Hale Notes Progress Towards Auditability

Despite financial uncertainties, the Defense Department has made significant progress in improving financial management, DOD Comptroller Robert F. Hale told the Senate Homeland Security and Governmental Affairs Committee today.

Hale specifically highlighted DOD's progress toward achieving clean financial statements.

"Despite the budgetary turmoil of recent years, I believe we have made substantial progress -- without question, more progress in the last few years than we've made in the other period," he said.

A clean audit is tough for the department for a number of reasons, Hale said, but he added that he believes DOD is on track to achieve audit readiness for all financial statements by 2017.
"Meeting audit goals requires major changes in a department that is big, and where change is difficult," Hale said. "We need a new financial system. We need significant changes in our business practices. They're hard to implement in a big organization."

And challenges have been thrown in the way, he noted. DOD went through five government shutdown planning drills in the last few years. The department went through two six-month continuing resolutions. In 2013, there was sequestration, "and a furlough followed by the shutdown and a furlough," Hale said.

"Time and again, we've wasted time re-planning budgets because of the seemingly constant changes in the outlook for revenues," he continued. "This turmoil has definitely usurped time that could have been spent on audit and other activities."

Still, he said, there is progress. In 2012, the Marine Corps received a clean audit opinion, "and we expect a similar result in 2013," Hale said.

The entire Department of Defense has been evaluated and deemed ready for audit of the funds-distribution process, Hale said. "It's a critical accomplishment," the comptroller added, "because it provides verification that we are distributing the funds the way that Congress envisioned when you passed the laws."

He listed other examples of progress, pointing out that the Navy has achieved a positive opinion on civilian pay and travel expenses, the Air Force has a positive opinion on funds balanced with the Treasury Department, and DOD is well along in deploying financial systems.

"We expect that most of DOD's budget statements will be ready for audit by Sept. 30, including statements in all of the military services," Hale said. "And I believe that is an enormous accomplishment for this department."

Testifying with Hale was our own Bob Speer, representing the Army and its FMIP.

Following the DOD and services Comptroller panel, a panel of DOD IG and GAO auditors testified on the subject. Here is a summary of the tstimony of DOD IG Jon Rymer.  Note the key role (and high risk potential) of the many ERP projects in the DOD arsenal of financial systems.

The Defense Department has made progress in efforts to improve financial management and begin preparing auditable financial statements, but challenges stand between the Pentagon and its 2014 and 2017 audit deadlines, DOD's inspector general said this week.

Jon T. Rymer spoke May 12 before the Senate Committee on Homeland Security and Governmental Affairs, whose members heard testimony from two panels on DOD financial management.
"Transforming the financial management of the department has proven to be a complex and difficult undertaking," Rymer told the Senate panel.

"The department's senior leadership," he added, "has recognized some of the difficulties related to the department's financial management, problems with internal controls, and related financial systems."
For example, the IG said, to work around difficulties in obtaining adequate supporting documentation for prior-year balances, DOD has asserted audit readiness on its schedule of budgetary activity, or SBA, versus the full statement of budgetary resources, or SBR.

Rymer explained the difference between an SBR and an SBA: An SBR includes among other things beginning balances, current-year transactions, and transactions from prior years that were executed in the current year, he said in written testimony. An SBA contains only the current-year activity that would be included in the SBR.

"The department determined that focusing on this information is a sensible path to full audit readiness," Rymer said.

Such an incremental approach to audit readiness doesn't fully meet statutory requirements because the SBA is a subset of information presented on the full SBR, he noted.
But this approach gives DOD the opportunity to have a portion of the SBR audited, Rymer said.
"The department plans to have the required SBR audits begin in fiscal 2018 and include auditable opening balances from prior years' audited SBAs," he added.

In his written testimony, Rymer said DOD audit deadlines are documented in the law.
Public Law 112–81, Section 1003, titled "Additional requirements relating to the development of the Financial Improvement and Audit Readiness plan," requires a plan, including interim objectives and a schedule of milestones for each military department and defense agency, to support the goal established by the defense secretary that the SBR is validated for audit no later than Sept. 30.
Public Law 111–84, Section 1003, titled "Audit readiness of financial statements of the Department of Defense," requires that financial statements of the Defense Department are validated as ready for audit no later than Sept. 30, 2017.

Rymer told the panel that DOD continues to work on financial improvement and audit readiness and has begun auditing its mission critical assets.

"The department issues a Financial Improvement and Audit Readiness, or FIAR, plan which defines the department's goals, strategy, priorities and methodology for achieving financial improvements and audit readiness," he said.

DOD also provides a biannual status report of the FIAR plan, the IG added, and the draft May 2014 FIAR Plan Status Report says that by June 30 most of the department, including the military departments, will have asserted audit readiness -- meaning all reporting entities will have an audit opinion or will be ready for audit.

"The department recognizes that significant challenges remain to be addressed," Rymer said, "such as correcting key internal controls, obtaining supporting documentation for beginning balances, and providing adequate support for the value of its assets."

Another critical area involves enterprise resource planning systems, or ERPs, which DOD is developing and deploying as critical components of its auditability strategy, Rymer said.

An ERP is an automated system that uses commercial-off-the-shelf software and consists of multiple integrated modules that perform a variety of business-related tasks such as general-ledger accounting, payroll and supply-chain management, he explained.

DOD's current financial management and feeder systems weren't designed to support the various material amounts on the financial statements, the IG said, and systemic deficiencies in financial management feeder systems and inadequate DOD business processes keep the department from collecting and reporting accurate, reliable and timely financial and performance data.

"Given the large volume of transactions and the complexity of DOD operations, combined with the inability of current systems to produce data that comply with accounting standards, we are concerned that the department will be unable to meets its auditability deadlines without these ERP systems fully up and operational," Rymer added.

The DOD IG office continues to report on issues with ERPs, he said, and DOD continues to report schedule delays because of challenges in reengineering business processes and correcting known material weaknesses, and keeps using outdated legacy systems.

"These delays in implementing ERP systems increases the risk that DOD will not achieve an auditable [SBR] fiscal 2014 or meet its deadline of full financial statement audit readiness by fiscal 2017," Rymer said.

DOD has ultimate responsibility to provide auditable financial statements, he added, but the Office of Inspector General is responsible for providing independent, objective oversight of DOD efforts to improve its financial management and provide an opinion on financial statements.

"Through our oversight role we will continue to work with the department and [the General Accountability Office] on moving toward auditable financial statements," Rymer said.
The department must maintain its commitment and may need to increase its efforts to meet the 2014 and 2017 deadlines, he said.

"The department's efforts can't just be an exercise to get a clean opinion," Rymer told the panel. "Rather, it needs to be about obtaining quality data that can be relied upon to make critical decisions regarding the operations of the department."

Here is the C-SPAN video of the the full session: