DOD Financial Management
Ongoing Challenges in Implementing the Financial Improvement and Audit Readiness Plan Gao ID: GAO-11-932T September 15, 2011In Process
In a report issued this week, GAO concluded that the FIAR Guidance provides a reasonable methodology for the DOD components to follow in developing and implementing their FIPs. It details the roles and responsibilities of the DOD components, and prescribes a standard, systematic process components should follow to assess processes, controls, and systems, and identify and correct weaknesses in order to achieve auditability. The FIAR Guidance also requires the components to prepare and implement corrective action plans for resolving the deficiencies identified during testing and to document the results, which is consistent with federal internal control standards and related guidance. DOD's ability to achieve audit readiness is dependent on the components' ability to effectively develop and implement FIPs in compliance with the FIAR Guidance. However, GAO's review of various DOD component efforts to achieve audit readiness found that the components experienced challenges in implementing the FIAR Guidance. Specifically: (1) The Navy and the Air Force had not adequately developed the two FIPs that GAO reviewed in accordance with the FIAR Guidance. As a result, they did not conduct sufficient control and substantive testing, and reached conclusions that were not supported by the testing results. (2) Auditors of the Marine Corps' Statement of Budgetary Resources (SBR) issued a disclaimer of opinion because the Marine Corps did not provide timely and relevant supporting documentation for accounting transactions and also reported that internal control weaknesses should be addressed. (3) GAO's preliminary work on the Navy's and Marine Corps' Fund Balance with Treasury (FBWT) reconciliation processes identified issues with their ability to reconcile FBWT--a key step in preparing the SBR. (4) Based on preliminary results, GAO identified issues in the implementation of two enterprise resource planning (ERP) systems by the Army and the Air Force. DOD has acknowledged that effective implementation of integrated systems is crucial to achieving departmentwide audit readiness. Although DOD and its military components had established organizational structures for monitoring and oversight of audit readiness efforts, GAO found that oversight responsibilities were not effectively carried out, resulting in the ineffective implementation of FIPs and unsupported conclusions of audit readiness. For the two FIPs that GAO reviewed, neither the designated officials nor the executive committees took sufficient action to ensure that the FIPs complied with the FIAR Guidance. Effective oversight would also help ensure that lessons learned from recent efforts would be disseminated throughout the department so that others could avoid similar problems. For example, the Marine Corps' SBR audit effort provide valuable lessons that, if effectively communicated and implemented, can provide a roadmap to help other DOD components achieve audit readiness. GAO recommends actions for components to comply with the FIAR Guidance, for the Marine Corps to develop appropriate corrective action plans, and for DOD to ensure that the services consider lessons learned. DOD concurred with GAO's recommendations related to implementing the component FIPs and with three of four recommendations related to the Marine Corps SBR. Further details on DOD's comments can be found in GAO's reports.
GAO-11-932T, DOD Financial Management: Ongoing Challenges in Implementing the Financial Improvement and Audit Readiness Plan
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United States Government Accountability Office:
GAO:
Testimony:
Before the Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, Committee
on Homeland Security and Governmental Affairs, U.S. Senate:
For Release on Delivery:
Expected at 2:30 p.m. EDT:
Thursday, September 15, 2011:
DOD Financial Management:
Ongoing Challenges in Implementing the Financial Improvement and Audit
Readiness Plan:
Statement of Asif A. Khan, Director:
Financial Management and Assurance:
GAO-11-932T:
GAO Highlights:
Highlights of GAO-11-932T, a testimony before the Subcommittee on
Federal Financial Management, Government Information, Federal
Services, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
The Department of Defense (DOD) has initiated several efforts over the
years to address its long-standing financial management weaknesses and
ultimately achieve unqualified (clean) opinions on its financial
statements. In 2005, the DOD Comptroller first issued the Financial
Improvement and Audit Readiness (FIAR) Plan for improving financial
management and reporting. In May 2010, the DOD Comptroller issued the
FIAR Guidance to provide standardized guidance to DOD components for
developing Financial Improvement Plans (FIP) to implement the FIAR
Plan.
GAO‘s testimony focuses on (1) progress made by the DOD Comptroller in
developing and issuing the FIAR Guidance, (2) challenges faced by DOD
components in implementing the FIAR Guidance, and (3) improvements
needed in DOD‘s oversight and monitoring of FIAR implementation
efforts.
This statement is based on four audits that were undertaken at the
request of this subcommittee and other congressional requesters to
evaluate the progress DOD is making in implementing its FIAR Plan and
FIAR Guidance. GAO addresses findings and recommendations from two
reports being issued this week (GAO-11-830 and GAO-11-851) and
preliminary information from two ongoing audits. Each audit
demonstrates some of the challenges DOD faces in improving its
financial management and achieving the goal of auditable financial
statements by 2017.
What GAO Found:
In a report issued this week, GAO concluded that the FIAR Guidance
provides a reasonable methodology for the DOD components to follow in
developing and implementing their FIPs. It details the roles and
responsibilities of the DOD components, and prescribes a standard,
systematic process components should follow to assess processes,
controls, and systems, and identify and correct weaknesses in order to
achieve auditability. The FIAR Guidance also requires the components
to prepare and implement corrective action plans for resolving the
deficiencies identified during testing and to document the results,
which is consistent with federal internal control standards and
related guidance.
DOD‘s ability to achieve audit readiness is dependent on the components‘
ability to effectively develop and implement FIPs in compliance with
the FIAR Guidance. However, GAO‘s review of various DOD component
efforts to achieve audit readiness found that the components
experienced challenges in implementing the FIAR Guidance. Specifically:
* The Navy and the Air Force had not adequately developed the two FIPs
that GAO reviewed in accordance with the FIAR Guidance. As a result,
they did not conduct sufficient control and substantive testing, and
reached conclusions that were not supported by the testing results.
* Auditors of the Marine Corps‘ Statement of Budgetary Resources (SBR)
issued a disclaimer of opinion because the Marine Corps did not
provide timely and relevant supporting documentation for accounting
transactions and also reported that internal control weaknesses should
be addressed.
