DOD Financial Management: Ongoing Challenges in Implementing the Financial Improvement and Audit Readiness Plan
Published: 2011-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) has initiated several efforts over the years to address its long-standing financial management weaknesses and ultimately achieve unqualified (clean) opinions on its financial statements. In 2005, the DOD Comptroller first issued the Financial Improvement and Audit Readiness (FIAR) Plan for improving financial management and reporting. In May 2010, the DOD Comptroller issued the FIAR Guidance to provide standardized guidance to DOD components for developing Financial Improvement Plans (FIP) to implement the FIAR Plan. GAO's testimony focuses on (1) progress made by the DOD Comptroller in developing and issuing the FIAR Guidance, (2) challenges faced by DOD components in implementing the FIAR Guidance, and (3) improvements needed in DOD's oversight and monitoring of FIAR implementation efforts. This statement is based on four audits that were undertaken at the request of this subcommittee and other congressional requesters to evaluate the progress DOD is making in implementing its FIAR Plan and FIAR Guidance. GAO addresses findings and recommendations from two reports being issued this week ( GAO-11-830 and GAO-11-851) and preliminary information from two ongoing audits. Each audit demonstrates some of the challenges DOD faces in improving its financial management and achieving the goal of auditable financial statements by 2017..
section_title: What GAO Found
paragraphs: In a report issued this week, GAO concluded that the FIAR Guidance provides a reasonable methodology for the DOD components to follow in developing and implementing their FIPs. It details the roles and responsibilities of the DOD components, and prescribes a standard, systematic process components should follow to assess processes, controls, and systems, and identify and correct weaknesses in order to achieve auditability. The FIAR Guidance also requires the components to prepare and implement corrective action plans for resolving the deficiencies identified during testing and to document the results, which is consistent with federal internal control standards and related guidance. DOD's ability to achieve audit readiness is dependent on the components' ability to effectively develop and implement FIPs in compliance with the FIAR Guidance. However, GAO's review of various DOD component efforts to achieve audit readiness found that the components experienced challenges in implementing the FIAR Guidance. Specifically: (1) The Navy and the Air Force had not adequately developed the two FIPs that GAO reviewed in accordance with the FIAR Guidance. As a result, they did not conduct sufficient control and substantive testing, and reached conclusions that were not supported by the testing results. (2) Auditors of the Marine Corps' Statement of Budgetary Resources (SBR) issued a disclaimer of opinion because the Marine Corps did not provide timely and relevant supporting documentation for accounting transactions and also reported that internal control weaknesses should be addressed. (3) GAO's preliminary work on the Navy's and Marine Corps' Fund Balance with Treasury (FBWT) reconciliation processes identified issues with their ability to reconcile FBWT--a key step in preparing the SBR. (4) Based on preliminary results, GAO identified issues in the implementation of two enterprise resource planning (ERP) systems by the Army and the Air Force. DOD has acknowledged that effective implementation of integrated systems is crucial to achieving departmentwide audit readiness. Although DOD and its military components had established organizational structures for monitoring and oversight of audit readiness efforts, GAO found that oversight responsibilities were not effectively carried out, resulting in the ineffective implementation of FIPs and unsupported conclusions of audit readiness. For the two FIPs that GAO reviewed, neither the designated officials nor the executive committees took sufficient action to ensure that the FIPs complied with the FIAR Guidance. Effective oversight would also help ensure that lessons learned from recent efforts would be disseminated throughout the department so that others could avoid similar problems. For example, the Marine Corps' SBR audit effort provide valuable lessons that, if effectively communicated and implemented, can provide a roadmap to help other DOD components achieve audit readiness.
section_title: What GAO Recommends
paragraphs: GAO recommends actions for components to comply with the FIAR Guidance, for the Marine Corps to develop appropriate corrective action plans, and for DOD to ensure that the services consider lessons learned. DOD concurred with GAO's recommendations related to implementing the component FIPs and with three of four recommendations related to the Marine Corps SBR. Further details on DOD's comments can be found in GAO's reports.

