DOD Financial Management: Improvements Needed in the Navy's Audit Readiness Efforts for Fund Balance with Treasury
Released: 2016-08-19T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: The National Defense Authorization Act for Fiscal Year 2014 mandates an audit of DOD's fiscal year 2018 department-wide financial statements. To help achieve this, the DOD Comptroller issued the FIAR Guidance to provide a standard methodology for DOD components to follow to improve financial management and achieve audit readiness, and designated the SBR as an audit priority. Full implementation of the Navy's General Fund FIP for FBWT is essential to achieving audit readiness for its General Fund SBR. The Navy asserted Statement of Budgetary Activity (SBA) audit readiness as of September 30, 2014, and in February 2016 received a disclaimer of opinion on the audit of its SBA for fiscal year 2015.

GAO is mandated to audit the U.S. government's consolidated financial statements, which cover activities and balances of executive branch agencies, including DOD. GAO's objective in this report was to determine the extent to which the Navy developed and implemented the Discovery phase of its General Fund FBWT FIP in accordance with the FIAR Guidance. GAO analyzed the Navy's FBWT FIP to determine whether it contained the tasks and activities required by the FIAR Guidance for the Discovery phase. GAO also reviewed the Navy's FBWT FIP key deliverables, such as process narratives and flowcharts, internal control assessments, and test results.

section_title: What GAO Found
paragraphs: The Navy has made progress in performing audit readiness activities, including developing a financial improvement plan (FIP) for its Fund Balance with Treasury (FBWT). These activities are critical to the Navy's General Fund Statement of Budgetary Resources (SBR) improvement efforts. The Navy's FBWT FIP is particularly important as it addresses improvement efforts across multiple business processes, including contract and vendor payments and military and civilian payroll that provide significant input to the SBR. However, the Navy did not fully implement certain tasks in its FBWT FIP in accordance with the Department of Defense's (DOD) Financial Improvement and Audit Readiness (FIAR) Guidance. These included activities in all four key tasks of the Discovery phase, the first of the five FIAR guidance phases. In the Discovery phase, the reporting entity documents processes, prioritizes audit readiness efforts, assesses and tests controls, and evaluates supporting documentation.

Document processes. The Navy did not fully document its FBWT process in system narratives and flowcharts. For example, the Navy's analysis did not explain the complex process that occurs within the Defense Departmental Reporting System - B, including merging data and deleting duplicative transactions. In the Navy's case, the process analysis is particularly important because the Navy's transactions do not follow the typical flow of data used to produce financial statements. Without a complete FBWT process analysis and system narratives, internal controls and risks for each of the systems in the process may not be readily identified and appropriately tested.

Prioritize audit readiness efforts. The Navy did not prioritize FBWT audit readiness efforts or fully implement its audit readiness prioritization and strategy for key information systems prior to its assertion of audit readiness. The Navy's lack of prioritization of key information technology limits management's ability to focus audit readiness efforts on the systems with the highest risk.

Assess and test internal controls. Within the FBWT assertion package, the Navy did not document information technology general computer controls for significant systems or the hardware and software interfaces, as required. Also, the Navy did not identify internal controls by assessable units (e.g., information systems supporting financial statement line items or other discrete portions of the program). Identifying controls by assessable unit is important for determining whether assessable units, sub-assessable units, and associated systems are producing reliable information and helps link systems and controls to the transaction flows.

Evaluate supporting documentation. Although the Navy performed substantive tests for supporting documents, such testing may not provide sufficient evidence of the Navy's ability to produce documentation in a substantive manner for future audits. An evaluation of key supporting documentation is important for determining whether the Navy would be able to support amounts presented in the financial statements or provide an external auditor with sufficient and appropriate evidence to perform the audit.

Addressing these shortfalls is critical to achieving audit readiness.

section_title: What GAO Recommends
paragraphs: GAO recommended that the Navy fully implement the FIAR Guidance for FBWT in the areas of process analysis, prioritization, internal control assessment and testing, and evaluation of supporting documentation to support audit readiness. The Navy concurred with all seven recommendations.

section_title: Letter
paragraphs: The Navy is the second largest component of the Department of Defense  (DOD), accounting for about $160 billion, or 25 percent, of DOD’s total  reported expenditures in fiscal year 2014. The Government Management  Reform Act of 1994 requires DOD to annually prepare and submit audited  financial statements to Congress and the Office of Management and  Budget. Over the years, we have reported on the Navy’s and other DOD  components’ efforts to overcome long-standing financial management  weaknesses that have prevented the issuance of auditable financial  statements. Pervasive deficiencies in financial and related business  management systems and internal controls have adversely affected  DOD’s and its components’ ability to control costs; ensure basic  accountability; anticipate future costs and claims on the budget; measure  performance; maintain funds control; prevent and detect fraud, waste,  and abuse; address pressing management issues; and prepare auditable  financial statements. These issues have led GAO to designate DOD  financial management as high risk since 1995.

Our prior work has raised concerns about the ability of DOD components  to effectively implement DOD’s Financial Improvement and Audit  Readiness (FIAR) Guidance. In this report, we focus on the Navy’s  General Fund Fund Balance with Treasury (FBWT) financial improvement  plan (FIP). Although the U.S. Marine Corps (USMC) is included in the  Navy’s consolidated financial statements, it is excluded from the scope of  this report since the USMC has separate financial statements and its own  audit readiness FIPs.

In the federal government, an agency’s FBWT account is similar in  concept to a corporate bank account. The difference is that instead of a  cash balance, FBWT represents the remaining spending authority in  appropriations. The Navy’s FBWT FIP is particularly important as it  addresses improvement efforts across multiple business processes that  provide input for FBWT balances, including contract and vendor  payments and military and civilian payroll that annually totals billions of  dollars. These processes also provide input for budgetary resources and  financial activity (e.g., appropriations, obligations, and outlays) that  represent significant portions of the amounts reported on the Navy’s  Statement of Budgetary Resources (SBR). Consequently, efforts to  develop and fully implement this FIP will significantly affect the Navy’s  ability to achieve SBR audit readiness as well as improve Navy  management’s ability to manage its funds.

This review was initiated under our mandate to audit the U.S.  government’s consolidated financial statements, which cover activities  and balances of executive branch agencies, including DOD. Serious  financial management problems at DOD represent one of the long- standing major impediments that continue to prevent GAO from  expressing an audit opinion on the U.S. government’s consolidated  financial statements. We focused on the Navy’s FBWT FIP because of  its importance to the Navy’s effort to achieve SBR auditability and,  ultimately, audit readiness for DOD’s department-wide SBR.