* GAO‘s preliminary work on the Navy‘s and Marine Corps‘ Fund Balance
with Treasury (FBWT) reconciliation processes identified issues with
their ability to reconcile FBWT”a key step in preparing the SBR.
* Based on preliminary results, GAO identified issues in the
implementation of two enterprise resource planning (ERP) systems by
the Army and the Air Force. DOD has acknowledged that effective
implementation of integrated systems is crucial to achieving
departmentwide audit readiness.
Although DOD and its military components had established
organizational structures for monitoring and oversight of audit
readiness efforts, GAO found that oversight responsibilities were not
effectively carried out, resulting in the ineffective implementation
of FIPs and unsupported conclusions of audit readiness. For the two
FIPs that GAO reviewed, neither the designated officials nor the
executive committees took sufficient action to ensure that the FIPs
complied with the FIAR Guidance. Effective oversight would also help
ensure that lessons learned from recent efforts would be disseminated
throughout the department so that others could avoid similar problems.
For example, the Marine Corps‘ SBR audit effort provide valuable
lessons that, if effectively communicated and implemented, can provide
a roadmap to help other DOD components achieve audit readiness. GAO
recommends actions for components to comply with the FIAR Guidance,
for the Marine Corps to develop appropriate corrective action plans,
and for DOD to ensure that the services consider lessons learned. DOD
concurred with GAO‘s recommendations related to implementing the
component FIPs and with three of four recommendations related to the
Marine Corps SBR. Further details on DOD‘s comments can be found in
GAO‘s reports.
View [hyperlink, http://www.gao.gov/products/GAO-11-932T]. For more
information, contact Asif A. Khan at (202) 512-9869 or khana@gao.gov.
[End of section]
Chairman Carper, Ranking Member Brown, and Members of the Subcommittee:
It is a pleasure to be here today to discuss the status of the
Department of Defense's (DOD) efforts to implement its Financial
Improvement and Audit Readiness (FIAR) Plan to improve its financial
management operations. Given the federal government's fiscal
challenges, there is a significant need for transparency and for the
Congress, the administration, and federal managers to have reliable,
useful, and timely financial and performance information, particularly
for the government's largest department. For more than a decade, DOD
has been on GAO's list of federal programs and operations at high risk
of being vulnerable to fraud, waste, and abuse.[Footnote 1] Despite
several reform initiatives, DOD's financial management remains on
GAO's high-risk list today. Long-standing and pervasive weaknesses in
DOD's financial management and related business processes and systems
have (1) resulted in a lack of reliable information needed to make
sound decisions and report on the financial status and cost of DOD
activities to Congress and DOD decision makers; (2) adversely affected
its operational efficiency and mission performance in areas of major
weapons system support and logistics; and (3) left the department
vulnerable to fraud, waste, and abuse. In addition, these long-
standing financial management weaknesses have precluded DOD from being
able to successfully undergo the scrutiny of a financial statement
audit.[Footnote 2] The National Defense Authorization Act (NDAA) for
Fiscal Year 2010 mandated that DOD be prepared to validate (certify)
that its consolidated financial statements are ready for audit by
September 30, 2017.[Footnote 3]
In 2005, the DOD Comptroller established the DOD Financial Improvement
and Audit Readiness (FIAR) Directorate to develop, manage, and
implement a strategic approach for addressing the department's
financial management weaknesses and for achieving auditability, and to
integrate those efforts with other improvement activities, such as the
department's business system modernization efforts. Also in 2005, the
DOD Comptroller first issued the FIAR Plan for improving financial
management and reporting. The NDAA for Fiscal Year 2010 mandated that
the FIAR Plan include the specific actions to be taken to correct the
financial management deficiencies that impair the department's ability
to prepare timely, reliable, and complete financial management
information. In May 2010, the DOD Comptroller issued the FIAR Guidance
to provide standardized guidance to DOD components for developing
Financial Improvement Plans (FIP) to implement the FIAR Plan. In
September 2010, we reported that the department needed to focus on
implementing its FIAR Plan and that the key to successful
implementation would be the efforts of the DOD military components and
the quality of their individual FIPs.[Footnote 4]
My testimony today will focus on three key issues:
(1)progress made by the DOD Comptroller in developing and issuing the
FIAR Guidance to assist DOD components in implementing the FIAR Plan;
(2)challenges in the implementation of the FIAR Guidance at the Navy,
Air Force, and Marine Corps; and:
(3)improvements needed in DOD's oversight and monitoring of FIAR
implementation efforts.
My statement is based on four audits that we have undertaken at the
request of this subcommittee and other congressional requesters to
evaluate the progress DOD is making in implementing its FIAR Plan and
related Guidance. Two of the reports have been issued this week,
[Footnote 5] and we are addressing preliminary findings for the other
two reports, which are in process. Each report demonstrates some of
the challenges DOD faces in improving its financial management,
including its ability to achieve the goal of reliable financial
information and auditable financial statements by 2017:
* The first report discusses the methodology reflected in DOD's FIAR
Guidance, whether selected military component FIPs adhered to the FIAR
Guidance, and DOD's oversight and monitoring of the FIP process.
[Footnote 6] The published report includes details on the scope and
methodology for this review.
* The second report addresses why auditors were unable to complete an
audit of one of DOD's financial statements, the Statement of Budgetary
Resources (SBR), for one military service, the U.S. Marine Corps.
[Footnote 7] This report also includes details on the scope and
methodology for this review.
* The remaining two ongoing audits address (1) a key process for DOD's
components--the Fund Balance with Treasury (FBWT) reconciliation--
which illustrates one of many of the department's challenges and (2)
the implementation of comprehensive, integrated business systems
called Enterprise Resource Planning (ERP) systems,[Footnote 8] which
DOD considers a key element to improving financial management and
achieving auditability. We discussed with DOD officials the
preliminary findings from these two ongoing audits that are included
in this testimony and considered their comments in this statement. We
plan to issue these reports in October 2011.
For our work on the FBWT reconciliation, we analyzed Navy and Marine
Corps policies and procedures covering the various FBWT reconciliation
steps, and met with Navy, Marine Corps, and Defense Finance and
Accounting Service (DFAS) officials, and performed walkthroughs of the
Navy and Marine Corps FBWT processes. For our work on ERP systems, we
focused on the status of two systems by reviewing the Army and Air
Force Test and Evaluation Commands' reports on the systems and
interviewing various DOD officials, including system users at DFAS.