section_title: Letter
paragraphs: It is a pleasure to be here today to discuss the status of the Department  of Defense’s (DOD) efforts to implement its Financial Improvement and  Audit Readiness (FIAR) Plan to improve its financial management  operations. Given the federal government’s fiscal challenges, there is a  significant need for transparency and for the Congress, the  administration, and federal managers to have reliable, useful, and timely  financial and performance information, particularly for the government’s  largest department. For more than a decade, DOD has been on GAO’s  list of federal programs and operations at high risk of being vulnerable to  fraud, waste, and abuse. Despite several reform initiatives, DOD’s  financial management remains on GAO’s high-risk list today. Long- standing and pervasive weaknesses in DOD’s financial management and  related business processes and systems have (1) resulted in a lack of  reliable information needed to make sound decisions and report on the  financial status and cost of DOD activities to Congress and DOD decision  makers; (2) adversely affected its operational efficiency and mission  performance in areas of major weapons system support and logistics; and  (3) left the department vulnerable to fraud, waste, and abuse. In addition,  these long-standing financial management weaknesses have precluded  DOD from being able to successfully undergo the scrutiny of a financial  statement audit. The National Defense Authorization Act (NDAA) for  Fiscal Year 2010 mandated that DOD be prepared to validate (certify)  that its consolidated financial statements are ready for audit by  September 30, 2017.
In 2005, the DOD Comptroller established the DOD Financial  Improvement and Audit Readiness (FIAR) Directorate to develop,  manage, and implement a strategic approach for addressing the  department’s financial management weaknesses and for achieving  auditability, and to integrate those efforts with other improvement  activities, such as the department’s business system modernization  efforts. Also in 2005, the DOD Comptroller first issued the FIAR Plan for  improving financial management and reporting. The 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 provide standardized guidance to DOD components for  developing Financial Improvement Plans (FIP) to implement the FIAR  Plan. In September 2010, we reported that the department needed to  focus on implementing its FIAR Plan and that the key to successful  implementation would be the efforts of the DOD military components and  the quality of their individual FIPs.
My testimony today will focus on three key issues:  (1)  progress made by the DOD Comptroller in developing and  issuing the FIAR Guidance to assist DOD components in  implementing the FIAR Plan;  (2)  challenges in the implementation of the FIAR Guidance at the  Navy, Air Force, and Marine Corps; and  (3)  improvements needed in DOD’s oversight and monitoring of  FIAR implementation efforts.
My statement is based on four audits that we have undertaken at the  request of this subcommittee and other congressional requesters to  evaluate the progress DOD is making in implementing its FIAR Plan and  related Guidance. Two of the reports have been issued this week, and  we are addressing preliminary findings for the other two reports, which  are in process. Each report demonstrates some of the challenges DOD  faces in improving its financial management, including its ability to  achieve the goal of reliable financial information and auditable financial  statements by 2017:    The first report discusses the methodology reflected in DOD’s FIAR  Guidance, whether selected military component FIPs adhered to the  FIAR Guidance, and DOD’s oversight and monitoring of the FIP  process. The published report includes details on the scope and  methodology for this review.    The second report addresses why auditors were unable to complete  an audit of one of DOD’s financial statements, the Statement of  Budgetary Resources (SBR), for one military service, the U.S. Marine  Corps. This report also includes details on the scope and  methodology for this review.    The remaining two ongoing audits address (1) a key process for  DOD’s components—the Fund Balance with Treasury (FBWT)  reconciliation—which illustrates one of many of the department’s  challenges and (2) the implementation of comprehensive, integrated  business systems called enterprise resource planning (ERP)  systems, which DOD considers a key element to improving financial  management and achieving auditability. We discussed with DOD  officials the preliminary findings from these two ongoing audits that  are included in this testimony and considered their comments in this  statement. We plan to issue these reports in October 2011.
For our work on the FBWT reconciliation, we analyzed Navy and Marine  Corps policies and procedures covering the various FBWT reconciliation  steps, and met with Navy, Marine Corps, and Defense Finance and  Accounting Service (DFAS) officials, and performed walkthroughs of the  Navy and Marine Corps FBWT processes. For our work on ERP systems,  we focused on the status of two systems by reviewing the Army and Air  Force Test and Evaluation Commands’ reports on the systems and  interviewing various DOD officials, including system users at DFAS.
Our work was conducted 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 the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Over the years, DOD has initiated several broad-based reform efforts to  address its long-standing financial management weaknesses. However,  as we have reported, those efforts did not achieve their intended purpose  of improving the department’s financial management operations. The  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 contains an incremental approach for addressing the department’s  financial management weaknesses and achieving financial statement  auditability. The plan focuses on three goals: (1) achieve and sustain  assurance on the effectiveness of internal controls, (2) develop and  implement financial management systems that support effective financial  management, and (3) achieve and sustain financial statement audit  readiness.
