Department of Defense Financial Improvement and Audit Readiness Northern Virginia Chapter Association of Government Accountants April 21, 2016 v8 Alaleh Jenkins, Assistant Deputy Chief Financial Officer

2 Agenda Audit Strategy/Timeline History of Audit Efforts to Date Overview of DoD Consolidated Audit Strategy Current Status Where are We Now? FY15 SBA Audit Results FY 2016 GF Projected to Be Under Audit Remaining Challenges Strategy for : Move the Big Rocks Key Department-wide Audit Readiness Information Technology Initiatives Treasury Index 97 Universe of Transactions Procurement and Financial Processes and Data (Handshakes) Cash Accountability- Direct Treasury Disbursing Intragovernmental Transactions Commitment to Audit Readiness Generally What is Left to Address Critical Success Factors Stay Connected

Audit Strategy/Timeline 3

4 History of Audit Efforts to Date Audit Strategy/Timeline FIAR Office Established Initial Priorities Established Pre-2009 Audit emphasis largely within only the comptroller organizations Post-2009 Audit efforts involve all functional areas enterprise-wide Initial DoD Efforts Begin The Climb from SBA to Full Financial Statement Audit Will Be Steep 2017 FY 2017 Statutory Direction Achieve Full Agency Financial Statement Audit Readiness FY 2017 Statutory Direction Achieve Full Agency Financial Statement Audit Readiness 2014 FY 2014 Statutory Direction Achieve Audit Readiness of General Fund Statement of Budgetary Resources (SBR) FY 2014 Statutory Direction Achieve Audit Readiness of General Fund Statement of Budgetary Resources (SBR) 2009

Overview of Consolidated Audit Strategy 5 Department-wide SSAE No.16 Coverage Use the Work of Component Auditors Consolidated auditor to assume responsibility for or make reference to audit opinions of each component auditor Perform Independent Testing Consolidated auditor to perform internal controls and substantive testing over activities & balances OUSD(C) Audit Infrastructure in Place to Support Fourth Estate Eliminations Consolidated Financial Statements 23% Budget 15% Assets (e.g. DLA, SOCOM, DISA ) DoD Designated Audits Tier 2 4% Budget 2% Assets (e.g. WHS, DARPA, DTRA) DoD Designated Examinations Tier 3 1% Budget < 1% Assets (e.g. DHRA DSS, DFAS GF) Immaterial Entities Tier 4 Army GF & WCF OMB Designated Entity Audits Navy* GF & WCF OMB Designated Entity Audits Air Force GF & WCF OMB Designated Entity Audits Other Tier 1 Entities (e.g. USACE, Military Ret. Trust Fund) OMB Designated Entity Audits Tier 1 (72% Budget, 83% Assets) Tier 1 (72% Budget, 83% Assets) OUSD(C) Audit Infrastructure in Place to Support Consolidation DoD Consolidation Process DoD Eliminations Agency Financial Report Other Consolidated Audit Responsibilities Internal Control Entity-Level Controls MICP End to End Process Documentation Monthly Testing NFR CAP Tracking Substantive/ Supporting Documentation Universe of Transactions and Reconciliations KSD Matrix Audit Liaison Process and Tools Percentages based on FY 2014 data *Includes U.S. Marine Corps Audit Strategy/Timeline

Current Status 6

Seven Defense Agencies continued to sustain full financial audits in FY 2015 Military Services and seven additional defense agencies were under SBA audits / examinations in FY 2015 Beginning in FY 2016 – Sustain and expand audit coverage: DLA and DISA to go through Full Financial Statement Audits Developing corrective action plans for SBA audit findings and tracking progress Implementing a risk-based approach for remaining financial statements; measuring progress in high-risk areas for each component Where Are We Now? Current Status Detailed information is contained in the November 2015 FIAR Plan Status Report at 7

