DOD Financial Management: Actions Under Way Need to Be Successfully Completed to Address Long-standing Funds Control Weaknesses
Published: 2014-04-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO, the DOD Inspector General (IG), and others have reported on DOD's inability to provide effective control over the use of public funds (i.e., funds control). Funds control requires obligations and expenditures to comply with applicable law. Funds control weaknesses have prevented DOD from reporting reliable financial information, including information on the use of public funds, results of operations, and financial statements, and put DOD at risk of overobligating and overexpending its appropriations in violation of the Antideficiency Act (ADA).
GAO was asked to review the status of DOD's efforts to address its funds control weaknesses. GAO's objectives were to determine the (1) extent of reported weaknesses in DOD's funds control and their effect and (2) status of DOD's corrective actions to address known weaknesses. GAO analyzed 333 GAO, DOD IG, and military department audit reports; DOD reports of ADA violations; and selected DOD financial reports. GAO also examined DOD actions to address audit findings and ADA violations, including actions under DOD's FIAR Plan, and discussed corrective actions on funds control weaknesses with DOD and military department auditors and financial managers.
section_title: What GAO Found
paragraphs: GAO's analysis of 333 reports related to Department of Defense (DOD) funds control, issued in fiscal years 2007 through 2013, identified over 1,000 funds control weaknesses related to (1) training, supervision, and management oversight; (2) proper authorization, recording, documentation, and reporting of transactions; and (3) business system compliance with federal laws and accounting standards. Many of the reports GAO reviewed included multiple findings.
GAO found that these weaknesses led DOD to make program and operational decisions based on unreliable data and impaired DOD's ability to improve its financial management. Fundamental weaknesses in funds control significantly impaired DOD's ability to (1) properly use resources, (2) produce reliable financial reports on the results of operations, and (3) meet its audit readiness goals.
DOD has actions under way to address its department-wide funds control weaknesses. These actions, several of which are targeted for completion in 2017, include
a DOD Financial Manager Certification Program intended to establish a framework to guide training and development of DOD's 54,000 financial management personnel at the staff, supervisory, and leadership levels;
transaction control testing and corrective action plans under its Financial Improvement and Audit Readiness (FIAR) Plan for reporting on the use of budgetary resources with regard to categories of transactions, such as fund balances, outlays, military and civilian payroll, and contract pay; and
testing under the FIAR Plan of material DOD component business system controls and service-provider systems and processes as well as military department actions to address enterprise resource planning system design and implementation issues.
DOD leadership says it is committed to achieving effective fund controls to support financial accountability and reliable information for day-to-day management decision making and auditable financial statements. However, because some of the corrective actions on long-standing funds control weaknesses are not expected to be completed until 2017, these weaknesses, until fully resolved, will continue to adversely affect DOD's ability to achieve its goals for financial accountability, including the ability to produce consistent, reliable, and sustainable financial information for day-to-day decision making. Sustained leadership commitment will be critical to achieving success.
section_title: What GAO Recommends
paragraphs: GAO is not making recommendations in this report because DOD already has numerous actions under way to address funds control weaknesses. DOD stated that it appreciates GAO's review and that past deficiencies have informed actions it has under way to address its funds control weaknesses.

section_title: Letter
paragraphs: In a time of fiscal and budgetary constraints, federal agencies need to  make the best use of their allotted funds and demonstrate careful  stewardship in their reporting to Congress and the public. The  Department of Defense (DOD) is one of the largest and most complex  organizations in the world. With over $1 trillion in total budgetary  resources, DOD has reported that it obligates an average of $2 billion to  $3 billion daily and makes hundreds of thousands of payments, such as  payroll, travel, utility, and contract payments, including payments in war  zones. DOD’s worldwide operations span a wide range of defense  organizations and business functions and rely on over 2,200 business   systems, including accounting systems and acquisition, logistics, and  personnel systems that feed financial data to accounting systems.
For years, we, the DOD Inspector General (IG), and others have reported  on DOD’s inability to provide effective control over the public funds it is  responsible for or to reliably report on its obligation and outlay of those  funds. In September 2011, we testified that DOD’s weak internal control  environment for funds control hindered its ability to ensure that  transactions were accurately recorded, sufficiently supported, and  properly executed by trained personnel subject to effective supervision.  DOD’s funds control weaknesses have prevented it from reporting reliable  financial information, including information on budget execution and  results of operations. Funds control weaknesses have also resulted in  violations of the Antideficiency Act (ADA), specifically through  overobligating or overexpending available budgetary resources. Like  other executive agencies, DOD is required by the ADA to prescribe by  regulation a system of administrative control of funds, designed to restrict  obligations or expenditures to the applicable legal limitations on their  amount, and to enable the head of the agency to fix responsibility for any   obligation or expenditure exceeding these limits. These regulations are  commonly referred to as “funds control regulations.”
DOD has acknowledged that long-standing weaknesses in its internal  controls, business systems, and processes have prevented auditors from  determining the reliability of its financial statements, including information  on budgeted spending, which is reported in DOD’s Statement of  Budgetary Resources (SBR) and information on the cost of operations,  which is reported in DOD’s Statement of Net Cost. The Financial  Improvement and Audit Readiness (FIAR) Plan, which was first prepared  in 2005, is DOD’s strategic plan and management tool for guiding,  monitoring, and reporting on the department’s financial management  improvement efforts. As such, the plan communicates incremental  progress in addressing the department’s financial management  weaknesses and achieving financial statement auditability (i.e., audit  readiness).
The National Defense Authorization Act (NDAA) for Fiscal Year 2010  mandated that the FIAR Plan include the specific actions to be taken to  correct the financial management deficiencies that impair the  department’s ability to prepare timely, reliable, and complete financial  management information. In May 2010, the DOD Comptroller issued the  FIAR Guidance to implement the FIAR Plan. The FIAR Guidance  provides a standardized methodology for DOD components to follow for  achieving financial management improvements and auditability. The FIAR  Guidance requires DOD components to identify and prioritize their  business processes into assessable units, and then prepare a Financial  Improvement Plan for each assessable unit in accordance with the FIAR  Guidance. The FIAR Guidance also addresses the need for adequate  transaction controls for each assessable unit, including proper  authorization, accurate recording, adequate support, and accurate and  timely reporting of obligation and disbursement transactions. These  transaction controls are key to effective funds control.
You asked us to review DOD’s internal control over its use of public  funds. Our objectives were to determine the (1) extent of reported  weaknesses in DOD’s funds control and their effect and (2) status of  DOD’s corrective actions to address known weaknesses. To address our  first objective, we reviewed issues identified in our prior reports on DOD  funds control and reports on DOD funds control issued by the DOD IG  from fiscal years 2007 through 2012 and military department auditors  from fiscal year 2010 through March 2012. We also reviewed all of  DOD’s reports to Congress on ADA violations for fiscal years 2007  through 2012 that were also sent to GAO, the military departments’  annual reports on evaluation of their funds control processes and  processing of ADA violations for 2011 and 2012, and DOD and military  department fiscal year 2011 and 2012 Statements of Assurance under  the law commonly known as the Federal Managers’ Financial Integrity Act  (FMFIA), and Agency Financial Reports for fiscal years 2011 through  2012. We analyzed internal control weaknesses identified in these reports  to determine the effect of funds control weaknesses with regard to the  proper use of resources, reliable financial reporting on operations, and  the success of audit readiness efforts. In addition, we reviewed DOD ADA  reports, FIAR Plan Status Reports, and DOD and military department  Agency Financial Reports for fiscal year 2013 to determine if the identified  weaknesses continued to exist.
To address our second objective, we reviewed DOD corrective actions  under DOD’s FIAR Plan and actions being taken outside of the FIAR  Plan, such as efforts to develop and implement enterprise resource  planning (ERP) systems. We met with DOD IG and military department  audit managers and reviewed auditor data on the status of military  department actions to address funds control-related audit  recommendations. We also met with DOD and military department  financial managers, including managers responsible for audit readiness,  to discuss their efforts to resolve findings of funds control weaknesses as  well as corrective actions on related material weaknesses disclosed in  their annual evaluations of funds control and annual Statements of  Assurance regarding the effectiveness of internal controls, including  controls over financial reporting. We assessed the DOD IG’s audit  quality procedures for assuring the reliability of support for reporting  findings and recommendations and the status of corrective actions to  address auditor recommendations. Our analysis of over 300 audit and  financial reports on DOD financial management operations issued over  the last 7 years identified over 1,000 funds control weaknesses. Based on  our review of DOD’s audit quality procedures and our comparison of  auditor reports and DOD disclosures of financial management  weaknesses, we determined the reported data and information to be  reliable for the purposes of our work.
