1. 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

2. 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

3. 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.

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Steps to Facilitate Valuation1 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.

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

18. Capitalization Threshold Analysis
Leveraged lessons learned and statistical methods utilized
Did not reconcile 2013 study with budget appropriations as was performed in the 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

19. 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

20. 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

21. Thank You! Questions? Comments? Contact: Amber Propert
Ken Miller
Bobby Garrett
For general questions and information, visit our website:
Thank You! 21