Achieving Balance Between Clean Audit and Transformation Imperatives “The Marine Corps is a combat force-not a business. To be successful, however, we need to support Warfighter excellence with well managed business processes that are both effective and efficient” M.W. Hagee 33rdCommandant, United States Marine Corps 6 March 2008

Agenda Reasons for Achieving Balance Clean Audit and Financial Improvement Similarities USMC’s Historical Challenges The Case for Transformation Successful Financial Improvement Application of the “Auditor Lens” Financial Improvement Efforts Translate to Audit Readiness Examples Balancing the Here and Now

Why Am I Achieving a Balance OUSD(C) Memorandum of May 2003 Improve Business Processes DoD Enterprise Architecture Systems Transition Plan Standard Data Improve Management Information OUSD(C) Memorandum of 8 Aug 2003 Mid–Range Financial Improvement Plan Identification of measurable steps to ensure material line items are auditable Address all identified major DoD deficiencies Dates when improved areas will be ready for external assessments and audits Favorable Audit Opinion by FY 2007

Clean Audit and Financial Improvement Similarities Transformation Imperative Clean Audit Objective: Timely, relative, accurate financial information to Commanders to aid decision making Objective: A fair presentation of an entity’s financial position. Outcomes: Sound processes to support Warfighters Savings Increased confidence in financial decisions Taxpayer and Congressional trust Approach: Business Process Improvements Application of “Auditor Lens” across business processes Transition from one system to another system may improve business processes but leave you un-auditable due to data conversions. SFIS compliance is a financial improvement but successful implementation does not make you auditable. Implementation of interfaces is a financial improvement that reduces costs, reduces errors, but does not make you auditable, you may not have sufficient internal controls, valuations may be recorded incorrectly, supporting documentation may be insufficient. You may invest in heroic efforts and obtain documentation, put in place processes that do not rely upon systems, and construct financial statements manually, all of which could very well be auditable, however; the financial improvements would be non-existence, you would have a costly, labor intensive manual system that is auditable but not cost effective. But ….. Audit can be achieved without improved business processes as Financial Improvements can be made without being auditable.

USMC’s Historical Challenges Lack of accurate, timely, and relevant financial information. Inability to quickly identify ineffective program/project execution. Lack of interfaces/or non-standard data structures across financial feeder systems. Manual processes increase DFAS support costs and are key contributor to interest penalty costs. Negatively impacts leaderships ability to redirect resources to meet emergent requirements while reducing execution risks of established programs. Delays funds redistribution to fund warfighter requirements. Inhibits the ability to provide accurate and relevant information to leadership. Reduces funds available for warfighting requirements. Problems Lost Opportunities

The Case for Transformation Lost Opportunities Prevent Reverted Balances $123 million (FY 2002 – 2004 O&M Costs) Fund Peacetime Depot Maintenance for 5th Echelon Repair for one year Avoid Congressional Reductions due to past Reverted Balance $15.7 million (Appropriation Act FY2005) Support Operating Budget of First Marine Division Reduce Supporting Establishment cost by 1% by improved understanding of cost Our current, outdated processes and procedures are causing us lost funding opportunities. For instance: - After each fiscal year, reverted balances (de-obligated funds we can no longer use for other efforts) over the past three years, have totaled the amount of resources we would spend in one year to fund peace time Depot Maintenance. - Not only do we miss opportunities due to reverted balance, Congress “penalizes” us with further funding reductions in the appropriations act based on the reversions. - Approximately 900 Marines (one Battalion) can be funded for every one percent in cost efficiencies that can be found in the supporting establishment. Bottom line: The Marine Corps could have increased our support for our Marines and our Warfighting Mission with better financial management tools and practices. $23 million (Appropriation Act FY2005) Buys 2+ Rifle Companies (Approx. 420 Marines) Reduce DFAS Bill 6$ Million (7% of $84 million – Projected FY 2005 DFAS Bill) Buys 2+ Rifle Platoons (Approx. 110 Marines) 3

