statement auditability.
Congressional and OMB staff have expressed frustration with the FIAR
plan‘s lack of a baseline from which to assess incremental progress.
Linkages between FIAR Plan Goals and Corrective Actions and Reported
Accomplishments Are Not Always Clear:
The FIAR Plan does not establish linkages between its goals and the
corrective actions and accomplishments reported in the plan.
Specifically, it does not clearly define how corrective actions or
accomplishments identified in the plan contribute individually or
collectively within a component or at the department level to
addressing a defined weakness, providing a financial management
capability, or achieving a FIAR goal. The lack of clear linkage makes
it difficult to clearly assess the sufficiency of corrective actions
and reported accomplishments in addressing DOD‘s financial management
weaknesses and achieving financial statement auditability.
* For example, the September 2008 FIAR Plan identifies a number of
accomplishments related to its efforts to improve visibility into
Global War on Terror (GWOT) funds appropriated, payments made, and
remaining funds available.
* However, the plan provides no discussion as to whether and how its
efforts to improve GWOT funds accountability contribute in a broader
sense to improved funds control DOD-wide and incremental progress
toward achieving financial statement auditability.
Clear Results-Oriented Metrics for Measuring and Reporting Incremental
Progress Are Needed:
The FIAR Plan does not utilize clear results-oriented metrics to
measure and report corrective actions and accomplishments in a manner
that clearly demonstrates how they contribute individually or
collectively to addressing a defined weakness, providing a certain
capability, or achieving a FIAR goal by an estimated milestone date
established for each component and the department.Furthermore, the FIAR
Plan does not identify task dependencies”key to identifying corrective
actions/tasks that must be finished on schedule if the planned result,
capability, or goal is to be achieved as planned. For example, the
September 2008 FIAR Plan update reported or identified:
* that DOD would complete its efforts to establish an interface between
the department‘s item unique identification (IUID) registry and its
military equipment accountability system to automate updates for Navy
small craft by December 31, 2008, but provided no measure of
incremental progress toward achieving this milestone;
* that by March 31, 2010, the Air Force would complete the corrective
action related to military equipment ’Achieve Defense Enterprise
Accounting and Management System-DEAMS-initial operational capability,“
[Footnote 17] but reported no progress toward achieving this goal, even
though the Air Force initiated its effort to acquire DEAMS in August
2003;
* no dependency relationship among any of the corrective actions
identified for the department or any of its components. For example:
- the relationship between components‘ efforts to identify the universe
of units, facilities, property, and/or operations that may have
environmental liabilities and their corrective actions planned to
document that all property, plant, and equipment records have been
reviewed and the liabilities properly recorded is unclear; and;
- the Air Force Audit Agency had completed a review of capital lease
reporting, but the component did not identify whether or how the audit
results affected its planned corrective actions.
Many of the corrective actions in the September 2008 FIAR Plan update
were reported as 100 percent complete. However, the FIAR Plan provides
no description as to how these completed actions contributed
individually or collectively toward addressing a specific weakness,
providing a capability, or achieving a FIAR goal by an estimated
milestone date established for each component and the department and
what corrective actions remain.
The lack of clear, results-oriented performance measures undermines the
department‘s ability to effectively monitor, measure, and report
progress or hold responsible individuals, offices, or organizations
accountable for results.
Roles and Responsibilities of the CMOs Are Not Defined:
The NDAA for Fiscal Year 2008 established the DOD CMO and military
service CMO positions responsible for efficient and effective business
operations within DOD, including the development of a strategic
management plan covering those operations and procedures to monitor its
progress.[Footnote 18]
Although the FIAR Plan and component FIPs are intended to improve the
effectiveness and efficiency of DOD‘s financial management operations,
the FIAR Plan does not identify or describe the roles and
responsibilities:
* the CMO will have in overseeing and monitoring the FIAR Plan and DOD‘
s financial improvement efforts. This is particularly important given
the need for sustained and focused leadership. Since its establishment
in 2005, the FIAR Directorate has been led by five different directors;
* the military service CMOs will have in overseeing and monitoring
their components‘ financial improvement efforts.