Our objective was to determine the extent to which the Navy developed  and implemented the Discovery phase of its General Fund FBWT FIP in  accordance with the FIAR Guidance. To address our objective, we  analyzed the Navy’s FBWT FIP to determine whether it contained the  applicable elements and tasks to be performed for the Discovery phase of  audit readiness efforts as required by the FIAR Guidance. We also  identified and reviewed the Navy’s FBWT FIP deliverables required by the  FIAR Guidance, such as system narratives and flowcharts, key internal  control assessments, and test results. In addition, we reviewed the results  of DOD’s Office of Inspector General (DOD OIG) audits as well as  independent public accountant (IPA) examinations of audit readiness  efforts related to the Navy’s FBWT. We interviewed Navy, Defense  Finance and Accounting Service (DFAS), and FIAR Directorate officials  within DOD’s Office of the Under Secretary of Defense (Comptroller) to  obtain explanations and clarifications on documentation we reviewed.

Additional information on our scope and methodology is provided in  appendix I. We conducted this performance audit from April 2014 to  August 2016 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 objective. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objective.
subsections: section_title: Background
paragraphs: The National Defense Authorization Act (NDAA) for Fiscal Year 2010  requires that DOD develop and maintain the FIAR Plan. The FIAR Plan  must include specific actions to take and the costs associated with  correcting the financial management deficiencies that impair DOD’s ability  to prepare reliable and timely financial management information and  ensure that its financial statements are validated as ready for audit by  September 30, 2017. Further, the NDAA for Fiscal Year 2014 mandates  an audit of DOD’s fiscal year 2018 department-wide financial statements  and submission of those results to Congress by March 31, 2019. Since  DOD management relies heavily on budget information for day-to-day  management decisions, the DOD Comptroller designated the SBR as an  audit priority.

In response to difficulties encountered in preparing for an SBR audit,  DOD reduced the scope of initial SBR audits beginning in fiscal year 2015  to focus on current-year budget activity reported on a Schedule of  Budgetary Activity. This is an interim step toward achieving an audit of  multiple-year budget activity required for an audit of the SBR.

In the last quarter of fiscal year 2014, each military service, including the  Navy, asserted audit readiness on its General Fund Schedule of  Budgetary Activity. The fiscal year 2015 Schedule of Budgetary Activity  reflects the balances and associated activity related only to budgetary  authority on or after October 1, 2014. In December 2014, DOD  contracted with an IPA, for the audit of the Navy’s fiscal year 2015  Schedule of Budgetary Activity. In February 2016, the IPA issued a  disclaimer of opinion on the Navy’s Schedule of Budgetary Activity and  identified pervasive control deficiencies in the Navy’s decentralized  financial management and information technology environment. Navy  management concurred with the findings in the IPA’s report and stated  that it will develop and execute corrective actions to address the IPA’s  recommendations, including those related to FBWT.
subsections: section_title: FIAR Guidance
paragraphs: In May 2010, the DOD Comptroller issued the FIAR Guidance to provide  a standard methodology for DOD components to follow in developing an  audit strategy and implementing FIPs. The FIAR Guidance defines DOD’s  strategy, goals, roles and responsibilities, and procedures for the  components to become audit ready. Specifically, the guidance provides  a standard methodology that DOD components are required to follow in  developing and implementing FIPs. These plans, in turn, provide a  framework for planning, performing, documenting, and monitoring efforts  to achieve auditability. To manage their improvement efforts, components  may develop multiple FIPs, including plans related to specific assessable  units, which can be information systems supporting financial statement  line items or other discrete portions of the program.

The FIAR Guidance describes the five audit readiness phases and  activities that DOD reporting entities (including the Navy) should include  in their FIPs. The five audit readiness phases are Discovery, Corrective  Action, Assertion/Evaluation, Validation, and Audit. Each phase includes  multiple tasks and activities that reporting entities should complete and  the corresponding required deliverables. (App. II identifies the detailed  FIAR tasks and required deliverables for each of these phases.) Most of  the audit readiness process occurs in the Discovery and Corrective Action  phases. In the Discovery phase, entities document their processes and  identify, test, and assess their controls and evaluate and confirm the  existence of documentation supporting relevant financial statement  assertions. In the Corrective Action phase, entities develop and execute  plans to address identified deficiencies and verify implementation of  corrective actions. In the last three phases, a reporting entity (1) asserts  its audit readiness, (2) has its assertion independently validated, and   (3) employs an IPA firm to perform a financial audit. The Navy asserted  audit readiness but did not complete the Corrective Action phase or  validate the assertion because of time constraints and moved directly into  an audit of its Schedule of Budgetary Activity by an IPA firm.

section_title: Navy FBWT Audit Readiness Strategy, Milestones, and Events
paragraphs: The Navy’s FBWT FIP provides a framework for planning, executing, and  tracking essential steps with supporting documentation to achieve audit  readiness for its FBWT. Figure 1 shows important milestones and events  in Navy’s FBWT FIP and overall audit readiness efforts.

In April 2013, the Navy asserted that its FBWT process was audit ready.  The scope of the Navy’s audit readiness assertion began with the feeder  systems that provide collection and disbursement transactions and  extended through posting these transactions to DFAS’s Defense  Departmental Reporting System - Budgetary (DDRS-B). At the time of  the Navy’s assertion in April 2013, the Navy reported that 21 of 33 key  controls that it had identified for FBWT were operating effectively. The  Navy further reported that it had developed corrective action plans for the  remaining 12 controls and the corrective actions were under way.

Subsequent to the Navy’s assertion, in May 2013, the DOD OIG initiated  a review of the Navy’s FBWT assertion to determine audit readiness.  Because of the significance of its findings, including that the Navy did not  include in its assertion all significant systems affecting the FBWT line  item, the DOD OIG did not complete its review. In August 2013, the DOD  OIG provided the Navy with informal feedback, including areas for  improving its FBWT audit readiness. In February 2014, in response to  the DOD OIG’s feedback and to support the FBWT-related line items on  its financial statements, the Navy expanded the scope of its FBWT audit  readiness efforts to include all systems affecting the financial statement  line items, including the Defense Departmental Reporting System -  Audited Financial Statements (DDRS-AFS) system. Although the Navy  expanded the scope of FBWT audit readiness efforts through financial  statement compilation and reporting, it did not reassert FBWT audit  readiness.

In March 2014, the DOD OIG began another engagement, which involved  a review of the Navy’s FBWT reconciliations. A DOD OIG official told us  that this engagement did not include a review of the Navy’s FBWT  assertion, but rather was to determine whether the Navy’s FBWT  reconciliation was effective, supportable, and sustainable.

In September 2014, DOD officials announced that all military services and  many defense agencies had asserted General Fund Schedule of  Budgetary Activity audit readiness. In December 2014, a contract was  signed with an IPA to audit the Navy’s fiscal year 2015 General Fund  Schedule of Budgetary Activity. For fiscal year 2015, the Navy’s Schedule  of Budgetary Activity and FBWT were based on funding from 19 General  Fund appropriation accounts. The IPA was to determine whether the  Schedule of Budgetary Activity and related notes were fairly presented, in  all material respects, in accordance with U.S. generally accepted  accounting principles.

