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Financial management should be every manager's concern: the financial management burden, says this author, shouldn't fall solely on the shoulders of financial managers.

Department of Defense (DoD) financial management encompasses a complex array of financial topics--such as accounting and related business systems, commercial payments, asset accountability, salary payments, and cash management--that spans a complex and multifaceted organization with a worldwide mission. The fundamental importance of financial management to DoD's mission primarily is twofold.

Financial management practitioners must make sure that funds are obtained and then appropriately managed to resource and train the men and women of our Armed Forces so that they may maintain force readiness and to provide combat support operations, predominantly through financial and contractual transactions, to preclude gaps in critical mission support. Relevant, reliable, and timely financial information provides valuable input to decision makers as they decide on investments, allocation of new resources, and reallocation of existing resources.

The complexity of and challenges facing DoD operations are reflected by our worldwide mission and particularly by our operations in South-west Asia. The financial information that supports worldwide DoD operations is, as reported for fiscal year (FY) 2009, as follows:
Assets $1.8 trillion
Liabilities $2.2 trillion
Earned Revenue $46.2 billion
Gross Costs $697.8 billion
Net Cost of Operations $651.6 billion


The Department reported that it cost $651.6 billion to operate in FY 2009. How do we demonstrate that funds have been used as intended and appropriately managed? Fundamentally, functional and mission proponents, and not just the comptroller offices, need to have ownership of the financial management process. The Government Accountability Office (GAO) identified that accountability needed to be assigned for achieving results in specific offices or organizations within the Department of Defense (GAO-09-373, "Achieving Financial Statement Auditability in the Department of Defense," May 6, 2009).

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Accountability is more than just achieving an unqualified opinion on financial statements; that outcome will occur if the underlying financial information is sound and the systems sustain the information. Various functional and mission proponents participate in the financial management process through establishing and maintaining sound internal controls, complying with laws and regulations, and operating effective business and support systems.

Every DoD manager should integrate the management control process into his or her daily management practices because:

* Reliable internal controls over transactions lead to reliable data entry to systems.

* Reliable internal controls over systems lead to reliable processing of transactions.

* Reliable internal controls over compiling results into financial reports lead to reliable financial statements.

The Financial Improvement and Audit Readiness Plan, March 2009, defines a strategy for improving financial management, prioritizing needs, and identifying dependencies impeding auditability. The plan has three goals: provide timely, reliable, accurate, and relevant financial information to decision makers; sustain improvements through an effective internal control program; and produce auditable financial statements.

Decision makers need relevant, timely, and reliable financial information--combined with other types of information, such as requirements and capabilities--to make more informed decisions that improve force readiness and support combat operations. Regardless of form, financial transactions supporting a mission objective must occur in an environment of sound internal control to help ensure that the information is relevant and reliable and satisfies the achievement of the mission at hand. For FY 2009, DoD management represented that the Department's financial statements were unreliable because of 13 identified material weaknesses:

* DoD financial management and supporting systems along with lacking business processes impede the collection and reporting of relevant, accurate, and reliable financial and performance information (Financial Management Systems)

* Unreconciled differences consistently occur with U.S. Treasury records, in unmatched disbursements, in negative unliquidated obligations, and in problems with in-transit disbursements (the "Fund Balance with Treasury" account)

* Incorrect valuation (Inventory)

* Inappropriate expensing of items when consumed (Operating Materials and Supplies)

* Reporting not in accordance with generally accepted accounting principles (General Property, Plant, and Equipment)

* Insufficient accountability (Government-Furnished Material and Contractor-Acquired Material)

* Incomplete identification, estimation, and reporting of cleanup costs for all ongoing, inactive, closed, and disposal operations (Environmental Liabilities)

* Untimely reporting of actual accrued costs and appropriate categories (Statement of Net Cost)

* Incorrect identification of most intragovern mental transactions by the customer because DoD systems do not track the buyer and seller data needed to match related transactions (Intragovernmental Eliminations)

* Inability to support accounting entries (Other Accounting Entries)

* Inability to reconcile net cost of operations to budget (Reconciliation of Net Cost of Operations to Budget)

* Inability to support accounts payable balances (Accounts Payable)

* Incorrect recording, reporting, collecting, and reconciling of transactions (Accounts Receivable)

The Office of Inspector General, DoD, has issued a summary of 255 reports issued from FY 2004 through FY 2008 that details the 13 identified material weaknesses. See Report No. 2010-002, "Summary of DoD Office of Inspector General Audits of Financial Management," dated October 19, 2009, at http://www.dodig.mil/Audit/reports/fylO/10-002.pdf.

Because the Department lacks a system of controls to mitigate these weaknesses and is unable to produce sufficient, relevant, and reliable data to support its financial statement account balances, the DoD Inspector General continues to issue disclaimers on financial statements for the Army, Navy, and Air Force General and Working Capital Fund, as well as the DoD Agency-wide Consolidated Financial Statement. The general funds are the primary operating funds for the organization, accounting for assets and abilities. Working capital funds are revolving funds that finance inventories of supplies and other items or provide working capital for industrial-type activities.

The financial management challenges are daunting, but greater progress can be made to overcome these challenges if they are faced by all DoD managers and not just those in the financial management community. All DoD managers should practice sound financial management to ensure the efficiency and effectiveness of DoD operations. The Department's recent initiative to focus first on improving the quality of the financial information used for the Statement of Budgetary Resources and on data supporting the existence and completeness of assets is a positive step to focus initially on information that DoD managers use every day.

The Department, however, cannot lose sight of the need to clean up historical cost information as well. If the DoD starts focusing now on appropriately capturing the existence and value of new assets acquired, as well as those disposed of, significant progress will be made in cleaning up its historical cost information, improving its overall financial management, and progressing toward auditable financial statements.

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MARY L. UGONE

Mary L. Ugone is the Deputy Inspector General for Auditing for the Department of Defense. She is a Certified Public Accountant and a Certified Computing Professional. She also is the recipient of numerous awards including the Presidential Meritorious Rank Award in 2007.
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Author:Ugone, Mary L.
Publication:Armed Forces Comptroller
Date:Jan 1, 2010
Words:1086
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