The recent establishment of a CMO within the department and its
military services was intended to help foster transformation of the
department‘s business operations, including financial management
through an integrated approach.
By not defining the roles and responsibilities of the CMO in achieving
financial management transformation, the department may not have the
executive leadership and authority needed to influence transformation
in related business operations, such as acquisition and logistics, that
impact financial management, but are not within the operational control
of the department‘s financial management community.
Accountability Is Not Assigned to Specific Offices or Organizations:
The FIAR Plan does not assign accountability for achieving results to
specific offices or organizations within:
* the department, such as the Property and Equipment Policy Office
within the Office of the Under Secretary of Defense for Acquisition,
Technology, and Logistics, and/or;
* at lower levels within a DOD component, such as the Deputy Chief of
Staff for Logistics, Installations, and Mission Support within the Air
Force.
Without formally assigning accountability for results, DOD lacks
assurance that sufficient and sustainable corrective actions will be
taken to address its financial management weaknesses and achieve
financial statement auditability.
Resources Budgeted and Consumed Are Not Identified:
The FIAR Plan does not identify at the department level and/or at the
component level, as appropriate, the resources budgeted and consumed to
achieve a specific corrective action, financial management capability,
or FIAR Plan goals.
As a result, DOD lacks assurance that resources utilized for corrective
actions are directed in the most efficient and cost effective manner.
Recent FIAR Directorate Actions:
The Acting FIAR Director acknowledged that the FIAR Plan does not yet
provide the department with a strategic plan or approach, including a
sequence of key activities and their dependencies, for addressing DOD‘s
financial management weaknesses and achieving financial statement
auditability. To its credit, the FIAR Directorate is currently in the
process of making improvements to the FIAR Plan and component FIPs that
it believes will collectively begin to address many of the issues we
have identified above. However, the Acting FIAR Director stated that
this will be a long-term effort and its effects on the FIAR Plan will
be gradual.
According to the Acting FIAR Director, the goals of these recent
actions are to:
elevate the level of understanding within the department and its
components of the actions needed to identify and address financial
management weaknesses, and achieve and sustain financial statement
auditability;
* improve standardization and completeness of FIP activities in
identifying and addressing financial management weaknesses;
* aid in defining the sequence of key activities and their dependencies
at the component level, so the critical path for achieving financial
statement auditability can also be defined at the department level;
and;
* enhance the FIAR Directorate‘s ability to guide, monitor, and report
on improvement efforts and incremental progress.
To improve its strategic approach, the FIAR Directorate is in the
process of:
1. developing and mandating the use of a standard FIP template to aid
in:
* providing greater comparability of corrective actions/approaches
planned among components for addressing similar issues to ensure
completeness of corrective actions;
* ensuring that weaknesses within the department‘s policies, processes
and controls, and systems and data, are identified and addressed in a
manner, which provides management with a greater level of assurance
that the conditions that may cause an account balance to be misstated”
missing entries, erroneous entries, or that are incorrectly presented
and described in the financial statements”are addressed;
* identifying specific results/progress toward addressing deficiencies
and achieving financial statement auditability;
* identifying the sequence of key activities and their dependencies for
achieving financial statement auditability at the component level,
which is needed to determine the critical path at the department level
and ultimately, when component and departmentwide financial statements
are likely to be auditable; and;
* assigning accountability and identifying resource needs for achieving
corrective actions.
2. establishing a task force of personnel from the military services,
the FIAR Directorate, and the DOD IG (as an independent observer/
advisor) to begin reviewing component approaches directed at
identifying and correcting financial management weaknesses and
achieving auditability.
* DOD intends to focus its efforts initially on the Army‘s FIP efforts
related to fund balance with Treasury and the Navy‘s FIP efforts
related to real property to identify weaknesses and gaps in their
current approaches.
* The components will be required to prepare and implement corrective
action plans and update their FIPs to remediate weaknesses identified
by the task force.
* The task force expects to complete these initial reviews by September
2009.