In August 2009, the DOD Comptroller sought to focus efforts of the  department and components, in order to achieve certain short- and long- term results, by giving priority to improving processes and controls that  support the financial information most often used to manage the  department. Accordingly, DOD revised its FIAR strategy and methodology  to focus on the DOD Comptroller’s two priorities—budgetary information  and asset accountability. The first priority is to strengthen processes,  controls, and systems that produce DOD’s budgetary information and the  department’s SBRs. The second priority is to improve the accuracy and  reliability of management information pertaining to the department’s  mission-critical assets, including military equipment, real property, and  general equipment. The DOD Comptroller directed the DOD  components—including the Departments of the Army, Navy, and Air  Force and the Defense Logistics Agency—to use a standard process to  implement the FIAR Plan and aggressively modify their activities to  support and emphasize achievement of the priorities.
In May 2010, DOD issued a revised FIAR Plan in which it introduced a  new phased approach toward achieving financial statement auditability.  This approach consists of five waves (or phases) of concerted  improvement activities. The first two waves involve budgetary  information—appropriations received and the SBR. According to DOD,  the components’ implementation of the methodology described in the May  2010 FIAR Plan is essential to the success of the department’s efforts to  ultimately achieve full financial statement auditability.
section_title: DOD’s FIAR Guidance Provides a Reasonable Methodology
paragraphs: Consistent with prior GAO recommendations and the NDAA for Fiscal  Year 2010, DOD issued the FIAR Guidance in May 2010, which details  the methodology for components to follow in order to achieve financial  management improvements and auditability. The FIAR Guidance requires  components to identify and prioritize their processes into assessable  units. For each assessable unit, a component is required to prepare a  FIP in accordance with the steps outlined in the FIAR Guidance. For  example, civilian and military pay are two assessable units for which each  DOD component, such as the Army, Navy, and Air Force, must develop  and implement plans in accordance with the FIAR Guidance to ensure  that their civilian and military pay can be audited. The steps required for  these plans include assessing processes, controls, and systems;  identifying and correcting weaknesses; assessing, validating, and  sustaining corrective actions; and ultimately achieving audit readiness.  After a component completes its evaluation of the effectiveness of  corrective actions for each assessable unit, it must determine whether  each assessable unit is ready for audit. For example, the Air Force, based  on its implementation of the FIAR Guidance and its FIP, planned to  conclude during fiscal year 2011 whether or not its FBWT Reconciliation  is reliable and ready for audit. Once a component’s management  determines that an assessable unit is ready for audit, the DOD  Comptroller and DOD Inspector General (IG) must review the related FIP  documentation to determine if they agree with management’s conclusion  of audit readiness.
In our report issued this week, we concluded that the FIAR Guidance  provides a reasonable methodology for the DOD components to follow in  developing and implementing their FIPs. However, as described later in  this statement, we found that implementation of the FIAR Guidance for  the two assessable units we reviewed was not effective. The FIAR  Guidance details the roles and responsibilities of the DOD components,  and prescribes a standard, systematic process that components should  follow to assess processes, controls, and systems, and identify and  correct weaknesses in order to achieve auditability for each of their  assessable units. Overall, the procedures required by the FIAR Guidance  are consistent with selected procedures for conducting financial  statement audits, which include the following:    Conducting internal control and substantive testing. Internal  control testing focuses on assessing the effectiveness of controls that  would prevent or detect potential misstatements in the financial  statements. Substantive tests are performed to obtain evidence on  whether amounts reported on the financial statements are reliable.    Reconciling the population of transactions to be tested. To  conduct internal control and substantive testing, a sample of the data  transactions is typically selected for testing. An organization must be  able to identify the complete population of transactions so that a  sample can be selected and tested.    Conducting tests of information systems controls. The  components are required to identify, document, and test both general  and application controls for key systems that process transactions.  General controls are the policies and procedures that apply to all or  a large segment of an entity’s information systems and help ensure  their proper operation. Application controls, sometimes referred to as  business controls, are incorporated directly into computer applications  to help ensure the validity, completeness, accuracy, and  confidentiality of data during application processing and reporting.
