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Navigating the Navy's transition from audit readiness to audit response.

The Department of the Navy's (DON) Fiscal Year (FY) 2015 Statement of Budgetary Activity (SBA) financial statement audit has kicked off. On December 3, 2014, the reality of this audit came to fruition when Cotton and Company, an independent public accounting firm, was awarded the General Fund Navy SBA Audit contract. As the Navy embarks on its first financial audit, the Office of Financial Operations' (FMO) focus is to position the DON to meet audit response requirements, while continuing to accomplish other audit readiness initiatives to meet demands stemming from future financial statement audits.

The SBA Audit has long been in sight for the DON and over the past several years, the Financial Improvement and Audit Readiness (FIAR) Plan has guided our focus in preparing for the audit through stakeholder training, process Improvement, and --controls testing. Our steady progress has established a new benchmark for Navy financial management and we look forward to forging new paths on our audit journey.

The Audit Training Engagement Roadshow

In Fall 2014, FMO took to the road to promote audit awareness to Navy Commands. The Audit Response & Evaluation Division (FMO-5) conducted the Audit Training Engagement (Roadshow) from October to December at nearly every Navy Budget Submitting Office (BSO) and at the Office of Budget (FMB), with planned engagements at Naval Operations (OPNAV) and the Office of the Secretary of the Navy (SECNAV). These day-long roadshow site visits are part of FMO's outreach efforts to ensure that all Navy Commands and senior leadership have sufficient awareness and expectations for the FY 2015 SBA Audit.

The Roadshow provided an overview of the audit infrastructure and timeline, while giving Commands the opportunity to Interact directly with FMO leadership. Leading the Roadshow team was Mr. Alex Hardisson, FMO-5 Director, along with representatives from his region teams and a group of private-sector auditors with federal audit experience. The Roadshow's structure was designed to establish an open two-way dialogue and to set a collaborative tone moving forward. Specifically, these sessions focused on Audit 101: Overview, Expectations, & Timeline, Financial Information Systems Controls Audit Manual Testing, FMO-5 Structure & Support Capabilities, and Common Exceptions & Observations from previous segment examinations. The Roadshow was a big success with nearly 750 members of the Commands' financial management community and their senior leadership participating in the events.

During the Roadshow, FMO emphasized the following key themes:

1. Audit is the new operating reality and will continue Into perpetuity.

2. Audit is not BSO centric; it is an audit of the entire Navy enterprise.

3. Audit involves all Navy Commands, Echelons, and Shared Service Providers (SSP) that will require heightened communication, collaboration, and enterprise-wide partnerships.

I had the pleasure of providing a FMO leadership update at most roadshow site visits and of discussing the achievements the DON has made thus far. The roadshow is the beginning of a two-way dialogue between Commands and FMO leadership and going forward, I will hold monthly check-ins with all Navy Commands while FMO-5 will engage in daily communication with BSOs. We are dedicated to supporting Navy BSOs throughout this new audit experience and to maintaining open and effective communication throughout the Navy enterprise.

Audit Readiness

Financial Improvement Audit Readiness (FIAR). To prepare the Navy Commands, lower echelons, and SSPs for the financial audits, DON FMO has been leading the Navy's audit readiness efforts. Following Department of Defense's (DoD) FIAR Guidance, the Navy established a segment approach (based on major business processes) to audit readiness, which enabled the DON to prepare key parts of its business prior to the SBA audit. We focused on strengthening internal controls to enhance the discipline and rigor of our business processes. Although auditors will not rely heavily on Navy internal controls in the first year, having rigorous controls Is critical to doing business the right way and will lead to a control-based audit in the future. As the auditors become more familiar with the safeguards in our business processes, the number of substantive sample requests will decrease, also decreasing the amount of time and effort required of our workforce.

Furthermore, FMO has been executing other audit readiness efforts such as preparing the Navy's Information Technology systems, tying out our transaction universe, supporting journal vouchers, and working to understand the crosswalks with our service providers. All of the Navy's extensive and important audit readiness efforts will improve our performance during the audits.

