“The Road to Clean Audit Opinion for the Department of Defense”

1. Office of the Under Secretary of Defense (Comptroller) “The Road to Clean Audit Opinion for the Department of Defense” Mr. Robert McNamara, Financial Improvement and Audit Readiness Director November, 2007

2. Department of Defense Goal • Improve Financial Information for Decision Makers • Receive an Unqualified Opinion on its Financial Statements

3. Why Is It So Difficult? • Size and Complexity • Multiple Antiquated Systems • Source Documentation Requirements • Value to Management

4. Unprecedented Scope and Complexity In terms of Gross Domestic Product (GDP) DoD dwarfs the largest countries in the world… If ranked on the Fortune 500, it would be ranked first and well ahead of Wal-Mart, Exxon and General Motors, the current top three. • DoD manages over 57 million General Ledger Transaction Accounts. • DoD’s Defense Finance and Accounting Service executes 145 million pay transactions per year, an average of 5 transactions every second. • This includes 13.8 million commercial invoice transactions and 7 million travel payments • DoD maintains more then 2,900 Business Mission Area systems. 2006 GDP Ranking 17. DoD The Department of Defense FY 2007 Appropriations 2006Fortune500 Ranking In Billions

5. DoD Approach • The Defense Financial Improvement and Audit Readiness (FIAR) Plan is the Department’s guide for comprehensively improving financial management and preparing for audit. • The September 2007 FIAR Plan was the fifth submission of the Plan to Congress and the Office of Management and Budget. Like previous submissions, the September 2007 FIAR Plan uses an incremental approach, incorporates lessons learned, and adapts to sustain and advance progress achieved.

6. FIAR Plan Scope • A DoD-wide comprehensive, step-by-step plan that integrates financial improvements and business enterprise initiatives across the Department of Defense: • Requirements in OMB Circular A-123, Appendix A • The President’s Management Agenda and GAO High Risk Series • Business Transformation Agency and Enterprise Transition Plan financial management initiatives and systems • Material weaknesses (auditor identified)

7. System Implementation • Each of the Military Departments is deploying Enterprise Resource Planning (ERPs) systems within complex business and financial environments located worldwide. • The ERPs will replace hundreds of business and financial systems and modernize our business practices and processes. • The ERPs are important both for achieving and then sustaining auditability.

8. Department is Delivering Results • As evidence that progress is being made, DoD is maintaining a green score for progress in Improving Financial Performance under the President’s Management Agenda. • The Department has already achieved an unqualified audit opinion on $215 billion (15%) of its assets and $969 billion (49%) of its liabilities in 2006. • Completed 75% of FY07 FIAR Plan milestones • Reduced internal control weakness from 70 to 19 since 2003 • The first phase of the "Check It" campaign, has been completed, demonstrating that internal management controls go beyond the financial management community and are embedded in everything the Department does.

9. $255 B $203 B $650 B 2005 2007 2010 2005 2007 2010 $210 B Sustainable and Measurable Improvement • From 2006 to 2010, DoD will increase the amount of audit ready assets by 220 percent (~$450 billion), and the amount of audit ready liabilities by 95 percent (~$850 billion) • This level of effort (2006-2010) exceeds a full audit of each of the top two Fortune 500 companies (Wal-Mart, Exxon). Assets Audit Ready or Unqualified $1072 B $1112 B $718 B Liabilities Audit Ready or Unqualified $969 B $897 B $1,749 B $991 B $977 B Numbers may not add due to rounding

10. Audit Readiness Strategy • The Department’s overall goal is sustainable financial management improvements. Receiving an unqualified opinion on DoD’s consolidated financial statements will demonstrate that the goal has been achieved. • The Department has a rigorous process for ensuring that only wise investments are made for audits. The process involves the Inspector General office. • The FIAR Plan Audit Readiness Strategy objectives are to: • Promote and support sustainable incremental financial improvement • Achieve full financial statement audit readiness • The business rules are designed to support the Audit Readiness Strategy

11. Audit Strategy • The DoD audit strategy: • Limits audits to entire financial statements rather than audits on financial statement lines. • Focuses on the business processes, or “segments,” that underlie the amounts reported on the financial statements rather than exclusively on balance sheet lines. • Recognizes that financial statement audibility, and the correction of deficiencies for many business processes, must be tied to implementation of Enterprise Resource Planning systems.

12. FIAR Plan Framework -- Segments • A Segment is a component of the business and financial environment that will be: • Asserted by management as audit ready • Validated as audit ready by either DoD IG or an IPA • Segments will be determined based on the environment’s complexity, materiality, and timing of corrective actions. • Segments can be: • Complete or partial business processes • Business and/or financial systems • Commands or Installations • Examples: Procure to Pay, Mil Equip, Civ Pay, NAVAIR

13. Audit Readiness Strategy & Business Rules Financial Statement Assertion Audit Readiness Validation Audit Readiness Sustainment Financial Statement Audit Discovery & Correction: • Processes, systems and controls documented, evaluated and tested • Weaknesses identified • Corrective actions, including system modernization or deployment, completed Segment Assertion:Management asserts audit readiness to OIG and OUSD(C) for concurrence Audit Readiness Validation:OIG or IPA validates management’s segment assertion Audit Readiness Sustainment:Annual verification by segment using OMB A-123, Appendix A, as guidance Financial Statement Assertion:Management asserts audit readiness to OIG and OUSD(C) for concurrence Financial Statement Audit:OIG or IPA performs an audit Discovery& Correction Segment Assertion

14. Next Steps • Incorporating a Segment and End-to-End Business Process Approach in the FIAR Plan • Expand Plan for opportunities to improve financial and business data needed by decision-makers • Publish March 2008 FIAR Plan

15. Additional Information FIAR Directorate, OUSD(C), website: http://www.dod.mil/comptroller/FIAR/index.mil DoD Business Transformation Agency website: http://www.dod.mil/bta FIAR Planning Tool help email address: FIARSupport@osd.mil FIAR Directorate telephone number: 703-607-0300