Our work was conducted 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.
Background:
Over the years, DOD has initiated several broad-based reform efforts
to address its long-standing financial management weaknesses. However,
as we have reported, those efforts did not achieve their intended
purpose of improving the department's financial management
operations.[Footnote 9] The FIAR Plan, which was first prepared in
2005, is DOD's strategic plan and management tool for guiding,
monitoring, and reporting on the department's financial management
improvement efforts. As such, the plan contains an incremental
approach for addressing the department's financial management
weaknesses and achieving financial statement auditability. The plan
focuses on three goals: (1) achieve and sustain assurance on the
effectiveness of internal controls, (2) develop and implement
financial management systems that support effective financial
management, and (3) achieve and sustain financial statement audit
readiness.
In August 2009, the DOD Comptroller sought to focus efforts of the
department and components, in order to achieve certain short-and long-
term results, by giving priority to improving processes and controls
that support the financial information most often used to manage the
department. Accordingly, DOD revised its FIAR strategy and methodology
to focus on the DOD Comptroller's two priorities--budgetary
information and asset accountability. The first priority is to
strengthen processes, controls, and systems that produce DOD's
budgetary information and the department's SBRs. The second priority
is to improve the accuracy and reliability of management information
pertaining to the department's mission-critical assets, including
military equipment, real property, and general equipment. The DOD
Comptroller directed the DOD components--including the Departments of
the Army, Navy, and Air Force and the Defense Logistics Agency--to use
a standard process to implement the FIAR Plan and aggressively modify
their activities to support and emphasize achievement of the
priorities.
In May 2010, DOD issued a revised FIAR Plan in which it introduced a
new phased approach toward achieving financial statement auditability.
This approach consists of five waves (or phases) of concerted
improvement activities. The first two waves involve budgetary
information--appropriations received[Footnote 10] and the SBR.
According to DOD, the components' implementation of the methodology
described in the May 2010 FIAR Plan is essential to the success of the
department's efforts to ultimately achieve full financial statement
auditability.[Footnote 11]
DOD's FIAR Guidance Provides a Reasonable Methodology:
Consistent with prior GAO recommendations[Footnote 12] and the NDAA
for Fiscal Year 2010, DOD issued the FIAR Guidance in May 2010, which
details the methodology for components to follow in order to achieve
financial management improvements and auditability. The FIAR Guidance
requires components to identify and prioritize their processes into
assessable units.[Footnote 13] For each assessable unit, a component
is required to prepare a FIP in accordance with the steps outlined in
the FIAR Guidance. For example, civilian and military pay are two
assessable units for which each DOD component, such as the Army, Navy,
and Air Force, must develop and implement plans in accordance with the
FIAR Guidance to ensure that their civilian and military pay can be
audited. The steps required for these plans include assessing
processes, controls, and systems; identifying and correcting
weaknesses; assessing, validating, and sustaining corrective actions;
and ultimately achieving audit readiness. After a component completes
its evaluation of the effectiveness of corrective actions for each
assessable unit, it must determine whether each assessable unit is
ready for audit. For example, the Air Force, based on its
implementation of the FIAR Guidance and its FIP, planned to conclude
during fiscal year 2011 whether or not its FBWT Reconciliation is
reliable and ready for audit. Once a component's management determines
that an assessable unit is ready for audit, the DOD Comptroller and
DOD Inspector General (IG) must review the related FIP documentation
to determine if they agree with management's conclusion of audit
readiness.
In our report issued this week, we concluded that the FIAR Guidance
provides a reasonable methodology for the DOD components to follow in
developing and implementing their FIPs.[Footnote 14] However, as
described later in this statement, we found that implementation of the
FIAR Guidance for the two assessable units we reviewed was not
effective. The FIAR Guidance details the roles and responsibilities of
the DOD components, and prescribes a standard, systematic process that
components should follow to assess processes, controls, and systems,
and identify and correct weaknesses in order to achieve auditability
for each of their assessable units. Overall, the procedures required
by the FIAR Guidance are consistent with selected procedures for
conducting financial statement audits, which include the following:
* Conducting internal control and substantive testing. Internal
control testing focuses on assessing the effectiveness of controls
that would prevent or detect potential misstatements in the financial
statements. Substantive tests are performed to obtain evidence on
whether amounts reported on the financial statements are reliable.
* Reconciling the population of transactions to be tested. To conduct
internal control and substantive testing, a sample of the data
transactions is typically selected for testing. An organization must
be able to identify the complete population of transactions so that a
sample can be selected and tested.
* Conducting tests of information systems controls. The components are
required to identify, document, and test both general and application
controls for key systems that process transactions. General controls
[Footnote 15] are the policies and procedures that apply to all or a
large segment of an entity's information systems and help ensure their
proper operation. Application controls, sometimes referred to as
business controls, are incorporated directly into computer
applications to help ensure the validity, completeness, accuracy, and
confidentiality of data during application processing and reporting.
The FIAR Guidance also requires the components to prepare and
implement corrective action plans for resolving the deficiencies
identified during testing and to document the results, which is
consistent with federal internal control standards and Office of
Management and Budget (OMB) guidance.[Footnote 16]
Challenges for DOD Components' Implementation of FIAR Guidance:
Although the FIAR Guidance provides a reasonable methodology for
improving financial management within the department, DOD's ability to
achieve audit readiness is highly dependent on the components' ability
to effectively develop and implement FIPs in compliance with the FIAR
Guidance. Our reviews of various DOD component efforts to achieve
audit readiness found that the components faced challenges in
effectively implementing the FIAR Guidance, resulting in unsupported
conclusions of audit readiness for Navy Civilian Pay, Air Force
Military Equipment, and the Marine Corps SBR. Our preliminary work
also found that a key element of basic financial management--
reconciling the FBWT account--was not being done properly on a regular
basis and the weaknesses were not properly identified or corrected by
the Navy or the Marine Corps. Finally, to achieve fundamental
improvements in financial management, DOD recognizes the importance of
transforming its business operations through the implementation of
Enterprise Resource Planning (ERP) systems. Our preliminary work on
two key ERPs that have been partially deployed found significant
issues in both systems.