We conducted this performance audit from November 2011 to April 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Appendix I provides further  details of our scope and methodology.
subsections: section_title: Background
paragraphs: DOD’s mission is to provide the military forces needed to deter war and  protect the security of the United States. As shown in figure 1, the  discretionary budget authority requested by DOD for fiscal year 2014  comprises about 53 percent of the budget request for discretionary  programs throughout the federal government. DOD’s approximately  $606 billion in requested fiscal year 2014 funding includes $526.6 billion  in spending authority for departmental operations and $79.4 billion to  support overseas contingency operations, such as those in Afghanistan.
subsections: section_title: Legal Framework for Internal Control
paragraphs: The Budget and Accounting Procedures Act of 1950 and FMFIA placed  primary responsibility for establishing and maintaining internal control on  the heads of federal agencies. FMFIA requires executive agencies to  establish internal controls that reasonably ensure that obligations and  costs comply with applicable law; that all assets are safeguarded against  waste, loss, unauthorized use, and misappropriation; and that revenues  and expenditures applicable to agency operations are recorded and  accounted for properly. Those internal controls that pertain to the  obligation, disbursement, and receipt of agency funds, as well as the  recording of those transactions, are referred to in this report as funds  control. Internal control is an integral component of an organization’s  management that when properly implemented and operating effectively,  provides reasonable assurance that the following objectives are being  achieved: (1) effectiveness and efficiency of operations, (2) reliability of  financial reporting, and (3) compliance with laws and regulations. Within  this broad framework, DOD must design and implement effective controls,  including funds control, and internal control over financial reporting.  Auditors of DOD’s financial statements are to assess the effectiveness of  these controls as part of a financial statement audit.
Because budgetary information is widely and regularly used for  management decision making on programs and operations, the Office of  the Under Secretary of Defense (Comptroller)/Chief Financial Officer,  commonly referred to as the DOD Comptroller, designated the SBR as  DOD’s first priority for improving its financial management and achieving  audit readiness. The financial information in the SBR is predominantly  derived from a federal entity’s budgetary accounts, which are used by the  entity to account for and track the use of public funds in accordance with  budgetary accounting rules. The SBR provides information about  budgetary resources made available to an agency as well as the status of  those resources at a specific point in time. According to the Office of  Management and Budget (OMB), the SBR was added as a basic federal  financial statement so that the underlying budgetary accounting  information could be audited and would, therefore, be more reliable for  routine management use and budgetary reporting, including reporting in  the President’s Budget.
section_title: Statutory Requirements for Funds Control
paragraphs: As noted above, one of the objectives of internal control generally, and  funds control in particular, is to ensure compliance with applicable law.  Executive agencies’ use of federal funds is governed by fiscal statutes  that establish specific funds control requirements. Many of these laws  have been codified in Title 31 of the United States Code, particularly in  chapters 13, 15, and 33. These chapters contain the laws known  commonly as the ADA, the Recording statute, the Miscellaneous  Receipts statute, the Purpose statute, and the Bona Fide Needs  statute, as well as the provisions establishing the procedures and  officials responsible for the disbursement of federal funds and the  provisions that govern the closing of appropriations accounts known as  the Account Closing Statute. Many other government-wide and agency- specific provisions of permanent law govern the use of federal funds,  such as the Adequacy of Appropriations Act and limitations on DOD  incurring obligations for business system modernization, as do the  provisions of annual appropriations acts. Appropriations acts prescribe  the purpose, amount, and time for which appropriations are available for  obligation and expenditure, and they often include additional permanent  and temporary fiscal guidance.
The ADA, in particular, is central to Congress’s ability to uphold its  constitutional power of the purse, to hold executive branch officials  accountable for proper use of budgetary resources, and to ensure proper  stewardship and transparency of the use of public funds. As noted above,  the act requires heads of federal agencies to establish by regulation a  system of administrative controls over obligations and expenditures,  commonly referred to as funds control regulations. The act also includes  certain prohibitions, such as prohibiting federal officers and employees  from authorizing or making obligations or expenditures in excess of the  amount available in an apportionment or reapportionment, an  appropriation or fund, or an allotment unless authorized by law.
Once it is determined that there has been a violation, the ADA requires  the agency head to report immediately to the President and Congress all  relevant facts and a statement of actions taken, and transmit a copy of  the report to the Comptroller General. The ADA also provides for possible  administrative and criminal penalties for employees responsible for  violations.
section_title: Pervasive Funds Control Weaknesses Impair the Effectiveness of DOD’s Financial Management Operations
paragraphs: Our analysis of over 300 audit and financial reports on DOD financial  management operations issued over the last 7 years identified over 1,000  funds control weaknesses. We grouped these weaknesses into three  major categories: (1) inadequate training, supervision, and management  oversight; (2) ineffective transaction controls; and (3) inadequate  business systems. In fiscal year 2013, the DOD Comptroller and DOD  auditors continued to report funds control weaknesses and ADA violations  related to these same areas. For example, in its November 2013 Agency  Financial Report, DOD self-reported 16 material weaknesses in financial  reporting, noting that it had no assurance of the effectiveness of the  related controls. These weaknesses place DOD at risk of making program  and operational decisions based on unreliable data and impair DOD’s  ability to improve its financial management operations and achieve the  department’s audit readiness goals. The long-standing, pervasive nature  of funds control weaknesses poses a significant impediment to reliable  financial management operations, including proper use of resources and  achieving financial audit readiness as well as accountability and  stewardship of taxpayer funds entrusted to DOD management. As  discussed later in this report, DOD has numerous corrective actions  under way to address these weaknesses, including actions related to its  audit readiness efforts as well as efforts to address findings in auditor and  ADA reports.
subsections: section_title: Auditors and DOD Management Continue to Report Pervasive Funds Control Weaknesses
paragraphs: Our analysis identified long-standing weaknesses across DOD  components related to the following three areas:  (1) Inadequate training, supervision, and management oversight of  budgetary processes and controls. Training assures that personnel have  the skills to carry out their assigned duties. Supervision is day-to-day  guidance by a supervisor and management oversight involves assuring  adequate supervisory guidance and training as well as overall monitoring  of the subject matter area.  (2) Inadequate transaction controls. These controls cover proper  authorization and recording of budgetary transactions, such as obligations  and disbursements (outlays); maintaining adequate supporting  documentation; and proper and timely reporting of transactions, related  summaries, and financial reports.  (3) Ineffective business systems. This category refers to business  systems that do not have effective controls for recording, supporting, and  reporting financial transactions, including budgetary transactions, and  therefore, do not provide adequate controls over financial reporting on the  results of operations and do not assure compliance with laws, such as the  Federal Financial Management Improvement Act of 1996 (FFMIA) and  the ADA. Figure 2 summarizes 1,006 reported funds control  weaknesses that span DOD budgetary accounting, funds control, and  financial reporting by three categories.
Examples of findings related to the three major categories of funds control  weaknesses follow. Many of the funds control reports identified more than  one weakness. See appendix II for additional details on these findings.
Training, supervision, and management oversight. In its November  2013 FIAR Plan Status Report, DOD continued to identify unqualified or  inexperienced personnel, not only at the working level but also in senior- level positions, as a risk to achieving sound financial management  operations and auditability. Standards for Internal Control in the Federal  Government states that effective management of an organization’s  workforce is essential to achieving positive results and is an important  part of internal control. Qualified and continuous supervision should be  provided to ensure that internal control objectives are achieved. In  addition, deficiencies found during ongoing monitoring should be  communicated to the individual responsible and to at least one level of  management above that individual. Serious matters should be reported to  top management. To help address skill needs, the NDAA for Fiscal Year  2012 authorized the DOD Comptroller to develop a financial management  training and certification program. FIAR Plan Status Reports continue to  identify the need for knowledgeable and qualified personnel as critical to  achieving DOD’s financial improvement and audit readiness goals. DOD’s  November 2013 FIAR Plan Status Report also identified a risk associated  with identified control weaknesses not being corrected. DOD reported that  the DOD Comptroller was formalizing a process and establishing a  tracking system to closely monitor actions on independent auditor findings  and recommendations resulting from financial audit readiness testing.  Federal internal control standards also state that internal control  monitoring should assess the quality of performance over time and  ensure that the findings of audits and other reviews are promptly  resolved.
