1. Bureau of Medicine and Surgery 2012 Navy Medicine Audit Readiness Training Symposium Civilian Payroll: Path to Audit Readiness June 5 th – 6 th, 2012

2. FOR OFFICIAL USE ONLY Audit Readiness Context  DoD is required to assert audit readiness for the Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As part of Navy Medicine’s audit readiness effort, the Civilian Payroll business process has been identified as an assessable unit for which assertion must take place. Purpose  To discuss the Key Control Objectives (KCOs), Key Supporting Documents (KSDs), identified gaps and potential corrective actions for Civilian Payroll. Outcome  An understanding of the status of the Civilian Payroll assessable unit, including major deficiencies and what can be done now at the field level to facilitate a successful financial statement audit.  Some assessable units may not require field action at this time. 2

3. Civilian Payroll Scope & Definition FOR OFFICIAL USE ONLY 3 Definition Includes hiring, time and attendance, payroll, accrual, reconciliation, personnel changes, separation and retirement of civilian personnel Assessable Unit Lead/Team Ms. Kimberly McIntire Ms. Mitzi Cruz Ms. Terry Carey Assessable Unit Support Bhavin Patel – bhavpatel@deloitte.combhavpatel@deloitte.com Chaz Swingle – cswingle@deloitte.comcswingle@deloitte.com Q1 FY12 Disbursements $313 million

4. Audit Readiness Timeline FOR OFFICIAL USE ONLY 4 FY12FY13FY14 Assessable Units – Wave 2 Max Assertion Date Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 Travel 4 SEP 2012 Consumables 3 DEC 2012 Reimbursable Work Orders – Grantor 3 DEC 2012 Reimbursable Work Orders – Performer (Non-UBO) 1 APR 2013 Military Payroll (including RPN) 1 APR 2013 Contract Administration 1 JUL 2013 Non-Federal Receivables (UBO/Medical Treatment) 1 JUL 2013 Federal Receivables (UBO/Medical Treatment) 3 SEP 2013 Civilian Payroll 2 DEC 2013 Financial Reporting 2 DEC 2013 Funds Management (FBWT) 2 DEC 2013 Assessable Unit Assertion Interim Progress Milestones (90 Days, 50 %, 75 %) Control Testing Time Period

5. Audit Readiness Process FOR OFFICIAL USE ONLY 5 TasksWork ProductsCompleted Document Assessable Units 1 Determine which key business processes are Assessable Units Process Narrative Process Flowchart Mar. 1st 2 Document Assessable Units through interviews and observation Assess Internal Controls 3 Determine control objectives for each Assessable Unit Control AssessmentMar. 1st 4 Highlight internal controls in process documentation 5 Assess whether controls are effective in meeting control objectives Assess Supporting Documentation 6 Determine what supporting documents exist for each transaction type Key Supporting Document Matrix Apr. 16th 7 Assess whether there are any unsupported transactions Identify and Prioritize Deficiencies 8 Create list of deficiencies for any objectives that are not met or transactions that are not supported Deficiencies ListingApr. 30th 9 Prioritize deficiency list based on audit criteria

6. Key Control Objectives KCO #KCO Description Need for Resource 1 Salary and benefits for new hires do not exceed funding authority Records Management (Personnel Action) 2 Civilian personnel actions are valid (authorized/approved transactions supported by requests for personnel action) and recorded accurately 3 All civilian personnel actions are recorded timely 4 Personnel and payroll records are adequately secured and appropriately safeguarded in compliance with established law and regulations FOR OFFICIAL USE ONLY 6 KCOs – Represent outcomes needed to achieve proper financial reporting and are a basis by which the effectiveness of control activities can be evaluated.

7. Key Control Objectives KCO #KCO Description Time and Attendance 5 Time and Attendance information is valid (authorized/approved transactions supported by timesheet) and is recorded correctly 6All Time and Attendance information is recorded timely Records Processing 7 Civilian payroll salary and benefit information is accurately calculated and paid based on correct data processing 8 Payroll obligations, accruals, and disbursements are valid (authorized/approved transactions supported by pay file, disbursing voucher, etc.) and are accurately recorded and classified in the General Ledger(s) 9 All payroll obligations, accruals and disbursements are recorded in the General Ledger(s) timely FOR OFFICIAL USE ONLY 7

8. Key Control Objectives KCO #KCO Description Adjustments 10 All obligations and accruals are reviewed for validity, and adjusted as necessary Information Technology 11 User access is consistent with assigned rights and privileges in accordance with Federal Information System Controls Audit Manual (FISCAM) requirements FOR OFFICIAL USE ONLY 8

9. Key Supporting Documentation Execution Code Description of TransactionKey Supporting Documentation 540To record an obligation for Civilian Labor OPTAR)amount in the BUMED Annual Planning Figure (BAPF) 510To record an accrual for Civilian Labor No Key Supporting Documentation 610To record a disbursement for Civilian Labor LXL3935 – Labor Report LXL3951 – Fringe Benefits Report FOR OFFICIAL USE ONLY 9 KSDs – Documentation retained to support individual financial transactions and accounting events.

