DOD Financial Management: The Army Faces Significant Challenges in Achieving Audit Readiness for Its Military Pay
Published: 2012-03-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses our work on the significant challenges the Army faces in achieving audit readiness for its military pay. The Armys military pay is material to the Armys financial statements. The Chief Financial Officers Act of 1990, as amended, established requirements for 24 agencies, including the Department of Defense (DOD), to prepare annual financial statements and have them audited. Further, 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. On October 13, 2011, the Secretary of Defense directed the department to achieve audit readiness for the Statement of Budgetary Resources, one of the principal financial statements, by the end of fiscal year 2014 as an interim milestone for DOD to meet the legal requirement in the NDAA for Fiscal Year 2010 to achieve full audit readiness for all DOD financial statements by 2017.
The Armys active duty military payroll, comprising about 20 percent of its reported $233.8 billion in fiscal year 2010 net outlays, is significant to both Army and DOD efforts to meet DODs 2014 Statement of Budgetary Resources auditability goal as well as the mandate to achieve full audit readiness for all DOD financial statements by 2017. For years, we and others have reported continuing deficiencies with the Armys military payroll processes and controls. These reported continuing deficiencies in Army payroll processes and controls have called into question the extent to which the Armys military payroll transactions are valid and accurate, and whether the Armys military payroll is auditable. Further, other military components, such as the Air Force and the Navy, share some of the same process and system risks as the Army.
Today's remarks are based on our report, "DOD Financial Management: The Army Faces Significant Challenges in Achieving Audit Readiness for Its Military Pay," which is being released today. The testimony focuses on problems that impede the Armys ability to (1) identify a valid population of military payroll transactions and (2) provide documentation that supports the validity and accuracy of payments for Army military payroll.
section_title: What GAO Found
paragraphs: We found that the Army could not readily identify a complete population of Army payroll accounts for fiscal year 2010, given existing procedures and systems. The Army and DFAS-IN did not have an effective, repeatable process for identifying the population of active duty payroll accounts. In addition, the Defense Manpower Data Center (DMDC), DODs central source for personnel information, did not have an effective process for comparing military pay account files to military personnel files to identify a valid population of military payroll transactions. For example, it took 3 months and repeated attempts before DFAS-IN could provide a population of service members who received active duty Army military pay in fiscal year 2010. Similarly, it took DMDC over 2 months to compare the total number of fiscal year 2010 active duty payroll accounts to its database of personnel files. "Standards for Internal Control in the Federal Government" requires all transactions and other significant events to be clearly documented and the documentation readily available for examination. DODs "Financial Improvement and Audit Readiness (FIAR) Guidance" sets out key tasks essential to achieving audit readiness, including defining and identifying the population of transactions for audit purposes. The "GAO/PCIE Financial Audit Manual" provides guidance concerning typical control activities, such as independent checks on the validity, accuracy, and completeness of computer-processed data. Without effective processes for identifying a complete population of Army military pay records and comparing military pay accounts to personnel records, the Army will have difficulty meeting DODs 2014 Statement of Budgetary Resources audit readiness goal and its 2017 goal for a complete set of auditable financial statements.
We identified deficiencies in DFAS-IN and Army processes and systems for readily identifying and providing documentation that supports payments for Army military payroll. First, DFAS-IN had difficulty retrieving and providing usable Leave and Earnings Statement files for our sample items. Second, the Army and DFAS-IN were able to provide complete documentation for 2 of our 250 military pay account sample items, partial support for 3 sample items, but no support for the remaining 245 sample items. Because the Army was unable to provide documents to support reported payroll amounts for our sample of 250 soldier pay accounts, we were unable to determine whether the Armys payroll accounts were valid and we could not verify the accuracy of payments and reported active duty military payroll. Further, because military payroll is significant to the financial statements, the Army will not be able to pass an audit of its Statement of Budgetary Resources without resolving these control weaknesses.

section_title: Letter
paragraphs: It is a pleasure to be here today to discuss our work on the significant  challenges the Army faces in achieving audit readiness for its military pay.  The Army’s military pay is material to the Army’s financial statements.  The Chief Financial Officers Act of 1990, as amended, established  requirements for 24 agencies, including the Department of Defense  (DOD), to prepare annual financial statements and have them audited.  Further, 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. On October 13, 2011, the Secretary of Defense directed the  department to achieve audit readiness for the Statement of Budgetary  Resources, one of the principal financial statements, by the end of fiscal  year 2014 as an interim milestone for DOD to meet the legal requirement  in the NDAA for Fiscal Year 2010 to achieve full audit readiness for all  DOD financial statements by 2017.