The FIAR Guidance also requires the components to prepare and  implement corrective action plans for resolving the deficiencies identified  during testing and to document the results, which is consistent with  federal internal control standards and Office of Management and Budget  (OMB) guidance.
section_title: Challenges for DOD Components’ Implementation of FIAR Guidance
paragraphs: Although the FIAR Guidance provides a reasonable methodology for  improving financial management within the department, DOD’s ability to  achieve audit readiness is highly dependent on the components’ ability to  effectively develop and implement FIPs in compliance with the FIAR  Guidance. Our reviews of various DOD component efforts to achieve  audit readiness found that the components faced challenges in effectively  implementing the FIAR Guidance, resulting in unsupported conclusions of  audit readiness for Navy Civilian Pay, Air Force Military Equipment, and  the Marine Corps SBR. Our preliminary work also found that a key  element of basic financial management—reconciling the FBWT account— was not being done properly on a regular basis and the weaknesses were  not properly identified or corrected by the Navy or the Marine Corps.  Finally, to achieve fundamental improvements in financial management,  DOD recognizes the importance of transforming its business operations  through the implementation of ERP systems. Our preliminary work on two  key ERPs that have been partially deployed found significant issues in  both systems.
subsections: section_title: FIPs for Navy Civilian Pay and Air Force Military Equipment Were Incomplete and Ineffective
paragraphs: Our review of the FIPs for Navy Civilian Pay and Air Force Military  Equipment found that neither FIP complied with the FIAR Guidance and  contained unsupportable conclusions. We found similar deficiencies in  both FIPs, which included the following:    The Navy and Air Force did not conduct sufficient control and  substantive testing, and contained unsupportable conclusions that the  amounts being reported for Navy Civilian Pay and Air Force Military  Equipment were reliable.    The Navy and Air Force did not complete reconciliations of the  population of transactions. As a result, the components could not  ensure that their testing results could be projected to the populations  of Navy civilian pay transactions and Air Force military equipment.    The Navy and Air Force did not fully test information systems controls.
The Navy’s system testing did not include essential areas such as  periodic reviews of user access authorizations and logs of changes to  security access authorizations. The Air Force’s FIP did not include  any documentation of control testing for the two systems that maintain  its military equipment data.    The Navy and Air Force did not fully develop and implement  corrective action plans to address deficiencies they identified during  testing. The Navy had not developed any corrective action plans at  the time that it incorrectly concluded that its civilian pay was ready for  audit. The Air Force had developed some plans related to its military  equipment weaknesses but not for all deficiencies identified, and  moreover, it had not implemented any of the corrective actions at the  time that it stated that its military equipment was ready for audit. Both  components stated that they planned to complete corrective actions in  the future.
Because of the deficiencies we identified, neither FIP that we reviewed  provided sufficient support for the components’ conclusions that the  balances for Navy Civilian Pay and Air Force Military Equipment were  ready for audit. Our report includes recommendations for DOD to ensure  that components’ FIPs comply with the FIAR Guidance. Navy officials  stated that they were taking action to address the issues identified and  planned to submit a revised FIP by March 2012. Air Force officials also  indicated that they were taking action to address the issues identified.
section_title: Marine Corps Statement of Budgetary Resources Was Not Auditable
paragraphs: After DOD established budgetary information as a priority in its FIAR  Plan, the Marine Corps was identified as the pilot military service for an  audit of the SBR. The SBR is designed to provide information on  authorized budgeted spending authority and links to the Budget of the  United States Government (President’s Budget), including budgetary  resources, availability of budgetary resources, and how obligated  resources have been used. Because the Marine Corps is a military  service within the Department of the Navy, its success in achieving audit  readiness is intended to pave the way for the Navy to undergo an SBR  audit. However, the DOD IG issued a disclaimer of opinion on the  Marine Corps’ fiscal year 2010 SBR because the Marine Corps did not  provide timely and relevant supporting documentation for accounting  transactions and disbursements in key areas, which prevented the  auditors from completing the audit by the November 15, 2010, reporting  deadline. In addition, the auditors reported that ineffective internal control  and ineffective controls in key financial systems should be addressed to  ensure the reliability of reported financial information. The auditors  identified 70 findings and made 139 recommendations to address the  issues. Examples of the problems identified include the following:    The DFAS location in Cleveland, Ohio, (DFAS–CL)—which performs  accounting, disbursing, and financial reporting services for the Marine  Corps—did not have effective procedures in place to ensure that  supporting documentation for transactions was complete and readily  available to pass basic audit transaction testing. For example, the  auditors found that DFAS staff had only retained selected pages of  the documents supporting payment vouchers, such as the voucher  cover sheet, and did not have the purchase order, receiving report,  and the invoice to support payments made.    The Marine Corps did not have effective controls in place to support  estimated obligations, referred to as “bulk obligations,” to record a  payment liability, and, as a result, was not able to reconcile the related  payment transactions to the estimates. The Marine Corps estimates  obligations in a bulk amount to record payment liabilities where it does  not have a mechanism to identify authorizing documentation as a  basis for recording the obligations.    The auditors found ineffective controls over three major information  technology (IT) systems used by the Marine Corps and reported  numerous problems that required resolution. For example, the  auditors identified a lack of controls over interfaces between systems  to ensure completeness of the data being transferred. System  interface controls are critical for ensuring the completeness and  accuracy of data transferred between systems.