FIPs for Navy Civilian Pay and Air Force Military Equipment Were
Incomplete and Ineffective:
Our review of the FIPs for Navy Civilian Pay and Air Force Military
Equipment found that neither FIP complied with the FIAR Guidance and
contained unsupportable conclusions.[Footnote 17] We found similar
deficiencies in both FIPs, which included the following:
* The Navy and Air Force did not conduct sufficient control and
substantive testing, and contained unsupportable conclusions that the
amounts being reported for Navy Civilian Pay and Air Force Military
Equipment were reliable.
* The Navy and Air Force did not complete reconciliations of the
population of transactions. As a result, the components could not
ensure that their testing results could be projected to the
populations of Navy civilian pay transactions and Air Force military
equipment.
* The Navy and Air Force did not fully test information systems
controls. The Navy's system testing did not include essential areas
such as periodic reviews of user access authorizations and logs of
changes to security access authorizations. The Air Force's FIP did not
include any documentation of control testing for the two systems that
maintain its military equipment data.
* The Navy and Air Force did not fully develop and implement
corrective action plans to address deficiencies they identified during
testing. The Navy had not developed any corrective action plans at the
time that it incorrectly concluded that its civilian pay was ready for
audit. The Air Force had developed some plans related to its military
equipment weaknesses but not for all deficiencies identified, and
moreover, it had not implemented any of the corrective actions at the
time that it stated that its military equipment was ready for audit.
Both components stated that they planned to complete corrective
actions in the future.
Because of the deficiencies we identified, neither FIP that we
reviewed provided sufficient support for the components' conclusions
that the balances for Navy civilian pay and Air Force military
equipment were ready for audit. Our report includes recommendations
for DOD to ensure that components' FIPs comply with the FIAR Guidance.
Navy officials stated that they were taking action to address the
issues identified and planned to submit a revised FIP by March 2012.
Air Force officials also indicated that they were taking action to
address the issues identified.
Marine Corps Statement of Budgetary Resources Was Not Auditable:
After DOD established budgetary information as a priority in its FIAR
Plan, the Marine Corps was identified as the pilot military service
for an audit of the SBR. The SBR is designed to provide information on
authorized budgeted spending authority and links to the Budget of the
United States Government (President's Budget), including budgetary
resources, availability of budgetary resources, and how obligated
resources have been used.[Footnote 18] Because the Marine Corps is a
military service within the Department of the Navy, its success in
achieving audit readiness is intended to pave the way for the Navy to
undergo an SBR audit. However, the DOD IG issued a disclaimer of
opinion[Footnote 19] on the Marine Corps' fiscal year 2010 SBR because
the Marine Corps did not provide timely and relevant supporting
documentation for accounting transactions and disbursements in key
areas, which prevented the auditors from completing the audit by the
November 15, 2010, reporting deadline. In addition, the auditors
reported that ineffective internal control and ineffective controls in
key financial systems should be addressed to ensure the reliability of
reported financial information.[Footnote 20] The auditors identified
70 findings and made 139 recommendations to address the issues.
Examples of the problems identified include the following:
* The DFAS location in Cleveland, Ohio, (DFAS-CL)--which performs
accounting, disbursing, and financial reporting services for the
Marine Corps--did not have effective procedures in place to ensure
that supporting documentation for transactions was complete and
readily available to pass basic audit transaction testing. For
example, the auditors found that DFAS staff had only retained selected
pages of the documents supporting payment vouchers, such as the
voucher cover sheet, and did not have the purchase order, receiving
report, and the invoice to support payments made.
* The Marine Corps did not have effective controls in place to support
estimated obligations, referred to as "bulk obligations," to record a
payment liability, and, as a result, was not able to reconcile the
related payment transactions to the estimates. The Marine Corps
estimates obligations in a bulk amount to record payment liabilities
where it does not have a mechanism to identify authorizing
documentation as a basis for recording the obligations.
* The auditors found ineffective controls over three major information
technology (IT) systems used by the Marine Corps and reported numerous
problems that required resolution.[Footnote 22] For example, the
auditors identified a lack of controls over interfaces between systems
to ensure completeness of the data being transferred. System interface
controls are critical for ensuring the completeness and accuracy of
data transferred between systems.
Further, in addressing the 70 audit findings and related 139
recommendations, we found that the Marine Corps did not develop an
effective overall corrective action plan that identified risks,
prioritized actions, and identified required resources in order to
help ensure that actions adequately respond to recommendations.
[Footnote 21] Instead, its approach to addressing auditor findings and
recommendations for its prior and current audit efforts focuses on
short-term corrective actions necessary to support heroic efforts to
produce reliable financial reporting at year-end. Such efforts may not
result in sustained improvements over the long term that would help
ensure that the Marine Corps could routinely produce sound data on a
timely basis for decision making. While the Marine Corps has
implemented an extensive SBR remediation effort that is focused on
individual initiatives to address the 70 audit findings and 139
related recommendations, such an approach could result in
inefficiencies and ineffectiveness. As of July 18, 2011, the Marine
Corps reported that actions on 88 of the 139 recommendations,
including weaknesses related to accounting and financial reporting and
IT systems, were fully implemented. However, the completeness and
effectiveness of the Marine Corps' actions have not yet been tested.
DOD IG auditors told us that tests performed during the Marine Corps'
fiscal year 2011 SBR audit effort will determine whether and to what
extent the problems identified during the fiscal year 2010 SBR audit
effort have been resolved. They also confirmed that as of August 25,
2011, the Marine Corps had remediated the problems on 11 of the IT
audit recommendations.
Furthermore, as described in our report being released this week, we
found that the design of many of the Marine Corps actions relied on
monitoring, a detective control; high-level initial fixes that did not
address root causes; and other actions that were not consistent with
the related auditors' recommendations.[Footnote 23] For example:
* Marine Corps remediation actions for 22 of the 56 accounting and
financial reporting recommendations rely on issuing guidance,
monitoring, or both, in an attempt to quickly address identified
weaknesses. However, correcting underlying causes requires process
improvements and in some cases, system changes.