In January 2015, after the Navy performed additional internal control  testing, it reduced the total number of key internal controls for FBWT from  33 to 31. At that time, the Navy reported that 25 of the 31 controls were  deemed to be operating effectively and that corrective actions were under  way for the remaining 6 key controls.

In April 2015, the DOD OIG issued a report on the process the Navy uses  to reconcile its FBWT accounts. Reconciling FBWT activity records with  the Department of the Treasury (Treasury) is similar to reconciling a  checkbook to a bank statement. The Treasury Financial Manual requires  agencies to reconcile their FBWT accounts to Treasury balances on a  monthly basis. In its report, the DOD OIG noted several findings,  including that the Navy (1) did not use general ledger data as source data  for FBWT reporting, (2) had difficulty identifying the universe of  transactions supporting the FBWT balance, and (3) may have used  unreliable computer-processed data from two FBWT-related systems with  reported significant deficiencies in internal controls.

Further, in February 2016, the IPA issued a disclaimer of opinion on the  Navy’s Schedule of Budgetary Activity and identified material weaknesses  in internal control. One of the material weaknesses included controls over  FBWT reporting and reconciliations, including the Navy’s related controls  over its third-party service provider. As noted above, Navy management  concurred with the findings in the IPA’s report and stated that it will  develop and execute corrective actions to address the IPA’s  recommendations.

Going forward, DOD’s goals are to assert audit readiness for existence  and completeness of its mission-critical assets by June 2016 and to  assert full financial statement audit readiness by September 30, 2017.  FBWT audit readiness is a step in achieving full financial statement audit  readiness.

section_title: Navy Did Not Fully Implement Certain FBWT FIP Tasks in Accordance with the FIAR Guidance
paragraphs: Although the Navy included all the required audit tasks for the Discovery  phase in developing its FBWT FIP, it did not fully implement certain  required activities within these tasks in accordance with the applicable  FIAR Guidance. These included activities in all four key tasks of the  Discovery phase, which requires the Navy to (1) perform statement-to- process (process) analysis, (2) prioritize audit readiness efforts,   (3) assess and test internal controls, and (4) evaluate supporting  documentation. The purpose of these tasks is to improve financial  information for Navy management and provide information to support the  financial statement audit. Completion of these tasks remains important  because FBWT collections and disbursements are integral to the Navy’s  Schedule of Budgetary Activity, which is currently undergoing a second  year audit for fiscal year 2016. Further, the FBWT line item is included on  the Navy’s balance sheet, which is expected to be audited when the Navy  undergoes the full financial statement audit planned for fiscal year 2018.
subsections: section_title: Process Analysis
paragraphs: The FIAR Guidance states that reporting entities are to perform a process  analysis. We found that the Navy did not implement certain tasks for  documenting the FBWT process, as required by the FIAR Guidance. The  process analysis includes tracing from a summary amount, such as a line  item on a financial statement, to underlying support, such as accounts in  the general ledger, and support for those accounts, such as subledgers  and transactions.

One of the purposes of the process analysis is to provide information on  the flow of data through the various systems to the financial statements.  To develop the process analysis, reporting entities are to identify  assessable units, business processes, systems, and other characteristics  associated with amounts reported in financial statement line items. A  process analysis describes the process, such as military pay, and  includes a system analysis depicting asset or transaction classes,  underlying processes, assessable units and subunits, and associated  systems. The Navy prepared two process analyses for the FBWT  assertion package, one in April 2013 and the second in February 2014,  when it expanded the scope of its FBWT audit readiness efforts to include  DDRS-AFS and the FBWT-related financial statement line items. The  Navy’s April 2013 process analysis identified collections and  disbursements as assessable units for the FBWT process and the Navy’s  general ledgers as sub-assessable units. While both of these analyses  identify the key systems involved in the FBWT process, neither fully  documents the flow of data through the various systems to the financial  statements.

Although the Navy provided narratives that describe the FBWT systems,  the narratives did not include certain significant events in the flow of  collection and disbursement transactions from feeder systems into the  financial statements. Among the events not included was the reversal of  general ledger amounts and other entries. Navy officials told us that the  narratives they provided in the FBWT assertion were based on the  original April 2013 FBWT scope, that is, from feeder systems to DDRS- B. In February 2014, in response to DOD OIG concerns regarding the  lack of agreement of FBWT financial statement amounts to the general  ledger and supporting transactions, the Navy expanded the scope of the  FBWT audit readiness efforts through the financial statement line item.  Navy officials said that they did not apply FIAR methodology to any new  items included in the expanded scope of the FBWT audit readiness  efforts. Because of the limited time remaining until the audit of the fiscal  year 2015 Schedule of Budgetary Activity, the Navy did not pursue an  additional FBWT validation of assertion.

In the Navy’s case, the process analysis is particularly important for  understanding the FBWT financial reporting process because the Navy’s  transactions do not follow the typical flow of data used to produce  financial statements. Generally, the flow is from subsidiary ledger to  general ledger to trial balance to financial statements. Without a complete  FBWT process analysis and system narratives, internal controls and risks  for each of the systems in the process may not be readily identified and  appropriately tested.

As shown in figure 2, the Navy’s FBWT financial reporting process is  complex, incorporates multiple information systems, and is based on  systems originally created for budgetary reporting and support of other  business functions. Figure 2 and the related narrative provide an  overview of the Navy’s FBWT data flow for financial reporting. A more  detailed description of the Navy’s FBWT data flow is included in appendix  III.

The original systems include subsidiary ledgers (Program Budget  Information System (PBIS) and Defense Cash Accountability System  (DCAS)), a budgetary reporting system (DDRS-B), and its general ledger  systems. These systems were modified over time to provide financial  reports and data for financial statement compilation.

Our analysis found that the Navy’s FBWT process relies on subsidiary  ledgers PBIS and DCAS to distribute (allocate) the Navy’s funds to the general ledgers; distribute collection and disbursement transaction information to the  forward summary data to the DFAS budgetary reporting system  (DDRS-B) for inclusion in the DFAS audited financial statements  system (DDRS-AFS), which ultimately creates the Navy’s  consolidated financial statements.

Another important activity in the process analysis is the quantitative  drilldown, which provides the sources to support a summarized amount,  such as a financial statement line item. The FIAR Guidance requires the  preparation of a level I and level II quantitative drilldown depicting dollar  activity or balances for each assessable unit.

A level I quantitative drilldown provides the first level of data sources,  the assessable units, that make up the summarized amount on a  financial statement.

A level II quantitative drilldown provides the sub-assessable units that  make up the amounts in the level I quantitative drilldown.

