Financial Management:

Achieving Financial Statement Auditability in the Department of Defense

GAO-09-373: Published: May 6, 2009. Publicly Released: May 6, 2009.

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Since the first financial statement audit was attempted at a major Department of Defense (DOD) component over 20 years ago, GAO and DOD auditors have continued to report significant weaknesses in the department's ability to provide timely, reliable, consistent, and accurate information for management analysis, decision-making, and reporting. DOD has undertaken a number of initiatives over the years, such as the Financial Improvement Initiative in 2003, to improve the department's business operations, including financial management, and achieve clean financial statement audit opinions. However, these initiatives have met with limited success. In 2005, the DOD Comptroller established the DOD Financial Improvement and Audit Readiness (FIAR) Directorate to manage DOD-wide financial improvement efforts and to integrate those efforts with transformation activities, such as those outlined in the Enterprise Transition Plan, across the department. The components report accomplishments and progress against planned corrective actions to the FIAR Directorate for reporting in the FIAR Plan. Congress asked GAO to analyze the department's FIAR Plan to identify any areas where improvements are needed to enhance the plan's effectiveness as a management tool for guiding, monitoring, and reporting on the department's efforts to identify and resolve its financial management weaknesses and achieve financial statement auditability.

In 2004, we reported that DOD lacked a comprehensive and integrated strategic plan with key milestones, measures/metrics, accountability mechanisms, or cost estimates for achieving financial statement auditability. According to best practices, a strategic plan should include the following key elements: (1) provide a comprehensive view of performance, including the establishment of a baseline of current operational functions, capabilities, and performance against which progress toward a defined goal or objective can be measured; (2) align goals and measures with departmentwide goals, and cascading goals and measures to lower organizational levels; (3) establish timelines and demonstrate results; (4) assign accountability for achieving results; and (5) link resource needs to performance. While the FIAR Plan identifies three goals for improving DOD financial information and achieving audit readiness, it does not contain the key elements of a strategic plan that we have previously reported as necessary for successful DOD business transformation. During our review of DOD's September 2008 FIAR Plan, we identified the following areas that the department needs to address to improve the FIAR Plan as a strategic and management tool: (1) clear guidance is needed in developing and implementing improvement efforts; (2) no clear baseline exists against which incremental progress can be measured; (3) linkages between FIAR Plan goals and corrective actions and reported accomplishments are not always clear; (4) clear results-oriented metrics for measuring and reporting incremental progress are needed, and (5) accountability is not clearly defined or assigned and resources budgeted and consumed are not identified. We also identified recent actions the department is taking to begin to address many of the issues we have identified above.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability, that the Secretary of Defense should direct the DOD CMO to ensure that the military service CMOs and the DOD Comptroller's Acting FIAR Director work jointly, as appropriate, to assign accountability in the FIAR Plan for achieving results to specific offices or organizations (1) within the department, such as the Property and Equipment Policy Office within the Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics); and/or (2) at lower levels within a DOD component, such as the Deputy Chief of Staff for Logistics, Installations, and Mission Support within the Air Force.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: The Department of Defense (DOD) updated its Financial Improvement and Audit Readiness Plan (FIAR) methodology and FIAR Guidance to assign accountability for achieving results to specific offices or organizations within the department and among DOD components. The FIAR Guidance and FIP (Financial Improvement Plan) template, call for components to identify the names of individuals and organizations that are accountable for achieving results through the discovery, assessment, testing, and corrective action phases.

    Recommendation: To increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability, that the Secretary of Defense should direct the DOD CMO to ensure that the military service CMOs and the DOD Comptroller's Acting FIAR Director work jointly, as appropriate, to describe in the FIAR Plan the oversight roles and responsibilities, if any, of the DOD CMO and military service CMOs over FIAR Plan and FIP improvement efforts, as appropriate.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: The Department of Defense (DOD) defined the responsibilities of the Financial Improvement and Audit Readiness (FIAR) Governance Board within the semiannual FIAR Plan status reports. The FIAR Governance Board, which was established in fiscal year 2010, replaces the Financial Management Leadership Council, and expands the participants to include the DOD DCMO (Deputy Chief Management Officer) and military department DCMOs. The FIAR Governance Board incorporates the department's most senior leaders from the financial management community along with the DCMOs. The DCMOs have cross-community (business and financial) responsibilities and authority to transform budget, finance and accounting operations and to eliminate or replace financial management systems that are inconsistent with transformation. The board meets quarterly to provide leadership and oversight of the department's FIAR plans (including reviewing the progress on each component's Financial Improvement Plan) and identify risks that could prevent the department from achieving its goals, and it is responsible for ensuring sufficient documentation of the FIP.