The following examples illustrate long-standing and persistent funds  control weaknesses in the area of training, supervision, and management  oversight that we and others have identified in the past. As discussed  later in this report, DOD has corrective actions under way through audit  readiness efforts under the FIAR Plan and through other efforts related to  improving training.
In 2012, we reported that the training on the Army’s General Fund  Enterprise Business System (GFEBS) and the Air Force’s Defense  Enterprise Accounting and Management System (DEAMS) focused  on a systems overview and how the systems were supposed to  operate. While this was beneficial in identifying how GFEBS and  DEAMS were different from the existing legacy systems, the training  focused too much on concepts rather than the skills needed for users  to perform their day-to-day operations. Without personnel with  adequate skill sets and training to properly use the new systems,  DOD staff members will not be positioned to control the use of funds  for which they are responsible. We made five recommendations to the  Secretary of Defense to ensure the correction of system problems  prior to further system deployment, including user training. DOD  concurred with four and partially concurred with one of the  recommendations and described its efforts to address them. With  regard to the partial concurrence, DOD stated that based on the  nature of an identified system deficiency, it will determine whether to  defer system implementation until it is corrected.
In March 2010, Navy auditors reported that the Navy provided  insufficient supervision of personnel responsible for documenting  receipt and acceptance of goods and services and for processing  invoices. As a result, Navy commands had incomplete documentation  with which to validate the accuracy of 53 invoices valued at $231,555  for 19 contracts at three Navy Fleet Readiness Centers. Without  effective supervision to ensure that sufficient documentation exists  prior to payment, the reliability of Navy invoice payments  (disbursements) is at risk. In addition, not properly managing the  invoice process increases the risk of improper or fraudulent payments.
In June 2010, Air Force auditors reported on their audit of the Air  Force’s tri-annual review process, stating that the service experienced  significant recurring difficulties in identifying and deobligating  unneeded obligation amounts. From fiscal years 2006 through 2010,  Air Force audit reports identified a 42-percent error rate for periodic  review to monitor and adjust obligations as required by DOD policy.  The DOD Financial Management Regulation (FMR) requires  component organizations to perform tri-annual reviews to monitor  commitment and obligation transactions for timeliness, accuracy, and  completeness. Specifically, reviewers are required to review and  determine the validity of commitments and obligations that have had  no activity (expenditures or adjustments) for 120 days and deobligate  any unneeded amounts of unliquidated obligations. Financial  managers are required to implement effective internal controls to  ensure timely completion of tri-annual reviews and any identified  corrective actions. However, Air Force Audit Agency reviews have  reported that the Tri-annual Review Program did not identify millions  of dollars of unsupported obligations that could have been used for  other mission requirements.
In July 2010, the DOD IG reported that the Army mismanaged   $110 million of its Defense Emergency Response Fund (DERF)  funding. According to the DOD IG report, when the Army spent its  DERF emergency supplemental appropriations for items such as  unrelated building repairs, furniture, and spare parts, instead of DOD  needs arising from the terrorist attacks of September 11, 2001, it  potentially violated the Purpose Statute (appropriations are applied to  the objects for which they were made) and the Bona Fide Needs Rule  (appropriations may only be used for needs arising within the period  of their availability). The DOD IG report stated that the potential ADA  violations occurred because the Army commands involved did not  follow DOD policies and procedures to ensure that appropriated funds  were expended for their intended purposes. The DOD IG made  recommendations directed at improving related training and  monitoring activities to ensure compliance with legal requirements and  DOD policies.
Transaction controls. Auditors have reported on DOD’s inability to  provide effective funds control and report reliable financial information,  including budgetary information for many years. DOD’s challenges in  properly recording and adequately supporting its obligations and  disbursements have impaired its ability to track and control the use of  public funds. Standards for Internal Control in the Federal Government  states that transactions should be promptly recorded to maintain their  relevance and value to management in controlling operations and making  decisions. All transactions and other significant events need to be  clearly documented, and the documentation should be readily available  for examination. Federal internal control standards further state that key  duties and responsibilities need to be divided or segregated among  different people to reduce the risk of error or fraud. According to DOD’s  FMR, obligations and expenditures are required to be recorded accurately  and promptly, even if the recording results in a negative amount at the  appropriation, fund, or other accounting level. However, we, the DOD  IG, and military department auditors have reported long-standing  weaknesses in DOD’s controls for proper authorization and recording,  adequate support, and accurate reporting of budgetary transactions. In  addition, we and the DOD IG have reported that DOD has not been able  to locate support for transactions in order to satisfy audit requirements.
The following examples demonstrate the persistent nature of DOD’s  funds control weaknesses related to ineffective transaction controls that  we and others have identified in the past. As discussed later in this report,  DOD has corrective actions under way to address its transaction control  weaknesses, particularly in regard to its audit readiness efforts.
In March 2012, we reported that the Army was unable to locate  supporting documentation for a sample of 250 active duty military  payroll accounts. In March 2011, we worked with Army Human  Resources Command, Army Finance Command, and Defense  Finance and Accounting Service (DFAS) Indianapolis officials to  obtain source documents that supported basic pay, allowances (such  as allowances for housing costs), and entitlements (special pay  related to type of duty, such as hazardous duty pay). After various  offices were unable to provide supporting documentation, we  suggested that the Army focus on the first 20 pay account sample  items. When the Army continued to have difficulty locating supporting  documentation, we suggested that the Army focus on the first 5  sample items. As of the end of September 2011, 6 months after  receiving our initial sample request, the Army and DFAS were able to  provide complete documentation for 2 of our 250 sample items, partial  support for 3 sample items, and no support for the remaining 245  sample items. We recommended that the Secretary of the Army  require personnel and pay-related documents that support military  payroll transactions to be centrally located, retained in each service  member’s Official Military Personnel File, or otherwise readily  accessible; and that the Army’s Human Resources Command  periodically review and confirm that service member Official Military  Personnel File records are consistent and complete to support annual  financial audit requirements. The Army concurred with our  recommendations and is taking actions to address them.
In December 2011, Navy auditors reported that Marine Corps  authorizing officials approved travel expense disbursements that were  not supported by receipts or were not allowable under the related  guidance because Defense Travel System travel administrator  functions (1) allowed complete access to the system by preparers and  reviewers of vouchers and (2) were not separated from travel voucher  review and approval functions, as required by DOD guidance. As a  result, employees received reimbursement for unsupported travel  expenses of $15,208 and unallowable expenses of $3,385.
In January 2010, Army auditors reported significant weaknesses in  transaction controls over disbursing functions at Multi-National  Division-South. Army auditors reported that 16 out of 62 voucher  packages reviewed (26 percent) contained missing or inaccurate  documentation, such as a certified voucher or invoice, contract or  deliverables information for the first and the final payment, and the  name of the government official documenting receipt and acceptance  of goods and services. Army auditors also found inaccurate reporting  of dollar values, differences in payee names on the voucher and the  related supporting documentation, and inaccurate paying office and  mailing address information. Army auditors concluded that the Army  did not have (1) adequate controls over its vendor payments to ensure  that payment authorizations and disbursements were accurate and  that funds were obligated and available before disbursement or   (2) reasonable assurance that vendor payments valued at over   $1.5 million were valid or fully supported. Further, Army auditors  reported that insufficient controls in high-risk areas leave the Army  vulnerable to fraud, waste, and misuse and could result in duplicate  payments, disbursements that are not matched to obligations,  disbursements that exceed recorded obligations, or possible ADA  violations.