* According to the Acting FIAR Director, DOD hopes to use these task
force reviews to (1) identify and share areas where the FIP approach
can be improved and (2) develop a methodology that can be applied to
future reviews of other component financial management improvement
areas.
[End of section]
Conclusions:
The FIAR Plan is intended to provide DOD components with a strategic
plan for addressing the department‘s financial management weaknesses
and achieving clean financial statement audit opinions. Additionally,
the FIAR Plan is intended to provide DOD management, OMB, and the
Congress with an overview of the department‘s financial management
improvement efforts and the incremental progress these efforts are
making toward addressing DOD‘s financial management weaknesses and
achieving financial statement auditability by estimated milestone dates
established for each component and the department.
As acknowledged by the department, the FIAR Plan does not yet provide
the department or its components with clear and consistent guidance for
implementing, measuring, and sustaining corrective actions and
reporting incremental progress toward achieving the FIAR Plan‘s goals.
Additional specificity is needed in the FIAR Plan regarding guidance,
metrics, linkage of corrective actions and accomplishments to goals,
accountability, resources, and governance to enhance the ability of the
FIAR Directorate to guide, monitor, and report on the department‘s
efforts to address its financial management weaknesses and achieve
financial statement auditability.
To its credit, the FIAR Directorate has initiated actions, consistent
with several of our recommendations, to improve the FIAR Plan through
its efforts to (1) standardize component level FIPs and (2) identify
and address gaps in corrective actions planned at the component level
and improve progress reporting. However, this will be a long-term
effort and its effects on the FIAR Plan will be gradual.
These actions are an important step toward enhancing the FIAR Plan as a
strategic and management tool for improving oversight of corrective
actions and the FIAR Directorate‘s ability to report on incremental
progress to DOD management, OMB, and the Congress.
Because the component FIPs provide the detailed steps that feed into
the FIAR Plan, it is critical for the FIAR Directorate to have
effective management oversight and monitoring and to ensure reliable
reporting of the components‘ financial management improvement efforts.
Given the importance of financial management to the department‘s
business operations, the department and military service CMOs should
have defined roles and responsibilities in overseeing and monitoring
financial management improvement efforts.
[End of section]
Recommendations for Executive Action:
To increase the FIAR Plan‘s effectiveness as a strategic and management
tool for guiding, monitoring, and reporting financial management
improvement efforts and increasing the likelihood of meeting the
department‘s goal of financial statement auditability, we recommend
that the Secretary of Defense direct the DOD CMO to ensure that the
military service CMOs and the DOD Comptroller‘s Acting FIAR Director
work jointly, as appropriate, to take the following six actions:
1. Issue guidance to standardize the development of the FIPs, including
their format and frequency, to aid in ensuring the:
* sufficiency of corrective actions through the identification of
performance gaps in corrective actions planned within and between
components;
* sharing of successful methodologies developed and implemented to
address a financial management weakness or achieve a defined
capability; and;
* reliability of progress reporting, including clear linkages and
descriptions of how the corrective action, individually or
collectively, contributes to the achievement of a defined capability or
goal by an estimated milestone date established for each component and
the department.
2. Establish a baseline of financial management capabilities and
weaknesses at the component level, and ultimately at the department
level, that can be used to:
* obtain a clear understanding of needed improvements in DOD‘s or a
component‘s policies, processes and controls, systems and data, and
human capital that are needed to address these weaknesses and support
relevant management assertions (i.e., existence or occurrence,
completeness, valuation, rights and obligations, and presentation and
disclosure) regarding the reliability of reported financial
information;
* identify gaps in planned corrective actions; and;
* establish a realistically attainable date, by component and at the
department level, for achieving financial statement auditability.
3. Establish clear results-oriented metrics within the FIAR Plan and
component FIPs for measuring and reporting quantifiable incremental
results toward achieving defined financial management capabilities,
addressing a specific weakness, and/or achieving FIAR Plan goals by an
estimated milestone date established for each component and the
department.
4. Describe in the FIAR Plan the oversight roles and responsibilities,
if any, of the DOD CMO and military service CMOs over FIAR Plan and FIP
improvement efforts, as appropriate.
