Financial Improvement and Audit Readiness (FIAR):

Past, Present, and Future

22 April 2015 Presented to:

American Society of Military Comptrollers

John Skober Branch Head, Financial Analysis Branch

SPAWAR FIAR Manager Space and Naval Warfare Systems Command

Christine Esparza SSC PAC Audit Readiness Coordinator

Comptroller Staff and Support Code 11010 Space and Naval Warfare Systems Center -

Pacific

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Agenda

Past   Statutory Requirements for Financial Audit   OSD FIAR Strategy – “Waves” and the Financial Statements

Present   General Fund Schedule of Budgetary Activity(SBA) Audit   General Fund Assessable Unit – Segment Approach

Future   April 2015 OSD FIAR Guidance – Notable Changes   Navy Working Capital Fund (NWCF) FIAR Approach   NWCF FIAR Plan of Action and Milestones (POAM)   Audit Challenges (GF/WCF)   Audit Impact on the Workforce

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Statutory Requirements for Financial Audit ▼  1982 Federal Managers’ Financial Integrity Act (FMFIA)

  Requires agencies to establish, maintain and assert to the effectiveness of internal controls

▼  1990 Chief Financial Officers (CFO) Act   Requires agencies to assess internal control and requires the audit of annual

financial statements ▼ National Defense Authorization Act (NDAA) of 2010

  Directs OUSD (C) to develop the FIAR Plan to meet the requirements in FMFIA and the CFO Act and be audit ready no later than September 30, 2017

▼ National Defense Authorization Act (NDAA) of 2012   Establishes interim goal requiring the Statement of Budgetary Resources to be

validated as audit ready no later than September 30, 2014

Present Future Past

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▼ OSD FIAR Waves

▼ DOD Financial Statements   Statement of Budgetary Resources   Balance Sheet   Statement of Changes in Net Position   Statement of Net Cost

OSD FIAR Strategy – “Waves” Completed by FY2014 Completed by FY2017 Completed by 30 June 2016

Present Future Past

*Based on November 2013 OSD FIAR Guidance

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OSD FIAR Waves and Financial Statements

Present Future Past

FIAR Wave Statement of Budgetary Resources

Balance Sheet Statement of Changes in Net Position

Statement of Net Cost

We are here: Currently under audit of the FY15 SBA

*Based on November 2013 OSD FIAR Guidance

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Schedule of Budgetary Activity(SBA) Audit

Present Future Past

We buy stuff We do work for each other We move things and people We pay our people

Everything we do

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▼ We buy stuff   Contract Vendor Pay (CVP)   Military Standard Requisitioning & Issue Procedures (MILSTRIP)

▼ We do work for each other   Reimbursable Work Order Grantor/Performer (RWOG/P)

▼ We move things and people   Transportation of People (TOP) and Military Permanent Change of Station

(MILPCS)   Transportation of Things (TOT)

▼ We pay our people   Civilian Pay (CIVPAY)   Military Pay (MILPAY)

General Fund Assessable Unit - “Segment” Approach

Present Future Past

The Navy's approach grouped transactions and processes with similar attributes into 'segments' to support auditability

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▼  Positives   Process Segments were easier to identify controls activities and understand the

process flow when compared to an SBR line (e.g. Obligations incurred) ▼ Negatives

  Difficult to establish the transaction universe by segment   During the Reimbursable Work Orders and Contract Vendor Pay examinations,

auditors were not able to make a positive opinion due to transaction universe

Line Item: Obligations

General Fund Assessable Unit - Segment Approach

Present Future Past

Reimbursable Work Orders

Contract Vendor Pay

Transactions cannot be easily identified by segment but can be easily identified by Financial Statement Line Item

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▼  Wave 1 – Complete ▼  Wave 2 - Substantially complete, undergoing the initial SBA which does not include the balances brought forward. In

order to complete SBR wave 2, focus will be put on Balances brought forward as Assessable Unit ▼  Wave 3 – Due to shortness of time, services are being required to incorporate valuation into Wave 3. ▼  Wave 4 – Challenges that need to be addressed in wave 4

