Audit Readiness The New Priorities -- Financial Information We Really Use

1. Office of the Under Secretary of Defense (Comptroller) Audit ReadinessThe New Priorities -- Financial Information We Really Use Joe QuinnOffice of the Under Secretary of Defense (Comptroller) June 2010

2. Agenda Financial Improvement and Audit Readiness (FIAR) Strategy Keys to Success Where Are We Now What Does Success Look Like What Do We Look Like The Changes We Need to Make

3. The FIAR Strategy • Congress requires DoD audit readiness by Sept 2017 • Focus efforts on improving information most often used to manage in the DoD in order to: • Build momentum to improve the processes and systems that underlie all financial information and statements • Demonstrate the value of improving financial information • Increase DoD-wide buy-in and participation • Prioritize on budgetary and asset records first • Valuation is secondary as it is rarely relevant to decisions • All transactions go through the budget execution lifecycle • Clean audits will be a byproduct of improved processes Focus first on information used to manage in order to build momentum and demonstrate value

4. The FIAR Strategy – Approach • Focus first on information used to manage the DoD • Budgetary Information (Waves 1 & 2) • Mission Critical Asset Information (Wave 3) • Incremental and prioritized approach to achieve auditability Based on accounting and audit principles and will not change

5. Keys to Success

6. Keys to Success • Enhanced Oversight and Governance • Incorporation of DCMO • FIAR Governance Board

7. Keys to Success • Resources • Increased resources for Army and Air Force • Using more CPAs and auditors

8. Keys to Success • Strategy and Guidance • FIAR Strategy based on sound business case • Guidance that defines activities, outcomes, and success criteria

9. Keys to Success • Enhanced Oversight and Governance • Incorporation of DCMO • FIAR Governance Board • Resources • Increased resources for Army and Air Force • Using more CPAs and auditors • Strategy and Guidance • FIAR Strategy based on sound business case • Guidance that defines activities, outcomes, and success criteria With these improvements DoD believes that we will see faster progress and better results than past efforts

10. Where Are We Now?

11. DoD’s CurrentSBR Status Under Audit 14% Immaterial 1% Preparing for Audit 85%

12. Current Status • We Have a Good Plan • "I applaud the Department of Defense for finally taking an important first step forward to achieve financial accountability by developing a coherent plan to clean up its books so that American taxpayer dollars aren't being wasted,“ said Sen. John McCain. • Sen. Tom Carper said, " The Pentagon hasn't yet met this critical goal of being able to audit its books, but at least we finally have a plan to help them navigate the path ahead” • Unfortunately, past pronouncements and plans have not resulted in the change in culture needed at the Defense Department to ensure financial accountability for taxpayer dollars. I hope this time, things are truly different," said Sen. Tom Coburn. Plans are only good intentions unless they immediately degenerate into hard work. --Peter Drucker

13. What Does Success Look Like?

14. What We Need To Do • Improve Controls • All financial business events are captured in the general ledger: • In the right period • At the correct amount • Using the proper funds • With appropriate authority • Support Balances • Balance tie to transaction populations • Transactions can be traced to supporting documents or data Auditors and 6 Year-Olds want to know the same thing… Where did that come from? Simple in concept and difficult in execution… requires discipline, persistence, and consistency

19. Support Balances • In the right period • At the correct amount • Using the proper funds • With appropriate authority

20. What Do We Look Like?

21. Our Current Environment • Multiple General Ledgers • Massive Unsupported Journal Voucher Adjustments • Data Calls to Identify Financial Events • Unrecorded Financial Events • Misclassified Financial Events We Must Change How We Conduct Our Business

22. The Changes We Need

23. Demonstrate the Value of Improved Information • Congress and the Public – Stewardship duty • Secretary Gates and Cost Accounting • Do more with less slightly more • Shift resources from “tail” to “tooth” • “The patriot today is the fellow who can do the job with less money” – President Eisenhower • Need to know how much “tail” we have and the performance/outputs of overhead cost centers • Financial Accounting is the Foundation of Management Information The path to mission efficiency is through financial management effectiveness

24. Demonstrate the Value of Improved Information • Cost or Managerial Accounting can only occur with a solid foundation of financial accounting* *Cost & Effect, Kaplan and Cooper, 1997

25. Culture Changes • Prove your strengths vice hide your faults • The traditional program/compliance audit approach does not work for financial statement audits • Human Capital • Align people with the proper experience and capabilities to the tasks assigned • In DoD we employ doctors to perform surgery, lawyers to argue cases, architects and engineers to build structures; but we don’t require use of CPAs to perform accounting and auditing • Business Excellence Everyday • Instill military operational discipline in business operations • You cannot cram for a financial statement audit Accountability for reliable financial information is critical

26. Dirty Jobs • Integrated End-to-End Processes • Link feeder and mixed systems to general ledger so all financial events are captured • Document Retention • Millions of paper and electronic records must be retained every month to support transactions recorded in general ledgers • Service Provider Integration • Business and financial organizations and people are being impacted by the changes. Must Change How We Conduct Our Business

27. Dirty Jobs • Integrated End-to-End Processes • Link feeder and mixed systems to general ledger so all financial events are captured

28. Dirty Jobs • Service Provider Integration • Business and financial organizations and people are being impacted by the changes.

29. Conclusion • We have a well defined way forward • With resources and leadership • There is a tremendous amount of work to do • With the right people and continued hard work this task can be accomplished We must succeed to support the DoD mission and meet our duty to taxpayers