UNCLASSIFIED OUT IN FRONT AGAIN – THE MARINES Financial Statement Audit Update

UNCLASSIFIED USMC Asserts Audit Readiness Sep 2008 Audit readiness was an output of our Financial Improvement Initiative (FII) 1.Management/Internal Controls 2.Organization and Infrastructure 3.Policies and Procedures 4.Information Systems 5.People Secretary Hale approved USMC financial statement audit in May, 2009 Grant Thornton, LLP awarded audit contract on 09 Sept 2009; Department of Defense Inspector General (DoDIG) maintains full oversight control of the contractor and outputs Strategic Areas USMC Audit Chronology 2

UNCLASSIFIED Audit of Statement of Budgetary Resources (SBR) began on 30 Sep 2009 Audit focused on Beginning Balance with limited testing conducted on FY10 Current Year activity due to challenges in the following areas:  Fund Balance w/ Treasury Reconciliation  Unadjusted to Adjusted Trial Balance by General Ledger Account  Military Payroll and Disbursement Processing  Service Provider Agreements and Expectations  Bulk Obligation Estimation and Support  Contract Management and Payment Processing  Information System Controls FY10 audit concluded with a disclaimer of opinion due to scope limitations that prevented the auditors from concluding their work USMC Audit Chronology 3 USMC Asserts Audit Readiness Sep 2008 Year One of Audit Sep 2009

UNCLASSIFIED USMC Audit Chronology 4 USMC Asserts Audit Readiness Sep 2008 Year One of Audit Sep 2009 Improper Accruals – recorded a prior period adjustment to correct unrealized accruals; initiated a change in the accounting system to prevent the recording of manual accruals ahead of receipt or delivery of goods or services. Bulk Obligations – recorded a prior period adjustment to adjust unsupported bulk transactions; developed improved estimation models that support periodic balance adjustments. Military Payroll Processing – implemented entitlements reconciliation that compares interfaced amounts from various systems (personnel, accounting and disbursing) by key elements. Information System Controls – addressed 40 of 56 systems findings related to access rights, data and configuration management, system strategy and design controls, and interface reconciliations. Fund Balance w/ Treasury and Trial Balances – fully reconciled and ready to test again in FY11. Remediation

UNCLASSIFIED USMC Audit Chronology 5 USMC Asserts Audit Readiness Sep 2008 Year One of Audit Sep 2009 Year Two of Audit Jan 2011 Jan 11 Dec 11 Nov 11 Oct 11 Sep 11 Feb 11 Apr 11 Mar 11 May 11 Aug 11 Jul 11 Jun 11 Jan 12 BEGINNING BALANCE TESTING PLANNING PHASE DODIG RENDERED DISCLAIMER REPORT 22 NOV 2011 TEST PHASE 1 CONTROL PHASE REPORT PHASE 1 INFORMATION TECHNOLOGY TESTING (4 SYSTEMS) CURRENT YEAR TESTING (FY11) Feb 12 Mar 12 TEST PHASE 2 REPORT PHASE 2 Apr 12 May 12 DODIG TO START FY12 SBR AUDIT (NOTIONAL) OUT-OF- CYCLE Remediation

UNCLASSIFIED Sample Allocations 6 CommandSample Count % HQMC 3, % MCRD % MCCDC % MCRC % LOGCOM % MARFOREUR % MARFORSOUTH % MARFORNORTH % MARFORPAC % MARFORCOM % MCCDC-HENDERSON HALL % 8th & I % MCSC 2, % TECOM % MARFORRES % MARCENT % MARSOC % DFAS 4, % Total12,016100%

UNCLASSIFIED FY11 Sample Trends 7 USMC unable to provide documentation to support obligations and expenses Lack of management explanations or other support to show transaction validity Lack of management explanations for manual transaction adjustments 1. Missing Audit Evidence Obligations and expenses recorded in error after FYE Lack of timeliness in recording manual adjustments to transactions Lack of periodic management review as abnormal accounting conditions were not addressed in the appropriate accounting period 2. Timely and Accurate Recording

UNCLASSIFIED FY11 Sample Trends 8 SDNs are dormant with no management follow-up or due diligence demonstrated Lack of management explanations to support the status of transaction balance, underlying estimates or outlay trends Lack of timeliness in recording adjustments 3. Stale & Bulk Obligations Predominantly relevant for expenses recorded after FYE where receipt and delivery occurred prior to 9/30 Lack of timely adjustment for known errors and/or abnormal accounting conditions Lack of timeliness in recording adjustments 4. Accounting Period Cut-Off

UNCLASSIFIED FY11 Sample Trends 9 Unable to determine validity of intra-governmental disbursement due to a lack of evidence for post-payment receipt of goods or services Lack of management explanations to support abnormal accounting conditions (LIQ > EXP) Lack of timeliness in recording adjustments 5. IPAC Transactions Example of Auditor Comments “CAT 1 MIPR - Unable to determine appropriate supporting documentation for intra-governmental expenses.” New guidance and procedures are being prepared for post-payment validation Guidance will require that all USMC Commands create and maintain a receiving report for all IPAC transactions recorded in FY12  IPAC Notification Report  Record expenses in the accounting system for amounts received and accepted  Process chargeback in accordance Treasury and DoDFMR policy

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