1. Coast Guard and the Financial Statement Audit
March 9, 2006

2. CG and the Financial Statement Audit Agenda
What are the financial statements?
Financial Statement Assertions
Where we are today?
Systemic Problems
FY06 Audit
Way ahead

3. CG and the Financial Statement Audit What are the financial statements?
Balance Sheet
Shows basic relationships
Asset = Liabilities + Equities as of a point in time
Proprietary Only
Statement of Net Costs
Private sector income statement
Total revenues – Expenditures = Net Costs
Summarizes activity through a period of time
Statement of Changes in Net Position
Ties the net cost figure to the equities line on the balance sheet
Rolls forward the net position from one year to the next using activity throughout the year from the statement of net cost

4. CG and the Financial Statement Audit What are the financial statements?
Statement of Budgetary Resources
SF-133
Top 3rd shows all your resources
Middle 3rd shows how your resources are being used (obligated vs. unobligated)
Bottom 3rd shows outlays
Shows activity throughout the year and at a point in time
Budgetary accounts only
Statement of Financing
Most difficult of all the financial statements
Ties the budgetary numbers from the Statement of Budgetary Resources back to the net cost figure on the Statement of Net Cost
Budgetary to proprietary reconciliation

5. CG and the Financial Statement Audit Financial Reporting Assertions
Presentation and Disclosure
Existence or Occurrence
Rights and Obligations
Completeness and Accuracy
Valuation and Allocation
Assertions apply to line items on the financial statements that map back to our processes

6. CG and the Financial Statement Audit Assertion Examples
Construction in Process
Accounts Receivable
Funds Control
PP&E
OM&S

7. DHS Financial Accountability Act
CG and the Financial Statement Audit
Our Financial World
Sarbanes-Oxley Act
DHS Financial Accountability Act
Coast Guard
Financial Reporting
Processes
Systems
FMFIA
Revised
A-123
Federal Managers Financial Integrity Act (FMFIA) (1982)
Requires head of executive agency to establish & maintain system of internal controls
Requires annual reporting
Sarbanes-Oxley Act
Public Company Financial Reporting Credibility questioned in late 2001
SOX Act addresses internal controls over financial reporting. Requires:
Evidence based Assertions
Disclosure Controls
Criminal Statutes
A-123
OMB implementing guidance issued under authority of FMFIA.
Standards for IC over FR.
Arbitrary before
Now parallel with audit standards
Requires 1) new annual assurance statement on internal controls over financial reporting. 2) The circular does not require a separate audit opinion on the internal controls over financial reporting. However, OMB may require an internal control audit opinion at its option if the agency cannot meet deadlines in its approved corrective action plan (DHS’s CAP). 3) Provides specific methodology for management’s assessment of internal control over financial reporting. 4) Requires management’s direct conclusion about the effectiveness of the overall design and operation of internal control over financial reporting. 5) Requires substantial documentation to support management’s conclusion.
DHS FAA
Recently Signed. Requires:
Mandatory compliance with CFO Act
DHS written assertion on internal controls in 2005
GAO to study cost/benefit of requiring audit opinion on internal controls
DHS audit opinion of internal controls over financial reporting, effective FY 06
DHS forming Internal Controls working committee
Auditor Focus – IC is core problem with audit results. Desire to conduct an internal control based audit. SOX environment making auditors more risk adverse and more independent.
Commercial Auditor
Focus on internal controls

8. CG and the Financial Statement Audit Audit History
1990
CFO Act passed
years to build
USCG builds toward a clean audit
1999 – Feb 2003
Under DOT
No material weaknesses or reportable conditions
Mar 2003 – Present Rebuilding
Move to DHS
CG causes qualifications, material weaknesses, & reportable conditions
2006 Additional Audit Opinion on Internal Controls
2003 was

