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Fiscal Year 2018 Audit: United States Coast Guard Continues to Improve and Solidify Results.

In 2004, one year after it began operations, the Department of Homeland Security (DHS) was mandated by Congress, via the Department of Homeland Security Financial Accountability Act (FAA), to abide by the Chief Financial Officer (CFO) Act of 1990, requiring executive departments and agencies to prepare audited financial statements. Congress went a step further in the DHS FAA by requiring DHS to obtain and pass an audit on internal controls over financial reporting (ICOFR). DHS is the only executive agency subject to these rigorous ICOFR requirements.

Eight years later, having not met all conditions of the CFO Act and DHS FAA, Congress passed the DHS Audit Requirement Target Act (DART) of 2012, setting a strict September 30, 2013 deadline for DHS to prepare its full set of financial statements and receive an unmodified opinion. Additionally, DART required DHS's CFO to regularly report to Congress on the progress being made toward achieving that unmodified opinion, and the plan and timeline to eliminate its ICOFR material weaknesses and significant deficiencies. Lastly, it required DHS to report on its plan for modernizing and unifying its many component financial management systems.

Helping to lead the charge to comply with DART was the United States Coast Guard (USCG). USCG has consistently received one of the largest appropriations among the DHS components and accounted for the largest percentage of balance sheet line items. While it has been overtaken by Customs and Border Protection on the budgetary side, USCG still maintains the lion's share of the balance sheet. At just over 50% of DHS's assets and liabilities, USCG has continually been at the forefront of the Department's efforts to receive an unmodified opinion.

Because it owns such a large percentage of the balance sheet, USCG's efforts in cleaning up its financial statements were vital to DHS receiving its first-ever unmodified opinion on its FY 2013 consolidated financial statements. USCG has continued to make strides year after year in helping DHS downgrade its material weaknesses and significant deficiencies. Figure one shows USCG's efforts in downgrading material weaknesses since 2008. DHS has continued to build on each year's successes, downgrading material weaknesses and significant deficiencies in its financial statements and bolstering its internal controls over financial reporting. For FY 2018, DHS received a clean audit opinion on its financial statements for the sixth consecutive year, and Coast Guard has notably made significant contributions to the sustainability of the Department's clean opinion. The Department and its components continue working toward downgrading its adverse opinion on its ICOFR audit.

Over the last six years, USCG management's tone at the top has been necessary and critical to success in obtaining an unmodified opinion. Members at every level have heard their Service's most senior leaders discuss the need for transparency and accountability to the taxpayers and decision-makers to ensure confidence in USCG's ability to eliminate waste and errors and to maintain the highest level of stewardship of Its resources. While that tone has permeated throughout the Service, and controls have been Implemented, leadership also recognizes the Importance of minimizing the field-level impact of the CFO audit, ensuring those who are conducting operational missions are not distracted from their critical tasks. Figure two shows USCG's progress In gaining completeness over the balance sheet since 2008.

USCG management has continually made specific and targeted decisions to help clean up its financial statements. In the area of Property Plant and Equipment in particular, USCG has developed several automated tools to better track its construction in progress (CIP). Through the use of electronic workflows and automated worksheets, USCG has been able to gain confidence and completeness over its CIP activities, which typically range from $400 million to over $1 billion in new assets annually, with a total balance of $2.4 billion. Furthermore, USCG has done a great deal of work to overcome the challenges associated with its legacy financial system as it relates to the property general ledger. Conducting in-depth analysis across its property accounts has allowed USCG to reconcile transactions to the general ledger through proper roll-forwards. Through the use of data analytic tools, USCG can link asset data from its enterprise resource planning system to an actual cutter sailing off the coast of the United States, and also recognize the supporting immobile shore assets that would be Impacted by a storm based upon geography and category.

The legacy financial system Is a key contributor to the material weakness in financial reporting. However, USCG Is overcoming this deficiency through systematic studying, classification, and documentation of its more than 3,500 manual adjustments made annually. USCG has implemented a multi-year approach to tackle and reduce the severity of these issues through thoughtful remediation, while implementing controls that will enable USCG management to provide reasonable assurance these numerous adjustments do not cause a material misstatement. Remediation steps include: validating the completeness and existence of population by reconciling multiple data sources, completing a focused root cause analysis over adjustments resulting from legacy system limitations, defining proper support for each adjustment, and conducting a quarterly analysis over the entire adjustment population to identify anomalies.

Other successes resulting from concentrated efforts within its remediation efforts include reducing USCG's Operating Expenses unobligated balances by $90M; modernizing logistics records for electronics, aviation, and aids to navigation; and perhaps most importantly, fostering greater communication between USCG directorates, programs, logistics centers, and individual units.

Coast Guard's efforts for the 2017 external audit helped reduce the Department's material weakness over property to a significant deficiency. This was a tremendous success for the Coast Guard, which owns approximately half of the DHS's General Property, Plant, and Equipment balance sheet line item. While FY 2018 did not yield another downgrade in property as In FY 2017, the findings and recommendations did show that the Coast Guard continued to Improve upon and solidify its controls over key property processes.

To continue this progressive trend, beginning in FY 2018, the Coast Guard developed a more robust method of tracking both its Notices of Findings and Recommendations (NFRs), issued by the external auditor that note key findings arrived at through data collection and analysis, and the associated Corrective Action Plans (CAPs) developed by each of the respective key process owners (KPOs). This process, managed by the Audit Remediation Division, was promulgated alongside the pre-existing Internal Controls Working Group, which meets bi-weekly and has a strong workflow for its test work over internal controls. This was particularly beneficial as it gave the Audit Remediation Division access to a large audience of key players, and avoided redundant efforts by KPOs, whose existing internal control CAPs could often be used to address external audit NFRs.

Establishing the path ahead to develop initial CAPs, but more importantly to follow through on the remediation efforts stated in those CAPs, required a great deal of coordination with program offices that are not commonly within the financial management field. Many hours were spent on the phone by the Audit Remediation Division, coaching KPOs through setting realistic, measurable, and attainable milestones for their processes. These discussions began by first educating the field on the importance of the audit and how the results of the audit may directly affect the future state of their programs. The Audit Remediation Division spent a significant amount of time gaining an understanding of these processes to properly guide the development of the CAPs and also to speak with the external auditor about each process from a position of knowledge. USCG demonstrated a greater competency in managing its programs, thus providing a significant level of comfort over the related balances. During the FY 2018 external audit, proper management and tracking of the CAPs showed a growing maturity in USCG's audit program and a progression from the previous FY 2017 audit.

For FY 2019, the United States Coast Guard will continue working toward downgrading its two remaining material weaknesses in Financial System Information Technology Controls and in Financial Reporting, and hopes to downgrade the significant deficiency in property as well. KPOs are already fully engaged in developing and tracking CAPs and ensuring existing internal control procedures are being followed. As in years past, USCG management is once again identifying key processes for targeted remediation efforts, and intends to continue building on its previous successes.

LCDR Ryan Waitt

Lieutenant Commander Ryan Waitt is currently assigned to the U.S. Coast Guard's Office of Audit Remediation. He graduated from the U.S. Coast Guard Academy with a Bachelor of Science degree and earned his Master of Business Administration and Master of Accounting degrees from the University of Maryland Robert H. Smith School of Business.

Caption: Chart 1: USCG Related Material Weakness

Caption: Chart 2: USCG Balance Sheet, % Supported
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Author:Waitt, Ryan
Publication:Armed Forces Comptroller
Date:Mar 22, 2019
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