10. Deficiency Types Material Weakness – A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected timely. Significant Deficiency – A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Control Deficiency – A deficiency that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely manner. FOR OFFICIAL USE ONLY 10

11. Considerations For Deficiency Type  Quantitative Materiality - Dollar impact or potential impact to the financial statements  Qualitative Materiality - Non-quantitative factors such as complexity of transactions, legal or regulatory concern or system deficiencies  Pervasiveness - Number of activities or transactions affected by the deficiency  Audit Dealbreaker - Issues that prevent an audit from occurring  Existing Guidance - Determining whether current policy or SOP is in place that meet financial reporting requirement FOR OFFICIAL USE ONLY 11

12. Civilian Payroll Material Weaknesses  Material Weakness 1: Lack of Reconciliation Between the Standard Accounting and Reporting System – Field Level (STARS-FL), Defense Civilian Pay System (DCPS), and Treasury  Material Weakness 2: Time & Attendance Inconsistencies General Causes: Lack of Standard Processes; No SOP Availability of Data Multiple Error Possibilities FOR OFFICIAL USE ONLY 12

13. FOR OFFICIAL USE ONLY Lack of Reconciliation in Payroll Processing Issue Detail  No standardized reconciliation occurring at Navy Medicine between Gross Pay File transmitted by DCPS, STARS-FL, and Treasury.  Reconciliation is required to ensure that amounts included in Gross Pay File are being accurately recorded in STARS-FL, as well as at Treasury.  Reconciliation should be performed on a bi-weekly pay period basis.  Reconciliation gives assurance that what was paid to employees is accurately reflected in financial statements. Impact on Audit Readiness  This reconciliation is utilized to detect any errors that may have occurred during the system interface between STARS-FL and DCPS.  Errors might include incomplete file transmission, duplicate file transmission, or rejection of certain data detail due to errors in file coming from DCPS.  Such errors might cause misstatements of the Gross Outlays line item on the SBR. 13

14. FOR OFFICIAL USE ONLY Lack of Reconciliation in Payroll Processing Path Forward  In conjunction with the Navy Medicine Standard Operating Procedure (SOP) team, the Civilian Payroll Audit Readiness team conducted a week long Civilian Payroll working group, the purpose of which was to develop a standard reconciliation process to address the identified material weakness. The developed standard process is scheduled to be documented in an SOP to be drafted by August 2012. Potential Activity Actions Participate in development of Civilian Payroll SOP via actively submitting change requests and feedback where possible. Once complete, Activities will be responsible for reconciling the Master Employee Record (MER) to SLDCADA and the Gross Pay File (GPF) to the general ledger (STARS-FL) and Work Year Personnel Cost (WYPC) in accordance with the SOP.. 14

15. FOR OFFICIAL USE ONLY Time & Attendance Inconsistencies Issue Detail  Variations exist across the enterprise in how Time & Attendance is recorded and certified.  Over time certification processes have shifted at the field level on a varying basis, creating no standard process. Some activities have a decentralized process; others are centralized.  Lack of standardized processes creates a situation in which controls can not be adequately assessed. This increases the risk that time and attendance may be reported incorrectly, and that payroll disbursements may be based on incorrect time and attendance amounts. Impact on Audit Readiness  Time and Attendance accuracy affects every disbursement recorded for Civilian Payroll. This means that we can not ensure that these amounts are accurate and correctly stated in the ‘Gross Outlays’ line of the SBR. 15

16. Path Forward  The Dept. of Navy has developed a high-level process for Civilian Payroll; Navy Medicine supported creation of this process. Navy Medicine will update the Time & Attendance Instruction to mirror this Navy process, at a much more detailed level, and create a plan to guide activities in implementing the new process. FOR OFFICIAL USE ONLY Time & Attendance Inconsistencies 16 Navy Medicine Time & Attendance Corrective Action Plan NME NMCSD NMLC Navy Medicine Single Process

17. Other Civilian Payroll Deficiencies Deficiency 1: Lack of Oversight over Service Providers Deficiency 2: Variations in the New Hire Process Deficiency 3: No Enterprise Standard Labor Data Collection and Distribution Application (SLDCADA) Administrator FOR OFFICIAL USE ONLY 17

18. FOR OFFICIAL USE ONLY Lack of Oversight at Service Providers Issue Detail  There is a lack of oversight by BUMED over the service providers at Human Resource Service Center (HRSC) and Defense Finance and Accounting Service (DFAS) Effect on Audit Readiness  Without validating transactions processed at service providers, there is a risk for misstatements in the financial statements Potential Activity Actions  Review SSAE-16 Service Audit Report for DCPS payroll processing  Ensure SF-52 is correctly processed by reviewing against final SF-50 18

19. FOR OFFICIAL USE ONLY No Enterprise SLDCADA Administrator Issue Detail  There is no enterprise SLDCADA administrator Impact on Audit Readiness  Having an enterprise administrator allows standardization of control activities and processes across the organization Potential Activity Actions  Determine feasibly of an enterprise SLDCADA administrator 19

20. FOR OFFICIAL USE ONLY In The Mean Time…….  DECENTRALIZE!  Communication (up and down the chain)  Work in progress  CIVPAY Audit Toolkit  Check sheet for timekeeping (employee, supervisor, CSR/SA)  Draft of Timekeeping instruction  Accrual basics  Region Recon tool  Activities Recon tool 20

21. FOR OFFICIAL USE ONLY Questions? 21