Achieving Auditable Financial Statements Within the Air Force.

The Chief Financial Officers Act of 1990, as amended by the Government Reform Act of 1994, requires 24 federal government agencies to produce audited, commercial-style financial statements. The Department of Defense (DoD) is by far the largest of the agencies covered by the Act. To comply, DoD produces financial statements that are a consolidation of Army, Navy Air Force, and Defense Agency statements. Taken as a whole, the DoD Financial Statements represent over 65 percent of the resources reported on the government-wide statements.

Because of the size, complexity and world-wide dispersal of DoD activities, efforts to achieve a positive opinion on the DoD and Service financial statements continue to be a work in progress. However, progress is the operative word and DoD and the services are doing just that--making progress.

This article addresses the Air Force overall approach to achieving audited financial statements, and then focuses on our initiatives and progress towards obtaining an unqualified opinion on the Statement of Budgetary Resources.

Air Force Approach to Auditability

The Air Force is using a three-point strategy for achieving auditable financial statements. That strategy consists of the following: (1) a comprehensive plan to fix the financial and feeder systems that provide information reported in the financial statements; (2) aggressive support of the Under Secretary of Defense (Comptroller)'s efforts to achieve auditable financial statements using the existing financial and feeder systems; and (3) a concerted effort to obtain an unqualified opinion on the General Fund Statement of Budgetary Resources.

Systems Fixes

Fixing the systems that produce financial information is the ultimate solution to achieving auditable financial statements. Today, we compile the Air Force financial statements using information from many different functional systems (e.g., logistics, personnel, acquisition, etc.) that were never designed to comply with accounting standards. In fact, most of these systems were developed long before Congress enacted the CFO requirements. However, these same functional systems are the sources for most of the information reported on Air Force financial statements. For example, data from the Automated Civil Engineer System and the Air Force Equipment Management System are the sources for approximately 80 percent of the Property, Plant, and Equipment value reported on the Air Force General Fund Balance Sheet. Overall, the Air Force has identified 42 critical feeder systems that feed financial data to the Air Force financial statements. Building the appropriate accounting requirements into these functional systems is the key to auditable financial statements.

To ensure we achieve our long-term goal of CFO-compliant feeder systems, the Office of the Assistant Secretary of the Air Force (Financial Management) (SAF/FM) has partnered with the functional communities, and in particular the logistics community to address the financial requirements for functional feeder systems. Overall, we are using a Y2K approach to managing this effort. For each system we are assigning a CFO expert to work with the functional program manager to assess, renovate, test, and certify each system. To date we have worked with the civil engineering community and are completing development of a real property system that will be CFO compliant. In concert with the logistics community we built a depreciation module and a CFO compliant valuation method into the Air Force system that maintains accountability for most personal property - the Air Force Equipment Management System. The Air Force Audit Agency is currently reviewing this system to determine whether it is CFO compliant. Others will foll ow as we focus on major systems such as the Combat Ammunition System, Defense Management and Production System, and the Stock Control System - to name just a few. Overall, our goal is to have all the critical feeder systems CFO-compliant by fiscal year (FY) 2003.

DoD Implementation Strategies

In the shorter term, we will continue to produce the most accurate financial statements possible using the information produced by existing systems. Producing auditable financial statements using the existing systems is no easy task since many were developed prior to the CFO Act. To address this short term requirement, the OSD Comptroller worked with the Office of Management and Budget, the General Accounting Office, and the DoD Inspector General to develop implementation strategies that would facilitate more CFO-compliant financial statements before the financial and feeder systems are fixed. The Air Force is aggressively supporting this effort by developing an Integrated Process Team (IPT) approach for addressing each balance sheet item. The IPT consists of groups tasked to work each key area such as real property, personal property, deferred maintenance, government furnished property, and environmental liabilities. In total, the Air Force has 13 separate working groups addressing the DoD financial statemen t strategies. In addition to the functional representatives, each group also has representatives from the Defense Finance and Accounting Service, Air Force Audit Agency, and SAF/FM. Ultimately, the goal of these working groups is to produce accurate financial statements in the short term while working toward CFO-compliant financial and feeder systems.

