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DoD's financial audit strategy: the way ahead: an insightful discussion on achieving auditability success.

Introduction

In the preceding article, John Knubel laid out a clear description of where we have been on our journey toward financial audit readiness. For those of us who have been active players, interested observers, cheerleaders; and so forth, we applaud the meaningful progress and dedicated efforts by so many talented professionais. But a the same fire, we must also acknowledge that we have riot mace the kind of Progress that might have been expected, given the significant capabilities and expertise that exist within the Department of Defense (DoD).

From a national security perspective, we can do amazing operational and technical things when faced with a threat. Logistically, we can literally move mountains in providing the material support required by the warfighter. During a recent meeting one senior-level Treasury Department official pointed out that we put a man on the moon in less time than we are currently projecting will still be required for full auditability of the Federal Government. Another official, this one at the Office of Management and Budget, remarked quite simply that the DoD will achieve a clean opinion when it finds that "it is in ... DoD's interest to do so."

The kind of motivation required to produce meaningful progress may be generated by positive incentives such as the value proposition that Mr: Knubei ascribes to the U.S. Marine Corps' (USMC) experience. (Even so, our budget brethren tend to be skeptical over how much of that "value" is cost avoidance compared to savings.) Hopefully, we can show sufficient progress to avoid externally imposed negative incentives such as reductions in resources for failure to achieve certain levels of audit readiness based on an estaoiished timetable.

The purpose of this article is to describe clearly the strategy that the DoD has recently embarked upon, explain why we think it will work (this time), and discuss some of the key success facto's that we will emphasize while executing this strategy. For a variety of reasons, I be lieve the time is right to seize the moment and take advantage of a confluence of circumstances, both internal and external, that will help us translate this strategy into meaningful results for the Department.

The Strategy

On August 11, 2009, the Honorable Robert F. Hale, Under Secretary of Defense (Comptroller) (USD(C)), issued a DoD-wide memorandum speciying priorities that the Depattment will follow to improve financial management and ultimately achieve audit readiness. In that memorandum, Mr. Hale stated that the first--and most important--step is to improve financial infomation and processes to make them more rellable and useful for managers. achieving unqualified audit opinions should be the result not the driver of these efforts.

Mr. Hate directed heads of the DoD Components to, focus first on improving information and processes in order to acheve auditable Statements of Budgetary Resources (SBR) and then to ve ify the existence and completeness of mission-critical-assets, That is, DOD Components must verity t at records accurately capture the number of each type of weapon system, real proerty. inventory, and operating mater a and operating materials and supplles, He also directed the DoD Components to ad just their Financial Improvement Plans to these two priorities.

In short, toe strategy involves prioritizing cu audit readiness efforts based or how information is routinely used to manage the Department--Whether that management involves budgetary resources, along with the processes and systems used to execute them, or operational support of the warfighter through better visibility of mission critical property.

The new DOD audit strategy focuses first on the SBR. This approach mirrors that adopted by the Department of the Navy and used by the USMC. It was chosen because the SBR is based upon the budgetary information that is the most relevant to day-to-day management of DoD resources it is far more important than the considerations of property valuation that previously dominated auditreadiness discussons, such as deprecated value or historical cost, both of which now are placed ast on the 1st of orioritres). In the private sector, asset values are critical for shareholders or investment analysts to value the net worth of a cornpan, which in turn directly impacts the trading value of the company's shares; no such comparison exists for the Federal Government.

Close behind the SBR in importance is to track the quantity and location of mission-critical military equipment and other assets, as well as their condition and readiness. So the new strategy is driven by a desire to support the needs of senior leaders, both military and civilian, who need to know and manage the location and condition of physical assets--especially equipment required to support deployments.

The Rationale

Since the creation in 2005 of the Financial Improvement and Audit Readiness Directorate within the Office of the Under Secretary of Defense (Comptroller) (OUSD(C)), significant effort has been devoted to focus areas such as valuation of military equipment. We believed that significant measurable progress could be made by attacking large dollar value lines on the balance sheet that might be less dependent on the legacy systems environment. Similar effort has been devoted to large liability categories (for example, environmental liabilities).

