Financial Audit Readiness

Symposium Discussion

Mr. Joe Marshall, SES2, USNNavy Medicine Comptroller

Deputy Chief for Resource Management (M8)June 2012

Ground Rules

• Listen to understand • Speak from the heart • Suspend certainty• Hold space for difference• Slow down the conversation

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Goals for today:

1. Leadership alignment and understanding2. Dialogue3. Background for this week’s sessions3. Actions for when you go home.

Financial Audit in DoDContext: Demand for a clean opinion--instituted by Congressional, DoD and

Navy leaders—is driving change across DoD and NM. • Forces are large and moving quickly. • Changes will touch SG / HQ / Regions / C-Os, but also every clinic, every

supply PO, every Department Head. • Far more than Comptroller & DFA responsibility.

Purpose: to improve the common understanding across Navy Medicine of what is required to support DoD’s audit.

Outcome: Understanding of the actions required—including use of SOPs—to get ready for audit.

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Financial Audit: FY14NM’s work has been / remains aligned with DoD & NavySECDEF push last fall sets new timelines / requirementsAudit Readiness WG reps from M1, M4, M8, & Regions

Regular meetings are aligning priorities and tackling issues

1 December 2011, VADM Nathan, Navy SG, empowered the group to move forward on the path towards audit readiness.

19 January 2012, Mr. Dennis Taitano, DASN(Financial Operations), aligned efforts with broader Navy-wide initiatives.

13 March 2012, Honorable Gladys Commons, ASN (Financial Management & Comptroller), addressed the urgency of the work.

But NM audit preparations began 4 years ago and continue…4

What Happens in an Audit?

We Assert Auditor will Test Expected Outcomes• Internal controls over

reporting are in place • Financial reports are

prepared accurately• Transactions have

supporting documentation

• Compliance with laws & regulations

• Design & operating effectiveness of internal controls

• Presentation & disclosure of reports

• Supporting documentation of individual transactions

• Compliance with laws & regulations

• Opinion on fair rep of reports & material weaknesses

• Opinion on control effectiveness

• Opinion on compliance with laws & regulations

• Letter w / deficiencies & corrective actions

Independently provide “reasonable assurance” whether financial reports “fairly present” the “truth.”

Auditors are personally liable under the law

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How Does Management “Assert”?Management tells auditors that financial reports are correct based on the following 5 criteria or ‘assertions’:

Existence & Occurrence

Whether assets / liabilities exist & whether transactions actually occurred

Completeness Whether all transactions & accounts are included

Rights & Obligations Only owned assets & liabilities are recorded

Valuation Whether asset, liability, revenues, & expenses are correct

Presentation and Disclosure Whether financial reports are properly written

What the Assertions Mean to Auditors:

All audits

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How Do SOPs Help Us Assert?Following SOPs in detail at every activity provides important documentation and controlled processes for all 5 criteria:

Existence & Occurrence

By following the SOPs, I have support for every transaction in STARS-FL that I have generated.

Completeness All Supporting Documents I maintain tie to transactions in STARS-FL.

Rights & Obligations I have properly performed reconciliations in SOPs to ensure all transactions included in STARS-FL are NM.

Valuation I have recorded transactions for the correct amount.

Presentation and Disclosure

I have recorded transactions using the right accounting and execution codes.

What the Assertions Mean to You:

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How Will Auditors Test Assertions?Effectiveness of Internal Controls & Materiality Are the Focus

Internal ControlIdentifies control activities performed in business processes Assesses control design are risks of misstatement mitigated? Tests operating effectiveness of key controls

Substantive TestingPerforms analytical procedures to determine the reasonableness of amounts & balances Tests dollar amounts on reports by reviewing detailed transactions

If controls are effective, the auditor can reduce the amount of substantive testing performed. But …will have to increase

samples if not going well!! 8

What is Internal Control?Internal Control = reasonable assurance that organizational risks are minimized & is the responsibility of the Commanding Officer.