The Army’s active duty military payroll, comprising about 20 percent of its  reported $233.8 billion in fiscal year 2010 net outlays, is significant to both Army and DOD efforts to meet DOD’s 2014 Statement of Budgetary  Resources auditability goal as well as the mandate to achieve full audit  readiness for all DOD financial statements by 2017. For years, we and  others have reported continuing deficiencies with the Army’s military  payroll processes and controls.Army payroll processes and controls have called into question the extent  to which the Army’s military payroll transactions are valid and accurate,  and whether the Army’s military payroll is auditable. Further, other military  components, such as the Air Force and the Navy, share some of the  same process and system risks as the Army.
These reported continuing deficiencies in  My remarks today are based on our report, DOD Financial Management:  The Army Faces Significant Challenges in Achieving Audit Readiness for  Its Military Pay, which is being released today. I will focus on problems  that impede the Army’s ability to (1) identify a valid population of military  payroll transactions and (2) provide documentation that supports the  validity and accuracy of payments for Army military payroll.
Our work on which this testimony is based 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. Our published report contains additional details on our scope  and methodology for this audit.
subsections: section_title: Background
paragraphs: For fiscal year 2010, Congress appropriated more than $52 billion to the  Military Personnel, Army appropriation primarily for Army active duty  military personnel costs.1-year appropriation available for the pay, benefits, incentives,  allowances, housing, subsistence, travel, and training primarily for Army  service members on active duty. According to the Defense Finance and  Accounting Service in Indianapolis, Indiana (DFAS-IN), of the $52 billion  in fiscal year 2010 military personnel appropriations, the Army’s nearly  680,000 service members received $46.1 billion in pay and allowances.  Army Human Resources Command, unit commanders, and training  certification officials, among others, are responsible for providing DFAS- IN with accurate and timely information regarding changes in individual  military member status necessary to maintain accurate and timely payroll  accounts. DFAS-IN is responsible for the accounting, disbursement, and  reporting for the Army’s military personnel costs using the Defense Joint  Military Pay System-Active Component (DJMS-AC).
section_title: Process and System Weaknesses Hindered Army’s Ability to Identify a Valid Population of Military Payroll Transactions
paragraphs: We found that the Army could not readily identify a complete population of  Army payroll accounts for fiscal year 2010, given existing procedures and  systems. The Army and DFAS-IN did not have an effective, repeatable  process for identifying the population of active duty payroll accounts. In  addition, the Defense Manpower Data Center (DMDC), DOD’s central  source for personnel information, did not have an effective process for  comparing military pay account files to military personnel files to identify a  valid population of military payroll transactions. For example, it took 3  months and repeated attempts before DFAS-IN could provide a  population of service members who received active duty Army military  pay in fiscal year 2010. Similarly, it took DMDC over 2 months to compare  the total number of fiscal year 2010 active duty payroll accounts to its  database of personnel files. Standards for Internal Control in the Federal  Government requires all transactions and other significant events to be  clearly documented and the documentation readily available for  examination.
DOD’s Financial Improvement and Audit Readiness (FIAR)
Guidance sets out key tasks essential to achieving audit readiness,  including defining and identifying the population of transactions for audit  purposes. The GAO/PCIE Financial Audit Manual provides guidance  concerning typical control activities, such as independent checks on the  validity, accuracy, and completeness of computer-processed data.Without effective processes for identifying a complete population of Army  military pay records and comparing military pay accounts to personnel  records, the Army will have difficulty meeting DOD’s 2014 Statement of  Budgetary Resources audit readiness goal and its 2017 goal for a  complete set of auditable financial statements.
subsections: section_title: DFAS-IN Did Not Have an Effective Process for Identifying the Population of Army Military Payroll Records
paragraphs: DFAS-IN made three attempts from November 2010 through early  January 2011 to provide us a Defense Joint Military Pay System-Active  Component (DJMS-AC) file extract of Army service members who  received active duty pay in fiscal year 2010. The first attempt included  11,940 duplicate pay accounts, and the total number of pay accounts  included in the second attempt increased by 28,035 records over the first  attempt, necessitating a third attempt to establish the population of fiscal  year 2010 active duty pay records. We requested that DMDC compare  the results of DFAS-IN’s third attempt to identify the population of Army  fiscal year 2010 payroll accounts against DMDC’s compilation of monthly  active duty payroll data that it received from DFAS-IN. Of the 677,024  Army active duty pay accounts, per DJMS-AC, we were able to reconcile  all but 1,025 pay accounts (less than 1 percent of the total active duty pay  accounts to pay account data that DFAS-IN had previously provided to  DMDC. However, as discussed later, we were unable to verify the validity  of the records. Standards for Internal Control in the Federal Government  requires all transactions and other significant events to be clearly  documented and the documentation readily available for examination. In  addition, DOD’s Financial Improvement and Audit Readiness (FIAR)  Guidance states that being able to provide transaction-level detail for an  account balance is a key task essential to achieve audit readiness.
