Department of the Navy DON Business Transformation Update “The Role of OMB A-123, Appendix A (Federal Version of Sarba

1. Department of the Navy DON Business Transformation Update “The Role of OMB A-123, Appendix A (Federal Version of Sarbanes-Oxley)” Presented to: ASMC Washington Chapter 11 October 2006

2. Accounting irregularities in the private sector led Congress to tighten reporting requirements for businesses. OMB Circular A-123 (Appendix A) establishes comparable Internal Controls reporting for the federal sector. FIAR, FIP, and Managers’ Internal Control Program are all integrated. • Sarbanes-Oxley (SOX) Act of 2002 and FMFIA/OMB A-123 • Enron, WorldCom, and Tyco accounting scandals resulted in a decline of public trust • Public should also have trust in how their government is using taxpayer dollars • Both Acts require management (CEOs, CFOs, Secretaries) to certify, or attest to the effectiveness of internal control over financial reporting. However, SOX prescribes criminal penalties. • Relationship to the DoD • DoD Component Heads must provide certification to OSD that controls are effective • Reported separately in the Annual Statement of Assurance (SOA), under the purview of FMFIA Over Financial Reporting • Implementation is integrated into the FIAR effort • Relationship to DON Financial Improvement Program (FIP) • Serves as the “validation” process of the FIP • Provides sustainment of FIP efforts • Implementation of OMB A-123, Appendix A is integrated into DON FIP effort

3. A clean audit on private sector financial statements is mandatory and ingrained; it reflects high-quality financial information and organizational credibility. Consider that: • In the private sector, achieving an unqualified or “clean” opinion is considered normal business – but with some recent problems (e.g., Enron) • If DON were a Fortune 500 Company, we would be #5, just above General Electric • DoD is the most significant Cabinet-level Department without an acceptable audit opinion • We apply rigor and discipline to operational missions (e.g., nuclear power, flight safety, etc.). Why not be as thoughtful, methodical, and accurate in financial management?

4. DON Financial Improvement Program Human Resources Materials Mgmt Human Resources Supply Mgmt People (NSPS) Processes (Lean Six Sigma) Supply Management Enterprise Transition Plan Program Management Materials Management Program Mgmt Internal Controls (MICP/A-123) Systems (Navy ERP) Financial Management Financial Mgmt Data/Stds (SFIS) Systems (FAM) Business process transformation recognizes the need for an enterprise-wide, integrated effort, aligning DON with the President’s Management Agenda, DoD Business Transformation, and Congressional intent. DoD Business Enterprise Architecture (DoD Financial Improvement and Audit Readiness (FIAR)) Current Environment (Stove-piped) DON Business Transformation Future Environment (Integrated)

5. The Department’s Business Transformation Program will continually mature as DoD’s Enterprise Transition Plan is executed. DON Business Transformation Council Oversight Internal Controls As-Is Environment Existing Processes Discovery & Correction Non-standard Controls Legacy Systems Audit Disclaimers Transition Plan Business Process Transformation “To-Be” Environment Best Practices A-123 Certified Controls N-ERP BTA/BEA Unqualified Audits Opinions

6. To summarize, DON’s Financial Improvement Program (DON FIP) integrates several initiatives advancing business processes, systems, and people. Key Success Factors: • Business rules and documentation • Sound systems environment • Ready access to audit trails and audit evidence • A paradigm shift – management takes ownership of the financial integrity of its processes • Human Capital Processes supported by a performance-based culture • Implementation, testing, and certification of Internal Controls over Financial Reporting (required by OMB A-123, Appendix A)

7. Audit Discovery & Correction Assertion Assessment Validation The methodical trail to an audit opinion prescribed by the FIAR process incorporates continual testing of controls, as A-123 Appendix A calls for. Focus Areas are at different stages along the audit continuum; Investments and Debt are the Focus Areas most advanced. FIAR/A-123/FIP are all inter-related. FIAR FlowchartRisksControls Test Controls StatementofAssurance Appendix A Real Property Military Equipment Accounts Payable Accounts Receivable Inventory and OM&S Environmental Liabilities FECA Liability Fund Balance with Treasury Appropriations Received Investments Debt FIP Focus Areas

8. DON Processes Established by Authoritative Guidance Risk/Control Point Analyze Risks Assess Controls Document Findings = Corrective Action Process Improve-ment & Standard-ization = DON FIP Validation Approach Aligns with A-123 Financial Reporting Requirements Continuous Monitoring A-123 Certification in SOA / Audit Readiness

9. To conclude: Internal Controls Over Financial Reporting (A-123, Appendix A) involves all business managers-- not just financial managers. Keys to DoD/DON Success: • Awareness • Relevance • Execution