Further, in addressing the 70 audit findings and related 139  recommendations, we found that the Marine Corps did not develop an  effective overall corrective action plan that identified risks, prioritized  actions, and identified required resources in order to help ensure that  actions adequately respond to recommendations. Instead, its approach  to addressing auditor findings and recommendations for its prior and  current audit efforts focuses on short-term corrective actions necessary to  support heroic efforts to produce reliable financial reporting at year-end.  Such efforts may not result in sustained improvements over the long term  that would help ensure that the Marine Corps could routinely produce  sound data on a timely basis for decision making. While the Marine Corps  has implemented an extensive SBR remediation effort that is focused on  individual initiatives to address the 70 audit findings and 139 related  recommendations, such an approach could result in inefficiencies and  ineffectiveness. As of July 18, 2011, the Marine Corps reported that  actions on 88 of the 139 recommendations, including weaknesses related  to accounting and financial reporting and IT systems, were fully  implemented. However, the completeness and effectiveness of the  Marine Corps’ actions have not yet been tested. DOD IG auditors told us  that tests performed during the Marine Corps’ fiscal year 2011 SBR audit  effort will determine whether and to what extent the problems identified  during the fiscal year 2010 SBR audit effort have been resolved. They  also confirmed that as of August 25, 2011, the Marine Corps had  remediated the problems on 11 of the IT audit recommendations.
Furthermore, as described in our report being released this week, we  found that the design of many of the Marine Corps actions relied on  monitoring, a detective control; high-level initial fixes that did not address  root causes; and other actions that were not consistent with the related  auditors’ recommendations. For example:    Marine Corps remediation actions for 22 of the 56 accounting and  financial reporting recommendations rely on issuing guidance,  monitoring, or both, in an attempt to quickly address identified  weaknesses. However, correcting underlying causes requires process  improvements and in some cases, system changes.    Remediation actions for 20 of the 139 recommendations were not  consistent with the related recommendations. For example, the  auditors identified unliquidated obligations on old contracts for which  performance was substantially complete. The auditors found that the  Marine Corps did not have an effective process for reviewing  undelivered orders and unliquidated obligations, and recommended  that they strengthen these controls, whose weaknesses were the root  cause of the finding. In response, Marine Corps officials stated that  they had implemented a robust review process for validating  obligations. However, the auditors reported that the Marine Corps  developed effective written procedures but found problems with the  implementation of those procedures. Thus, the Marine Corps did not  fully address the recommendation or root cause of the problem.    The Marine Corps disagreed with six auditor recommendations to  strengthen SABRS system controls over information processing. For  example, for three recommendations related to password and log-on  controls, the Marine Corps action states that the Defense Information  System Agency (DISA) and not DFAS is responsible for the actions.  However, Marine Corps officials told us they had not contacted DISA  officials to ensure that they would address the recommendations.
Our report includes recommendations to the Secretary of the Navy to  direct the Marine Corps to develop a comprehensive, risk-based  corrective action plan, confirm that corrective actions fully address auditor  findings, and work more closely with service providers, such as DFAS, to  clarify their roles and responsibilities on corrective actions that require  cross-component work. In commenting on our report, the Navy said that it  is working to address the auditor-identified deficiencies. Further details on  the Navy’s comments and our evaluation of them can be found in our  report.
section_title: Issues with Navy and Marine Corps Processes for Reconciling Fund Balance with Treasury (FBWT)
paragraphs: Reconciling the FBWT account is a key financial management control.  FBWT is an asset account that reflects the available budget spending  authority of federal agencies. Reconciling a FBWT account with Treasury  records is a process similar in concept to reconciling a check book with a  bank statement. However, within the large, complex DOD environment,  the FBWT reconciliation involves reconciliations between several different  systems, such as the DOD components’ general ledgers, the DOD-wide  general ledger, DOD’s cash accountability system, and Treasury records.  FBWT reconciliations are a key internal control for ensuring that all  receipt and disbursement transactions have been properly recorded in  federal agency accounting records. Effective fund balance reconciliations  serve as a detective control for identifying unauthorized and unrecorded  transactions at a federal agency or at the U.S. Treasury.