Navy officials told us that they did not prepare a level I quantitative  drilldown for the Navy’s FBWT assessable units, showing how FBWT  amounts are summarized for financial reporting, as they did not think this  requirement was applicable for FBWT. The FIAR Directorate, in its review  of the Navy’s FBWT assertion package, also determined that the  quantitative drilldowns called for in the FIAR Guidance were not  applicable. A FIAR Directorate official noted that the quantitative  drilldown is intended to prioritize and disaggregate assessable units at the  early stages of FIAR execution. A comprehensive reconciliation of the  detailed transactions to the financial statements occurs later on. The  FIAR Directorate official further noted that quantitative drilldowns by  assessable unit were not necessary in this FIP because assessable units,  such as military pay or contracts, are covered in other FIPs. Although the  Navy and the FIAR Directorate said that a quantitative drilldown was not  applicable, a level I quantitative drilldown for FBWT is critical for  determining all the sources of transactions, including journal vouchers,  comprising the population of transactions, as well as for prioritizing audit  efforts. For example, system-generated entries and journal vouchers  occur within DDRS-B. These journal vouchers are a source of activity  affecting FBWT that according to FIAR Guidance, should be prioritized for  testing. Without identification and an understanding of the entire  population of transactions, including journal vouchers and other system- specific entries that a drilldown will help identify, Navy management and  the auditor will not have information important for an understanding of the  source of transactions, which is necessary to assess risk and determine  the level of audit work necessary.
subsections: section_title: Other Audit Readiness Issues within the Navy’s FBWT Process Analysis
paragraphs: Other audit readiness issues resulting from the Navy’s FBWT process are  its reconciliations and transactions posted to suspense accounts. The  Navy’s FBWT reconciliation process is both complex and time- consuming. The Navy has 19 general funds (appropriations) and a FBWT  account for each general fund, each of which the Treasury Financial  Manual requires to be reconciled monthly to Treasury accounts. The  diverse nature of the numerous feeder systems provides a large volume  of transactions, and the Navy’s complex FBWT process complicates the  reconciliation process. The Navy’s reconciliation process is further  described in appendix IV. Suspense accounts have been a long-standing  problem at DOD. For example, in fiscal year 2003, Congress authorized  DOD to write off long-standing debit and credit transactions reported in  suspense accounts. DOD subsequently reported that it wrote off  transactions with an absolute value of $35 billion. In April 2014, we  reported that DOD had recorded billions of dollars of disbursement and  collection transactions in suspense accounts over the years because the  proper appropriation accounts could not be identified and charged,  generally because of coding errors. More recently, in March 2015, the  DOD OIG withdrew its opinion on the USMC fiscal year 2012 Schedule of  Budgetary Activity because of suspense accounts held at Treasury that  contained USMC transactions that had not been posted to valid  appropriations. Appendix V provides more information on the issues and  extent to which DOD and the Navy use suspense accounts.

section_title: Prioritization of Audit Readiness Efforts
paragraphs: The Navy did not prioritize certain FBWT audit readiness efforts required  by the FIAR Guidance to provide reasonable assurance that its audit  readiness efforts were adequate. Because assessable units provide the  focus for financial improvement efforts, FIAR Guidance requires the  prioritization of audit readiness efforts, including ranking assessable units  in order of quantitative materiality and developing qualitative factors  affecting audit readiness. The FIAR Guidance also requires documenting  the audit readiness strategy. However, the Navy did not prioritize its  FBWT audit readiness efforts, quantitatively or qualitatively, or fully  implement its audit readiness prioritization and strategy for key  information systems prior to assertion. Without prioritization, the Navy  cannot reasonably assure that it will first address the highest-risk areas  within the FBWT process and information technology.
subsections: section_title: Prioritization of Audit Readiness Efforts for the FBWT Process
paragraphs: Navy officials told us that they did not produce a prioritization and audit  strategy document because they considered FBWT systems complete, as  they each contained 100 percent of the transactions. DOD’s FIAR  Directorate reviewed the Navy’s FBWT assertion documentation and  agreed with Navy officials, indicating that the “comprehensive nature of  the FBWT FIP assertion” (1) did not lend itself to prioritization within the  SBR assessable unit or audit segment and (2) did not require any follow- up prior to examination. However, certain activity is unique to each  system, including system-generated entries, adjustments to reconcile to  Treasury, and consolidation and elimination entries. As previously noted,  a level I quantitative drilldown is critical for audit readiness and would  show how each FBWT system is unique and the extent of system-specific  activity, and would allow each FBWT system to be prioritized for audit  purposes and assessed for risk. The FIAR Guidance states that agencies  should rank each assessable unit in terms of risk and in order of  quantitative materiality, with largest dollar activity being the highest  priority. Further, in connection with performing a financial statement audit,  government auditing standards state that the auditor gains an  understanding of the operating environment and assesses key controls  over information systems. While the same or similar transactions flow  through each of the Navy’s FBWT systems, each system also includes  unique activity. For example, DDRS-B includes system-generated entries  that are not in the lower-level system of DCAS. In addition, qualitative  factors, such as system ownership, can affect risk to varying degrees. By  assigning the same priority to all of the FBWT systems, without regard to  quantitative and qualitative factors and their effects on risk, the Navy  cannot reasonably assure that it initiates audit readiness efforts and  corrective actions for the higher-risk systems first.

section_title: Prioritization of Audit Readiness Efforts for Information Technology Systems
paragraphs: For an audit readiness plan for key information technology systems, the  Navy provided a schedule that identified 22 relevant systems, 16 of which  the Navy deemed key FBWT systems. For these 16 systems, the Navy  noted that to assess audit readiness, 11 systems would receive self- assessments, 4 systems would receive independent assessments, and  for 1 system the assessment type had not yet been determined. However,  the Navy indicated that only 6 of the self-assessments and all 4 of the  independent assessments were completed. For the remaining 6 key  FBWT systems, the Navy did not provide planned start dates or expected  completion dates or indicate when it would obtain audit readiness  assurance for these systems. Navy officials thought the systems  inventory schedule provided with the assertion package met the FIAR  requirement for prioritization of systems. However, in our view, the Navy’s  schedule did not meet the FIAR Guidance requirement to prepare an  assessable unit strategy document listing all assessable units prioritized  by quantitative rank and adjusted for significant qualitative factors and  scoping out legacy systems and processes that will not be part of the  audit-ready environment. The Navy’s lack of prioritization of key  information technology systems used in the FBWT process limits  management’s ability to focus audit readiness efforts on the most  important systems. Further, such a prioritization would also provide  information to auditors on the effectiveness of controls for these systems.

Further, we noted that independent reports and reviews of key FBWT  systems identified serious internal control deficiencies with reporting  (DDRS-B), accounting (DCAS), and budgetary systems (PBIS).  Statement on Standards for Attestation Engagement No 16 reports on  controls for a service organization incorporating DDRS-B included an  adverse opinion for the period March 1 to November 30, 2014, and a  qualified opinion for the period December 1, 2014, to July 31, 2015, due  primarily to ineffective controls. The reviews of DCAS and PBIS  identified significant deficiencies in internal controls. Without effective  controls over key systems involved in the FBWT process, management  may not have reasonable assurance that this financial statement line item  is audit ready.

section_title: Internal Control Assessment and Testing
paragraphs: The Navy did not fully implement certain FBWT internal control and  assessment activities required by the FIAR Guidance. Specifically, the  Navy did not document information technology general computer controls  for significant systems or the hardware and software interfaces as  required by the FIAR Guidance. In addition, as previously noted, the  Navy did not sufficiently complete FIAR-required data flowcharts and  system narratives. This includes an understanding of how data are  processed and transferred in the various systems and how they interact  with other data sources through the FBWT process to the financial  statements.