Statement of Budgetary Resources

In addition to the feeder system fixes and the DoD financial statement strategies, SAF/FM is making a concerted effort to obtain a qualified audit opinion on the Statement of Budgetary Resources by FY 2000 and an unqualified opinion by FY 2001. We focused on this statement because it closely portrays the every day operation of financial management within the Air Force. Specifically, this statement with its "resources provided" section captures the funds the Air Force receives and distributes through the appropriations process. The statement also reports the amount of disbursements occurring during a fiscal year and the obligated balance at year-end.

We began our first major push to obtain a positive opinion with the FY 1997 statement and have continued with the subsequent year statements. To date, we have been unable to attain a positive opinion, but we have made significant progress--and the lessons learned have been invaluable.

From the beginning, the audits have shown that we receive and distribute the money Congress appropriates in accordance with all laws and directives. Needless to say, that is good news. However, during that first year (FY97), it also became apparent that support for disbursements was our first major hurdle. AFAA reviewed a representative sample of disbursements DFAS made on behalf of the Air Force and unfortunately, we were not always able to find the appropriate contract documentation, receiving reports and invoices needed to adequately support the payments. Further, when the documentation was available, it was not always properly completed. With the support of DFAS, we began a major awareness and education campaign regarding the appropriate documentary support for disbursements. We issued guidance to the field and also developed a web-based instruction module for completing receiving reports. This increased attention to the disbursement process helped us pass the disbursements audit test in FY 1998 and we ma de an even better showing for FY 1999.

As we began the audit for the second year (FY 1998), we faced a new gremlin. Still in the afterglow of passing the disbursement test, we were disappointed to find out that invalid obligations would be our next stumbling block. When the auditors traced their sample of outstanding obligations to the source documents, they found that many of the obligations were not properly supported. Based on their statistical sample, the auditor projected that about $4 billion of an ending obligation balance exceeding $30 billion was not properly supported. SAF/FM again marshaled forces with the contracting community and DFAS to address this very significant problem. Special emphasis was placed on the tri-annual reviews of unliquidated obligations. In addition, we held a series of meetings between senior financial and acquisition personnel to address solutions to the problem of old obligations that personnel were reluctant to de-obligate because of the potential for future bills. Although the audit work continues, it appears we made significant progress in ensuring that obligations are properly supported. Based on the progress made, we believe we are still on track to attain a qualified opinion on the FY 2000 statement and an unqualified opinion by FY 2001.

Efforts to Improve Management Information

Financial information should not only be accurate and auditable, it should also be useful. Of particular importance is accurate and timely cost information. We are addressing this need with several important cost information systems. For example, the Air Force Total Ownership Cost System is the acknowledged leader in ownership cost databases. This system provides comprehensive and timely cost information on major Air Force systems and infrastructure. The system also provides managers with cost data for unclassified aircraft, space, and missile systems; munitions; military construction; and base operations. Managers can view the data by appropriation and also have visibility over operating and support costs down to the installation level by aircraft type. Another example is the OPSTEMPO System being fielded by Air Combat Command. This system provides detailed flying hour cost information by individual aircraft. Wing Commanders can use this information to monitor cost trends for maintenance, fuel, and spare par ts, and then focus on managing the major cost items. A third example is the Defense Maintenance and Production System that is currently planned for deployment in FY 2001. It will provide detailed depot maintenance cost information at the Air Force Air Logistics Centers.

Summary

The Air Force is working very closely with the OSD Comptroller and our functional counterparts to comply with the Chief Financial Officers Act. We have made significant progress in fixing our financial and feeder systems and we are working within our existing systems to produce more accurate financial information. Despite the difficulties encountered with our Statement of Budgetary Resources work, the audits have shown that we are complying with all laws and regulations when receiving and distributing appropriated funds. For two years in a row, we passed the audit test for disbursements and we are now making significant progress towards passing the obligations test. We believe we now have the elements in place to reach our goal- an unqualified opinion on the Air Force General Fund Statement of Budgetary Resources Statement for Fiscal Year 2001. Finally, as we continue to refine and develop financial systems, we will not only focus on more accurate information, but will also strive to provide Air Force manager s with relevant and useful information.

Ron Speer is the Principal Deputy Assistant Secretary of the Air Force (Financial Management). In this position he has worked extensively on the Air Force implementation of the CFO Act. In one of his prior positions, Mr. Speer was the Assistant Auditor General for Financial and Support Audits. where he was responsible for the CFO audit of the Air Force General Fund Financial Statements.