5. Assign accountability in the FIAR Plan for achieving results to
specific offices or organizations:
* within the department, such as the Property and Equipment Policy
Office within the Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics; and/or;
* at lower levels within a DOD component, such as the Deputy Chief of
Staff for Logistics, Installations, and Mission Support within the Air
Force.
6. Provide visibility to DOD management, OMB, and the Congress, within
each FIAR Plan update, of resources budgeted and spent to address a
specific weaknesses or achieve specific incremental improvements in the
department‘s financial management capabilities.
[End of section]
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of Defense and
received written comments from the Under Secretary of Defense
(Comptroller), which are reprinted in appendix II. Overall, DOD
concurred with our recommendations and identified specific actions that
are either completed, underway, or planned.
DOD acknowledged the importance of properly allocating and utilizing
resources to address financial management weaknesses. The department
indicated that it has modified the component level financial
improvement plans to begin collecting resource information, but
indicated that it may be cost prohibitive to identify and track
resources related to addressing specific weaknesses.
Given the finite resources available for financial management
improvement, we believe that it is incumbent upon the department to
identify and use cost information where practical in authorizing and
prioritizing corrective actions to ensure that the department‘s limited
business transformation resources are targeted at those actions that
will result in long-term sustained financial management improvements.
[End of section]
Scope and Methodology:
We reviewed the DOD FIAR Plans for December 2005 through September 2008
and the FIPs used to prepare the March and September 2008 FIAR updates
to obtain an understanding of the:
* process the department has outlined for its components to follow in
identifying and correcting their financial management weaknesses and
supporting the department‘s efforts to achieve and sustain financial
statement auditability;
* reported financial management accomplishments;
* metrics utilized within the plan to assess and report incremental
progress;
* changes, if any, to the department‘s financial management improvement
and audit readiness strategy; and;
* FIAR Directorate‘s oversight and monitoring of the FIAR Plan,
including reported accomplishments and incremental progress.
To further our understanding of the FIAR Plan and FIPs, we obtained
briefings and conducted interviews with key personnel responsible for
these plans within the Office of the Under Secretary of Defense
(Comptroller), the FIAR Directorate and the Financial Management and
Comptroller Offices of the Army, the Navy, and the Air Force.
We obtained briefings from FIAR Directorate personnel regarding the
FIAR Web-based planning tool and reviewed extracts from the tool to
further our understanding of the department‘s measures/metrics,
monitoring, and reporting process.
To assess the adequacy of DOD‘s FIAR Plan in providing DOD components
with a strategy for addressing the department‘s financial management
weaknesses and achieving financial statement auditability, we utilized
criteria that identified the key elements of a strategic plan as
identified by our previous work[Footnote 19] and as stipulated by the
Government Performance and Results Act of 1993. These elements include:
* providing a comprehensive view of performance, including the
establishment of a baseline of current operational functions,
capabilities, and performance against which progress toward a defined
goal or objective can be measured;
* aligning of goals and measures with departmentwide goals and
cascading goals and measures to lower organizational levels;
* establishing timelines and demonstrating results;
* assigning of accountability for achieving results; and;
* linking resource needs to performance.
Given the importance of ensuring the sufficiency of corrective actions
and accomplishments in achieving the FIAR Plan goals, we considered the
financial statement assertions as criteria in assessing the adequacy of
the FIAR Plan as a strategic and management tool for guiding,
monitoring, and reporting incremental progress toward identifying and
addressing financial management weaknesses and achieving auditability.
* Assertions are representations by management regarding the
reliability of reported financial information. These assertions
include: existence or occurrence, completeness, rights and obligations,
valuation or allocation, and presentation and disclosure.[Footnote 20]
* Most of the auditors‘ work in forming an opinion on financial
statements consists of obtaining and evaluating sufficient appropriate
evidence concerning management‘s assertions in the financial
statements.
We performed our review from October 2008 through May 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings based on our audit objectives. We believe the evidence
obtained provides a reasonable basis for the our findings and
conclusions based on our audit objectives.