* Remediation actions for 20 of the 139 recommendations were not
consistent with the related recommendations. For example, the auditors
identified unliquidated obligations on old contracts for which
performance was substantially complete. The auditors found that the
Marine Corps did not have an effective process for reviewing
undelivered orders and unliquidated obligations, and recommended that
they strengthen these controls, whose weaknesses were the root cause
of the finding. In response, Marine Corps officials stated that they
had implemented a robust review process for validating obligations.
However, the auditors reported that the Marine Corps developed
effective written procedures but found problems with the
implementation of those procedures. Thus, the Marine Corps did not
fully address the recommendation or root cause of the problem.
* The Marine Corps disagreed with six auditor recommendations to
strengthen SABRS system controls over information processing. For
example, for three recommendations related to password and log-on
controls, the Marine Corps action states that the Defense Information
System Agency (DISA) and not DFAS is responsible for the actions.
However, Marine Corps officials told us they had not contacted DISA
officials to ensure that they would address the recommendations.
Our report includes recommendations to the Secretary of the Navy to
direct the Marine Corps to develop a comprehensive, risk-based
corrective action plan, confirm that corrective actions fully address
auditor findings, and work more closely with service providers, such
as DFAS, to clarify their roles and responsibilities on corrective
actions that require cross-component work. In commenting on our
report, the Navy said that it is working to address the auditor-
identified deficiencies. Further details on the Navy's comments and
our evaluation of them can be found in our report.
Issues with Navy and Marine Corps Processes for Reconciling Fund
Balance with Treasury (FBWT):
Reconciling the FBWT account is a key financial management control.
FBWT is an asset account that reflects the available budget spending
authority of federal agencies. Reconciling a FBWT account with
Treasury records is a process similar in concept to reconciling a
check book with a bank statement. However, within the large, complex
DOD environment, the FBWT reconciliation involves reconciliations
between several different systems, such as the DOD components' general
ledgers, the DOD-wide general ledger, DOD's cash accountability
system, and Treasury records. FBWT reconciliations are a key internal
control for ensuring that all receipt and disbursement transactions
have been properly recorded in federal agency accounting records.
Effective fund balance reconciliations serve as a detective control
for identifying unauthorized and unrecorded transactions at a federal
agency or at the U.S. Treasury.
A successful audit of the SBR is dependent on an auditable FBWT, which
includes the ability to reconcile the FBWT account with the Treasury
records. However, our preliminary work has identified issues with the
Navy and Marine Corps' implementation of effective processes for
reconciling their FBWT, including issues related to financial
management systems and certain policies and procedures, training, and
supervisory review and approval. For example:
* DOD has not tested application controls over the Defense Cash
Accountability System (DCAS)--the department's system of record for
all cash activity. Navy, Marine Corps, and DFAS officials stated that
they have identified over 650 system deficiencies that affect DCAS
data reliability, and that over 200 of the identified deficiencies
affect audit readiness. They identified the top 20 deficiencies that
require immediate attention; however, they stated that a time frame
for addressing these top 20 issues had not yet been established.
* DFAS did not maintain adequate documentation for the sample of items
we tested to enable an independent evaluation of its efforts to
research and resolve differences.
* Navy and DFAS policies and procedures did not contain detailed
information on the roles and responsibilities of organizations and
personnel and the process for identifying, researching, and resolving
discrepancies, including maintaining required supporting
documentation. The policies and procedures also did not require
supervisory review and approval of reconciliation efforts and results.
Navy, Marine Corps, and DFAS officials acknowledged that existing
policies and procedures are inadequate. They also stated that the base
realignment and closure changes in 2006 through 2008 resulted in a
loss of experienced DFAS-CL personnel and that the remaining staff
have not received the needed training. Navy officials stated that they
are currently developing a Plan of Actions and Milestones (POAM) to
address weaknesses that affect the Navy and Marine Corps' audit
readiness, including reconciling FBWT records.
We will report more fully on these issues, including actions DOD is
taking to address them, in our forthcoming report.
Issues with Implementation of Two of DOD's Enterprise Resource
Planning (ERP) Systems:
The implementation of an integrated, audit-ready systems environment
through the deployment of ERP systems underlies all of DOD's financial
improvement efforts and is crucial to achieving departmentwide audit
readiness. According to DOD, the successful implementation of the ERPs
is not only critical for addressing long-standing weaknesses in
financial management, but equally important for helping to resolve
weaknesses in other high-risk areas such as business transformation,
business system modernization, and supply chain management. Successful
implementation will support DOD by standardizing and streamlining its
financial management and accounting systems, integrating multiple
logistics systems and finance processes, providing asset visibility
for accountable items, and integrating personnel and pay systems.
Previously, we reported that delays in the successful implementation
of ERPs have extended the use of existing duplicative, stovepiped
systems, and have continued the funding of these systems longer than
anticipated.[Footnote 24] To the degree that these business systems do
not provide the intended capabilities, DOD's goal of departmentwide
audit readiness by the end of fiscal year 2017 could be jeopardized.
Over the years, we have reported that DOD has not effectively employed
management controls to ensure that the development and implementation
of ERPs deliver the promised capabilities on time and within budget.
As we reported in October 2010, DOD has identified 10 ERPs--1 of which
had been fully implemented--as essential to its efforts to transform
its business operations.[Footnote 25] We are currently reviewing the
status of two of these ERPs--the Army's General Fund Enterprise
Business System (GFEBS) and the Air Force's Defense Enterprise
Accounting and Management System (DEAMS). GFEBS is intended to support
the Army's standardized financial management and accounting practices
for the Army's general fund, except for funds related to the Army
Corps of Engineers. The Army estimates that GFEBS will be used to
control and account for approximately $140 billion in annual spending.
DEAMS is intended to provide the Air Force with the entire spectrum of
financial management capabilities and is expected to maintain control
and accountability for approximately $160 billion. GFEBS is expected
to be fully deployed during fiscal year 2012, is currently operational
at 154 locations, including DFAS, and is being used by approximately
35,000 users. DEAMS is expected to be fully deployed during fiscal
year 2016, is currently operational at Scott Air Force Base and DFAS,
and is being used by about 1,100 individuals.