At the time we initiated our audit, Army officials told us that they had not  yet focused on this area in their audit readiness efforts because the target  date for Army military pay was not until the first quarter of fiscal year  2015. The inability to readily provide a population of military pay  accounts impeded our efforts to accomplish our audit objectives and, if  not effectively addressed, will impede the Army’s ability to meet DOD’s  new Statement of Budgetary Resources audit readiness goal of  September 30, 2014.
section_title: System Weaknesses Hindered the Matching of Army Pay Accounts to Personnel Files
paragraphs: The Army’s pay and personnel systems are not integrated, which can  lead to differences between the systems and potential errors. Therefore,  an audit of military pay would include comparisons of military payroll  accounts to personnel records to identify discrepancies. However, we  found that DMDC did not have an effective process for comparing military  pay account files with military personnel files. While DMDC was ultimately  able to confirm that all 677,024 service members who received fiscal year  2010 active duty Army military pay from the DJMS-AC had an active  duty personnel file in one of the multiple personnel systems, the  reconciliation process was labor intensive and took over 2 months to  complete. For example, DMDC’s initial comparison of active duty Army  military pay accounts to personnel records identified 67,243 pay accounts  that did not have a corresponding active army personnel record on   Labor-intensive research was necessary to  September 30, 2010.reconcile the differences between DJMS-AC pay records and Army  personnel files compiled by DMDC. According to DMDC, these  differences related primarily to personnel who had either left or were  scheduled to leave the service, were reserve component soldiers  released from active duty, or were soldiers who had died during fiscal  year 2010.
DMDC attempted to complete our requested comparison of active duty  Army pay accounts to military personnel records in January 2011, but  was unable to complete the reconciliation until early March 2011. DMDC  officials told us that the reasons for the delays included mainframe  computer issues, staff illness and turnover, and management data  quality reviews of the file comparison results, including additional file  comparisons to resolve differences. We referred six duplicate Social  Security numbers in personnel account records that we confirmed with  the Social Security Administration to DMDC and the Army for further  research and appropriate action. The absence of an effective process  for confirming that the Army’s active duty payroll population reconciles to  military personnel records increases the risk that the Army will not meet  DOD’s Statement of Budgetary Resources auditability goal of September  30, 2014.
section_title: The Army Was Unable to Provide Documentation to Support the Validity and Accuracy of a Sample of Payroll Transactions
paragraphs: We identified deficiencies in DFAS-IN and Army processes and systems  for readily identifying and providing documentation that supports  payments for Army military payroll. First, DFAS-IN had difficulty retrieving  and providing usable Leave and Earnings Statement files for our sample  items. Second, the Army and DFAS-IN were able to provide complete  documentation for 2 of our 250 military pay account sample items, partial  support for 3 sample items, but no support for the remaining 245 sample  items. Because the Army was unable to provide documents to support  reported payroll amounts for our sample of 250 soldier pay accounts, we  were unable to determine whether the Army’s payroll accounts were valid  and we could not verify the accuracy of payments and reported active  duty military payroll. Further, because military payroll is significant to the  financial statements, the Army will not be able to pass an audit of its  Statement of Budgetary Resources without resolving these control  weaknesses.