[End of section]
[End of appendix]
Appendix II: Comments from the Under Secretary of Defense
(Comptroller):
Under Secretary Of Defense:
Comptroller:
1100 Defense Pentagon:
Washington, DC 20301-1100:
April 21, 2009:
Mr. Asif A. Khan:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Khan:
This is the Department of Defense (DoD) response to the GAO draft
report GAO-09-373, "Financial Management: Achieving Financial Statement
Auditability in the Department of Defense" (GAO code 197081).
The Department is encouraged that the draft report cites the work that
the Financial Improvement and Audit Readiness (FIAR) Directorate has
completed to improve the FIAR Plan and the underlying efforts of the
Department to achieve its financial improvement objectives. As with any
effort the size and scope of the Department's financial management
improvement efforts, continuous evaluation and evolution of the
strategy and approach is warranted. The FIAR Directorate and the
financial management leadership in the Military Services and Defense
Agencies remain devoted to achieving the goals of the FIAR Plan in the
most efficient manner possible.
The financial management of the Department is the responsibility of the
Chief Financial Officer (CFO) acting on behalf of the Secretary of
Defense. As in any organization the CFO collaborates with and is
dependent on operational organizations to implement and operate
effective internal controls to achieve reliable financial management.
The Chief Management Officer (CMO) of the Department and the CMOs of
the Military Services are critical to the Department's success by
facilitating the prioritization of financial management improvement
efforts across the functional areas of the Department.
I agree in principle with the recommendations in your draft report so
long as responsibility for improvement remains with the CFO. Consistent
with that view, and as stated in your report and our detailed responses
attached, the FIAR Directorate in my office is already implementing
solutions to address them. We value the feedback of the GAO received
during the review and in this draft report. We look forward to
continued collaboration to ensure that our efforts are as effective as
possible.
The Department appreciates the opportunity to comment on the draft
report. My point of contact for this effort is Ms. Radha Sekar. She can
be reached at 703-697-3200 or by email at radha.sekar@osd.mil.
Sincerely,
Signed by:
Robert F. Hale:
Attachment: As stated:
[End of letter]
GAO Draft Report Dated March 18, 2009:
GAO-09-373 (GAO CODE 197081):
"Financial Management: Achieving Financial Statement Auditability In
The Department Of Defense"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the DoD Chief Management Officer (CMO) to ensure that the
military service CMOs and the DoD Comptroller's Acting Financial
Improvement and Audit Readiness (FIAR) Director work jointly, as
appropriate, to issue guidance to standardize the development of the
financial improvement plans (FIP), including their format and
frequency. (Page 7/GAO Draft Report)
DOD Response: Concur. The Under Secretary of Defense (Comptroller)/
Chief Financial Officer (USD(C)) will retain overall responsibility for
statement audibility and ensure the Military Services Financial
Improvement Plan Program Management Offices and Military Service CMOs
collaborate with the FIAR Directorate on implementing standard FIPs.
The FIAR Directorate began the effort to establish standard RP plan
content and format in the last quarter of fiscal year 2008. The
guidance for standard FIP format and content was delivered to the
Components on December 18, 2008. The Components' FIPs were updated to
comply with the new guidance as of February 28, 2009. The FIAR
Directorate continues to work with the Components to improve the
content of their FIPs and achieve standard formats, contents and
outcomes within the Components' FIPs.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the DoD Chief Management Officer (CMO) to ensure that the
military service CMOs and the DoD Comptroller's Acting Financial
Improvement and Audit Readiness (FIAR) Director work jointly, as
appropriate, to establish a baseline of financial management
capabilities and weaknesses at the component level, and ultimately at
the department level. (Page 7/GAO Draft Report)
DOD Response: Concur. The USD(C) will ensure the FIAR Directorate works
directly with the Military Service Financial Improvement Plan Program
Management Offices to establish capability baselines related to
financial controls and to ensure that the military services make
appropriate progress in achieving the objectives and capabilities.