Our preliminary results identified issues related to GFEBS and DEAMS
providing DFAS users with the expected capabilities in accounting,
management information, and decision support. To compensate, DFAS
users have devised manual workarounds and several applications to
obtain the information they need to perform their day-to-day tasks.
The Army and Air Force have stated that they have plans to address
these issues, and the Army has plans to validate the audit readiness
of GFEBS in a series of independent auditor examinations over the next
several fiscal years. For DEAMS, the DOD Milestone Decision Authority
[Footnote 26] (MDA) has directed that the system is not to be deployed
beyond Scott Air Force Base until the known system weaknesses have
been corrected and the system has been independently tested to ensure
that it is operating as intended. Examples of the issues in these
systems that DFAS users have identified include the following:
GFEBS:
* The backlog of unresolved GFEBS trouble tickets has continued to
increase from about 250 in September 2010 to approximately 400 in May
2011. Trouble tickets represent user questions and issues with
transactions or system performance that have not been resolved.
According to Army officials, this increase in tickets was not
unexpected since the number of users and the number of transactions
being processed by the system has increased, and the Army and DFAS are
taking steps to address issues raised by DFAS.
* Approximately two-thirds of invoice and receipt data must be
manually entered into GFEBS from the invoicing and receiving system
(i.e., Wide Area Work Flow).[Footnote 27] DFAS personnel stated that
manual data entry will eventually become infeasible due to increased
quantities of data that will have to be manually entered as GFEBS is
deployed to additional locations. Army officials acknowledged that
there is a problem with the Wide Area Work Flow and GFEBS interface
and that this problem reduced the effectiveness of GFEBS, and that
they are working with DOD to resolve the problem.
* GFEBS lacks the ability to run ad hoc queries or search for data in
the system to resolve problems or answer questions.[Footnote 28] The
Army has recognized this limitation and is currently developing a
system enhancement that they expect will better support the users'
needs.
DEAMS:
* Manual workarounds are needed to process certain accounts receivable
transactions such as travel debts. DFAS personnel stated that the
problem is the result of the data not being properly converted from
the legacy systems to DEAMS.
* DFAS officials indicated that they were experiencing difficulty with
some of the DEAMS system interfaces.[Footnote 29] For example, the
interface problem with the Standard Procurement System has become so
severe that the interface has been turned off, and the data must be
manually entered into DEAMS.
* DFAS officials stated that DEAMS does not provide the capability--
which existed in the legacy systems--to produce ad hoc reports that
can be used to perform the data analysis need to perform daily
operations.[Footnote 30] They also noted that when some reports are
produced, the accuracy of those reports is questionable.
DFAS users also told us that the training they received focused more
on how GFEBS and DEAMS were supposed to operate, rather than providing
DFAS personnel training about how to use these systems to perform
their day-to-day operations. The Army acknowledged that from a DFAS
perspective, the training should have shown DFAS how they could use
GFEBS to perform task such as the reconciliation of accounts. To help
address this training issue, DFAS is in the process of developing
courses and desk guides suitable for DFAS employees who use GFEBS and
DEAMS on a day-to-day basis.
We will report more fully on these issues, including DOD's actions to
address them, in our forthcoming report.
Improved Monitoring and Oversight of Component Financial Improvement
Plans (FIP) Are Needed:
In one report we issued this week, we found that weaknesses in the
Navy and Air Force FIAR Plan implementation efforts indicate that the
monitoring and oversight of such efforts have not been effective.
[Footnote 31] Although we found that DOD and its military components
had established appropriate organizational structures for monitoring
and oversight of audit readiness efforts, oversight responsibilities
were not always effectively carried out. Both DOD and the components
have established senior executive committees as well as designated
officials at the appropriate levels to monitor and oversee their
financial improvement efforts. These committees and individuals have
also generally been assigned appropriate roles and responsibilities.
However, we found that component officials as well as the oversight
committees at both the component and DOD levels did not effectively
carry out their monitoring responsibilities for the Navy Civilian Pay
and Air Force Military Equipment FIPs. Specifically, for these two
FIPs that we reviewed, neither individual officials nor the executive
committees took sufficient action to ensure that the FIPs were
accurate or complied with the FIAR Guidance. As a result, the Navy
concluded that its Civilian Pay was ready for audit, as did the Air
Force with respect to its Military Equipment, even though they did not
have sufficient support to assert audit readiness.
On the other hand, once the Navy and Air Force submitted the FIPs to
DOD in support of their audit readiness assertions, both the DOD
Office of the IG and the DOD Comptroller carried out their
responsibilities for reviewing the FIPs. In their reviews, both
organizations identified issues with the FIPs that were similar to
those we had identified. The DOD Comptroller, who makes the final
determination as to whether an assessable unit is ready for audit,
concluded that neither of these FIPs supported audit readiness.
Effective oversight and monitoring would also help ensure that lessons
learned from recent efforts would be sufficiently disseminated
throughout the department and applied to other financial improvement
efforts. In commenting on our report about the FIPs, the DOD
Comptroller stated that it is critical that the department continues
to look at how effectively it applies lessons learned. For example,
the results of the Marine Corps' SBR audit effort provide valuable
lessons on preparing for a first-time financial statement audit. As we
recently testified, lessons learned from this audit effort can provide
a roadmap to help other DOD components achieve audit readiness.
[Footnote 32] While this audit effort provided numerous issues for the
other military services to consider in their audit readiness efforts,
we identified and reported on five overall lessons that are critical
to success.[Footnote 33] Specifically, the Marine Corps' SBR
experience demonstrated that prior to asserting financial statement
audit readiness, DOD components must be able to perform the following
procedures;
* Confirm completeness of populations of transactions and address any
abnormal transactions and balances. The Marine Corps SBR auditors made
multiple requests for transaction-level detail for key SBR accounts.
Navy officials told us that they identified problems with the way
transactions map to general ledger accounts, which makes it difficult
to identify transaction populations. Navy officials noted that these
problems impeded the Marine Corps SBR audit effort and also prevent
the reconciliation of Unadjusted to Adjusted Trial Balances, FBWT
reconciliations, and overall funds control.