These efforts, combined with substantive and sustained auditability in large asset reporting entities, such as the Military Retirement Trust Fund, gave the appearance that the DoD was much farther along than actually was the case. Even worse, much of this effort was focused within the financial management community, sustaining the "myth" that auditability was solely a financial management issue rather than a reflection of the strength of our business infrastructure across the DoD enterprise and as demonstrated in the USMC experience to date.

With the inauguration of the new administration in January 2009, the associated transition ushered in an opportunity to reevaluate where we were and where we were heading. The USD(C) personally engaged the senior financial managers of the military services and several Defense agencies in a dialogue that ultimately produced the new strategy. He laid out several criteria that were used to evaluate options:

* It had to provide meaningful value for the Department;

* It had to be relevant and understandable to those outside the financial management community since we would need senior leadership support across many business areas; and

* It had to be executable within a reasonable timeframe.

As previously discussed, the final strategy and associated direction was issued on August 11, 2009, several months after it was originally drafted and concurred with by all parties. The intervening time was used to communicate the new strategy to major stakeholders outside the Department, including the Government Accountability Office (GAO) and congressional defense committees, which ultimately concurred and provided authorization guidance that was consistent with this strategy and will accompany the fiscal year 2010 DoD appropriations when received.

Key Success Factors

While it is too early to tell how this new strategy will work, one thing is clear: The basic principles and lessons learned in our earlier experience must inform our future efforts. One of the criticisms of recent OUSD(C) emphases--both from external stakeholders such as the GAO and by several DoD Components--is that we have changed the game plan and rules much too often. My response to those criticisms is that our areas of emphasis may have changed, but the principles of sound, well-controlled business processes--those processes that carry the appropriated dollars that support our mission--have remained the same. Now we are applying them as a priority through focus on achieving audit-able SBRs as a first priority.

The following are some of the key areas that will contribute to the probability of success in reaching our goals:

* Dedicated resources. There is a clear relationship between resources and results. The Department of the Navy and the Defense Logistics Agency (DLA) have already demonstrated that, and other DoD Components are taking this element for action.

* A more consistent and comprehensive internal control framework. Entities such as the U.S. Army Corps of Engineers, which has achieved an unqualified opinion, know this, and others are getting the message. This is really the foundation needed to obtain and sustain audit readiness. It also uses the financial audit process for what it can and should be: a source of continuous process improvement.

* Clarity in service provider responsibilities in an audit. The interrelationships among organizations within the DoD represent one of the complexities and challenges to a financial audit. The organization being audited must rely on service providers such as the Defense Finance and Accounting Service, the Defense Information Systems Agency, and the DLA to understand that this is an important element in providing high-quality, reliable service.

* An improved understanding of the relationship of systems to current process weaknesses. While implementation of our target systems is not a silver bullet, we need to do a much better job of implementing these systems with a financial audit in mind and understanding how they ultimately contribute to achieving this goal.

Summary

Our current strategy is fundamentally sound; however, there are still challenges ahead. There is a positive value proposition in terms of improved financial information, business efficiency, and enhanced public stakeholder confidence. To capture this value, we must fundamentally change the way we think about and actually conduct our business. This will involve a change management process that addresses some of the key elements of our culture that drive our priorities. To succeed, senior leadership across the DOD not just from the financial management community must recognize and embrace both the opportunity and its value.

MARK E. EASTON, CDFM

Mark E. Easton currently serves as the Deputy Chief Financial Officer of the Department of Defense. He previously served as the Director of the Office of Financial Operations and Deputy Assistant Secretary of the Navy for Financial Operations in the Office of the Department of the Navy Comptroller. Previously, he was appointed to the Senior Executive Service and served as Director, DFAS-CleveJand. Mr. Easton retired from the United States Navy following a distinguished career as a Supply Corps officer. He is a past National President of the American Society of Military Comptrollers and a member of ASMC's Washington Chapter.

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Author:Easton, Mark E.
Publication:Armed Forces Comptroller
Date:Jan 1, 2010
Words:1673
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