Ineffective business systems. DOD spends billions of dollars each year  to acquire modern systems that it considers fundamental to achieving its  business transformation goals. In February 2013, we reported that while  DOD’s capability and performance relative to business systems  modernization has improved, significant challenges remain. The  department has not fully defined and established business systems  modernization management controls, which are vital to ensuring that it  can effectively and efficiently manage an undertaking with the size,  complexity, and significance of its business systems modernization and  minimize the associated risks. We designated this area as high risk in  1995 and since then have made about 250 recommendations aimed at  strengthening DOD’s institutional approach to modernization and  reducing the risk associated with key investments. While DOD has made  progress toward implementing key institutional modernization  management controls in response to statutory provisions and our  recommendations, progress has been slow and DOD has been limited in  its ability to demonstrate results. Further, we, the DOD IG, and military  department auditors identified business system design and development  weaknesses affecting funds control, such as noncompliance with DOD’s  Standard Financial Information Structure (SFIS), Business System  Architecture, and the U.S. Standard General Ledger (USSGL). The  following examples illustrate the scope of DOD’s long-standing problems  in the area based on prior GAO, DOD, and DOD IG findings. DOD is  working to modernize its financial management systems and related  business processes, as discussed later.
Army Logistics Modernization Program (LMP). In April 2010, we  reported that the Army’s LMP, which is intended to replace aging  Army systems used to manage inventory and depot repair operations  and support financial management and reporting, would require at  least two additional deployments because problems with data quality,  training, and metrics to measure success of LMP implementation had  not been resolved. We recommended that the Army (1) improve  testing activities to obtain reasonable assurance that the data used by  LMP can support the LMP processes, (2) improve training for LMP  users, and (3) establish performance metrics to enable the Army to  assess whether the deployment sites are able to use LMP as  intended. The Army concurred with our recommendations and noted  actions under way to address them. In November 2010, we reported  that the Army had implemented data audits and new testing activities  to improve data accuracy, but data issues that could impede LMP  functionality persisted. For example, we reported that it was unclear  whether (1) the system would provide all the software functionality  needed to conduct operations, (2) data maintained in the system were  sufficiently accurate, and (3) the Army would achieve all the expected  benefits from its investment in the system. We recommended that  within 90 days of the beginning of its third deployment, the Army  periodically report to Congress on the progress of LMP, including its  progress in ensuring that the data used in LMP can support the  system, timelines for the delivery of software necessary to achieve full  benefits, and the costs and time frames of its mitigation strategies.  DOD concurred with our recommendation stating that the Army would  comply with the reporting timetable and conditions in our  recommendation. While DOD concurred with our recommendation, as  of our last update in November 2013, it had not yet provided any such  reports to Congress.
In May 2012, the DOD IG reported that after spending about   $1.8 billion, Army managers had not accomplished the reengineering  needed to integrate the LMP procure-to-pay functions to comply with  DOD Business Enterprise Architecture requirements and correct  material weaknesses. According to DOD IG auditors, as of   August 31, 2011, LMP activities reported more than $10.6 billion in  abnormal obligated balances. In addition, the DOD IG reported that  (1) LMP did not record the actual invoice numbers from the vendors,  (2) LMP incorrectly recorded the interface date with the pay  entitlement system instead of the dates for invoice receipt and receipt  of goods and services, and (3) its invoice and receiving report  transaction screens did not identify the corresponding disbursement  voucher information. Because more than one disbursement generally  liquidated an obligation, LMP needed to link the various invoices and  receiving reports to the corresponding disbursement vouchers. The  absence of actual invoice numbers, accurate dates, and disbursement  voucher information prevented Army activities from using LMP to  detect duplicate payments and validate that payments complied with  the Prompt Payment Act. According to DOD’s November 2012 FIAR  Plan Status Report, the Army’s abnormal obligated balances  decreased during fiscal year 2012, but disbursements that could not  be matched to a recorded obligation increased.
Navy ERP. In February 2012, the DOD IG reported that the Navy  approved deployment of its ERP general ledger system without  ensuring that it complied with DOD’s SFIS and the USSGL. As a  result, the Navy spent $870 million to develop and implement a  system that may not produce accurate and reliable financial  information. The DOD IG reported that this is a significant weakness  because when fully deployed, the system is intended to manage 54  percent of the Navy’s total obligational authority, which was   $155.9 billion for fiscal year 2013.
Air Force DEAMS. In September 2012, the DOD IG reported that the  Air Force’s DEAMS lacked critical functional capabilities needed to  generate accurate and reliable financial management information.  According to the DOD IG, this weakness occurred because DEAMS  managers did not maintain an adequate general ledger chart of  accounts, and because DOD and Air Force management initially  decided not to report financial data directly to the Defense  Departmental Reporting System (DDRS) for financial reporting  purposes until the fourth quarter of fiscal year 2016. Further, we  recently reported that the Air Force did not meet best practices in  developing a schedule for the DEAMS program. This raises  questions about the credibility of the deadline for acquiring and  implementing DEAMS to provide needed functionality for financial  improvement and audit readiness. We recommended that the Air  Force update the cost estimate as necessary after implementing our  prior recommendation to adopt scheduling best practices. DOD  concurred with our recommendation.
section_title: Effect of Funds Control Weaknesses on DOD Financial Management Operations
paragraphs: Fundamental weaknesses in DOD funds control, including related  business systems weaknesses, significantly impair DOD’s ability to  ensure the (1) proper use of resources, (2) reliability of reports on the  results of operations, and (3) success of its financial audit readiness  efforts. For example, billions of dollars in DOD-reported improper  payments and continuing reports of millions of dollars in ADA violations  underscore DOD’s inability to assure proper use and accountability of  resources provided to carry out its mission and operations. Further,  DOD’s transaction control weaknesses, including unsupported  adjustments (plugs) to reconcile DOD fund balances with the Department  of the Treasury’s (Treasury) records, and suspense transactions that  cannot be identified to a fund account impair accurate accounting for  programs and results of operations. As a result, quarterly and annual  financial statements, reports on budget execution, and reports on the  results of operations, which could have a material effect on budget,  spending, and other management decisions as well as determinations of  agency compliance with laws and regulations, are unreliable. Military  auditors also reported that these weaknesses leave their departments at  risk of fraud and improper transactions.
Additionally, funds control weaknesses continue to hinder DOD’s ability to  achieve its September 2014 SBR audit readiness goal and raise  questions about DOD’s ability to achieve audit readiness on a full set of  financial statements by the end of fiscal year 2017. In response to  component difficulties in preparing for a full SBR audit, the November  2012 FIAR Plan Status Report and the March 2013 FIAR Guidance  included a revision to narrow the scope of initial audits to only current- year budget activity and expenditures on a Schedule of Budgetary  Activity. Under this approach, beginning in fiscal year 2015, reporting  entities are to undergo an examination of their Schedules of Budgetary  Activity reflecting the amount of SBR balances and associated activity  related only to funding approved on or after October 1, 2014. As a result,  the Schedules of Budgetary Activity will exclude unobligated and  unexpended amounts carried over from prior years’ funding as well as  information on the status and use of such funding in subsequent years  (e.g., obligations incurred, outlays). These amounts will remain unaudited.  Over the ensuing years, as the unaudited portion of SBR balances and  activity related to this funding decline, the audited portion is expected to  increase. However, the NDAA for Fiscal Year 2010, as amended by the  NDAA for Fiscal Year 2013, requires that the FIAR Plan describe specific  actions to be taken and the costs associated with ensuring that DOD’s  SBR is validated as ready for audit by not later than September 30, 2014.  Because the audit of the Schedule of Budgetary Activity is an incremental  step building toward an audit-ready SBR, the FIAR Plan does not  presently comply with this requirement. Furthermore, all material amounts  reported on the SBR will need to be auditable in order to achieve the  mandated goal of full financial statement audit readiness by   September 30, 2017. It is not clear how this can be accomplished if  activity related to funding provided prior to October 1, 2014, remains  unaudited.
subsections: section_title: Proper Use of Resources
paragraphs: DOD does not know the accuracy or validity of billions of dollars it spends  annually to carry out its mission and operations. For example, our work  and the work of the DOD IG has shown that DOD does not have a valid  methodology for estimating its annual improper payments, and it does not  have assurance that its obligations and expenditures comply with  applicable law, including the ADA. As a result, management decisions are  being made using incomplete and unreliable data. The following  examples from our past work and the past work of others illustrate the  effect of these weaknesses.