Accurate, Timely, Relevant Financial Information Successful Financial Improvement Accomplished thru Strategic Changes of Business Processes Looking to the Future Organization & Infrastructure Policies & Procedures Management Control People Information Systems Data Integrity Accurate, Timely, Relevant Financial Information 5 Key Strategic Areas Governance Sustainability Financial Improvement is about improving the way you do business in future Financial Improvements must be sustainable Financial Improvements should be cost effective Financial Improvements should be efficient Financial Improvements should be auditable

Accurate, Timely, Relevant Financial Information Clean Audit Accomplished thru the Application of the “Auditor Lens” over all Business Processes Looking at the Past Business Organization & Infrastructure Policies & Procedures Management Control People Information Systems Data Integrity Accurate, Timely, Relevant Financial Information 5 Key Strategic Areas Governance Sustainability Internal Controls Source Documentation Reconciliations Transactional Validity and Integrity Completeness Rights and Obligations Valuation or Allocation Existence or Occurrence Presentation and disclosure

Financial Transformation Efforts Translate to Audit Readiness Financial Improvement Value Transformation Efforts Audit Readiness Value Defense Property and Accountability System (DPAS) and Standard Accounting Budgeting and Reporting System (SABRS) interface for the reporting of personal property. Implementation of abnormal condition tracking within the financial environment. Transaction analysis of SABRS.

Financial Transformation Efforts Translate to Audit Readiness Financial Improvement Value Transformation Efforts Audit Readiness Value Transaction integrity between the accounting system and the mixed personal property system. Asset visibility. Manual journal vouchers eliminated. Defense Property and Accountability System (DPAS) and Standard Accounting Budgeting and Reporting System (SABRS) interface for the reporting of personal property. Root cause/trend analysis Process improvement benchmarking. Implementation of abnormal condition tracking within the financial environment. Assurance that the accounting system is in accordance with the Treasury Financial Manual. Assurance that linkages exist between the general ledger and transactions. Transaction analysis of SABRS

Financial Transformation Efforts Translate to Audit Readiness Financial Improvement Value Transformation Efforts Audit Readiness Value Transaction integrity between the core accounting system and the mixed personal property system. Asset visibility. Manual journal vouchers eliminated. Defense Property and Accountability System (DPAS) and Standard Accounting Budgeting and Reporting System (SABRS) interface for the reporting of personal property. Provides an integrated process to record and account for personal property Enhances internal controls over financial reporting Root cause/trend analysis Process improvement benchmarking. Implementation of abnormal condition tracking within the financial environment. Documents the existence of “Environmental Controls” over transaction records, documents and financial activities. Assurance that the accounting system is in accordance with the Treasury Financial Manual. Assurance that linkages exist between the general ledger and transactions. Transaction analysis of SABRS Documents transaction level assessment and compliance with Treasury, OMB and DoD financial management regulations and requirements Financial Improvements resulted in less reverted 1 year after FY close. Example GWOT obligations 2003 – 2005 O&M Obligations ($M) Obligations ($M) FY End of FY End of Next FY Reverted ($M) % Rev 2003 $ 2,055 $ 1,964 $ 91 4.4 % 2004 $ 1,558 $ 1,518 $ 40 2.6 % 2005 $ 2,599 $ 2,571 $ 28 1.1 %

Examples of Where We Are Today Reverted Balances - GWOT % Rev Reverted ($M) End of Next FY End of FY FY Obligations ($M) 1.1 % $ 28 $ 2,571 $ 2,599 2005 2.6 % $ 40 $ 1,518 $ 1,558 2004 4.4 % $ 91 $ 1,964 $ 2,055 2003 2006 $ 2,289 $ 2,253 $ 36 1.5 % Interest Penalties CONDITION FY04 FY07 %Chg Interest Penalty Cost Per $M $ 818 $ 134 84% Interest Paid $ 1,400K $ 366K 74% Discounts Taken $ 0 $ 390K DFAS Bill Reduction of $ 6M in FY 07

Balancing the Here and Now Against the Future How do we do this? Redskins fans know the answer…

Balancing the Here and Now Against the Future “The future is now.” - G. Allen

“The Marine Corps is a combat force-not a business. In Conclusion… “The Marine Corps is a combat force-not a business. To be successful, however, we need to support Warfighter excellence with well managed business processes that are both effective and efficient” M.W. Hagee 33rdCommandant, United States Marine Corps