Department of the Navy Drive to Auditability

1. Department of the Navy Drive to Auditability Presentation to the 2010 ASMC PDI Mr. Dennis Taitano – DASN Financial Operations 2 June 2010

2. Agenda • Everyone Contributes to Auditability • Why is FIAR Important? • DoD Challenges • DoD FIAR Strategy and DON FIP Progress-to-Date • Assertion and Audit Lessons Learned • Summary

3. Management Assurance (Internal) 3rd Party Assessment (External) Everyone Contributes to Auditability – Bottom Line Up Front Essentially, auditability is: • Well-controlled business processes to satisfy: • Generally Accepted Accounting Principles (GAAP) • Compliance with Federal Financial Management Regulations (FMR, FFMIA, FMFIA, etc.) • Ability to readily produce evidence (e.g. documentation, testing) to support business transactions Financial Audit Readiness is presented through 5 Management Assertions: • Completeness: Are all assets and liabilities accounted for? • Rights and Obligations: Do we have ownership and control of assets (i.e. title), and are liabilities our obligation? • Existence: Do all assets and liabilities in our records actually exist? • Valuation: Have we completely and accurately accumulated the appropriate costs of assets and liabilities? • Presentation and Disclosure: Have we presented the transactions appropriately in our financial statements? Through our efforts to reach this goal, the outcome produced will be timely, accurate, and reliable financial information.

4. Qualified Assurance Reasonable Assurance Absolute Assurance No Assurance NuclearReactorSafety Current State FinancialAuditability FFMIACompliant “Playground Rules” No Control (Anything Goes!) Complete Control • “Closing the Gap” Will Mean: • Controls that are in place and tested • More standard processes • Implementing more capable systems • Improved operational efficiency • Reduced vulnerability to fraud/waste • Sustained public trust/confidence DoD Business “Control Continuum” GAP

5. Financial Improvement and Audit Readiness (FIAR) Why is FIAR Important? Comply with Laws:- Laws require financial statement audits Verify Correct Allocation of Funds:- Verify that all resources are efficiently allocated to approved mission priorities Improve Mission Support:- Provide better information for timely, informed decision-making Increase Public Trust:- Reassure the public that DoD is a good steward

6. Many diverse functional organizations must work together Lack of understanding relating to financial audit requirements Current business environment makes auditability hard to achieve DoD systems are not integrated and/or manually intensive Lack of processes standardization or embedded internal controls Some systems do not collect or lack visibility of data at transaction level Lack of coordinated plans Services pursuing different agendas at different pace Earlier focus was on information of limited value to management DoD Challenges New Approach Established in August 2009:Focus on Improving Information We Use

7. “It will take longer than we thought to become audit-ready.”

8. Focus on information DoD uses to manage Budgetary data Asset counts/location (existence and completeness) Main emphasis: improve information Use audits to verify success or identify problems Focus on internal controls and source documentation Lower priority for information not useful to managers New Approach OSD/Services Developing Detailed Financial Improvement Plans

9. DON FIP is a department-wide effort designed to achieve the goal of DON reaching an audit ready state The program continues to drive toward more effective business processes, with the focus centered on effective internal control implementation DON FIP outcomes include: More accurate, timely, and reliable information for decision making More confidence of DON’s effective stewardship of taxpayer dollars DON Financial Improvement Program Overview

10. DON FIP Accomplishments and Updates • Accomplishments to Date: • In Process Items: • Key Upcoming Milestones/Dates:

11. FIAR FY 11-16 Milestones - Audit Ready Assertion Dates Obligation Status- DON Supply Orders (MILSTRIPs) Q3 FY11 Contracts Q4 FY11 Military Pay Q4 FY12 Funds Balance with Treasury (Outlays) - DON Q4 FY12 Statement of Budgetary Resources DON (USMC already under audit) Q1 FY13 Army Q1 FY15 Air Force Q4 FY16 Mission Critical Asset Existence and Completeness DON Q2 FY15 Army Q3 FY15 Air Force Q4 FY16 We Will Seek Independent Validation for Some of These

12. DON FIP Strategy - Management Challenges Challenge How We Are Responding Implementing a Robust Internal Control Environment Across a Large, Geographically Dispersed Organization • Focusing on mitigating risk and meeting control objectives • Defining key controls across business processes • Integrating Audit Readiness with Change Management efforts Intra/Inter DoD Agency Coordination • Continuing to foster cooperative relationships with business partners (e.g. DFAS, DLA, DCMA) • Reaching outside of the FM community (e.g. Acquisition, Logistics) • Working to adopt BTA standards and promote common business processes and interoperability of data Building and Sustaining an Audit Readiness Infrastructure • Looking to standardize processes and internal controls to reduce complexity, risk, cost of maintenance, and deploy new enterprise systems (e.g. Navy ERP, FPPS) • Promoting awareness and understanding of the importance and use internal controls across the enterprise, while establishing accountability • Developing an organized systemic means to periodically evaluate operating effectiveness (OMB A-123 Appendix A - ICOFR)

13. Lessons Learned: Assertion to Audit Key Lessons Learned thus far can be grouped into four areas: • Financial Environment • “Know Your Environment” • Understand the flow of events and transactions from recognition through recording to reporting • Reconciliation of: FBWT, UTB to ATB, DO-Unpaid to A/P, etc. • Readily available source docs • Standard internal controls, • systems, and processes improves • audit performance • Data Management • Sample retrieval, submission, and tracking, as well as follow-up question management “Transmitting Timely and Accurate Information” • DoD/DON information security requirements Pathway to Success • Data requirements are large and complex – requires constant focus Auditor-Auditee Communication Human Resource Management “Simple in Concept… Monumental in Execution” “People Make the Difference” • Quality people are needed in the auditee organization as well as in the external service providers • Constant education of both auditor and auditee • Must have the “Will to Win” – Audit is unrelenting • Know how to communicate with the auditor • Assure clear understanding by all parties of business activities • We know our business better than anyone, so be confident

14. What is the Significance of These Dates? 1990 1996 2000 2007 2017

15. Summary • DoD’s financial management community is performing well • DoD’s financial management health and capabilities are a reflection of the business environment and key supporting elements (i.e., people, processes, systems) • Enterprise-wide changes in our business will be required to meet stakeholder expectations • Better integrated/more capable systems • Standardized business processes which are periodically tested and measured against efficiency, effectiveness and compliance criteria • The Comptroller serves as a catalyst in strengthening the key elements of our business…both inside and outside of the FM “stovepipe.” • We need to recapitalize our business infrastructure Continue to build and strengthen the audit support infrastructure today, to support the audit tomorrow.