We and the DOD IG have reported weaknesses in DOD’s payment  controls, including weaknesses in its process for assessing the risk of  improper payments and reporting estimates of the magnitude of  improper payments. In September 2011, we testified that in its Agency  Financial Report for fiscal year 2010, DOD reported that it made an  estimated $1 billion in improper payments under five of its programs.  However, this estimate was incomplete because DOD did not include  estimates from its commercial payment programs, which account for  approximately one-third of the value of DOD-reported payments. In  May 2013, we reported that DOD’s fiscal year 2011 Agency Financial  Report included commercial payment programs in its improper  payment estimates, totaling over $1.1 billion. However, we found  that DOD’s improper payment estimates were neither reliable nor  statistically valid. We also found that DOD did not conduct a risk  assessment for fiscal year 2011 in accordance with the requirements  of the Improper Payments Elimination and Recovery Act of 2010  (IPERA). Further, although DOD had a corrective action plan for  fiscal year 2011 to address problems with the reliability of its improper  payment estimates, the plan did not include the required risk  assessment. We concluded that DOD’s lack of a risk assessment  made it difficult for the department to fully identify underlying reasons  or root causes of improper payments in order to develop a  comprehensive, effective corrective action plan. Additionally, DOD did  not conduct recovery audits nor did it determine that such audits  would not be cost effective, as required by IPERA. Finally, the  department did not have procedures to ensure that improper payment  and recovery audit reporting in its fiscal year 2011 Agency Financial  Report was complete, accurate, and compliant.
DOD has taken some actions to reduce improper payments, such as  reporting a statistical estimate for DFAS commercial payments and  issuing revised FMR guidance on improper payments and recovery  audits. Further, in addendum A to DOD’s Fiscal Year 2013 Agency  Financial Report, the DOD IG reported that the department had taken  many corrective actions to improve identification of its improper  payments; however, more work is needed to improve controls over  payments processed throughout the department. For example, the  DOD IG reported that improper payments are often the result of  unreliable data, a lack of adequate internal controls, or both, which  increases the likelihood of fraud. As a result, DOD continues to lack  assurance that billions of dollars of annual payments are disbursed  correctly. The DOD IG also reported that the department’s inadequate  financial systems and controls hamper its ability to make proper  payments, and that the pace of operations and volume of department  spending create additional risk of improper payments. These  challenges have hindered the department’s ability to detect and  recover improper payments. As stated in our May 2013 report, until  the department takes action to correct the deficiencies in underlying  transaction controls and deficiencies we have found in the past  related to identifying, estimating, reducing, recovering, and reporting  improper payments and thereby fulfills legislative requirements and  implements related guidance, DOD remains at risk of continuing to  make improper payments and wasting taxpayer funds. We made 10  recommendations to improve DOD’s processes to identify, estimate,  reduce, recover, and report on improper payments. DOD concurred  with 9 and partially concurred with 1 of the recommendations and  described its plans to address them.
Continuing reports of ADA violations underscore DOD’s inability to  assure that obligations and expenditures are properly recorded and  do not exceed statutory levels of control. The ADA requires, among  other things, that no officer or employee of DOD incur obligations or  make expenditures in excess of the amounts made available by  appropriation, by apportionment, or by further subdivision according to  the agency’s funds control regulations. According to copies of ADA  violation reports sent to GAO, DOD reported 75 ADA violations from  fiscal year 2007 through fiscal year 2012, totaling nearly $1.1 billion.  We received reports of two additional ADA violations in 2013 totaling  $148.6 million. However, the number of violations and dollar amounts  reported may not be complete because of weaknesses in DOD’s  funds control and monitoring processes that may not have allowed all  violations to be identified or reported. For example, DOD IG reports  issued in fiscal years 2007 through 2012 (see fig. 3) identified   $5.5 billion in potential ADA violations that required further  investigation to determine whether an ADA violation had, in fact,  occurred, or if adjustments could be made to avoid a violation.  Further, while DOD’s FMR limits the time from identification to  reporting of ADA violations to 15 months, our analysis identified  several examples of time spans for investigations of potential ADA  violations taking several additional months to several years before  determinations of actual violations were reported. For example, as of  September 30, 2013, 3 of the DOD IG-reported potential violations  totaling $713.1 million could not be fully corrected and have resulted  in $108.8 million in actual, reported ADA violations. To the extent that  ADA violations are not identified, corrected, and reported, DOD  management decisions are being made based on incomplete and  unreliable data.
Our analysis of DOD’s reports of ADA violations determined that the  increases in violations reported in fiscal years 2011 and 2012 relate  primarily to the military services’ use of “bulk” (estimated) amounts used  to record obligation transactions for permanent change-of-station moves  and significant increases in bonuses paid from their respective Military  Personnel appropriations. These violations are specific to the ADA with  regard to prohibiting federal officers and employees from authorizing or  making obligations or expenditures in excess of available amounts. The  use of estimated obligations requires periodic monitoring and  reconciliation of estimated obligations to the related disbursement  transactions and the recording of appropriate adjustments to the  estimated obligations based on actual disbursement amounts; however,  these ADA violations occurred largely because the military services did  not have adequate procedures for monitoring and reconciling  disbursements to bulk obligations. During fiscal year 2011, the Navy and  the Air Force reported violations related to permanent change-of-station  moves totaling $183 million and $87.5 million, respectively. In fiscal year  2012, after an extended investigation, the Army reported a related  violation of $155 million. Additionally, the reason for the Army’s large  spike in fiscal year 2011 violations related primarily to $100.2 million in  transportation services that were also recorded using bulk obligations.  Our recent coordination with the DOD IG and the military departments on  the status of corrective actions indicated that the military departments  continue to be at risk of ADA violations related to using estimated bulk  obligations because they have not yet corrected process weaknesses that  prevent them from recording transaction-level obligations for these  activities and estimating methodologies are not automatically adjusted for  changes in fuel costs and increases in other costs, such as insurance.
section_title: Reliability of Reports on Results of Operations and Budget Execution
paragraphs: DOD has stated that its major financial decisions are based on budgetary  data (e.g., the status of funds received, obligated, and expended). The  department’s ability to improve its budgetary accounting has historically  been hindered by its reliance on fundamentally flawed financial  management systems and processes and transaction control  weaknesses. In its November 2013 Agency Financial Report, DOD self- reported 16 material weaknesses in financial reporting, noting that it has  no assurance of the effectiveness of the related controls. These  weaknesses affect reporting on budgetary transactions and balances,  including budget authority, fund balance, outlays, and categories of  transactions, such as civilian pay, military pay, and contract payments,  among other areas. As a result, reports on budget execution and reports  on the results of operations that could have a material effect on budget,  spending, and other management decisions are unreliable.
The following examples illustrate the effect of transaction control and  system weaknesses on DOD’s operational and budgetary reporting.
DOD continues to make billions of dollars of unsupported, forced  adjustments, or “plugs,” to reconcile its fund balances with Treasury’s  records. In the federal government, an agency’s Fund Balance with  Treasury (FBWT) accounts are similar in concept to corporate bank  accounts. The difference is that instead of a cash balance, FBWT  represents unexpended spending authority in appropriation accounts.  Similar to bank accounts, the funds in DOD’s appropriation accounts  must be reduced or increased as the department spends money or  receives collections that it is authorized to retain for its own use. For  fiscal year 2012, DOD agencies reported making $9.2 billion in  unsupported reconciling adjustments to agree their fund balances with  Treasury’s records. As shown in table 1, DOD’s unsupported  reconciling adjustments to agree its fund balances to Treasury  records grew to $9.6 billion in fiscal year 2013.
Over the years, DOD has recorded billions of dollars of disbursement  and collection transactions in suspense accounts because the proper  appropriation accounts could not be identified and charged, generally  because of a coding error. Accordingly, Treasury does not accept  DOD reporting of suspense transactions, and suspense transactions  are not included in DOD component FBWT reconciliations. It is  important that DOD accurately and promptly charge transactions to  appropriation accounts since these accounts provide the department  with legal authority to incur and pay obligations for goods and  services. Table 2 shows DOD-reported suspense balances for fiscal  years 2010 through 2012. Reported suspense account balances could  be understated because of DOD’s process for complying with  Treasury’s rule for clearing suspense amounts within 60 days. For  example, as we previously reported, during our audit of the Navy and  Marine Corps FBWT reconciliation processes, we observed the  transfer of unresolved suspense disbursement transactions to  canceled accounts and the transfer of unresolved collection  transactions to Miscellaneous Receipts of the Treasury without  supporting documentation to show the adjustments were proper. We  also identified subsequent accounting entries that moved these  transactions back to the suspense accounts. When we asked DFAS  personnel about this pattern, they explained that they transfer  transactions from suspense to these accounts to comply with  Treasury’s 60-day rule for clearing (i.e., resolving) them. DFAS  personnel told us they later transfer the transactions back into  suspense to restart the clock on the 60-day period for resolving them.  Consequently, it is not possible to determine the number and  significance of these unsupported transactions, and DOD does not  know the balance of budget authority that is truly available in its  appropriation and fund accounts. Further, this practice runs contrary  to Treasury’s requirements, which is to fully resolve these transactions  within a reasonable time frame.