A successful audit of the SBR is dependent on an auditable FBWT, which  includes the ability to reconcile the FBWT account with the Treasury  records. However, our preliminary work has identified issues with the  Navy and Marine Corps’ implementation of effective processes for  reconciling their FBWT, including issues related to financial management  systems and certain policies and procedures, training, and supervisory  review and approval. For example:    DOD has not tested application controls over the Defense Cash  Accountability System (DCAS)—the department’s system of record for  all cash activity. Navy, Marine Corps, and DFAS officials stated that  they have identified over 650 system deficiencies that affect DCAS  data reliability, and that over 200 of the identified deficiencies affect  audit readiness. They identified the top 20 deficiencies that require  immediate attention; however, they stated that a time frame for  addressing these top 20 issues had not yet been established.    DFAS did not maintain adequate documentation for the sample of  items we tested to enable an independent evaluation of its efforts to  research and resolve differences.    Navy and DFAS policies and procedures did not contain detailed  information on the roles and responsibilities of organizations and  personnel and the process for identifying, researching, and resolving  discrepancies, including maintaining required supporting  documentation. The policies and procedures also did not require  supervisory review and approval of reconciliation efforts and results.
Navy, Marine Corps, and DFAS officials acknowledged that existing  policies and procedures are inadequate. They also stated that the base  realignment and closure changes in 2006 through 2008 resulted in a loss  of experienced DFAS-CL personnel and that the remaining staff have not  received the needed training. Navy officials stated that they are currently  developing a Plan of Actions and Milestones (POAM) to address  weaknesses that affect the Navy and Marine Corps’ audit readiness,  including reconciling FBWT records.
We will report more fully on these issues, including actions DOD is taking  to address them, in our forthcoming report.
section_title: Issues with Implementation of Two of DOD’s Enterprise Resource Planning (ERP) Systems
paragraphs: The implementation of an integrated, audit-ready systems environment  through the deployment of ERP systems underlies all of DOD’s financial  improvement efforts and is crucial to achieving departmentwide audit  readiness. According to DOD, the successful implementation of the ERPs  is not only critical for addressing long-standing weaknesses in financial  management, but equally important for helping to resolve weaknesses in  other high-risk areas such as business transformation, business system  modernization, and supply chain management. Successful  implementation will support DOD by standardizing and streamlining its  financial management and accounting systems, integrating multiple  logistics systems and finance processes, providing asset visibility for  accountable items, and integrating personnel and pay systems.  Previously, we reported that delays in the successful implementation of  ERPs have extended the use of existing duplicative, stovepiped systems,  and have continued the funding of these systems longer than  anticipated. To the degree that these business systems do not provide  the intended capabilities, DOD’s goal of departmentwide audit readiness  by the end of fiscal year 2017 could be jeopardized.
Over the years, we have reported that DOD has not effectively employed  management controls to ensure that the development and implementation  of ERPs deliver the promised capabilities on time and within budget. As  we reported in October 2010, DOD has identified 10 ERPs—1 of which  had been fully implemented—as essential to its efforts to transform its  business operations. We are currently reviewing the status of two of  these ERPs—the Army’s General Fund Enterprise Business System  (GFEBS) and the Air Force’s Defense Enterprise Accounting and  Management System (DEAMS). GFEBS is intended to support the  Army’s standardized financial management and accounting practices for  the Army’s general fund, except for funds related to the Army Corps of  Engineers. The Army estimates that GFEBS will be used to control and  account for approximately $140 billion in annual spending. DEAMS is  intended to provide the Air Force with the entire spectrum of financial  management capabilities and is expected to maintain control and  accountability for approximately $160 billion. GFEBS is expected to be  fully deployed during fiscal year 2012, is currently operational at 154  locations, including DFAS, and is being used by approximately 35,000  users. DEAMS is expected to be fully deployed during fiscal year 2016, is  currently operational at Scott Air Force Base and DFAS, and is being  used by about 1,100 individuals.