Transition to Audit Response

Structured for Success. To enhance our ability to respond to auditor requests, the DON established the Audit Response & Evaluation Division in May 2013. FMO-5 serves as the DON'S communicators, coordinators, facilitators, and liaison with the DoD Inspector General, the Government Accountability Office, the Independent Public Accountants, and the Navy Commands for all matters relating to financial audits. This division is structured to provide optimal service to all Navy Commands and employs a regional-operating model to achieve this goal. FMO-5 headquarters is located in Arlington, VA, and its region teams are located in Arlington and Norfolk, VA, and San Diego, CA. Each FMO-5 Region Team supports the Navy Commands located in their respective geographic areas. They are familiar with their Command's unique operating environments and are able to promptly address specific needs.

Key Audit Response Communication Protocols.

During the audit, we will focus on executing the following four key audit response communication protocols:

* Communications between Auditors and FMO-5 Headquarters Audit Response Team

All communication with the Auditors goes through the Audit Response Team within FMO-5 Audit Response Headquarters.

* Communications between FMO-5 Headquarters Audit Response Team and FMO-5 Audit Response Region Teams

The FMO-5 Headquarters Audit Response Team will direct and oversee audit response activities for all region teams and SSPs. During audit response, they will perform a 20% review on the region teams of the documentation submitted by the BSOs.

* Communications between FMO-5 Audit Response Region Teams and BSOs

The region teams act as the face of FMO-5 to the BSOs and serve as their first point of contact. When responding to auditor requests, the region teams will perform a 100% review of the documentation submitted by the BSOs before forwarding the submissions to FMO-5 Headquarters for review.

* Communications between FMO Headquarters Audit Response Team and SSPs

The FMO-5 Headquarters Audit Response Team is. the face of the FMO-5 Audit Response Division to the SSPs and serves as their first point of contact. When responding to auditor requests for SSP-owned documentation, the Headquarters Team will perform a 100% review of the documentation submitted by the SSPs.

Successfully managing and executing these communication protocols will enhance the audit response process flow and will ensure that we respond to auditor requests promptly and effectively.

Focus on SBA

The Navy has spent the last several years in dress rehearsal, undertaking disciplined and focused SBA audit readiness efforts. Now we are undergoing a paradigm shift and moving into the formal audit phase. The FY 2015 SBA Audit will review the current-year warranted transactions to verify: that each financial transaction is supported by source documentation; that balances align with transaction-level detail; and that consistency and evidence of required management controls for business processes and financial systems exist.

While we are prepared for the SBA Audit, it is critical that we remember that financial audits are not command inspections. During the audits, our focus will be on demonstrating continuous improvement since some initial failures are expected. The true value of an audit, in the first couple years, will be the findings we receive from auditors and the action we take to continue to make improvements.

Audit Response

The SBA Audit requires the Navy to act with increased volume, intensity, and tempo. Consisting of four major phases--the planning phase, the control phase, the testing phase, and the reporting phase, the SBA Audit will occur over approximately 12-17 months. These phases may run concurrently and will require different levels of Command involvement with the highest level of Command Involvement anticipated during the testing phase.

As compared to audit readiness, audit response will require:

* Shorter Timeframes: The auditors will grant a 10 calendar day window to submit samples.

* Added Reliance on Shared Service Providers: Transactional support may need to be obtained from organizations such as DFAS, DISA, DLA, DCMA, DCAA, etc. These samples will not be resampled and supporting documentation will be required to avoid an exception.

* Larger Sample Sizes: Sample sizes will be significantly higher than segment testing approach and samples will be across all segments.

* More Efficient Key Supporting Documentation (KSD) Retrieval: The controls and KSD retrieval methods used during assertion may need to change due to larger sample sizes across multiple segments.

* Additional KSD Requirements: Auditors will perform procedures required by audit programs and audit standards, rather than adhering to control and substantive test scripts during segments. Auditors may perform more IT control testing than required by FIAR.

* More Rigorous Support for Estimates and Accruals: Audit testing will focus more on the supportability and reasonableness of estimates, to include both obligations and accruals. Supporting receipt and acceptance will be in scope.

* Different Auditor Criteria: Auditors will utilize Generally Accepted Accounting Principles (GAAP) and Generally Accepted Government Auditing Standards (GAGAS). Less emphasis will be placed on FIAR Guidance and DoD Financial Management Regulation.

