DOD Financial Management:

Marine Corps Statement of Budgetary Resources Audit Results and Lessons Learned [Reissued on October 17, 2011]

GAO-11-830: Published: Sep 15, 2011. Publicly Released: Sep 15, 2011.

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Long-standing weaknesses in Department of Defense (DOD) business processes, systems, and controls have hindered efforts to achieve financial audit readiness. Because DOD relies heavily on budget information for day-to-day management decisions, in August 2009, the DOD Comptroller designated the Statement of Budgetary Resources (SBR) as an audit priority. The U.S. Marine Corps was identified as the pilot military service for an SBR audit. GAO was asked to determine (1) the primary reasons the Marine Corps was unable to obtain an opinion on its fiscal year 2010 SBR; (2) the effectiveness and status of the Marine Corps' remediation plan, and (3) military service efforts to leverage Marine Corps SBR audit lessons. GAO reviewed auditor findings and recommendations, evaluated the Marine Corps corrective action plans, and reviewed documentation on military service audit readiness and lessons learned efforts. During its work, GAO met with DOD, Marine Corps, military service, and Defense Finance and Accounting Service (DFAS) officials and the auditors..

The Marine Corps received a disclaimer of opinion on its Fiscal Year 2010 SBR because it could not provide supporting documentation in a timely manner, and support for transactions was missing or incomplete. Auditors also reported that the Marine Corps did not have adequate processes, systems controls, and controls for accounting and reporting on the use of budgetary resources. Further, the Marine Corps could not provide evidence that reconciliations for key accounts and processes were being performed on a monthly basis. The auditor also identified ineffective controls in key information technology (IT) systems used by the Marine Corps to process financial data. The auditors provided 139 recommendations to correct identified weaknesses. The Marine Corps developed action items and milestones in response to the auditor's findings. But its remediation plan was focused on near-term outcomes and did not adequately specify key elements, including goals and objectives, actions for addressing those objectives, and associated performance measures. GAO previously reported that it is standard practice to have strategy that includes these features. GAO found that many of the Marine Corps' actions did not address the specific auditor recommendations, and other actions were not adequate to correct underlying problems or root causes. Further, many of the remediation actions would require steps on the part of other DOD components, such as DFAS and the Defense Contract Management Agency. As of July 2011, the Marine Corps reported that actions on 88 of the 139 auditor recommendations were fully implemented. Auditors will assess the effectiveness of these actions as part of the fiscal year 2011 SBR audit effort. However, because many of the actions do not address the underlying internal control weaknesses, the Marine Corps risks continuing disclaimers of opinion. The Marine Corps' fiscal year 2010 SBR audit results provide valuable lessons on preparing for a first-time financial statement audit. GAO identified five fundamental lessons that are critical to success. Specifically, the Marine Corps' experience demonstrated that prior to asserting financial statement audit readiness, DOD components must (1) confirm completeness of populations of transactions and address any abnormal transactions and balances, (2) test beginning balances, (3) perform key reconciliations, (4) provide timely and complete response to audit documentation requests, and (5) verify that key IT systems are compliant and auditable. These issues are addressed in Internal Control Standards and audit requirements as well as DOD's Financial Improvement and Audit Readiness Guidance, which the military services are to follow in developing their respective Financial Improvement Plans (FIP). Navy, Army, and Air Force FIP officials stated that they were aware of the Marine Corps lessons. Navy officials stated that they are in the process of updating their audit readiness plan to address all five areas. Army and Air Force officials indicated their plans addressed some but not all of the lessons. GAO makes recommendations to (1) the Marine Corps to develop a riskbased remediation plan and confirm its actions fully respond to auditor recommendations and (2) DOD to direct other military services to consider key lessons learned in their audit readiness plans, as appropriate. DOD concurred with three of four recommendations but said the recommendation for a risk-based plan was too prescriptive. GAO believes this is needed for the long term.

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 improve Marine Corps and Department of Defense (DOD) audit readiness efforts, the Secretary of the Navy should direct the Commandant of the Marine Corps to, for remediation actions that require coordination and action on the part of other DOD components, such as Defense Finance and Accounting Service (DFAS), Defense Contract Management Agency (DCMA), and Defense Contract Audit Agency (DCAA), require the Marine Corps to develop and implement timely and effective service-provider agreements with the appropriate DOD components in accordance with the Financial Improvement and Audit Readiness (FIAR) Guidance. These agreements should identify roles and responsibilities, the individuals responsible for those activities, and performance measures that establish accountability.