Funds control weaknesses continue to hinder DOD’s ability to achieve  successful audits of its financial statements and raise questions about its  ability to achieve the department’s goals of validating SBR audit  readiness by the end of fiscal year 2014 and undergoing an audit on a full  set of financial statements for fiscal year 2018. The DOD Comptroller  represented to the DOD IG that DOD’s Fiscal Year 2012 and Fiscal Year  2013 Consolidated Financial Statements did not substantially conform to  U.S. generally accepted accounting principles (GAAP) and that DOD  financial management and business systems that report financial data  were unable to adequately support material amounts on the financial  statements as of September 30, 2012, and September 30, 2013.  Accordingly, the DOD IG reported disclaimers of opinion in its efforts to  audit DOD’s consolidated financial statements. DOD’s FIAR Plan Status  Reports continue to identify unqualified or inexperienced personnel and  information system control weaknesses as significant risks to audit  readiness. In addition, military department and DOD service-provider  efforts have not yet resolved continuing transaction control weaknesses  related to proper recording, adequate supporting documentation, and  accurate and timely reporting in order to correct material weaknesses that  impede DOD’s audit readiness efforts. As a result, DOD has not yet  asserted audit readiness for most military department SBR assessable  units.
The following examples illustrate the effect of additional funds control and  system weaknesses on DOD’s financial audit readiness efforts that we  and others have identified in our previous work.
In December 2012, we reported on the status of DOD efforts to  address audit backlogs needed to close certain aging contracts and  ensure that DOD deobligates and uses unspent funds before they are  canceled. Contract closeout backlogs also can contribute to  overstatements in reported contract obligations because of the lack of  support for obligated amounts that should have been, but were not,  deobligated. For fiscal years 2007 through 2011, DOD reported  obligations of more than $1.8 trillion on contracts for acquiring goods  and services needed to support its mission. As of the end of fiscal  year 2011, DOD reported it had a large backlog of contracts— numbering in the hundreds of thousands—that have not been closed  within the time frames required by federal regulations. The Defense  Contract Audit Agency (DCAA) is addressing DOD’s contract closeout  backlog through an initiative to reduce the backlog of incurred cost  audits, which will ultimately allow the Defense Contract Management  Agency (DCMA) and others to make final adjustments to obligated  balances on completed contracts and close the contracts. In  addition, while DCMA is attempting to accelerate efforts to close  contracts that are physically complete, the success of its efforts  depends on DCAA’s ability to complete annual incurred cost audits in  a timely manner and the reliability of information on contract statuses.  We also reported that at the local level, seven out of the nine  contracting offices we spoke with collected some information about  their overage contracts, such as the total number of contracts in the  backlog and the type of contracts, but the offices generally were  unable to provide us with detailed information as to where the  contracts were in the closeout process, such as the number awaiting  a DCAA incurred cost audit. We recommended that DCAA develop a  plan to assess its incurred cost audit initiative and that DCMA improve  data on over-age contracts. We also recommended that the military  departments develop contract closeout data and establish  performance measures. DOD concurred with the recommendations  and identified ongoing and planned actions to address them.
In a series of reports, the DOD IG reported that DOD managers did  not take the steps needed to ensure that four component ERPs  (GFEBS, LMP, Navy ERP, and DEAMS) had the capability to record  and track transaction data. Instead of recording transactions in the  ERPs, such as budget authority, obligations, collections, and  disbursements (at the time of the related events), DOD managers  relied on DFAS to record journal vouchers (adjusting entries) in DDRS  and used other offline electronic processes, such as spreadsheets, to  record accounting entries in the four ERPs. According to the DOD IG,  because most funds control accounting is not being managed in the  accounting and business information systems, DOD continues to build  its budget execution reports and SBRs using budgetary status data  that cannot be traced to actual transaction data within any official  accounting system. This weakness impairs the reliability of DOD’s  budgetary reports, including periodic reports to Congress. In addition,  the DOD IG reported that the lack of effective oversight of the  development and implementation of system access templates left  LMP data at risk of unauthorized and fraudulent use. The DOD IG  also reported the lack of support for feeder system transactions  imported in Defense Departmental Reporting System-Budgetary that if  not corrected, will hinder DOD’s audit readiness efforts. The DOD IG  is continuing to monitor DOD’s actions to resolve these system  weaknesses.
section_title: DOD Has Actions Under Way to Address Many DOD- Wide Funds Control Weaknesses, but Effective Implementation Will Be Critical
paragraphs: DOD is addressing corrective actions on funds control weaknesses  through audit readiness efforts under the FIAR Plan and related FIAR  Guidance, through other efforts mainly related to improving training and  business system controls, and through efforts to address findings in  auditor and ADA reports. Many of these actions have not been fully  implemented so their effectiveness is yet to be determined. Because  several critical DOD-wide corrective actions to improve financial  management and address open audit recommendations are targeted for  completion in 2017, funds control issues are likely to persist during this  time. The following discussion highlights DOD actions under way to  address funds control weaknesses related to (1) training, supervision, and  management oversight; (2) transaction controls; and (3) business  systems.
Training, supervision, and management oversight. A key principle for  effective workforce planning is that an agency needs to define the critical  skills and competencies that it will require in the future to meet its  strategic program goals. Once an agency has identified critical skills and  competencies, it can develop strategies to address gaps in the number of  personnel, needed skills and competencies, and deployment of the  workforce. FIAR Plan Status Reports continue to identify the need for  knowledgeable and qualified personnel as critical to achieving DOD’s  financial improvement and audit readiness goals. Currently, FIAR training,  which focuses on audit readiness efforts, and military department  financial management training are not tied to mission-critical financial  management competencies, staff experience and proficiency levels, or  identified skill gaps.
DOD is addressing financial management workforce competencies and  training through complementary efforts by (1) the Office of the Under  Secretary of Defense for Personnel and Readiness (DOD Personnel and  Readiness) to develop a strategic civilian workforce plan that includes  financial management, pursuant to requirements in the NDAA for Fiscal  Year 2010, as amended, and (2) the DOD Comptroller to develop and  implement a Financial Management Certification Program, pursuant to  requirements in the NDAA for Fiscal Year 2012. Financial management  personnel are expected to possess the competencies that are relevant to  and needed for their assigned positions. These competencies include  fundamentals of accounting, accounting analysis, budget execution,  financial reporting, and audit planning and management, among others.  DOD Personnel and Readiness is currently working on a department- wide competency assessment tool that will be used by the department,  including the financial management functional community, to capture  information related to competencies, such as proficiency level,  importance, and criticality, and to identify any gaps in support of the  Comptroller’s financial management certification program.
For example, as of March 2012, the Office of Personnel and Readiness,  Strategic Human Capital Planning Program Office, had identified 32  mission-critical occupations, including four financial management  occupations: accounting, auditing, budget analysis, and financial  administration. The Program Office currently assesses skills or staffing  gaps, which relate to unfilled positions by occupation, by analyzing the  differences between the number of positions by occupational series that  DOD was authorized to fill and the number of occupational positions that  are currently filled. DOD is working toward completing its gap  assessments by 2015.
In support of the new certification program, the DOD Comptroller has  identified 23 mission-critical financial management competencies and five  levels of proficiency for each competency. The new Financial Manager  Certification Program will require training in three areas: (1) selected  financial management competencies at the proficiency level  commensurate with the required certification level for that position;   (2) leadership competencies as defined by the DOD Leadership  Continuum; and (3) other technical training in key areas, such as how to  respond to an audit, fiscal law, and ethics. Training on fiscal law would  cover funds control and ADA requirements.