An important activity required in the key FIAR task of assessing and  testing controls is the preparation of systems documentation to include or  describe  system narratives and flowcharts;  risk assessments and internal control worksheets documenting its  financial statement assertion risks;  control activities and information technology general computer  controls for significant systems, applications, or microapplications;  system certifications or accreditations;  system, end user, and systems documentation locations; and hardware, software, and interfaces.

While the Navy prepared system narratives, flowcharts, financial reporting  objectives, and control activities and included them in the FBWT assertion  package, it did not prepare documentation of general computer controls  for significant systems; system certifications or accreditations; system,  end user, and systems documentation locations; or a description of  hardware, software, and interfaces as required by the FIAR Guidance.  Also, the system narratives and flowcharts the Navy provided did not  sufficiently disclose the flow of data. This includes the Navy’s collection  and disbursement activity through the financial statement line items,  including FBWT on the balance sheet and outlays on the SBR. For  example, as previously noted, the narratives did not include discussion of  the reversal of general ledger transactions or other entries within   DDRS-B.

Navy officials told us that some of the missing systems documentation  items might have been included in another audit segment or assertion  package. However, the Navy did not provide evidence to support that  claim, and no reference to another assertion package was made in the  FBWT assertion package. According to the FIAR Guidance,  documentation of performance of the required procedures for each FIP  task must be completed and included in each applicable assertion  package. Once the scope of the FBWT FIP was expanded to include all  systems through the financial statement line item, FBWT audit readiness  officials did not ensure that all required audit readiness procedures within  the expanded scope were performed and the documentation supporting  the procedures was available for auditors. Complete and accurate system  narratives and flowcharts, and documentation of general computer  controls, help to provide management and the auditor with information on  the systems environment and data flow, which they use to prioritize audit  efforts.

Further, in preparing its April 2013 internal control assessment, the Navy  identified key internal controls in the FBWT process, but it did not identify  those controls by assessable unit as required by FIAR Guidance. The  FIAR Guidance for this task requires (1) preparing an internal control  assessment document for entity-level controls and for each assessable  unit and (2) summarizing control activities that are appropriately designed  and in place. Navy officials told us that several years ago they  assembled a matrix of controls to be assessed. They organized the  controls by the FBWT area that the controls supported or by control  owner, and they thought that this met the FIAR Guidance requirement.  Some of the internal controls the Navy identified and tested may be  related to an assessable unit. However, the Navy did not identify controls  for each assessable unit. Identifying controls by assessable unit is  important for determining whether assessable units, sub-assessable  units, and associated systems are producing reliable information and  helps link systems and controls to the transaction flows. As a result, the  Navy is missing an opportunity to identify and correct control deficiencies  for the key systems that could affect its FBWT audit readiness. For  example, DCAS is the primary subledger used to process the universe of  collection and disbursement transactions for FBWT. Although the Navy  did identify some controls involving DCAS, it did not identify internal  controls by system or assessable unit. Therefore, the Navy does not have  assurance that DCAS is operating as intended and that output from the  system is reliable.

section_title: Evaluate Key Supporting Documentation
paragraphs: The Navy’s substantive testing for key supporting documents may not  provide sufficient evidence that its efforts to produce supporting  documentation are sustainable for future audits. FIAR-required activities  for this task include preparation of the transaction population, reviews of  unusual or invalid transactions, and identification of key supporting  documents. The FIAR Guidance also requires developing a test plan,  selecting random samples from the population of transactions, and testing  individual transactions and balances to confirm the existence and  evaluate the quality of supporting documentation for relevant financial  statement assertions. An evaluation of key supporting documentation is  important for determining whether the Navy would be able to support  amounts presented in the financial statements and provide an external  auditor with sufficient and appropriate evidence to perform the audit.

In the first round of substantive testing, the Navy identified significant  deficiencies that resulted in the test failing. The Navy then performed  another round of substantive testing, which, although it passed, may not  provide sufficient evidence of the Navy’s ability to produce needed  documentation in a sustained manner for future audits. In the second  round of testing, the Navy completed 13 procedures, 3 of which involved  statistical sampling while the other 10 relied on analytic or non-random  sampling procedures. In both rounds of testing, documentation was  limited to a 3-month period, which, even if successful, may not provide  sufficient evidence of the consistent availability of supporting  documentation for a 12-month period, or the ability to timely produce  needed documentation over a sustained period.

Because the Navy performed two rounds of substantive tests, Navy  officials considered this FIAR task implemented. Further, Navy officials  told us that after they asserted audit readiness, they anticipated that they  would be under audit by an IPA soon thereafter, so time constraints did  not permit further testing. However, lack of supporting documentation has  historically been an issue on DOD audits. This was also the case in the  audit of the Navy’s fiscal year 2015 Schedule of Budgetary Activity, in  which the IPA disclaimed an opinion, in part, because the Navy could not  provide sufficient, appropriate audit evidence to support transactions.  Without performing adequate substantive testing, the Navy does not have  reasonable assurance of the availability of key documentation to support  amounts presented in the financial statements.

Further, none of the procedures tested the supporting documentation for  supplemental quarterly reconciliations. Supplemental quarterly  reconciliations provide a secondary check on the accuracy of monthly  reconciliations and on other monitoring procedures. Both monthly and  quarterly reconciliations are key internal controls for FBWT and testing for  these reconciliations provide reasonable assurance that supporting  documentation is maintained and available for financial statement audits.  In addition, the Navy did not perform reviews to identify unusual, invalid,  or missing data as required by the FIAR Guidance. Specifically, the FIAR  Guidance requires such reviews on the universe of transactions to identify  and address (1) unusual or invalid transactions and (2) abnormal  balances or missing data fields. Navy officials stated that these FIAR  Guidance tasks were not performed because they thought these tasks  would be performed in another FIP. However, we were not provided with  evidence that such tasks were included in another FIP and no reference  to another FIP was made in the FBWT assertion package. FIAR  Guidance requires that documentation of performance of the required  procedures for each FIP task be completed and included in each  applicable assertion package. Without this testing, there is increased risk  that errors may not be detected.

section_title: Conclusions
paragraphs: The Navy has made progress in performing its key audit readiness  activities, including the development of its FBWT FIP to help guide  implementation of its General Fund SBR improvement efforts. However,  the Navy did not fully complete certain tasks in accordance with the FIAR  Guidance prior to asserting audit readiness for FBWT, a significant  account for the Navy’s as well as DOD’s department-wide SBR  auditability. FIAR Guidance Discovery phase tasks that the Navy did not  fully complete include the FBWT process analysis, system narratives,  quantitative and qualitative drilldowns, prioritization of audit readiness  efforts, and documentation of general computer controls. In addition,  although the Navy performed substantive tests for supporting  documentation, such testing may not provide sufficient evidence of the  Navy’s ability to produce needed documentation in a sustained manner  for future audits.