9. CG and the Financial Statement Audit Our Financial World
DHS received a disclaimer on the FY05 Financial Statements (Balance Sheet only)
Coast Guard was a major contributor to 10 material weaknesses and 1 reportable condition
Financial Management
Financial Reporting
Financial Systems
Fund Balance with Treasury
Plant Property and Equipment
Operating Materials and Supplies
Undelivered Orders, Accounts and Grants Payable and Disbursements
Actuarial Liabilities
Budgetary Accounting
Intragovernmental and Intradepartmental Balances
Environmental Liabilities (reportable condition)
KPMG Audit Report at:
In early FY-06 we received $20 million to remediate the audit findings
$12 million will be spent on OM&S
The remaining funds will be spent on the remaining MW with the focus on strengthening our backbone and completing the integration of our systems such as tearing down the multiple GLs
The CG had a very difficult time believing they were not as good as they thought they were. Diffiicult transition period from FY03 to FY04.

10. Coast Guard Audit Dashboard
Due
Status
Progress
Program
As of 21 Feb 2006
(Note 1)
Financial Management Oversight
Financial Reporting
Financial Systems (Note 2)
Funds Balance w/Treasury
Actuarial Liability
OM&S (Note 3)
PP&E
Undelivered Orders & Accounts Payable
Budgetary Accounting
Intra-governmental Balances
Environmental Liabilities
FY07
All
FINCEN
CG-8
CG-1
CG-4
FY07
FY07
FY06
FY06
FY07
FY07
FY07
All
FY07
CG-8
FY07
CG-8
FY06
CG-4
/1: Indicates areas that have a complete plan, which is results focused to achieve success listed in the Coast Guard’s strategic remediation plan Indicates that the plan is being successfully implemented Indicates that a sufficient plan has not been provided or that the program is not achieving the plan. Arrows mark relative improvement since last report, regardless of whether or not progress has resulted in a change in dashboard color.
/2 CG-841 provided a plan with system requirements totaling $23.1M. The requirements of the plan need to be further reviewed, approved, and scaled down to reflect only those items deemed essential for audit success by FY07.
/3 66 of 650 field units complete. $46M excess removed to ICPs.

11. CG and the Financial Statement Audit Systemic Problems
Inadequate/incomplete policy and procedures
Poor data integrity
Multiple Processes/Systems/Decentralized
Oversight program/Accountability
Competency
All of the above must be corrected for the CG to move forward with audit remediation, internal controls, improved efficient/effective financial processes.

12. Financial Systems/Processes and Infrastructure
Material Weakness
Inadequate Policy
Data Integrity
Multiple Processes/De-centralized
Oversight/
Accountability
Competency
Financial Management Oversight X
Financial Reporting &
Intragovernmental
Financial Systems
Funds Balance with Treasury

13. Programmatic Material Weaknesses
Inadequate Policy
Data Integrity
Multiple Processes/De-centralized
Oversight/
Accountability
Competency
Actuarial Liabilities X
OM&S
PP&E
UDO’s & A/Payable
Budgetary Accounting
Envrionmental Liabilities

14. CG and the Financial Statement Audit FY06 Audit
Held informal meetings with auditors and process owners
In process of developing audit plan/schedule
Formal kickoff scheduled for Mid March
Balance sheet only audit
Some internal control work will be involved

15. CG and the Financial Statement Audit Way Ahead
Establish Accountability at all levels
Cold Fusion Program, World Prosperity Program, Child Prodigy Program
Complete integration of financial systems
Establish financial management competency
Completing Planning-Formulating-Execution-Reporting Cycle
Internal Control Program
Process improvement
Program Level CFOs vs Resource or Budget Directors
Solicit input from the field
In many cases as we address audit issues, we are also improving our processes and customer service

16. CG and the Financial Statement Audit Closing
On the road to success
Although the path maybe longer than we think
Manage Expectations
We will continue to uncover issues
Field plays a role in identifying and communicating problems before the auditors find them
Apply the financial reporting assertions to the activities that you perform
New way to look at our world of work
We will be a better organization as a result of the audit and our remediation activities