The certification program includes three levels of certification covering  staff, supervisors, and management, with requirements for initial hours of  training, continuing-education, and experience. (See table 3.) While  DOD’s Certification Program requirements do not specify that the  recommendations for attaining bachelor’s and master’s degrees are  specific to degrees in financial management-related areas, the  Certification Program is designed to accept college courses in financial  management as fulfilling certain of the certification program course  requirements. If effectively implemented, these three levels of certification  could help address training, supervision, and management oversight  weaknesses. Employees will have 2 years to complete courses, training,  and professional development requirements for the certification level  required for their assigned positions. DOD’s Financial Manager  Certification Program received National Association of State Boards of  Accounting (NASBA) approval in March 2013.
The DOD Comptroller initiated the pilot for the certification program in  July 2012, which was completed at the end of March 2013. Phased  implementation began in June 2013, and the current target date for full  implementation is the end of fiscal year 2014. The Certification Program  is to be mandatory for DOD’s approximately 54,000 civilian and military  financial management personnel.
Effective implementation of the certification program is critical to ensure  that financial management personnel obtain the needed skills to make  effective improvements in financial management, including improved  funds control and audit readiness as well as appropriate supervision and  management oversight.
Transaction controls. DOD officials are addressing transaction control  weaknesses under the department’s FIAR Plan efforts. In December  2011, the DOD Comptroller updated the FIAR Guidance to identify key  SBR-related transaction control objectives within military department  assessable units related to the funds control and budget execution  processes. These key transaction controls include proper authorization  and recording, adequate supporting documentation, and accurate  reporting of obligation and disbursement transactions. DOD components  are testing these key transaction controls for each assessable unit,  including civilian pay, military pay, contract pay, and net outlays as  reflected in FBWT, as a basis for determining whether they can achieve  audit readiness for the SBR by September 2014. Once the military  departments deem their transaction support and other controls to be  effective for a particular assessable unit of the SBR, they will assert audit  readiness for that assessable unit and request an audit by an  independent public accountant to validate their audit readiness assertion.  Figure 4 shows the SBR audit readiness milestone dates for the military  departments and other defense agencies as of the November 2013 FIAR  Plan Status Report. While DOD has made progress toward financial audit  readiness, milestone dates for the Navy have slipped and SBR milestone  dates for the Army and the defense agencies have been compressed,  making it questionable that corrective actions for these DOD components  will be completed by September 2014 for all assessable units. Further,  the Air Force has revised its milestone dates for achieving SBR audit  readiness to the third quarter of fiscal year 2015. With a reported   $187.8 billion in fiscal year 2013 General Fund budgetary resources, the  Air Force is material to DOD’s SBR and if the Air Force cannot meet  DOD’s September 2014 SBR audit readiness goal, DOD will not be able  to meet this goal. This, in turn, raises concerns about DOD’s ability to  undergo an audit on a full set of financial statements for fiscal year 2018.
DOD uses service providers to improve efficiency and standardize  business operations in various functional areas, including accounting,  personnel and payroll, logistics, contracting, and system operations and  hosting support. DOD service providers and their business systems are  fundamental to reliable accounting and reporting and financial audit  readiness. The FIAR Guidance requires DOD service providers, such as  DFAS, the Defense Logistics Agency, the Defense Information Systems  Agency, and DCMA, to obtain an examination of their operating controls,  including system controls, under Statements on Standards for Attestation  Engagements (SSAE) No.16, when their controls are likely to be relevant  to reporting entities’ internal controls over financial reporting. DOD  service providers plan to use the results of their SSAE No. 16  examinations as a basis for improving their operating processes and  controls. Figure 5 shows the service providers and the operating systems  supporting business functions that are targeted for SSAE No. 16  examinations under FIAR and the related milestone dates for audit  readiness assertions and their validation.
In August 2013, we reported that DOD did not have an effective process  for identifying audit-readiness risks, including risks associated with its  reliance on service providers for much of its components’ financial data,   and it needed better department-wide documentation retention policies.  Effective service-provider controls are critical to ensuring improvements in  DOD funds control.
With regard to corrective actions related to ADA violations associated with  military personnel appropriations, significant process improvements  related to proper recording of transactions are needed and according to  the military departments, the time frame for completing corrective actions  depends on implementation of their respective integrated personnel and  payroll systems, referred to by DOD as IPPS, for military payroll—in late  2016 and 2017.
Business systems. In February 2012, we reported that DOD, in an  attempt to modernize and develop an effective standardized financial  management process throughout the department, had initiated various  efforts to implement new ERP financial management systems and  associated business processes. We further reported that based upon  data provided by DOD, 6 of the 10 ERPs DOD had identified as critical to  transforming its business operations had experienced schedule delays  ranging from 2 to 12 years, and 5 had incurred cost increases totaling an  estimated $6.9 billion. In its Summary of Challenges discussed in  addendum A to DOD’s fiscal year 2013 Agency Financial Report, the  DOD IG reported that timely and effective implementation of the ERPs is  critical for DOD to achieve its financial improvement efforts and audit  readiness goals. However, the DOD IG reported that not all of the ERP  systems will be implemented by the department’s September 2014 goal  for validating audit readiness for the SBR or its goal for undergoing an  audit on a full set of financial statements for fiscal year 2018. Moreover,  without fully deployed ERPs, the department will be challenged to  produce reliable financial data and auditable financial statements without  resorting to extreme efforts, such as data calls or manual workarounds, to  provide financial data on a recurring basis. The DOD IG also reported that  the department has not reengineered its business processes to the extent  necessary; instead, it has often customized commercial ERPs to  accommodate existing processes, creating the need for system interfaces  and weakening controls built into the ERP systems.
In the March 2013 FIAR Guidance, DOD reported that material internal  control weaknesses were classified in DOD’s Agency Financial Report by  the financial statement line item or type of activity affected by the  weakness. DOD’s fiscal year 2013 Agency Financial Report lists 16  material weaknesses over financial reporting and relates these  weaknesses to ERP systems and end-to-end business processes. DOD  reported one overall material weakness related to financial systems.  Together, these 17 material weaknesses impact military pay, civilian pay,  FBWT, contracts, and military supply requisitions. We and the DOD IG  have reported that DOD component ERPs lack the functionality needed to  support reliable financial reporting, including accurate and complete  USSGL and DOD-wide SFIS information and data requirements and the  ability to record budgetary data at the transaction level. DOD has stated  that several of the department’s ERPs have been or will be implemented  to support the 2018 financial statement audit goal. However, in its  summary of management and performance challenges included in DOD’s  fiscal year 2012 Agency Financial Report, the DOD IG stated that  because of schedule delays ranging up to 13 years, DOD will continue  using outdated legacy systems and poorly developed and implemented  ERP systems, increasing the risks that (1) the SBR will not be audit ready  by September 30, 2014, and (2) DOD may not be able to produce reliable  financial data and auditable financial statements without resorting to  “heroic efforts, such as data calls and manual workarounds.” In DOD’s  fiscal year 2013 Agency Financial Report, the DOD IG reiterated this  concern and noted that the department has not reengineered its business  processes to the extent necessary, stating that instead it has often  customized commercial ERPs to accommodate existing processes.
In addition, the FIAR Plan requires the military departments and DOD  service providers to use GAO’s Federal Information System Controls  Audit Manual (FISCAM) reviews to test business system general and  application controls for material systems, including general ledger  accounting systems and selected feeder systems, as part of their audit  readiness efforts. FISCAM provides a methodology for performing  information system control audits of federal and other governmental  entities in accordance with professional standards. FISCAM focuses on  evaluating the effectiveness of general and application controls. The  November 2013 FIAR Guidance provides a detailed description of DOD’s  audit readiness requirements related to financial system controls. The  Guidance states that the FIAR Directorate has identified the FISCAM  control activities and techniques needed to address the key internal  controls over financial management reporting risk and includes a link to  them. The Guidance further states that DOD reporting entities have  ultimate responsibility for information technology controls for those  systems through which their transactions flow and will need to  communicate and coordinate audit readiness efforts with service  providers. The shared understanding between the reporting entity and the  service provider is required to be documented in a service-level  agreement or memorandum of understanding. According to DOD’s  November 2013 FIAR Plan Status Report, the military departments plan  to complete their FISCAM general and application control tests as follows:
The Army plans to achieve relevant FISCAM general and application- level control objectives for material systems supporting its SBR  assessable units, including GFEBS, by June 2014.
The Navy planned to complete relevant FISCAM general and  application control objectives for Navy ERP in February 2014 and  plans to achieve a relevant review or perform a self-assessment of  material legacy systems and selected feeder systems by September  2014.
