DoD Audit Readiness… The ‘duck’ stops here! Mr. Ken Miller Mr. Bobby Garrett For: Ms. Amber Propert OUSD(AT&L) P&EP 18 November 2018

Overview OUSD(AT&L) Property & Equipment Policy (P&EP) Office Agenda Overview OUSD(AT&L) Property & Equipment Policy (P&EP) Office Audit Readiness Update: Existence & Completeness (E&C) Ongoing DoD efforts, with support of P&EP: Valuation emphasis Military Equipment (ME) classification Capitalization Threshold Study

Property & Equipment Policy Who we support: Office of the Under Secretary of Defense, Acquisition, Technology and Logistics (OUSD, AT&L) Acquisition Resources & Analysis (ARA) Property & Equipment Policy Office (P&EP) Mission: To establish policies and support business process development that enables military services and defense agencies to provide more accurate and reliable information to senior leaders to support management decisions at an enterprise level.

Financial Improvement Priorities Highlights of October 13, 2011 Memorandum “All Hands” effort across Department Need to accelerate plan and place greater emphasis on overall effort Achieve audit readiness for Statement of Budgetary Resources by FY2014 Increase emphasis on asset accountability Execute a full review of Department financial controls over next 2 years & establish goals to measure progress Mandatory training for audit and key financial efforts Meet legal requirements to achieve audit readiness by FY2017 Secretary Hagel echoed former-Secretary Panetta’s commitment to an auditable DoD: Restructure around material weakness information Following slide “graphic of plane/GFP parts” (insert slide after) “We need auditable statements, both to improve the quality of our financial information and to reassure the public … that we are good stewards of public funds.” (Sec. Hagel submitted statement to “House Armed Services” Committee – 11 April 2013)

Comptroller Guidance – August 2009 CFO Act 1990 Compliance Requires auditable financial statements Demonstrates to public that DoD is good stewards of tax dollars DoD Priorities Must focus limited resources Must improve financial information & processes Initial Focus – (1) Statement of Budgetary Resources and (2) Existence & Completeness of mission critical assets Mr. Hale Memo Re-purpose slide for MDA Summit purposes. (less SBR more E&C, and define mission critical assets) Existence & Completeness (E&C) Mission critical assets accurately reflected in accountable property and logistical systems Process of verifying reported assets exist at a given date and records detailing essential data for the items Successful completion of E&C is essential to audit-readiness process and achieving accurate valuation of the Component’s assets Statement of Budgetary Resources (Key highlights) Major financial decisions based upon budgetary related data Initial focus is Appropriations received

Preparing for Audit Readiness Audit readiness is not just a financial management initiative, but a team effort Collaboration and communication among business process owners (ACQ, LOG, and FIN) is essential to audit success Key Players in Audit Readiness Process Financial community Logisticians Business Process owners Industry counterparts Service providers (i.e. DFAS, DPAS, IUID Registry) Internal and external stakeholders Decision-makers

FIAR Guidance – Wave 3 Existence & Completeness In order to assert to Audit Readiness, Component management must satisfy financial statement assertions: Existence Reported assets actually exist at a given date Completeness All assets are properly recorded in the Component’s Accountable Property System of Record (APSR) Rights and Obligations Reporting entity claims it has the rights to and “owns” the equipment, and has documentation to support its “rights” Presentation and Disclosure Assets are consistently categorized, summarized, and reported from period to period in accordance with DoD guidance and Federal financial reporting standards

Documentation for Assertion – Existence Management Asserts: Reported assets exist Documentation proving asset existence APSR Asset Listing reconciles with financial statements Auditors Examine: Complete Asset Listing from APSR Process documentation detailing how periodic verification of asset listing is performed Documentation regarding the actual performance of inventories, including wall-to-wall efforts Physically Verified

Documentation for Assertion – Completeness Management Asserts: All assets meeting definition of capital equipment have been recorded and reported Auditors Examine: Reconciliation of Financial Statements to APSR Asset Listings Program Offices activity and Procurement Budgets Review “floor to book” samples from Physical Inventories Receiving and acceptance documentation Recorded in APSR

Management Asserts: Auditors Examine: Documentation for Assertion – Rights & Obligations Management Asserts: Management has the rights to and “owns” the equipment and has documentation supporting its assertion Auditors Examine: Receiving and acceptance documentation (e.g., DD250, DD3161, DD1149) Contract terms and GFP listings in contracts Preponderance of Use documentation DD250 Notional example Receiving Report Notional example

Management Asserts: Auditors Examine: Documentation for Assertion – Presentation & Disclosure Management Asserts: General Property Plant and Equipment (GPP&E) values are accurately reported GPP&E classifications and summarization has been consistent from period to period GPP&E has been properly footnoted Auditors Examine: Component Financial statements with Federal Financial Accounting and DoD Guidance GPP&E classifications and summarization for consistency Financial statements and footnotes contain all required information For this assertion: Collaboration and Communication between FM & Program Office is critical