  Approach to value re-worked and improved assets   Implement business rules around co-located facilities (joint basing) and assets purchased by others (e.g., USMC aircraft)   Identification of federal and non-federal transactions and capturing correct trading partner codes to support reconciliation   Imputed Costs methodology (e.g. Occupancy costs for office space in a MILDep Facility)   Determining environmental liabilities – ensuring completeness and documenting cost-to-complete factors, assumptions and

amounts   Dependence on Service Provider Controls   Infrastructure necessary to respond to audit team requests within 5 business days

April 2015 OSD FIAR Guidance – Wave changes

Completed by FY2014 Completed by FY2017 Completed by 30 June 2016

Present Future Past

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April 2015 OSD FIAR Guidance – Other Notable Changes

▼  Expanded priorities to include proprietary accounts and valuation of assets, liabilities, revenues, and costs

▼  Internal Controls   Combined Internal Controls over Financial Reporting (ICOFR) and Information Technology (IT)

Controls   Synchronized Guidance with Manager’s Internal Control Program (MICP)

▼  Audit Infrastructure necessary to respond to the audit ▼  Defined SBR beginning balances, material line items and financial reporting as assessable

units −  Non-material line items (at consolidated level) included in an appendix

▼  Incorporated financial reporting risks, objectives and outcomes into one table for each financial statement line item

▼  Leveraging the work from prior Waves – Work in prior waves is expected to be leveraged for future efforts. OSD provides a financial statement to assessable unit cross walk Examples:   Vendor Pay can be used to assert Accounts Payable on the balance sheet,   Contract Pay can be used assert gross cost on Statement of Net Cost   Civilian Pay can be used to assert Net Cost of Operations on Statement of Change in Net position

Present Future Past

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Prepare for Audit (Assertion)

Today

Assertion: Schedule of Budgetary

Activity

Audit: Schedule of Budgetary

Activity

Assertion: Existence &

Completeness of Assets

Assertion: All Financial Statements

Audit: All Financial Statements

Report to Congress on Full Financial

Statement Audit

2014 2015 2016 2017 2018 2019

Statement of Net Cost

Balance Sheet

Statement of Net Position

Notes: •  The Schedule of Budgetary Activity (SBA) consists of

appropriations for a single fiscal year.

Prepare for Audit (Assertion)

Prepare for Audit (Assertion)

Prepare for Audit (Assertion)

Under Audit + Sustainment

Existence & Completeness of Assets Prepare for Audit (Assertion) Under Audit + Sustainment

Under Audit + Sustainment

Under Audit + Sustainment

Under Audit + Sustainment

Statement of Budgetary Resources Prepare for Audit (Assertion)

March 31, 2019 Sept. 30, 2017 June 30, 2016 Sept. 30, 2014

Department of the Navy Financial Improvement and Audit Readiness Milestones

Present Future Past

Working Capital Fund Statements Under Audit + Sustainment

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Learn from previous FIAR work to understand NWCF operating environment and prepare Corrective Action Plan (CAP) and testing approach

Navy Working Capital Fund (NWCF) FIAR Approach Ob

jectiv

es Build confidence in accuracy of material financial statement line items to support an assertion

Correct known issues and find additional issues in preparation for assertion testing

Phase 2: Business Process Testing

Phase 1: Research and Planning

Proceed to Line Item Assertion Testing when: • One to Two rounds of testing are complete

OR • All controls in scope pass at designated percentage

  Most closely resembles an IPA audit of the financial statements

  Creates an assertion package that is relatable to an external auditor

  Transaction universe is tied-out at the line item-level, reducing data issues

  Builds upon work done to-date using business segment construct

  Focuses time and resources on business segments that are high risk of material misstatement