The FIAR Directorate has already begun collaborating with the Military
Services Financial Improvement Plan Program Management Offices to
establish a set of control objectives and capabilities that are
critical to achieving improved financial management and audit
readiness. These objectives and capabilities have been integrated into
the Component FIPs to serve as the outcomes against which progress will
be measured.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the DoD Chief Management Officer (CMO) to ensure that the
military service CMOs and the DoD Comptroller's Acting Financial
Improvement and Audit Readiness (FIAR) Director work jointly, as
appropriate, to establish clear results-oriented metrics within the
FIAR Plan and components FIPS for measuring and reporting quantifiable
incremental results toward achieving defined financial management
capabilities, addressing a specific weakness, and/or achieving FIAR
Plan goals by an estimated milestone date established for each
component and the department. (Page 7/GAO Draft Report)
DOD Response: Concur. The USD(C) will ensure the Military Service CMOs,
the Military Service Financial Improvement Plan Program Management
Offices, and the FIAR Directorate will collaborate to establish and
implement outcome based performance metrics to measure progress toward
financial management improvement and auditability.
As stated in the response to recommendation 2, the FIAR Directorate has
already begun collaboration with the Military Services to establish
objectives and define the capabilities needed to achieve financial
management improvement and audit readiness. These objectives and
capabilities will serve as the outcome-oriented metrics and milestones
to measure incremental and meaningful progress towards the ultimate
goals.
Recommendation 4: The GAO recommends that the Secretary of Defense
direct the DoD Chief Management Officer (CMO) to ensure that the
military service CMOs and the DoD Comptroller's Acting Financial
Improvement and Audit Readiness (FIAR) Director work jointly, as
appropriate, to describe in the FIAR Plan the oversight roles and
responsibilities, if any, of the DoD CMO and the military service CMOs
over FIAR Plan and FIP improvement efforts as appropriate. (Page 7/GAO
Draft Report)
DOD Response: Concur. The USD(C) will be responsible for implementing
this option.
Recommendation 5: The GAO recommends that the Secretary of Defense
direct the DoD Chief Management Officer (CMO) to ensure that the
military service CMOs and the DoD Comptroller's Acting Financial
Improvement and Audit Readiness (FIAR) Director work jointly, as
appropriate, to assign accountability in the FIAR Plan for achieving
results to specific offices or organizations. (Page 7/GAO Draft Report)
DOD Response: Concur. The FIAR Plan already is the responsibility of
the Secretary of each Military Service and the Director of the Defense
Agencies as they formally coordinate on the FIAR Plan as prepared by
their assigned offices in collaboration with the FIAR Directorate. The
USD(C) as the chief financial officer holds the responsibility for
achieving auditable financial statements for the Department. The USD(C)
will work with the Military Service financial communities and CMOs and
Directors of the Defense Agencies and FIAR Directorate on assigning
accountability for FIAR progress to the appropriate offices and
organizations below the CMO level in the Military Services and Defense
Agencies. In order to accommodate this, the FIAR Directorate has added
a requirement to the FIPs to identify the specific offices and
organizations responsible for achieving each control objective and
capability.
Recommendation 6: The GAO recommends that the Secretary of Defense
direct the DoD Chief Management Officer (CMO) to ensure that the
military service CMOs and the DoD Comptroller's Acting Financial
Improvement and Audit Readiness (FIAR) Director work jointly, as
appropriate, to provide visibility to DoD management and the Congress,
within each FIAR Plan update, of resources budgeted and spent to
address a specific weakness or achieve specific incremental
improvements in the department's financial management capabilities.
(Page 8/GAO Draft Report)
DOD Response: Partially concur. The USD(C) will ensure the Military
Service CMOs and Military Service Financial Improvement Plan Program
Management Offices collaborate with the FIAR Directorate to provide
visibility of the resources needed and used for FIAR efforts. The
Department recognizes that it is important to properly allocate
resources to the FIAR effort and to ensure that once allocated those
resources are effective. The HP plans have been modified to collect
this information; however, the cost and effort of assigning and
tracking resources to address specific weaknesses may be prohibitive.