Component Quick Win E&C Accomplishments E&C Status Update As of May 2013 FIAR Status Report, 53% of mission critical assets are either under audit, have been validated as audit ready, or have asserted audit readiness P&EP collaborates with Components by monitoring and providing support with FIPs and Assertion Packages DoD Components plan to achieve asset E&C assertion prior to 30 September 2017 Component Quick Win E&C Accomplishments Note 1 – Army has pulled assertion package back for additional review

Defining Valuation (Wave 4) Per March 2013 FIAR Guidance: full audit will require valuation of assets (Wave 4) Assets must be valued at full cost according to SFFAS #6 Expectations are for accounting systems to provide transactional data to justify full cost of assets SFFAS #35 allows estimates for full cost valuation GPP&E baseline values have not been maintained since 2009, when DoD deemphasized valuation

MEV Current Assessment Summary Despite de-emphasis of Valuation, all Components are currently valuing assets Components self rated SFFAS level of compliance as low Manual data pulls drive financial reporting processes Components are not currently relying upon ERP systems deployment for 2017 audit readiness Components lack complete and auditable supporting documentation

Strategic Vision & Notional Timeline Establish “line in the sand” as FY2014 and beyond Valuation Legacy Asset Valuation Valuation Guidance Valuation Prioritization Capitalization Threshold Study Military Equipment Definition Removal Implement Change by FY2014 Publish prior to FY2014- Estimation Methods, SFFAS 35 Compliant Study Complete this FY. Implement Change in FY2014 Shift audit priorities to address Valuation, beginning FY2014

Steps to Facilitate Valuation 1 2 Legacy asset valuation Background: BCA states that legacy valuation will not be performed; confusion exists among Components regarding what constitutes a legacy asset and which assets will be subject to audit. Recommendation: Establish a “line in the sand” for assets to be valued and subjected to audit. Potential recommendation would be for all assets on the books FY2014 and beyond. Valuation Guidance Background: Components not capturing and documenting acquisition costs for GPP&E in accordance with Federal Financial Reporting Standards. There is lack of a strategic, long-term plan to address the valuation issue. Recommendation: Publish DoD Guidance that prescribes acceptable methodologies for estimating equipment acquisition costs in accordance with SFFAS No. 35. 3 4 2013 Capitalization Study Background: P&EP is currently supporting a capitalization threshold analysis; increasing the Department threshold will provide Components assistance by decreasing the pool of assets required to value for audit readiness. Recommendation: Conduct threshold analysis, develop recommendations, and propose a threshold that will be acceptable but the audit and IG communities. Memo Support Background: Valuation is a fundamental part of the audit readiness initiative, and requires leaderships’ endorsement for Components to commit efforts to valuation assertion. Recommendation: Draft a memo from senior leadership indicating the priority of achieving valuation compliance, eliminating the Military Equipment (ME) definition categorizing all assets as GPP&E, and implementation instructions for the new capitalization threshold.

Capitalization Threshold? Brain Teaser What is the current DoD Capitalization Threshold? $25,000 $100,000 $250,000 $1,000,000 ???

Capitalization Threshold Analysis Leveraged lessons learned and statistical methods utilized Did not reconcile 2013 study with budget appropriations as was performed in the 2009 study Audit community indicated that approximately 95% capitalization rate is desirable Component’s FY12 Financial Statement (Note 10) was used as reference point to validate data Records with acquisition cost less than $100k were omitted from the data source Data consisted of military equipment (ME) and general equipment (GE) Analysis was applied to General Fund (GF) assets (GF assets account for 99.15% of total acquisition cost) Unable to confirm reconciliation for Working Capital Fund (WCF) items to financial statement Data Analysis Facts to Consider ME definition will be eliminated and included within the definition of GE Change in capitalization threshold should anticipate a significant reduction in number of assets while maintaining a significant percentage of asset dollars capitalized Regardless of capitalization threshold, DoD and its Components must maintain accountability of all assets

Capitalization Threshold Analysis Impacts of increasing DoD’s capitalization threshold: Advantages Disadvantages Reduces number of assets requiring valuation Balances financial reporting Accountability requirements for assets will not be impacted Operational efficiencies will be obtained Best position the Department, and Components mandated to produce financial statements, for an unqualified audit opinion Potential to create complexity in implementation and execution Number of assets expensed may be interpreted as a significant portion of assets Individual Component thresholds risk creating inconsistencies with reporting when assets are transferred between Components with varying thresholds

Moving Forward Remember: complete auditability includes valuation Utilize lessons learned from SBR and E&C assertions to maximize efforts for successful valuation Coordinate efforts with P&EP Office P&EP can address questions, provide support, and clarify guidance as needed Changes in policy are being formulated and will facilitate Department’s valuation efforts

Thank You! Questions? Comments? Contact: Amber Propert (Amber.Propert@OSD.mil) Ken Miller (Kmiller@AOCSolutions.com) Bobby Garrett (Bgarrett@AOCSolutions.com) For general questions and information, visit our website: http://www.acq.osd.mil/pepolicy/ Thank You! 21