* Test beginning balances. A first-year SBR audit requires substantial
testing to confirm beginning balances. Navy officials noted that
earlier audit readiness efforts were not sufficient to confirm
beginning balances, and problems identified with the assignment of
general ledger account numbers and mapping of transactions to the
proper accounts will need to be resolved to ensure the auditability of
beginning balances.
* Perform key reconciliations. The Marine Corps did not have processes
in place to reconcile key accounts such as FBWT. In addition, although
it made repeated attempts to reconcile the Unadjusted Trial Balance to
the Adjusted Trial Balance, it was not able to do so. This
reconciliation is an important step to verify that the SBR is accurate.
* Provide timely and complete response to audit documentation
requests. The auditors reported that the Marine Corps, through its
service provider, DFAS, did not consistently provide timely and
accurate audit documentation. Without such documentation, the auditors
were unable to determine whether a given transaction was authorized,
whether the goods or services were received, whether the invoice was
approved for payment, or whether the funds disbursed were correct.
* Verify that key IT systems are compliant and auditable.[Footnote 34]
The auditors informed the Marine Corps of numerous control weaknesses
they identified in key systems, including some DOD-wide systems, which
affected auditability. The auditability of key systems, including
military payroll systems, accounting systems, and financial reporting
systems, is essential to achieving and sustaining an audit opinion.
These five critical lessons from the Marine Corps SBR audit effort are
all addressed in the FIAR Guidance as procedures that must be
performed before an assessable unit can be considered ready for audit.
As the Army, Navy, and Air Force move forward in developing and
implementing their FIPs, in our report we recommend that they take
into account the lessons learned during the course of pilot audit
efforts, such as the Marine Corps SBR. Navy financial management
officials indicated that they are aware of the Marine Corps lessons
and that they are updating their audit readiness plan to address all
five critical lessons. Army and Air Force officials indicated their
awareness of some of these findings but only provided information on
their efforts regarding FBWT reconciliations and ERP implementations.
As noted above, DOD generally agreed with the need to effectively
communicate lessons learned among its components. Our report more
fully describes DOD's comments and our evaluation of them.
Concluding Observations:
With the FIAR Plan and related FIAR Guidance, DOD has established a
reasonable strategy and methodology for improving its financial
management. However, it faces considerable implementation challenges
and has much work to do if it is to meet the goal of audit readiness
by the end of fiscal year 2017. These challenges, as we have
previously testified, include (1) maintaining committed and sustained
leadership; (2) developing and implementing an effective plan to
correct internal control weaknesses; (3) establishing accountability
and effective oversight to monitor progress; and (4) successfully
implementing ERP systems consistent with an effective corporate
enterprise architecture.[Footnote 35] It is critical that DOD's
current initiatives be continued and provided with sufficient
resources. Oversight and monitoring will also play a key role in
ensuring that DOD's plans are implemented as intended and that lessons
learned are identified and effectively disseminated. Absent continued
momentum and necessary future investments, the current initiatives may
falter, similar to previous efforts. Continued congressional oversight
will be an important factor in helping to ensure the department's
success.
Chairman Carper, Ranking Member Brown, and members of the
Subcommittee, this completes my prepared statement. I would be pleased
to respond to any questions that you may have at this time.
GAO Contacts and Staff Acknowledgments:
If you or your staff have any questions about this testimony please
contact me at (202) 512-9869 or khana@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this testimony. GAO staff who made key contributions
to this testimony included Abe Dymond, Assistant Director; Francine
Delvecchio; Kristi Karls; Sheila Miller; Heather Rasmussen; and David
Yoder.
[End of section]
Footnotes:
[1] DOD bears responsibility, in whole or in part, for 14 of the 30
federal programs or activities that GAO has identified as being at
high risk of waste, fraud, abuse, and mismanagement. The seven
specific DOD high-risk areas are (1) approach to business
transformation, (2) business systems modernization, (3) contract
management, (4) financial management, (5) supply chain management, (6)
support infrastructure management, and (7) weapon systems acquisition.
The seven governmentwide high-risk areas that include DOD are: (1)
disability programs, (2) interagency contracting, (3) information
systems and critical infrastructure, (4) information sharing for
homeland security, (5) human capital, (6) real property, and (7)
ensuring the effective protection of technologies critical to U.S.
national security interests.
[2] DOD's auditors have reported material financial management
weaknesses in the following areas: (1) Financial Management Systems,
(2) Fund Balance with Treasury, (3) Accounts Receivable, (4)
Inventory, (5) Operating Materials and Supplies, (6) General Property,
Plant, and Equipment, (7) Government-Furnished Material and Contractor-
Acquired Material, (8) Accounts Payable, (9) Environmental
Liabilities, (10) Statement of Net Cost, (11) Intragovernmental
Eliminations, (12) Other Accounting Entries, and (13) Reconciliation
of Net Cost of Operations to Budget.
[3] Pub. L. No. 111-84, div. A, § 1003(a), (b), 123 Stat. 2190, 2439-
40 (Oct. 28, 2009).
[4] GAO, Department of Defense: Financial Management Improvement and
Audit Readiness Efforts Continue to Evolve, [hyperlink,
http://www.gao.gov/products/GAO-10-1059T] (Washington, D.C.: Sept. 29,
2010).
[5] GAO, DOD Financial Management: Improvement Needed in DOD
Components' Implementation of Audit Readiness Efforts, GAO-11-851
(Washington, D.C.: Sept. 13, 2011); and DOD Financial Management:
Marine Corps Statement of Budgetary Resources Audit Results and
Lessons Learned, [hyperlink, http://www.gao.gov/products/GAO-11-830]
(Washington, D.C.: Sept. 15, 2011).
[6] [hyperlink, http://www.gao.gov/products/GAO-11-851].
[7] [hyperlink, http://www.gao.gov/products/GAO-11-830].
[8] An ERP solution is an automated system using commercial off-the-
shelf (COTS) software consisting of multiple, integrated functional
modules that perform a variety of business-related tasks, such as
general ledger accounting, payroll, and supply chain management.