Control ActivitiesRisks

Controls Objective

sMitigated by Achieved by

Control Objective Examples“Payments only made to authorized vendors for goods actually received.”“Employees are paid only for time worked.”

Control Activity Examples“Accounts payable system compares purchase order, receiving record, & vendor invoice prior to payment.”“Supervisor reviews each employee timesheet for accuracy & authorizes payment via signature.”

Control Objectives = goals.

Control Activities: describe: WHO performs the control WHAT the control is WHERE the control occurs WHEN the control occurs WHY the control is occurring

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What Are “Must Haves”?These are audit “dealbreakers” that must be addressed BEFORE an audit starts

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What Are “Must Haves”?These are audit “dealbreakers” that must be addressed BEFORE an audit starts

6 of 8 Supported by SOPs11

DoD’s Audit Timing

Wave 3Wave 3 Wave 4Wave 4

Appropriations Appropriations ReceivedReceived

Statement Statement of of

Budgetary Budgetary Resources Resources

Mission Critical Mission Critical Asset Existence Asset Existence & Completeness & Completeness

Wave 1Wave 1 Wave 2Wave 2

Full Audit Full Audit

Deadlines:Readiness for SBR Audit by 31 March 2014Readiness for full audit by end of FY 2017

DoD’s Audit Strategy: Four Prioritized Waves

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FY12 FY13 FY14

Assessable Units – Wave 2 Max Assertion Date Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Travel 4 SEP 2012Consumables 3 DEC 2012Reimbursable Work Orders – Grantor

3 DEC 2012

Reimbursable Work Orders – Performer (Non-UBO)

1 APR 2013

Military Payroll (including RPN) 1 APR 2013Contract Administration 1 JUL 2013Non-Federal Receivables (UBO/Medical Treatment)

1 JUL 2013

Federal Receivables (UBO/Medical Treatment)

3 SEP 2013

Civilian Payroll 2 DEC 2013Financial Reporting 2 DEC 2013Funds Management (FBWT) 2 DEC 2013

What are Assertion Deadlines?

Assessable Unit AssertionInterim Progress Milestones (90 Days, 50 %, 75 %)

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What is the Work to be Done?

Note: The gray boxes are key tasks that must be repeated on a continuous basis as they are key in achieving and maintaining auditability and reliable financial information 14

What is Our Status?Recent Activities Upcoming Activities

• Identified Assessable Units & Assigned Leads

• Conducted Workgroups

• Launched Discovery Phase: Assessing Internal Controls for

Each Unit Updating Process Narratives,

Flowcharts, Control Assessments

• Identify Key Documents

• Test Effectiveness of Internal Controls

• Test Supporting Documents of Individual Transactions

• Evaluate Testing Results & ID Probs

• Develop / Implement Corrective Actions for Deficiencies

15Symposium 4-6 June is audit training for Comptrollers, DFAs, MMDs, & Logisticians .

What Must We Do?1. Implement and use the SOPs exactly as written

• Civilian and Military performance requirement• Clinicians must be engaged with Comptrollers and DFAs

2. Work the issues in the Financial Spotlight Metrics:Obligation validation (otherwise $$ are used inefficiently)Closeout for liquidated obligations over $25K (ditto)Biweekly payroll certification (budget) & employee electronic timesheet verification

& supervisor certificationPurchase card use: can anything move to contract?Location & control of property: wade in.Slow travel claims (>5days) & uncollected travel debt

3. Work other process issues: DEERS Verification (goes directly to fraud control), 2569s for 3rd party collections…and more

16Most importantly—must ask hard questions and lead change among

clinicians, comptrollers and DFAs.

What Do I Do at My MTF?Insist on Transactional Excellence = SOP Use

Internal Controls, Key Supporting Documentation at the Activity Level—not HQSOPs = strong internal controls & proper documentation; required Local modification or adjustment not allowed but seeking feedback

Use Financial Spotlight MetricsProvides benchmark of Audit Readiness

Review Command-Level Testing Results Provides insight into the controls and quality of your transactions

Insist on Corrective Actions…and Follow Up!Be proactive in recognizing & reporting issues; lead change!