          Planning Phase               Control Phase
          4.5-6.5 months               1.5-2.5 months

Auditor   Submit Provided By Client    Perform walk-thrus of key
Roles     (PBC) requests to seek       business processes and
          explanatory information to   internal controls; Identify key
          familiarize with the Navy    management and system
          universe; Develop an audit   controls

BSO       Respond to PBC requests--    Facilitate the review of
Roles     this will continue through-  internal controls and
          out the audit cycle          processes to include MIC,
          (Auditor use of the PERM     ICOFR, System Access &
          file will reduce the volume  User Provisioning, etc.
          of PBC requests)

          BSO Involvement               BSO Involvement
               Low                          Medium

          Test Phase                   Report Phase
          4.5-6.5 months               1.5 months

Auditor   Perform substantive,         Evaluate test results to
Roles     control and compliance       determine compliance with
          tests; Develop samples       financial audit regulations;
                                       Provide DON a report of

BSO       Provide key supporting       Assigned Office of Primary
Roles     documentation (KSD) to       Responsibility (OPRs) develop
          sample requests from the     Corrective Action Plans (CAPs)
          audition in a timely

          BSO Involvement               BSO Involvement
               High                          Medium

Audit Response Center (ARC) Tool.

To streamline our efforts, we are employing the ARC Tool, a permission-based SharePoint environment that serves as the DON'S centralized management and repository of all KSDs related to auditor-generated Provided by Client (PBC) requests. Accessible through Navy Marine-Corps Intranet (NMCI) accounts, the ARC Tool will be utilized by the BSOs, Auditors, and FMO-5 to effectively and efficiently submit and review samples. It will also be used to track Notifications of Findings and Recommendations (NFRs) and Corrective Action Plans (CAPs) implementation during sustainment.

The ARC Tool is a gateway to a suite of tools using leading edge technologies to:

* Provide an integrated workspace serving as the centerpiece of FMO Audit Response strategy and initiatives.

* Provide a robust process automation platform to enhance and streamline day-to-day operations for audit response activities supported by FMO.

* Deliver customized workspaces to support specific work processes and initiatives across FMO.

* Display real time business intelligence through dashboard and metrics to present the overall health of an examination or audit to help leadership make decisions to better posture the organization for success.

* Provide a globally accessible workspace from any CAC authenticated machine 24/7.

* Deliver tiered helpdesk support to address user concerns in a timely and efficient manner.

Looking Past the SBA

Even as the DON is in the midst of the SBA Audit, we must keep our eyes on the ultimate goal of successfully completing a Full Balance Sheet Audit by 2019. Thus, we must continue to pursue audit readiness efforts for the Working Capital Fund, the Balance Sheet, and Asset Management. We will be challenged by the resource constraints--time, personnel, and allocated funding but FMO is committed to preparing the Navy to navigate these challenges ahead. Clear communication and strong partnerships across the Navy enterprise will become even more critical as we move forward. We expect it will take multiple audit cycles to achieve a favorable opinion, but we will focus on learning from weaknesses revealed and on correcting them to ensure we are doing business the right way. Knowing both the business improvements we have enacted and the dedication of our workforce, I am confident that Navy is ready to undergo audit and most importantly, to remediate any findings recommended by the auditors.

Annual audit is the new operating reality and will continue into perpetuity

Preparing for and executing audit activities is a DON Enterprise-wide effort involving all Commands and Echelons

The SBA portion of the Financial Audit will take place over 12-17 months, beginning in FY15--with full financial auditability by FY17

The scope of the SBA audit will include only FY15 warranted appropriations--no beginning balances will be brought forward

Success in the near term is to obtain actionable findings from the auditor, in order to better understand our business process and continue to make improvements

[i] Unlike a Command inspection, the annual audit is not BSO-centric--it is an audit of the entire Navy enterprise

Karen Fenstermacher, SES

Ms. Fenstermacher is the Deputy Assistant Secretary of the Navy (Financial Operations). I Prior to her present assignment, she served as the Assistant Commander for Financial Management and Comptroller, Naval Supply Systems Command (NAVSUP). Ms. Fenstermacher was selected to the Senior Executive Service in 2004 and holds a professional membership in the American Society for Military Comptrollers.
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Author:Fenstermacher, Karen
Publication:Armed Forces Comptroller
Date:Jan 1, 2015
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