[9] GAO, Financial Management: Achieving Financial Statement
Auditability in the Department of Defense, [hyperlink,
http://www.gao.gov/products/GAO-09-373] (Washington, D.C.: May 6,
2009); DOD Financial Management: Integrated Approach, Accountability,
Transparency, and Incentives Are Keys to Effective Reform, [hyperlink,
http://www.gao.gov/products/GAO-02-537T] (Washington, D.C.: Mar. 20,
2002); Defense Management: Actions Needed to Sustain Reform
Initiatives and Achieve Greater Results, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD-00-72] (Washington, D.C.: July
25, 2000).
[10] "Appropriations received" is an element of the SBR that
represents appropriated funds made available for use by DOD components.
[11] As we have reported
[hyperlink, http://www.gao.gov/products/GAO-11-851], the department
has not yet fully defined its strategy for completing all actions
necessary to achieve the FIAR goals, including actions related to the
auditability of most of the department's consolidated financial
statements such as the Balance Sheet and the Statement of Net Cost,
and significant audit areas such as equipment valuation.
[12] [hyperlink, http://www.gao.gov/products/GAO-09-373].
[13] An assessable unit can be any part of the financial statements,
such as a line item or a class of assets (e.g., civilian pay or
military equipment), a class of transactions, or it can be a process
or a system that helps produce the financial statements.
[14] [hyperlink, http://www.gao.gov/products/GAO-11-851].
[15] The objectives of general controls include safeguarding data,
protecting application programs, and ensuring continued computer
operations in case of unexpected interruptions.
[16] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999); and OMB Circular No. A-123,
Appendix A, Internal Control Over Financial Reporting.
[17] [hyperlink, http://www.gao.gov/products/GAO-11-851].
[18] Budgetary resources include the amount available to enter into
new obligations and to liquidate them. Budgetary resources are made up
of new budget authority (including direct spending authority provided
in existing statute and obligation limitations) and unobligated
balances of budget authority provided in previous years.
[19] In a disclaimer of opinion, the auditor does not express an
opinion on the financial statements. A disclaimer of opinion is
appropriate when the audit scope is not sufficient to enable the
auditor to express an opinion, or when there are material
uncertainties involving a scope limitation--a situation where the
auditor is unable to obtain sufficient appropriate audit evidence.
[20] Internal control comprises the plans, methods, and procedures to
provide reasonable assurance that objectives are being achieved in the
following areas: (1) effectiveness and efficiency of operations, (2)
reliability of financial reporting, and (3) compliance with applicable
laws and regulations.
[21] Some of these elements are consistent with the FIAR Guidance
requirements for a corrective action plan, such as identifying
required resources and ensuring that actions address the identified
deficiencies.
[22] The three systems are the Marine Corps Total Force System
(MCTFS), which is an integrated military personnel and payroll system;
the Standard Accounting, Budgeting, Reporting System (SABRS), which is
the Marine Corps' general ledger accounting system; and the Defense
Departmental Reporting System (DDRS), which is a DOD-wide financial
reporting system.
[23] [hyperlink, http://www.gao.gov/products/GAO-11-830].
[24] GAO, DOD Business Transformation: Improved Management Oversight
of Business System Modernization Efforts Needed, [hyperlink,
http://www.gao.gov/products/GAO-11-53] (Washington, D.C.: Oct. 7,
2010).
[25] [hyperlink, http://www.gao.gov/products/GAO-11-53]. The 10 ERPs
are as follows: Army--General Fund Enterprise Business System (GFEBS),
Global Combat Support System-Army (GCSS-Army), and Logistics
Modernization Program (LMP); Navy--Navy Enterprise Resource Planning
(Navy ERP) and Global Combat Support System-Marine Corps (GCSS-MC);
Air Force--Defense Enterprise Accounting and Management System (DEAMS)
and Expeditionary Combat Support System (ECSS); Defense--Service
Specific Integrated Personnel and Pay Systems and Defense Agencies
Initiative (DAI); and Defense Logistics Agency--Business System
Modernization (BSM). According to DOD, BSM was fully implemented in
July 2007.
[26] The Milestone Decision Authority is the senior DOD official who
has overall authority to approve entry of an acquisition program into
the next phase of the acquisition process and is accountable for cost,
schedule, and performance reporting, including congressional reporting.
[27] Office of Federal Financial Management, Core Financial System
Requirements (Washington, D.C.: January 2006) states that a Core
financial system must deliver workflow capabilities including
integrated workflow, workflow process definition and processing
exception notices.
[28] Office of Federal Financial Management, Core Financial System
Requirements state a Core financial system must provide an integrated
ad hoc query capability to support agency access to and analysis of
system-maintained financial data.
[29] Office of Federal Financial Management, Core Financial System
Requirements state that a Core financial system financial transactions
can be originated using multiple external feeder applications. These
feeder systems and the Core financial system must interface seamlessly
so that data can move effectively between them. The Core system must
be able to process and validate the data independent of origination.
There must also be a process for handling erroneous input and
correction."
[30] Office of Federal Financial Management, Core Financial System
Requirements state that a Core financial system financial transactions
must deliver an integrated ad hoc query capability to support agency
access to and analysis of system maintained financial data.
[31] [hyperlink, http://www.gao.gov/products/GAO-11-851].
[32] GAO, DOD Financial Management: Numerous Challenges Must Be
Addressed to Achieve Auditability, [hyperlink,
http://www.gao.gov/products/GAO-11-864T] (Washington, D.C.: July 28,
2011).
[33] [hyperlink, http://www.gao.gov/products/GAO-11-830].
[34] DOD financial management systems are required by the Federal
Financial Management Improvement Act of 1996 (FFMIA) to comply with
federal financial management systems, applicable federal accounting
standards, and the United States Government Standard General Ledger at
the transaction level. Pub. L. No. 104-208, div. A, title VIII, § 803,
110 Stat. 3009, 3009-390 (Sept. 30, 1996).
[35] [hyperlink, http://www.gao.gov/products/GAO-11-835T]; [hyperlink,
http://www.gao.gov/products/GAO-11-864T].
[End of section]
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