subsections: section_title: DFAS-IN Could Not Readily Provide Usable Leave and Earnings Statement Files for Sample Items
paragraphs: DFAS-IN staff experienced difficulty and delays in providing usable Leave  and Earnings Statement files to support our testing of Army military  payroll. We selected a sample of 250 Army active duty soldier pay  accounts and in April 2011 requested the relevant Leave and Earnings  Statement files for fiscal year 2010. Standards for Internal Control in the  Federal Government requires internal control and all transactions and  other significant events to be clearly documented and the documentation  readily available for examination. DOD Regulation 7000.14-R, Financial  Management Regulation (FMR), requires the military components to  maintain documentation supporting all data generated and input into  finance and accounting systems or submitted to DFAS. After multiple  discussions and requests, we ultimately obtained usable Leave and  Earnings Statement files for our sample items—5 weeks after our initial  request. DFAS-IN took over 2 weeks to provide the initial set of Leave  and Earning Statement files because it needed to retrieve files from two  areas of the Defense Joint Military Pay System-Active Component  (DJMS-AC). The DJMS-AC database holds the current month plus the  previous 12 months’ data. Data older than this are archived and need to  be retrieved from the archived database. In addition, the first set of Leave  and Earnings Statement files that DFAS-IN provided included statements  outside the requested fiscal year 2010 timeframe of our audit. It took 1  week, including our data reliability review, to obtain the second set of  DFAS-IN Leave and Earnings Statement files consisting of 445 separate  files containing monthly statements for 250 service member pay accounts  in our sample. We determined that the Leave and Earnings Statement  files for an individual service member generally were in two or more of the  files provided. Consequently, we had to combine these files into a format  with each service member’s Leave and Earnings Statement files grouped  together to include all of the pay and allowance information for the service  members in our sample. This combining and formatting required 2  additional weeks.
section_title: The Army Was Unable to Locate Supporting Documentation for Military Pay Account Sample Items
paragraphs: We found that the Army’s inability to locate personnel documents to  support its military payroll transactions was primarily the result of  weaknesses in Army procedures. Standards for Internal Control in the  Federal Government requires internal control and all transactions and  other significant events to be clearly documented and the documentation  readily available for examination. DOD Regulation 7000.14-R, Financial  Management Regulation (FMR), requires the military components to  maintain documentation supporting all data generated and input into  finance and accounting systems or submitted to DFAS. This regulation  also requires the components to ensure that audit trails are maintained in  sufficient detail to permit tracing of transactions from their sources to their  transmission to DFAS. Audit trails are necessary to demonstrate the  accuracy, completeness, and timeliness of transactions as well as to  provide documentary support for all data generated by the component  and submitted to DFAS for recording in the accounting systems and use  in financial reports. Further, DOD’s FIAR Guidance states that identifying  and evaluating supporting documentation for individual transactions and  balances, as well as the location and sources of supporting  documentation and confirming that appropriate supporting documentation  exists, is a key audit readiness step. Without the capability to readily  locate and provide supporting documentation for military pay transactions,  the Army’s ability to pass a financial statement audit will be impeded.
As of the end of September 2011, 6 months after receiving our initial  request, the Army and DFAS-IN 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. As shown in  figure 1, our review of the partial documentation provided for 3 sample  items showed that the Army was unable to provide supporting  documentation for common elements of its military pay, including basic  allowance for housing, cost of living allowance, hardship duty pay- location, and hostile fire/imminent danger pay.
One of the factors impeding the Army’s ability to provide supporting  documentation is that it does not have a centralized repository for pay- affecting documents. Army personnel and finance documentation  supporting basic pay and allowances resides in numerous systems, and  original hard copy documents are scattered across the country—at  hundreds of Army units and National Archives and Records  Administration (NARA) federal records centers. According to Army and  DFAS-IN officials, there are at least 45 separate systems that the Army  uses to perform personnel and pay functions with no single, overarching  personnel system. Although these systems contain personnel data on  Army active duty military members and their dependents and feed these  data to DJMS-AC, the systems do not contain source documents.
Further, we found that the Army had not established a mechanism for  periodic monitoring, review, and accountability of the Interactive  Personnel Management System (iPERMS) to ensure that personnel files  are complete. Army Regulation No. 600-8-104, Military Personnel  Information Management/Records, establishes requirements for the  Army’s Official Military Personnel File. The Army deployed iPERMS in  2007 and designated it as the Army’s Official Military Personnel File.  However, when we attempted to find supporting documents in iPERMS,  we found that this system had not been consistently populated with the  required service member documents, resulting in incomplete personnel  records. For example, when testing our sampled transactions, we  discovered that documents, such as orders to support a special duty  assignment, permanent change of station orders, and release or  discharge from active duty, that should have been in iPERMS were not.  The Army has designated the Human Resources Command as the owner  of iPERMS; however, local installation personnel offices across the  country are responsible for entering most documents into individual  service member iPERMS accounts. We found that documents needed to  support pay transactions are not in iPERMS because (1) Army Regulation  600-8-104 does not require the specific personnel forms to be included  and (2) some pay-supporting documents are finance documents and are  not considered personnel documents.documents should also be maintained in the Army’s central repository of  pay-supporting documentation.