    Recommendation: To increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability, that the Secretary of Defense should direct the DOD CMO to ensure that the military service CMOs and the DOD Comptroller's Acting FIAR Director work jointly, as appropriate, to establish clear results-oriented metrics within the FIAR Plan and component FIPs for measuring and reporting quantifiable incremental results toward achieving defined financial management capabilities, addressing a specific weakness, and/or achieving FIAR Plan goals by an estimated milestone date established for each component and the department.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: Starting with its May 2010 FIAR Status Report, DOD has included clear results-oriented metrics within the FIAR Plan and component financial improvement plans (FIP) for measuring and reporting quantifiable incremental results toward achieving defined financial management capabilities, addressing a specific weakness, and/or achieving FIAR Plan goals by an estimated milestone date established for each component and the department. These metrics include key control objectives (KCOs) and key supporting documentation (KSD) measures. The KCO metrics provide management with visibility of the military services' and DOD components' assessments, testing and remediation activity until the KCOs have been determined to be effective. A standard set of KCOs are embedded in each of the military services' and DOD components' FIPs. KSD metrics capture the military services' and DOD components' progress in identifying supporting documentation deficiencies and problems that must be remediated before achieving auditability. DOD recognized, in developing the KSD metrics, that maintaining and making readily available acceptable evidential matter has been a long-standing deficiency for the Department and is critical to successful audits. The FIAR methodology provides guidance to assist in resolving this deficiency in readily available acceptable evidence and the KSD metrics tracks progress in remediating this deficiency.

    Recommendation: To increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability, that the Secretary of Defense should direct the DOD CMO to ensure that the military service CMOs and the DOD Comptroller's Acting FIAR Director work jointly, as appropriate, to establish a baseline of financial management capabilities and weaknesses at the component level, and ultimately at the department level, that can be used to (1) obtain a clear understanding of needed improvements in DOD's or a component's policies, processes and controls, systems and data, and human capital that are needed to address these weaknesses and support relevant management assertions (i.e., existence or occurrence, completeness, valuation, rights and obligations, and presentation and disclosure) regarding the reliability of reported financial information; (2) identify gaps in planned corrective actions; and (3) establish a realistically attainable date, by component and at the department level, for achieving financial statement auditability.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: In its semiannual Financial Improvement and Audit Readiness (FIAR) Plan Status Update, the Department of Defense (DOD) identified baseline financial reporting and management risks and weaknesses and outlined changes in policies, processes, and controls that DOD officials deem vital to achieving financial statement auditability for all components within the department. In its FIAR Guidance, DOD identified additional human capital resources necessary for achieving auditability and established a plan to address gaps in corrective actions for remediating weaknesses in processes, controls, and financial information systems. DOD also modified its semiannual FIAR Plan Status Update to set forth a series of milestone dates for each DOD component to achieve auditability of the SBR by the departmentwide date of 2014 and overall auditability of the majority of the DOD components by 2017.

    Recommendation: To increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability, that the Secretary of Defense should direct the DOD CMO to ensure that the military service CMOs and the DOD Comptroller's Acting FIAR Director work jointly, as appropriate, to issue guidance to standardize the development of the FIPs, including their format and frequency, to aid in ensuring the (1) sufficiency of corrective actions through the identification of performance gaps in corrective actions planned within and between components; (2) sharing of successful methodologies developed and implemented to address a financial management weakness or achieve a defined capability; and (3) reliability of progress reporting, including clear linkages and descriptions of how the corrective action, individually or collectively contributes to achievement of a defined capability or goal by an estimated milestone date established for each component and the department.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: The Department of Defense (DOD) has issued its Financial Improvement and Audit Readiness (FIAR) Guidance, in which DOD's goals, strategy, roles, responsibilities, and procedures for achieving audit readiness are defined. The FIAR Guidance standardizes the development of the DOD component agencies' financial improvement plans (FIP) and provides a systematic, standardized process of defining phases/business rules for measurable outcomes, outlines the format of the phases that the components must follow to develop and implement their FIPs, and establishes that FIPs are to be updated monthly based on the standardized phases. The FIAR Guidance also sets forth a plan for designing and implementing corrective actions that remediate weaknesses in a timely manner and provides a framework for collaboration among the components for sharing successful methods of addressing weaknesses or achievements vital to DOD's goals. The FIAR Guidance, along with the FIAR Plan, defines key capabilities and links them to the corrective actions taken to help achieve success toward DOD goals by established dates for each component and the department.

    Recommendation: To increase the FIAR Plan's effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department's goal of financial statement auditability, that the Secretary of Defense should direct the DOD CMO to ensure that the military service CMOs and the DOD Comptroller's Acting FIAR Director work jointly, as appropriate, to provide visibility to DOD management and the Congress, within each FIAR Plan update, of resources budgeted and spent to address a specific weakness or achieve specific incremental improvements in the department's financial management capabilities.

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: Department of Defense (DOD) officials have substantially addressed the intent of this recommendation. DOD is including budgeted resource information in its Financial Improvement and Audit Readiness (FIAR) Plan Status Reports, but DOD officials stated that the cost and effort of assigning and tracking resources used to address specific weaknesses is prohibitive. Therefore, amounts spent are not included in the FIAR Plan Status Updates even though amounts budgeted for audit readiness, validation, and audits, and financial systems are included.

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