The Air Force plans to achieve relevant FISCAM general and  application control objectives for material systems supporting its SBR  between November 2012 and June 2014. Air Force audit readiness  efforts will rely on manual controls and legacy system improvements  because its ERP general ledger system—DEAMS—will not be fully  deployed until sometime after 2017.
section_title: Concluding Observations
paragraphs: DOD has committed significant resources to improving funds controls for  achieving sound financial management operations and audit readiness.  While DOD expects that these improvements, once realized, will also  strengthen the department’s controls in support of proper use of  resources, reliable reporting on the results of operations and budget  execution, and financial audit readiness, the department continues to face  pervasive, long-standing internal control and business system challenges  that not only impair its control over funds entrusted to it, but also pose  continuing challenges to achieving reliable financial reporting. DOD  leadership remains committed to achieving financial accountability and  reliable information for day-to-day management decision making as well  as financial audit readiness. However, corrective actions are not expected  to be completed for several years on long-standing funds control  weaknesses related to (1) training, supervision, and management  oversight; (2) proper authorization, recording, documenting, and reporting  of budgetary transactions; and (3) business systems controls. As a result,  these weaknesses will continue to adversely affect DOD’s ability to  achieve its goals for effective funds controls, including reductions in ADA  violations, financial accountability, and reliable financial reporting. In  addition, to the extent that DOD and its components continue to rely on  data calls or manual work-arounds to achieve auditability of the SBR and  other financial statements, it is unlikely that DOD will be able to produce  consistent, reliable, and sustainable financial information for day-to-day  decision making.
section_title: Agency Comments
paragraphs: We received written comments on a draft of this report from DOD’s  Deputy Chief Financial Officer (CFO) on April 14, 2014, stating that the  department appreciates our review of past reports as the identified  deficiencies have informed DOD’s current corrective actions. The Deputy  CFO expressed the department’s commitment to building a stronger  business environment with regard to people, processes, and systems and  noted progress in each of the three weakness areas discussed in this  report, including (1) enrollment of 22,300 financial managers in the new  DOD Financial Management Certification Program; (2) audit readiness  assertions within several organizations, supported in part by transaction  control testing; and (3) ongoing efforts to review financial and financial  feeder systems for data reliability. Effective implementation of outstanding  recommendations from past reports will better position the department to  minimize the occurrence of ADA violations. DOD’s comments are  reprinted in appendix III.
We are sending copies of this report to the Chairmen and Ranking  Members of the Senate Committee on Armed Services, the Senate  Committee on Appropriations, the House Committee on Oversight and  Government Reform, the House Committee on Armed Services, and the  House Committee on Appropriations. We also are sending copies to the  Secretary of Defense; the Under Secretary of Defense (Acquisition,  Technology and Logistics); the Under Secretary of Defense (Personnel  and Readiness); the Under Secretary of Defense (Comptroller) and Chief  Financial Officer; the Deputy Chief Financial Officer; the Director for  Financial Improvement and Audit Readiness; the FIAR Governance  Board; the Assistant Secretaries (Financial Management and  Comptroller) of the Army, the Navy, and the Air Force; the Commandant  of the Marine Corps; the Director of the Defense Finance and Accounting  Service; the Director of the Office of Management and Budget; and other  interested parties.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, Secretary of Defense, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9869 or khana@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff members who made key contributions to  this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the extent of long-standing funds control weaknesses, we  analyzed 333 audit and financial reports on the Department of Defense’s  (DOD) financial management operations issued over the last 7 years– including 190 DOD audit reports, 30 GAO reports, 36 DOD financial  reports, and 77 DOD reports of Antideficiency Act (ADA) violations  provided to GAO and identified over 1,000 funds control weaknesses. Our  reports and DOD Inspector General (IG) reports covered fiscal years  2007 through 2012 and the military department audit reports covered  fiscal years 2010 through the first half of fiscal year 2012. We assessed  the DOD IG’s audit quality assurance procedures for assuring the  reliability of data and findings presented in auditor reports. We also  reviewed the military departments’ January 2012 Annual Evaluations of  Funds Control Processes and Processing of ADA Violations and their  Annual Financial Reports and Statements of Assurance for fiscal years  2011 and 2012. In addition, we reviewed all DOD reports of ADA  violations sent to GAO in fiscal years 2007 through 2013. (See table 4.)  To determine whether reported weaknesses continued, we reviewed  fiscal year 2013 reports of ADA violations sent to GAO and DOD IG  reports of potential ADA violations; recent auditor reports; DOD financial  management reports, including DOD and military department Agency  Financial Reports; 2013 Financial Improvement and Audit Readiness  (FIAR) Plan Status Reports; and FIAR Guidance. While these documents  are included in the 333 reports of funds control weaknesses, the related  findings are not included in the 1,006 weaknesses identified through fiscal  year 2012.
To determine the effect of reported weaknesses, we considered problems  associated with (1) proper use of resources; (2) accurate accounting and  support for transactions (primarily obligations and disbursements) with  regard to reports on program and project statuses, results of operations,  and budget execution; and (3) financial audit readiness. We also  reviewed DOD reports of ADA violations reported in fiscal years 2007  through 2012 to identify DOD’s reported causes of the violations and the  corrective actions noted in these reports. To frame our discussion of  identified funds control weaknesses and DOD-reported corrective actions,  we grouped the identified weaknesses into three categories that are  consistent with those identified in DOD and GAO reports. Many of the  reports on funds control weaknesses identified more than one weakness.  The three categories relate to the following areas:  (1) Inadequate training, supervision, and management oversight.  Supervision is day-to-day guidance by a supervisor and management  oversight involves assuring adequate supervisory guidance and training  as well as overall monitoring of the subject matter area.  (2) Ineffective transaction controls. These controls cover proper  authorization and recording of budgetary transactions, such as obligations  and disbursements (outlays); maintaining adequate supporting  documentation for the transactions; and proper and timely reporting of  transactions and related summaries and financial reports.  (3) Ineffective business systems. This category refers to business  systems that do not have effective controls for recording, supporting, and  reporting financial transactions, including budgetary transactions, and  therefore, do not provide adequate controls over financial reporting on the  results of operations and do not assure compliance with laws and  regulations.
To determine the status of DOD’s corrective actions to address identified  funds control weaknesses, we reviewed corrective action statuses in  response to mandates in National Defense Authorization Acts related to  financial management competencies, skill gaps, and training; corrective  actions on transaction-level accounting and financial reporting under  DOD’s FIAR Plan; the status of actions to address business system  weaknesses; and actions to address DOD ADA violations and DOD IG  and military department audit recommendations. We met with DOD IG  and military department audit officials to obtain information on open audit  recommendations and discuss recurring findings of funds control  weaknesses and their effect on reliable financial reporting. In addition, we  met with DOD and military department financial managers and audit  readiness officials to discuss their efforts to resolve findings of funds  control weaknesses, including material weaknesses related to financial  reporting disclosed in DOD annual Agency Financial Reports, as well as  how funds control is being addressed in Statement of Budgetary  Resources audit readiness initiatives and the status of those initiatives.  We analyzed DOD’s FIAR Plan Status Reports and FIAR Guidance and  military department audit readiness plans from November 2010 through  November 2013 to identify and evaluate audit readiness efforts related to  funds control. Based on our review of DOD’s audit quality procedures and  our comparison of auditor reports and DOD disclosures of financial  management weaknesses, we determined the reported data and  information to be reliable for the purposes of our work.
section_title: Appendix II: Details of Reported DOD Funds Control Weaknesses by Category
paragraphs: As shown in figure 6, we identified over 1,000 separately reported funds  control weaknesses. We noted but did not count Department of Defense  (DOD) financial management reports that discussed weaknesses  identified in audit reports. We grouped funds control weaknesses  identified in our reports analysis into three categories: (1) inadequate  training, supervision, and management oversight; (2) ineffective  transaction controls; and (3) inadequate business systems. These  categories are consistent with those identified in DOD and GAO reports.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Gayle L. Fischer (Assistant  Director), Lisa Brownson, Francine DelVecchio, Maxine Hattery,   Donald D. Holzinger, Jason Kelly, Jason Kirwan, Gregory Marchand  (Assistant General Counsel), Sheila D. M. Miller, Marc Molino, Heather  Rasmussen, and Robert Sharpe made key contributions to this report.