In addition, the Army’s efforts to achieve auditability are compounded by  payroll system limitations. DJMS-AC, used to process Army active duty  military pay, is an aging, Common Business Oriented Language  (COBOL) mainframe-based system that has had minimum system maintenance because DOD planned to transition to the Forward  Capability Pay System and then to the Defense Integrated Military Human  Resources System.pay active duty Army service members. To address these functionality  limitations, DFAS has developed approximately 70 workaround  procedures that are currently being used to compensate for the lack of  functionality in DJMS-AC. An audit of Army military pay would necessitate  an evaluation of these procedures and related controls.
DJMS-AC lacks key payroll computation abilities to  Another factor in the Army’s inability to provide support for military payroll  is that the Army has not adequately documented its personnel processes  and controls related to military pay. During our audit, we spent  considerable time attempting to identify the range of personnel and  finance documents that would be needed to support basic military pay  and allowances reported on service members’ Leave and Earnings  Statements and the appropriate office responsible for providing the  documentation. According to Internal Control Standards, written  documentation should exist covering the agency’s internal control and all  significant transactions and events.control includes identification of the agency’s activity-level functions and  related objectives and control activities and should appear in  management directives, administrative policies, accounting manuals, and  other such guidance.
section_title: Army Military Pay Audit Readiness Efforts Currently Under Way
paragraphs: DOD’s November 2011 FIAR Status Report includes DOD’s goal of  achieving audit readiness for its Statement of Budgetary Resources by  the end of fiscal year 2014. DOD and the Army have established interim  goals for meeting the fiscal year 2014 Statement of Budgetary Resources  audit readiness goal. For example, the Army plans to assert audit  readiness for its General Fund Statement of Budgetary Resources,  including military pay, by March 31, 2013, and have its assertion tested  and fully validated by June 30, 2014. Army officials stated that military  pay audit readiness poses a significant challenge and acknowledged that  the success of the Army’s efforts will be key to meeting DOD’s 2014  Statement of Budgetary Resources audit readiness goal. To meet this  goal, the Army has several military pay audit readiness efforts planned or  under way, such as developing a matrix of personnel documents that  support military pay and allowances and developing the Integrated  Personnel and Payroll System-Army.are in the early planning stages.
However, many of these efforts  In our report, we recommend that the Army document and implement a  process for identifying and validating the population of payroll  transactions and identify, centrally retain, and periodically review key  finance and personnel (i.e., pay-affecting) documents that support military  payroll transactions. The Army agreed with our recommendations to  improve the controls and processes related to active duty military. Our  report more fully describes the Army’s comments and our evaluation of  them.
section_title: Concluding Observations
paragraphs: Active Army military payroll, reported at $46.1 billion for fiscal year 2010,  is material to the Army’s financial statements and, as such, will be  significant to DOD’s audit readiness goals for the Statement of Budgetary  Resources. The Army has several military pay audit readiness efforts that  are planned or under way. Timely and effective implementation of these  efforts could help reduce the risk related to DOD’s ability to achieve its  2014 Statement of Budgetary Resources audit readiness goal. However,  most of these actions are in the early planning stages. Moreover, these  initiatives, while important, do not address (1) establishing effective  processes and systems for identifying a valid population of military payroll  records, (2) ensuring Leave and Earnings Statement files and supporting  personnel documents are readily available for verifying the accuracy of  payroll records, (3) ensuring key personnel and other pay-related  documents that support military payroll transactions are centrally located,  retained in service member Official Military Personnel Files, or otherwise  readily accessible, and (4) requiring the Army’s Human Resources  Command to periodically review and confirm that service member Official  Military Personnel File records in iPERMS or other master personnel  record systems are consistent and complete. These same issues, if not  effectively resolved, could also jeopardize the 2017 goal for audit  readiness on the complete set of DOD financial statements. In addition,  the Army’s military pay auditability weaknesses have departmentwide  implications for other military components, such as the Air Force and the  Navy, that share some of the same military pay process and systems  risks as the Army.
Chairmen Carper and Platts, Ranking Members Brown and Towns, and  Members of the Subcommittees, this completes my prepared statement. I  would be pleased to respond to any questions that you or other members  of the subcommittees may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staffs 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 are Gayle L. Fischer, Assistant Director; Carl S. Barden;  Lauren S. Fassler; Wilfred B. Holloway; Julia C. Matta, Assistant General  Counsel; Sheila D. M. Miller, Auditor in Charge; Margaret A. Mills;  Heather L. Rasmussen; James Ungvarsky; and Matt Zaun.
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