    Agency Affected: Department of Defense: Department of the Navy

    Status: Open

    Comments: The Marine Corps has acknowledged that the work on this recommendation is on-going. A new service-level agreement with DFAS was completed in January 2012. The Marine Corps' latest update outlines better communication and coordination with service providers, and increased participation in DOD-wide FIAR meetings. However, the Marine Corps has provided no specific information or plan related to additional service-level agreements with its other DOD service providers, such as the Defense Logistics Agency, the Transportation Command, and the Defense Contract Management Agency. This recommendation remains open.

    Recommendation: To improve Marine Corps and Department of Defense (DOD) audit readiness efforts, the Secretary of the Navy should direct the Commandant of the Marine Corps to review Marine Corps SBR remediation actions under way and confirm that actions are fully responsive to the auditor recommendations.

    Agency Affected: Department of Defense: Department of the Navy

    Status: Open

    Comments: The Marine Corps reported that remediation on all financial statement Notices of Findings and Recommendations (NFR) have been completed, but the NFRs will remain open until the auditors can test the effectiveness of actions in a full Statement of Budgetary Resources (SBR) audit. We reviewed the two financial NFRs that were reported as closed by the auditors in fiscal year 2012 and determined that the results of the testing improved from prior years. However, there was no documentation in the auditors' workpapers confirming that the actions taken were fully responsive to the auditors' recommendations. For example, there was no evidence that the Marine Corps implemented strong reconciliation controls over accrued delivered orders, nor was there evidence that it established controls to ensure that goods and services related to amounts for undelivered orders that remained open beyond fiscal year end would actually be delivered and confirmed and that payments would be liquidated against the related obligations. The auditors did not provide any documentation from the Marine Corps that support the completion of the remediation steps for the financial statement NFRs. Further, we did not see evidence to support closing 4 of 19 information technology (IT) system NFRs for which the Marine Corps reported it had completed action. This recommendation remains open.

    Recommendation: To improve Marine Corps and Department of Defense (DOD) audit readiness efforts, the Secretary of the Navy should direct the Commandant of the Marine Corps to, using the results of the fiscal year 2010 and 2011 SBR audit efforts, develop a comprehensive, risk-based plan for designing and implementing corrective actions that provide sustainable solutions for SBR auditor recommendations. Such a plan should identify goals and objectives, identify and prioritize actions for addressing those objectives, allocate resources, assign roles and responsibilities, and measure performance against objectives.

    Agency Affected: Department of Defense: Department of the Navy

    Status: Open

    Comments: The Navy stated that the Marine Corps disagreed with our recommendation and does not believe that it needs to prioritize corrective actions based on risk. Because no action was taken on this recommendation and there is no evidence the USMC is actively working to remediate audit findings, we consider this recommendation to be open.

    Recommendation: To help fully leverage lessons learned from the first-year Marine Corps SBR audit effort, the Secretary of Defense shoud direct the Secretaries of the Army, the Navy, and the Air Force to consider the fundamental lessons resulting from the Marine Corps effort and incorporate the lessons, as appropriate, in their respective Financial Improvement Plan (FIPs).

    Agency Affected: Department of Defense

    Status: Closed - Implemented

    Comments: Our review of Marine Corps' fiscal year 2010 Statement of Budgetary Resources (SBR) audit effort identified five overall lessons that are critical to a successful audit. Specifically, the Marine Corps' experience demonstrated that prior to asserting financial statement audit readiness, DOD components must (1) confirm completeness of transaction populations and address any abnormal balances; (2) test beginning balances; (3) perform key reconciliations, (4) provide a timely and complete response to audit documentation requests; and (5) verify that key information technology systems are compliant comply with the Federal Financial Management Improvement Act of 1996 and are auditable. Our follow-up meetings determined that the Navy was addressing some of the Marine Corps lessons, but the Army and the Air Force were not. In December 2011, DOD updated its Financial Improvement and Audit Readiness (FIAR) Guidance to help ensure the success of the department's audit readiness assertion efforts by adding a list of issues, which included the five areas identified in our report that prevented the Marine Corps from achieving audit readiness for its SBR.

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