For the most part, the Navy did not complete these tasks because Navy  officials believed that their efforts had satisfied the FIAR Guidance  requirement, that certain tasks did not apply to the FBWT effort, or that  time constraints prevented completion of the tasks. However, it is critical  that FBWT tasks are adequately evaluated and documented. Although  required audit readiness procedures for FBWT were not fully completed,  the Navy decided to go forward with an audit of its Schedule of Budgetary  Activity. The IPA’s fiscal year 2015 audit resulted in a disclaimer of  opinion and the reporting of material weaknesses in internal control and  related recommendations, including several recommendations pertaining  to FBWT. Recommendations made in this report are in addition to the  recommendations made in the IPA’s audit report. Successful completion  of the FIAR Discovery phase tasks for FBWT may identify additional  deficiencies that affect the auditability of the Navy’s financial statements.  By not fully identifying and remediating its deficiencies specific to the  FBWT effort, the Navy’s ability to achieve audit readiness and remediate  internal control weaknesses is hindered. Resolution of these deficiencies  is crucial to the Navy’s and DOD’s efforts to meet the September 30,  2017, statutory target date for validating audit readiness of DOD’s full  financial statements.

section_title: Recommendations for Executive Action
paragraphs: To improve the Navy’s implementation of the FIAR Guidance for its  General Fund FBWT FIP and facilitate efforts to achieve SBR auditability,  we recommend that the Secretary of the Navy direct the Assistant  Secretary of the Navy, Financial Management and Comptroller, to take  the following seven actions in the Discovery phase.
subsections: section_title: Process Analysis
paragraphs: Update FBWT data flowcharts and narratives to fully describe the flow  of data from the Navy’s receipt of collection and disbursement  transaction information through the financial statement line items,  including the reversal of general ledger trial balance data generated  by the automated system and other entries made within DDRS-B.

Prepare a level I quantitative drilldown in accordance with the FIAR  Guidance.

section_title: Prioritization of Audit Readiness Efforts
paragraphs: To prioritize audit readiness efforts for the key FBWT systems,  prepare an audit strategy that identifies for each system (1) the Navy’s  plan for assessing the system to gain assurance that the system can  be relied on; (2) the assessment types, including prioritizing the  assessments based on qualitative and quantitative factors for each  system; and (3) planned start and completion dates of these  assessments for each system.

section_title: Internal Control Assessment and Testing
paragraphs: Prepare, in accordance with FIAR Guidance, the documentation of  control activities and information technology general computer  controls for significant systems; system certifications or accreditations;  system, end user, and systems documentation locations; and  hardware, software, and interfaces.

Prepare an internal control assessment document for each  assessable unit, summarizing control activities that are appropriately  designed and in place.

section_title: Supporting Documentation
paragraphs: Perform sufficient testing for supporting documentation to reasonably  determine whether such documentation, including that for key  reconciliations, is available in a sustainable manner for future audit  efforts.

For each fiscal year expected to be under audit, identify and address  unusual and invalid transactions, abnormal balances, and missing  data fields in the universe of collection and disbursement transactions.

section_title: Agency Comments
paragraphs: We provided a draft of this report to the Navy for review and comment. In  its written comments, reprinted in appendix VI, the Navy concurred with  our seven recommendations. In response to our recommendations, the  Navy stated that it has actions planned, taken, or under way to   (1) develop procedures and documentation that describe the processes  associated with the flow of data; (2) prepare a quantitative drilldown;   (3) prioritize audit readiness efforts for key FBWT systems; (4) document  control activities, information technology general computer controls for  significant systems, systems documentation locations, and hardware,  software, and interfaces; (5) prepare an internal control assessment  document; (6) test effectiveness of FBWT controls, which includes  assessing the availability of supporting documentation; and (7) obtain  monthly data from DFAS on invalid FBWT transactions. The Navy also  provided technical comments, which we have incorporated as  appropriate.

We are sending copies of this report to the Secretary of Defense; the  Deputy Chief Management Officer; the Under Secretary of Defense  (Comptroller/Chief Financial Officer); the Deputy Chief Financial Officer;  the Director, Financial Improvement and Audit Readiness; the Secretary  of the Navy; the Assistant Secretary of the Navy; the Chief Management  Officer of the Navy; the Directors of the Defense Finance and Accounting  Service and Defense Finance and Accounting Service, Cleveland; the  Director of the Office of Management and Budget; and interested  congressional committees. In addition, the report is 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 VII.

section_title: Appendix I: Objective, Scope, and Methodology
paragraphs: The objective of our review was to determine the extent to which the Navy  developed and implemented the Discovery phase for its General Funds’  Fund Balance with Treasury (FBWT) financial improvement plan (FIP) in  accordance with the Financial Improvement and Audit Readiness (FIAR)  Guidance. This objective was applied to FBWT for three of the Navy’s  general ledgers—the Standard Accounting and Reporting System – Field  Level, the Standard Accounting and Reporting System – Headquarter  Claimant Module, and the Navy Enterprise Resource Planning. We  excluded from our review the Navy’s fourth general ledger, Navy Systems  Management Activity, because of its classified activity. To address our  objective, we analyzed the Navy’s FBWT FIP to determine whether it  contained the applicable elements and tasks to be performed for the  Discovery phase of audit readiness as required by the FIAR Guidance.  We identified and reviewed the Navy’s FBWT FIP key deliverables  required by the FIAR Guidance, such as system narratives and  flowcharts, internal control assessments, and the Navy’s test results. We  performed a site visit to the Defense Finance and Accounting Service  (DFAS), Cleveland, and walked through the FBWT process,  reconciliations, and related systems. We interviewed Navy, DFAS, and  FIAR Directorate officials within Department of Defense’s (DOD) Office of  the Under Secretary of Defense (Comptroller) to obtain explanations and  clarifications on documentation we reviewed. In addition, we reviewed the  results of DOD’s Office of Inspector General audits as well as  independent public accountant examinations of audit readiness efforts  related to the Navy’s FBWT.