[End of appendix]
Footnotes:
[1] The FIAR Directorate is responsible for preparing the FIAR Plan to
comply with provisions in the National Defense Authorization Act for
Fiscal Year 2002 and subsequent provisions in the Authorization Acts
for fiscal years 2006 and 2007.
[2] DOD considers the Enterprise Transition Plan its department-wide
plan for business transformation.
[3] GAO, Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD, [hyperlink, http://www.gao.gov/products/GAO-04-910R]
(Washington, D.C.: Sept. 20, 2004).
[4] See GAO, Defense Business Transformation: Achieving Success
Requires a Chief Management Officer to Provide Focus and Sustained
Leadership, [hyperlink, http://www.gao.gov/products/GAO-07-1072]
(Washington, D.C.: Sept. 5, 2007); and as stipulated by the Government
Performance and Results Act of 1993.
[5] DOD defines total asset visibility as the capability to provide
timely and accurate information on the location, movement, status or
condition, and identify of units, personnel, equipment, and supplies
DOD-wide and having the capability to act on that information.
[6] Pub. L. No. 110-181, §904, 122 Stat. 3, 273 (Jan. 28, 2008).
[7] In its annual financial report for fiscal year 2008, DOD reported
that it intends to leverage its FIAR Plan to implement the internal
control assessment and corrective actions required under OMB Circular
No. A-123, Management‘s Responsibility for Internal Control, Appendix
A, Internal Control Over Financial Reporting.
[8] GAO, High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January
2009).
[9] GAO, Financial Management: Further Actions Are Needed to Establish
Framework to Guide Audit Opinion and Business Management Improvement
Efforts at DOD, [hyperlink, http://www.gao.gov/products/GAO-04-910R]
(Washington, D.C.: Sept. 20, 2004).
[10] These statutes include the Chief Financial Officers Act, the
Government Management Reform Act of 1994, the Federal Financial
Management Improvement Act of 1996, and various annual authorization
and appropriations act provisions.
[11] The Annual Report on Reliability.
[12] An enterprise architecture is a modernization blueprint of an
organization or a functional or mission area that together with an
enterprise transition plan, provides a road map for moving between the
current state of operations to the intended state.
[13] DOD defines total asset visibility as the capability to provide
timely and accurate information on the location, movement, status or
condition, and identity of units, personnel, equipment, and supplies
DOD-wide and having the capability to act on that information.
[14] OMB Circular No. A-123, section IV and appendix A requires DOD to
assess these key elements and to provide guidance on how to identify
and assess weaknesses.
[15] Department of Defense, Property and Equipment Policy, Office of
the Undersecretary of Defense for Acquisition, Technology, and
Logistics, Internal Validation and Verification Project: Military
Equipment Valuation(June 13, 2006).
[16] Department of Defense Inspector General, Financial Management:
Report on Development of the DOD Baseline for Military Equipment,D-2005-
114 (Arlington, VA: Sept. 30, 2005); and Financial Management: Report
on the Review of the Development of the DOD Baseline for Military
Equipment, D-2005-112 (Arlington, VA: Sept. 30, 2005); Air Force Audit
Agency, Air Force Military Equipment Baseline Valuation, F2007-0009-
FB3000 (May 29, 2007); and Military Equipment Baseline–Electronic Pods,
F2007-0003-FB3000 (Jan. 19, 2007).
[17] Initial operational capability is achieved when a system is
implemented with some minimal capabilities and additional capabilities
are planned before the system is determined to be fully operational.
[18] Pub. L. No. 110-181, §904, 122 Stat. 3, 273 (Jan. 28, 2008).
[19] See GAO, Defense Business Transformation: Achieving Success
Requires a Chief Management Officer to Provide Focus and Sustained
Leadership, [hyperlink, http://www.gao.gov/products/GAO-07-1072]
(Washington, D.C.: Sept. 5, 2007).
[20] The American Institute of Certified Public Accountants‘ Statement
on Audit Standards No. 106: Audit Evidence, and the GAO/President‘s
Council on Integrity and Efficiency Financial Audit Manual.
[End of section]
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