Considerations

Assert Financial Statements

Phase 3: Line Item Assertion Testing

Present Future Past O

bjec

tives

Act

iviti

es O

utco

mes

Proceed to Business Segment Testing when: • Processes are verified • Risks/Controls/Key supporting documentations are identified

• Testing Workbook is complete • CAPs are developed • List of known material weaknesses is complete

• Perform Statement to Process Analysis • Prioritize Accessible Units (AU)s • Prepare AU Strategy and Prioritization Document

• Validate Business Process Standardization (BPS)documentation reflects NWCF current operating environment

• Utilize existing work products:  Systems Inventories  Business Process Standards  GF SBA Assertion Packages  Independent Audit Exam results  NWCF Financial Statements and Footnotes  GF SBA matrices for KSDs, risks, and controls  GF SBA testing workbooks

• Implement CAPs • Assess and Test Controls with a targeted testing methodology in which sampling is stratified by materiality, source system, or other key attribute

• Summarize Test Results • Identify and Evaluate Deficiencies • Evaluate Supporting Documentation • Develop additional CAPs based on test results

• Develop test plans:   Control   Substantive

• Transaction universe is driven by materiality analysis

• Tie out Line Item Transaction Universe

• Conduct testing of a random sample of the transaction population

• Identify and Evaluate Deficiencies • Evaluate Supporting Documentation • Summarize Test Results • Conduct root cause analysis • Develop Additional CAPs • Implement CAPs

Proceed to Post-Assertion Activities when: • Testing results for all line items meet FIAR Guidance criteria for assertion

Bypass business segment testing for lower materiality or low risk business

segments

Approved for public release

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NWCF FIAR Plan of Action and Milestones (POAM) Key Major Milestones Est. Completion *

Phase I – Research and Planning Systems Inventory: List April 2015

Systems Inventory: Matrix and System Process Flow Diagrams (initial) May 2015

Assessable Unit (AU) Prioritization & Strategy Document July 2015

Statement to Process Analysis September 2015

Data Reconciliation: GL transaction detail to field level trial balance August 2016

Phase II – Business Segment Testing Contract Vendor Pay (CVP) June 2015

Reimbursable Work Order – Grantor (RWO-G) July 2015

Reimbursable Work Order – Performer (RWO-P) August 2015

Military Standard Requisitioning & Issue Procedures (MILSTRIP) September 2015

Financial Statement Compilation & Reporting (FSCR) December 2015

Phase III – Line Item Testing Inventory (OM&S, SM) June 2015

General Equipment (GE) March 2016

Funds Balance with Treasury (FBWT) September 2016

Accounts Receivable (AR) September 2016

Accounts Payable (AP) February 2017

Audit Ready Financial Statements (Assertion) Data Reconciliation: Feeder system transaction detail to general ledger systems May 2017

Systems Inventory: Matrix and System Process Flow Diagrams (Final) September 2017

Submit Assertion Package to Office of Secretary of Defense (OSD) September 2017 *Dates subject to change

Increase in Command Support

Present Future Past

Approved for public release

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Audit Challenges (GF/WCF)

▼ Key Supporting Documentations (KSDs)   Properly documenting financial transactions

▼ Cost/Benefit   Developing and implementing corrective action plans in a cost

effective manner ▼ KSD Storage and Retention

  Maintaining KSDs for the required time period   Decentralized document storage locations for KSDs that are not

easily accessible ▼ Business Process Standardization

  Lack of standard business processes within business segments   Dispersed workforce

Present Future Past

Approved for public release

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Audit Impact on the Workforce

▼ Manpower effort   Increase manpower at all levels for supporting future audit efforts

▼ Data calls   Information requests from Commands regarding systems,

processes, and financial data ▼ Phase 2: Business process testing

  Commands will have a 16 calendar-day turnaround for audit requests from Office of Financial Operations (FMO)

Present Future Past

√√√√Approved for public release

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Questions?