Our preliminary results identified issues related to GFEBS and DEAMS  providing DFAS users with the expected capabilities in accounting,  management information, and decision support. To compensate, DFAS  users have devised manual workarounds and several applications to  obtain the information they need to perform their day-to-day tasks. The  Army and Air Force have stated that they have plans to address these  issues, and the Army has plans to validate the audit readiness of GFEBS  in a series of independent auditor examinations over the next several  fiscal years. For DEAMS, the DOD Milestone Decision Authority (MDA)  has directed that the system is not to be deployed beyond Scott Air Force  Base until the known system weaknesses have been corrected and the  system has been independently tested to ensure that it is operating as  intended. Examples of the issues in these systems that DFAS users have  identified include the following:    The backlog of unresolved GFEBS trouble tickets has continued to  increase from about 250 in September 2010 to approximately 400 in  May 2011. Trouble tickets represent user questions and issues with  transactions or system performance that have not been resolved.  According to Army officials, this increase in tickets was not  unexpected since the number of users and the number of transactions  being processed by the system has increased, and the Army and  DFAS are taking steps to address issues raised by DFAS.    Approximately two-thirds of invoice and receipt data must be manually  entered into GFEBS from the invoicing and receiving system (i.e.,  Wide Area Work Flow). DFAS personnel stated that manual data  entry will eventually become infeasible due to increased quantities of  data that will have to be manually entered as GFEBS is deployed to  additional locations. Army officials acknowledged that there is a  problem with the Wide Area Work Flow and GFEBS interface and that  this problem reduced the effectiveness of GFEBS, and that they are  working with DOD to resolve the problem.    GFEBS lacks the ability to run ad hoc queries or search for data in the  system to resolve problems or answer questions. The Army has  recognized this limitation and is currently developing a system  enhancement that they expect will better support the users’ needs.    Manual workarounds are needed to process certain accounts  receivable transactions such as travel debts. DFAS personnel stated  that the problem is the result of the data not being properly converted  from the legacy systems to DEAMS.    DFAS officials indicated that they were experiencing difficulty with  some of the DEAMS system interfaces. For example, the interface  problem with the Standard Procurement System has become so  severe that the interface has been turned off, and the data must be  manually entered into DEAMS.    DFAS officials stated that DEAMS does not provide the capability— which existed in the legacy systems—to produce ad hoc reports that  can be used to perform the data analysis needed to perform daily  operations. They also noted that when some reports are produced,  the accuracy of those reports is questionable.
DFAS users also told us that the training they received focused more on  how GFEBS and DEAMS were supposed to operate, rather than  providing DFAS personnel training about how to use these systems to  perform their day-to-day operations. The Army acknowledged that from a  DFAS perspective, the training should have shown DFAS how they could  use GFEBS to perform tasks such as the reconciliation of accounts. To  help address this training issue, DFAS is in the process of developing  courses and desk guides suitable for DFAS employees who use GFEBS  and DEAMS on a day-to-day basis.
We will report more fully on these issues, including DOD’s actions to  address them, in our forthcoming report.
section_title: Improved Monitoring and Oversight of Component Financial Improvement Plans (FIP) Are Needed
paragraphs: In one report we issued this week, we found that weaknesses in the Navy  and Air Force FIAR Plan implementation efforts indicate that the  monitoring and oversight of such efforts have not been effective.  Although we found that DOD and its military components had established  appropriate organizational structures for monitoring and oversight of audit  readiness efforts, oversight responsibilities were not always effectively  carried out. Both DOD and the components have established senior  executive committees as well as designated officials at the appropriate  levels to monitor and oversee their financial improvement efforts. These  committees and individuals have also generally been assigned  appropriate roles and responsibilities. However, we found that component  officials as well as the oversight committees at both the component and  DOD levels did not effectively carry out their monitoring responsibilities for  the Navy Civilian Pay and Air Force Military Equipment FIPs. Specifically,  for these two FIPs that we reviewed, neither individual officials nor the  executive committees took sufficient action to ensure that the FIPs were  accurate or complied with the FIAR Guidance. As a result, the Navy  concluded that its civilian pay was ready for audit, as did the Air Force  with respect to its military equipment, even though they did not have  sufficient support to assert audit readiness.
On the other hand, once the Navy and Air Force submitted the FIPs to  DOD in support of their audit readiness assertions, both the DOD IG and  the DOD Comptroller carried out their responsibilities for reviewing the  FIPs. In their reviews, both organizations identified issues with the FIPs  that were similar to those we had identified. The DOD Comptroller, who  makes the final determination as to whether an assessable unit is ready  for audit, concluded that neither of these FIPs supported audit readiness.