We conducted this performance audit from April 2014 to August 2016 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 objective.

section_title: Appendix II: FIAR Guidance for Reporting Entities
paragraphs: Table 1 presents the reporting entity methodology in the Financial  Improvement and Audit Readiness Guidance, which the Navy is required  to follow in implementing its Fund Balance with Treasury financial  improvement plan.

section_title: Appendix III: Navy’s FBWT Process and Data Flow System Descriptions
paragraphs: The Navy’s Fund Balance with Treasury (FBWT) financial reporting  process incorporates multiple information systems and is based on  systems originally created for budgetary reporting and support of other  business functions. The original systems include transaction-processing  budget and reporting systems and its general ledger systems. These  systems were modified over time to also provide financial reports and  data for financial statement compilation. As a result, as shown in figure 2,  the flow of the Navy’s transactional data does not follow the typical flow of  data from subsidiary ledger to general ledger to trial balance to financial  statements. The FBWT process relies on subsidiary ledgers to distribute  and record the Navy’s funds and to record collection and disbursement  transaction information to the general ledgers. Data are forwarded from  subsidiary ledgers to the budgetary reporting system for inclusion in the  financial statement system, which ultimately creates the Navy’s  consolidated financial statements.

This process results in some transactions flowing to the financial  statements that are not posted in any of the general ledgers. This bypass  of the general ledgers for financial statement preparation represents a  significant audit challenge because the general ledgers do not agree with  the Navy’s financial statements for FBWT. General ledgers are typically  an entity’s primary system of record, where all transactions are recorded  and from which financial statements are prepared. In an audit, for  supporting FBWT financial statement line item amounts, it is essential  that the Navy reconcile any differences between the financial statements  and the general ledgers, and between the general ledgers and underlying  transactions, to assure that all transactions in the financial statements are  recorded in the general ledgers. Specifically:

According to the Navy, the Defense Cash Accountability System  (DCAS) contains the universe of collection and disbursement  transactions, except for timing difference transactions. The Navy’s  FBWT process begins when collection and disbursement transaction  information from the Navy’s multiple disbursement feeder systems is  posted to DCAS. When DCAS edit checks identify a transaction with  missing or incorrect account coding information, the transaction is not  distributed to the general ledgers and remains in DCAS as an  “undistributed” transaction until it can be investigated and the  necessary information obtained. DCAS distributes all other  transactions to one of the Navy’s general ledgers. Each month, DCAS  transmits summary collection and disbursement information, including  undistributed transactions, to the Defense Departmental Reporting  System - Budgetary (DDRS-B). DCAS is also used for the Navy’s fund  balance reconciliation process with the Department of the Treasury’s  (Treasury) Central Accounting Reporting System (CARS).

DDRS-B has historically been used as a budgetary reporting tool for  numerous Navy commands and Navy headquarters, but it has also  been adapted for financial reporting. It receives budgetary information  from the Program Budgetary Information System and proprietary  information from DCAS. DDRS-B also receives summary information  from the general ledgers. To avoid duplication of transactions,  system-generated journal entries are made within DDRS-B that are  intended to reverse the general ledger transactions, which were also  posted by DCAS. The general ledger is typically the system of record  for an entity’s financial reporting. However, since DCAS is considered  to contain the universe of the Navy’s collection and disbursement  transactions, DCAS transactions—not the summary transaction  information from the general ledgers—flow through DDRS-B to the  financial statements. Also, within DDRS-B, journal entries (forced- balance entries) are prepared and posted to temporarily make the  balances in the Navy’s FBWT equal to the balances in Treasury’s  CARS, until such differences can be reconciled as required by the  Treasury Financial Manual. Navy officials said that forced-balance  journal entries are eventually reconciled to transaction detail and are  reversed in the following period; they are not posted to the Navy’s  general ledgers. As a result, the Navy’s general ledger balances do  not directly agree with the Navy’s financial statements.

The Defense Departmental Reporting System - Audited Financial  Statements (DDRS-AFS) receives an adjusted trial balance from  DDRS-B. Consolidation and elimination entries are posted in DDRS- AFS to produce the Navy’s financial statements. For the Navy, net  expenditure amounts on the Schedule of Budgetary Activity and  financial statements are supported by DDRS-AFS, then DDRS-B,  then DCAS, and then numerous feeder systems, while the general  ledgers are omitted from this drilldown process. Journal entries posted  in DDRS-B and undistributed transactions in DCAS are not posted in  the Navy’s general ledgers, but are reflected in financial statement  FBWT line item balances.

section_title: Appendix IV: Navy’s FBWT Reconciliations
paragraphs: The Navy’s Fund Balance with Treasury (FBWT) reconciliation process  requires investigating thousands of undistributed transactions. The Navy  has 19 general funds (appropriations) and a FBWT account for each  general fund, which the Treasury Financial Manual requires to be  reconciled monthly to Department of the Treasury (Treasury) accounts.  The diverse nature of the numerous feeder systems providing the  transaction information also complicates the FBWT reconciliation  process. The Navy receives transaction information from both centralized  and decentralized disbursement feeder systems, including the  Centralized Automated Disbursing System, Intra-Governmental Payment  and Collections, Mechanization of Contract Administrative Services, and  other component reporting through the Defense Finance and Accounting  Service (DFAS) Disbursing Station Symbol Numbers (DSSN) by Navy  Shore DSSNs and Navy Ship DSSNs.

The complexity of the overall financial reporting process leads to  difficulties in the FBWT reconciliation process. With multiple systems  used in the process and the Navy’s unique process flow, additional  reconciliations are required. Consequently, each month the Navy  completes four reconciliations for each of its 19 general funds. Each  quarter, the Navy prepares reconciliations for each of the 19 general  funds as well as consolidating schedules and reconciliations between  financial systems. As of March 2015, it was taking the Navy from 2 to 3  months from the end of each fiscal quarter to complete its FBWT  reconciliations.

In the first quarter of fiscal year 2015, DFAS processed, through the  Defense Cash Accounting System (DCAS), an average of 1.6 million  nonpayroll Navy transactions per month. Of those transactions  processed, an average of about 22,000 per month required intervention  by DFAS and Navy FBWT reconciliation staff for them to be posted  appropriately to a general ledger account. A transaction registered in the  Navy’s DCAS and not distributed to one of the Navy’s general ledgers is a  variance that requires human investigation and adjustment so it can be  distributed and posted in one of the Navy’s general ledgers.

Two types of variances are a recurring part of the Navy’s FBWT  reconciliation process: (1) forced balance entries, which are necessary to  agree the Navy’s balances with Treasury’s balances until timing  difference transactions can be resolved, and (2) undistributed  transactions, which come from feeder systems and contain insufficient or  incorrect coding. Reconciling forced balance entries and investigating  undistributed transactions contribute to the labor and time required to  reconcile the Navy’s FBWT. Figure 3 shows the reconciliation of Navy  Treasury accounts to the Navy’s general ledger for each of the quarters  for fiscal year 2014 and the variance at the end of each quarter.