Key Themes of the FY 2015 Audits Results – Critical issues identified, 700 combined findings and recommendations Incomplete universe of transactions, and General Ledger/Feeder system reconciliations Insufficient information technology controls, for both the reporting entity and Service Providers DoD-wide issues (e.g., Fund Balance with Treasury differences, Journal Vouchers for Eliminations and Accruals) Lack of control operating effectiveness and centralized document repository Key Takeaways A positive opinion was not expected The experience implemented a financial management discipline as the “new norm,” not just preparation for audit Focus on prioritizing, tracking, and validating corrective action plans (CAPs) FY 2015 SBA Audit Results Current Status As with many first year audits, the audit opinion will not be positive. It is expected that it will be several years before DoD achieves a positive SBA audit opinion, but SBR opinions should follow directly. 8

FY 2016 General Funds Projected to Be Under Audit 9 Current Status $ Billion Projected Under Audit % Audit Coverage

This Journey Will Take Time and Resources Resources are necessary to support and sustain audits, and remediate audit findings Legacy environment is stove-piped, complex, non-standard, and decentralized, making audits difficult and highly inefficient Migrating to a new control environment will take time, but it will enhance auditability successes and efficiencies Examples of Specific Challenges Universe of transactions (21 general ledger systems, 600 feeder systems) Defense-wide shared appropriation (TI-97), to include use of sub-allotments o Lack of visibility of transactions at the Component level hinders proper reconciliation of cash Funds Balance with Treasury auditable o Poses challenge for a complete universe of transactions Valuation of Property (and establishing policies that are cost-effective) Remaining Challenges 10 Current Status

Strategy for : Move the Big Rocks Current Status Over the next two years, the Department will continue to expand the scope of audits while sustaining a stronger, more disciplined environment, until full audit readiness is achieved. OUSD(C) and DCMO are increasing pressure and visibility using FIAR Governance. 11 Risk-Based Approach, Measuring Progress and Performing Control Testing, Focused on Seven Critical Capability Areas: Universe of Transactions – Reconcile feeder systems to general ledgers and retain underlying detailed transactions Fund Balance with Treasury (FBWT) – Reconcile FBWT and retain supporting documentation Journal Vouchers (JVs) – Validate that JVs are supported and justified Open Obligations – Confirm that the balances are valid and supported Existence, Completeness and Rights & Obligations of Assets – Validate that assets exist and records are complete; verify ownership Valuation of Assets – Record assets at the correct amount Environmental and Disposal Liabilities – Implement a process for identifying, estimating and recording the cleanup costs of hazardous waste Information Technology (IT) – Implement and validate IT controls (e.g., security, access control)

Key Department-wide Audit Readiness Information Technology Initiatives 12

Key Financial Management Information Technology Initiatives Key Department-wide Audit Readiness Information Technology Initiatives Information Technology Initiatives Directly Support Audit Readiness Critical 2-Year Initiatives/Requirements Treasury Index (TI) 97 Universe of Transactions Procurement and Financial Processes and Data (Handshakes) Cash Accountability, Direct Treasury Disbursing Intragovernmental Transactions, G-Invoicing

TI-97 Universe of Transactions Key Department-wide Audit Readiness Initiatives Requirement: Automated capability to provide a transactional universe for sampling and evidentiary proof. Necessary to assert audit readiness. Treasury Index 97- Universe of Transactions Key Department-wide Audit Readiness Information Technology Initiatives Accounting Source Systems Other Source Systems NIPR Credential Server Distributed File System Storage Financial Reconciliation Standard/Dashboard Reporting Ad Hoc Reporting DATA Act

Procure-to-Pay Handshakes Handshake 1 “Certify Funds” Handshake 2 “Validate Funds” Handshake 3 “Record Obligation” Handshake 4 “Procurement Instrument for Entitlement” Contract Writing System Purchase Request System Accounting System Contract Writing System Accounting System Contract Writing System Entitlement System Requirement: Match contract/purchasing controls and data to financial/pay controls and data Procure to Pay (P2P) Handshakes Key Department-wide Audit Readiness Initiatives Data Standardization and Exchange Hub Data Feed Data Standardization and Exchange Hub Data Feed Data Standardization and Exchange Hub Data Standardization and Exchange Hub