Effective oversight and monitoring would also help ensure that lessons  learned from recent efforts would be sufficiently disseminated throughout  the department and applied to other financial improvement efforts. In  commenting on our report about the FIPs, the DOD Comptroller stated  that it is critical that the department continues to look at how effectively it  applies lessons learned. For example, the results of the Marine Corps’  SBR audit effort provide valuable lessons on preparing for a first-time  financial statement audit. As we recently testified, lessons learned from  this audit effort can provide a roadmap to help other DOD components  achieve audit readiness. While this audit effort provided numerous  issues for the other military services to consider in their audit readiness  efforts, we identified and reported on five overall lessons that are critical  to success. Specifically, the Marine Corps’ SBR experience  demonstrated that prior to asserting financial statement audit readiness,  DOD components must be able to perform the following procedures;    Confirm completeness of populations of transactions and  address any abnormal transactions and balances. The Marine  Corps SBR auditors made multiple requests for transaction-level  detail for key SBR accounts. Navy officials told us that they identified  problems with the way transactions map to general ledger accounts,  which makes it difficult to identify transaction populations. Navy  officials noted that these problems impeded the Marine Corps SBR  audit effort and also prevent the reconciliation of Unadjusted to  Adjusted Trial Balances, FBWT reconciliations, and overall funds  control.    Test beginning balances. A first-year SBR audit requires substantial  testing to confirm beginning balances. Navy officials noted that earlier  audit readiness efforts were not sufficient to confirm beginning  balances, and problems identified with the assignment of general  ledger account numbers and mapping of transactions to the proper  accounts will need to be resolved to ensure the auditability of  beginning balances.    Perform key reconciliations. The Marine Corps did not have  processes in place to reconcile key accounts such as FBWT. In  addition, the Marine Corps had to make repeated attempts before it  could reconcile the Unadjusted Trial Balance to the Adjusted Trial  Balance. This reconciliation is an important step to verify that the SBR  is accurate.    Provide timely and complete response to audit documentation  requests. The auditors reported that the Marine Corps, through its  service provider, DFAS, did not consistently provide timely and  accurate audit documentation. Without such documentation, the  auditors were unable to determine whether a given transaction was  authorized, whether the goods or services were received, whether the  invoice was approved for payment, or whether the funds disbursed  were correct.    Verify that key IT systems are compliant and auditable. The  auditors informed the Marine Corps of numerous control weaknesses  they identified in key systems, including some DOD-wide systems,  which affected auditability. The auditability of key systems, including  military payroll systems, accounting systems, and financial reporting  systems, is essential to achieving and sustaining an audit opinion.
These five critical lessons from the Marine Corps SBR audit effort are all  addressed in the FIAR Guidance as procedures that must be performed  before an assessable unit can be considered ready for audit. As the  Army, Navy, and Air Force move forward in developing and implementing  their FIPs, in our report we recommend that they take into account the  lessons learned during the course of pilot audit efforts, such as the  Marine Corps SBR. Navy financial management officials indicated that  they are aware of the Marine Corps lessons and that they are updating  their audit readiness plan to address all five critical lessons. Army and Air  Force officials indicated their awareness of some of these findings but  only provided information on their efforts regarding FBWT reconciliations  and ERP implementations. As noted above, DOD generally agreed with  the need to effectively communicate lessons learned among its  components. Our report more fully describes DOD’s comments and our  evaluation of them.
section_title: Concluding Observations
paragraphs: With the FIAR Plan and related FIAR Guidance, DOD has established a  reasonable strategy and methodology for improving its financial  management. However, it faces considerable implementation challenges  and has much work to do if it is to meet the goal of audit readiness by the  end of fiscal year 2017. These challenges, as we have previously  testified, include (1) maintaining committed and sustained leadership; (2)  developing and implementing an effective plan to correct internal control  weaknesses; (3) establishing accountability and effective oversight to  monitor progress; and (4) successfully implementing ERP systems  consistent with an effective corporate enterprise architecture. It is critical  that DOD’s current initiatives be continued and provided with sufficient  resources. Oversight and monitoring will also play a key role in ensuring  that DOD’s plans are implemented as intended and that lessons learned  are identified and effectively disseminated. Absent continued momentum  and necessary future investments, the current initiatives may falter,  similar to previous efforts. Continued congressional oversight will be an  important factor in helping to ensure the department’s success.
Chairman Carper, Ranking Member Brown, and members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony 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 testimony. GAO staff who made key contributions to  this testimony include Abe Dymond, Assistant Director; Francine  Delvecchio; Kristi Karls; Sheila Miller; Heather Rasmussen; and David  Yoder.
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