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Failure to Engage

• Inconsistent results from looking at our transactions across Navy Medicine will 1) undercut the SG’s goal for audit readiness & 2) highlight under-performers.

• Outliers = poor internal control & drive ever larger sampling of transactions creating a spiral of ‘ever more’ samples to give auditors assurance of how we do business.

• Consistent results will drive less sampling and cleaner, tighter support of our business processes.

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This has been exactly the USMC experience that has resulted in protracted audit work and a ‘disclaimer’ for the last 2 years.

Goal: business processes that support care and demonstrate good stewardship over resources—consistently!

Clinicians Impact on Audit• Examples of Different Action or Documentation Required Today:

• Supervisors must certify employee-generated time cards.• Cradle-to-grave documentation for equipment: requirement-to- purchase,

receipt, inventory, and disposal.• Documented requirements for contract staff and services.• Prompt filing of travel claims.• Rigorous ID / insurance screening at front desk.

• High levels of purchase card use providers seeking specific items • …which require additional effort to document. But: equivalents available in

ECAT now…so —why not more ECommerce? • Need active Product Standardization Boards.

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In many cases, this is compliance with existing requirements that have been ignored or regarded as ‘too hard.’

SOP Spotcheck--Feedback

• Team examined ~150 specific actions for evidence of SOP use at 3 sites.

• Team learned how to ‘ask’ the questions. • Field personnel learned how to ‘answer’ the questions. • Findings: in the 150 items checked, effectiveness varied from 50 to 80%.

• Outcomes: valuable insight on gauging SOP use and how to more effectively assess audit readiness through best practices

• In West: SOP Standdowns for each activity & weekly spotchecks on specific areas

• East has similar actions underway

20Driving SOP use to the next level.

SOP Outreach: Support & Training

Outreach responds to SOP gaps found in training, inspections, etc.

Collaborative team structure: Outreach Coordinator coordinates communication, visibility, & responses for quick resolution

SOP Team documents issues & develops an Action Plan under guidance from the SOP Outreach Coordinator

Outreach Coordinator engages SOP Team, SMEs, and Champions as appropriate in collaboration with Regional and Activity leadership

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Outreach in Practice: Example

Scenario: During IG visit, it is discovered that the staff at an Activity is using a locally-developed form rather than following the SOP.

What Happens Next?:1.IG SOP Team Outreach Coordinator who provides guidance and works with Champions (Region) to establish extent of issue.2.SOP Team works with SMEs to develop an action plan that includes recommended actions, associated timelines, personnel involved, and follow-up actions.3.Action plan is finalized after discussion with SMEs and Region. 4.Outreach Coordinator maintains visibility of corrective action to ensure follow through.

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SOP Outreach Coordinators

SOP Outreach Coordinators

Role Name

Deputy Comptroller Capt (s) David Breier

Assistant Deputy Chief Installations & Logistics Mr. David Oliveria

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Outreach Program POCs: Regional SOP Champions

Regional SOP Champions

Role Name

Navy Medicine East (NME)

Commander RDML Elaine Wagner

Chief of Staff (Acting) Mrs. Susan Herrron

Regional Comptroller Mr. Gavin Wente

Regional Logistician CDR Eskinder Dagnachew

Navy Medicine West (NMW)

Commander RDML Forrest Faison

Chief of Staff CAPT Mark Brouker

Regional Comptroller Mr. Tim Paule

Regional Logistician Mr. Scott Waniewski

Benefits of the Outreach Program Supports all users

Improves quality and training as information and feedback from the field is received and incorporated

Supports audit readiness

Any questions, comments, or input related to the SOP Outreach program can be directed to BUMED-SOP@med.navy.mil