Need an approach that is simplified, standardized, and provides real-time balancing and traceability to general ledger (GL) accounts Current environment: Volume of transactions combined with complex processes/systems environment Lack of data standardization and controls, causing many reconciling items Inability to reconcile “check book” daily, impacting accurate and timely GL postings Issues/Risks with current non-standard process: $3.9 billion in undistributed disbursements and collections $7.0 billion in budgetary/proprietary differences $26.0 billion in In-transit disbursements and collections $ billion in unsupported accounting entries Cash Accountability Target State- Direct Treasury Disbursing Key Department-wide Audit Readiness Initiatives Benefits of Direct Treasury Disbursing: Sustainment of Financial Auditability Real-time cash balancing with Treasury Ensures DoD fund balances align with Treasury Account Statements Validation of GL accounts Reduction in Interest Payments and Outstanding Debt and Recovery/Capture of Discounts Traceability of the direct cite/cross- disbursing business processes Reduction of process errors associated with unsupported journal vouchers, unmatched disbursements, and in-transits

ERPs/Accounting Systems Entitling Systems (MOCAS, OnePay, DCPS, etc.) Daily Disbursing Systems (ADS, DDS) Monthly Departmental Systems (HQARS, DCMS, DCAS) Monthly Treasury Entitling Systems (MOCAS, OnePay, DCPS, etc.) Daily Disbursing Systems (ADS, DDS) ERPs/Accounting Systems Treasury Daily (PIR) Daily, Direct Phase 2: ERP Transition to Direct Treasury Disbursing ERPs/Accounting Systems Entitling Systems (MOCAS, OnePay, DCPS, etc.) Daily Disbursing Systems (ADS, DDS) Treasury Daily (PIR) Phase 1: Transition to Daily Reporting ERPs/Accounting Systems Entitling Systems (MOCAS, OnePay, DCPS, etc.) Daily, Direct Treasury Target State: All Direct Treasury Disbursing Cash Accountability Target State- Direct Treasury Disbursing Key Department-wide Audit Readiness Initiatives Covers more than 99.9% of the disbursement process

“Inaccurate and unsupported intragovernmental account balances continues to be one of the long-standing material control weaknesses preventing DoD from achieving audit readiness on the DoD Agency-wide basic financial statements.” – Report No. DODIG General Requirements: All Support Agreements for reimbursables created and managed in G-Invoicing Buyer and seller trading partner (TP) data included on all reimbursable work orders/MIPRs Execute 100% of Reimbursable Authority in G-INV, submit trading partner data on 100% of federal Accounts Payables FY16 Focus – Near Term Plan: Recording general terms & conditions in G-invoicing and TP data for Intragovernmental transactions orders in ERPs and track progress via DDRS & G-INV Provide resourcing strategy (people and systems) for FY16 and out (near and long term plan) 2/21/14 Integrity - Service - Innovation 18 Intragovernmental Transactions (IGT): G-Invoicing Key Department-wide Audit Readiness Initiatives

G- INVOICING Intragovernmental Transactions: G-Invoicing Key Department-wide Audit Readiness Initiatives

Commitment to Audit Readiness 20

Commitment across functional communities to fix and sustain known problems Sub-allotments (letting another entity have control of one’s checkbook) Universe of Transactions to include sensitive activities Balance our “check-book” with Treasury Continue integrating and simplifying processes & systems: Over 400 separate and mostly legacy systems relevant to audit – make tracing dollars from one system to another system nearly impossible Implement standard language within systems Finish counting assets and ensure processes are in place to value assets Ensure close collaboration with service providers (e.g., DFAS, DLA, Military Departments) Generally What’s Left To Address Commitment to Audit Readiness 21 Embrace and encourage new ways of doing business (change management) Audit Readiness is not just aligned to Financial Management, it’s spans across all Functional communities

Critical Success Factors 22 Commitment to Audit Readiness Tone From the Top Access to Supporting Documentation Strong Audit Infrastructure Well organized Audit Support Team Continual and effective communication Leadership’s buy-in Stress importance Emphasize deadlines Correct, clear, properly documented, and timely Auditor must be able to follow (Plain English)

Visit the FIAR website Read the FIAR Plan Status Report Subscribe to the DCFO’s ‘Defense Audit Readiness News’ Join the distribution list by ing 23 Stay Connected