As noted in figure 3, at the end of fiscal year 2014, the total of net forced  balance entries and net undistributed transactions was $777 million, (1.0  percent of the Navy’s total net expenditures for the year).

section_title: Appendix V: DOD and Navy Suspense Accounts
paragraphs: In fiscal year 2003, Congress authorized the Department of Defense  (DOD) to write off long-standing debit and credit transactions that  occurred before March 31, 2001, and could not be cleared from the  department’s books because DOD lacked the supporting documentation  necessary to record the transactions to the correct appropriations. DOD  subsequently reported that it wrote off an absolute value of $35 billion, or  a net value of $629 million, of suspense account amounts and check  payment differences using this authority.

Congress required GAO to review and report on DOD’s use of this write- off authority. DOD reported that as of December 31, 2004, after the  write-off of $35 billion, it still had more than $1.3 billion (absolute value) of  suspense amounts that were not cleared for more than 60 days, and  DOD acknowledged that its suspense reports were incomplete and  inaccurate. Our June 2005 audit report concluded that without compliance  with existing laws and enforcement of its own guidance for reconciling,  reporting, and resolving amounts in suspense and check differences on a  regular basis, the buildup of current balances would likely continue, the  department’s appropriation accounts would likely remain unreliable, and  another costly write-off process could eventually be required.

In April 2014, we reported that DOD had 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 coding errors. (Table 2 shows a comparison of the  Navy’s suspense account balances compared to total DOD suspense  account balances based on data in our April 2014 report.)

In a letter dated March 23, 2015, the DOD Office of Inspector General  (DOD OIG) withdrew its opinion on the U.S. Marine Corps’ (USMC) fiscal  year 2012 Schedule of Budgetary Activity because of suspense accounts  held by the Department of the Treasury (Treasury) that contained USMC  transactions that had not been posted to valid appropriations. Because  these suspense accounts contained unrecorded transactions from all  DOD components, the DOD OIG was unable to quantify the number and  dollar amount of USMC transactions that resided in the accounts and  whether those transactions were material to the fiscal year 2012 USMC  Schedule of Budgetary Activity. In addition to the variances identified in  the Navy’s reconciliation process presented in figure 3, figure 4 identifies  other transactions posted to Navy general ledger suspense accounts and  other fund suspense account transactions not yet identified as belonging  to Navy.

In addition to the undistributed transactions and forced-balance amounts  shown in figure 3, the Navy has two types of suspense accounts:

General ledger suspense accounts represent unmatched transactions  for expenditures and collections. These transactions are distributed  from the Defense Cash Accounting System and are recorded in a  general ledger against valid fund accounts but lack sufficient  information to match them with another data element, such as an  obligation.

Fund suspense accounts represent temporary holding accounts used  to record unidentifiable general, revolving, special, or trust fund  expenditures or collections that are not included in the Navy’s general  ledgers. Fund suspense accounts can also include deposit accounts  used to record money that the federal government owes to others,  including state and local income taxes, security deposits, civilian pay  allotments, foreign taxes, and estates of deceased service members.

Balances in Navy suspense accounts totaled $191 million as of  September 30, 2014, and represented only 0.3 percent of the Navy’s total  net expenditures. The balances reported are net, meaning increases and  decreases are added together, and do not reflect the gross amount in  suspense accounts or the age of individual transactions.

section_title: Appendix VI: Comments from the Department of the Navy

section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, the following individuals made  key contributions to this report: Francine DelVecchio, Doreen Eng,  Maxine Hattery, Jason Kelly, Richard Kusman, Roger Stoltz (Assistant  Director), and Chevalier Strong.


Question-summary annotations: questions: question: In what way did the Navy's analysis fail to document its FBWT process?
answer: The Navy did not fully document its FBWT process in system narratives and flowcharts. For example, the Navy's analysis did not explain the complex process that occurs within the Defense Departmental Reporting System - B, including merging data and deleting duplicative transactions.
child_questions: question: Why is FBWT process analysis crucial for naval transactions?
answer: In the Navy's case, the process analysis is particularly important because the Navy's transactions do not follow the typical flow of data used to produce financial statements.

question: What are the dangers of proceeding without a complete FBWT process analysis?
answer: Without a complete FBWT process analysis and system narratives, internal controls and risks for each of the systems in the process may not be readily identified and appropriately tested.

questions: question: In what ways did the Navy fail to document information regarding their digital infrastructure?
answer: Within the FBWT assertion package, the Navy did not document information technology general computer controls for significant systems or the hardware and software interfaces, as required.

question: How did the FBWT assertion package fail to evaluate financial information systems?
answer: Also, the Navy did not identify internal controls by assessable units (e.g., information systems supporting financial statement line items or other discrete portions of the program).
child_questions: question: Why is it important to evaluate financial information systems, particularly by unit?
answer: Identifying controls by assessable unit is important for determining whether assessable units, sub-assessable units, and associated systems are producing reliable information and helps link systems and controls to the transaction flows.

questions: question: What are the limits of the Navy's audit readiness efforts?
answer: Evaluate supporting documentation. Although the Navy performed substantive tests for supporting documents, such testing may not provide sufficient evidence of the Navy's ability to produce documentation in a substantive manner for future audits.

question: Why is an evaluation of supporting documentation important for an auditing effort?
answer: An evaluation of key supporting documentation is important for determining whether the Navy would be able to support amounts presented in the financial statements or provide an external auditor with sufficient and appropriate evidence to perform the audit.

questions: question: What does the National Defense Authorization Act for Fiscal Year 2014 require?
answer: The National Defense Authorization Act for Fiscal Year 2014 mandates an audit of DOD's fiscal year 2018 department-wide financial statements.
child_questions: question: What guidance did the DOD Comptroller issue in line with the National Defense Authorization Act?
answer: To help achieve this, the DOD Comptroller issued the FIAR Guidance to provide a standard methodology for DOD components to follow to improve financial management and achieve audit readiness, and designated the SBR as an audit priority.

question: What is the relationship between the Navy's General Fund FIP for FBWT and the General Fund SBR?
answer: Full implementation of the Navy's General Fund FIP for FBWT is essential to achieving audit readiness for its General Fund SBR.

question: What was the Navy's audit process from 2014 to 2016?
answer: The Navy asserted Statement of Budgetary Activity (SBA) audit readiness as of September 30, 2014, and in February 2016 received a disclaimer of opinion on the audit of its SBA for fiscal year 2015.

questions: question: What is the role of federal accountability in the U.S. government's financial workings?
answer: GAO is mandated to audit the U.S. government's consolidated financial statements, which cover activities and balances of executive branch agencies, including DOD.
child_questions: question: What was GAO's objective in their report on the Navy?
answer: GAO's objective in this report was to determine the extent to which the Navy developed and implemented the Discovery phase of its General Fund FBWT FIP in accordance with the FIAR Guidance.
child_questions: question: What did GAO analyze in their report?
answer: GAO analyzed the Navy's FBWT FIP to determine whether it contained the tasks and activities required by the FIAR Guidance for the Discovery phase. GAO also reviewed the Navy's FBWT FIP key deliverables, such as process narratives and flowcharts, internal control assessments, and test results.