DOD Financial Management: Additional Actions Needed to Complete the Army's Analyses of Unsupported Accounting Entries for Its General Fund
Released: 2017-10-20T00:00:00

Letter

Background

The federal government began preparing and we began auditing the consolidated financial statements of the U.S. government in fiscal year 1997. However, we have been unable to render an opinion on them in part because of serious financial management problems at DOD that have prevented its financial statements from being auditable. Pursuant to the NDAA for Fiscal Year 2010, DOD developed and has updated a Financial Improvement and Audit Readiness (FIAR) Plan. The FIAR Plan includes the specific actions to be taken and costs associated with (1) correcting the financial management deficiencies that impair DOD’s ability to prepare complete, reliable, and timely financial management information and (2) ensuring that DOD’s financial statements are validated as ready for audit by September 30, 2017. Further, the NDAA for Fiscal Year 2014 mandated that the Secretary of Defense ensure that an audit is performed on DOD’s fiscal year 2018 financial statements and that the results are submitted to Congress no later than March 31, 2019.

DOD has undertaken several financial management improvement initiatives over the years to address deficiencies in business systems, processes, and controls through its FIAR Plan and financial management reform methodology contained in its FIAR Guidance. In its April 2016 FIAR Guidance, DOD identified seven critical capabilities that are necessary to achieve auditability. One of the seven critical capabilities identified is the ability to support or eliminate certain material JVs and other adjustments made to financial transactions, trial balances, and financial statements. As of September 2015, DOD determined that the largest portion attributable to the billions of dollars of unsupported JVs relates to the Army’s general fund. In 2015, DOD created the Working Group, made up of both Army and DFAS personnel, to develop solutions to reduce the number of required JVs and reduce or eliminate the number of unsupported JVs that affect the Army’s general fund.

In July 2016, DOD’s Office of the Inspector General (OIG) released a report indicating that about 90 percent of the dollar value and number of the Army general fund JVs the OIG tested, which were defined by the Army as “supported,” were in fact unsupported because the JVs either (1) forced account balances to agree with other data sources without reconciling the differences or determining which data sources were correct, (2) corrected errors or reclassified amounts to other accounts without adequately documenting why the JVs were needed, or (3) changed ending balances of accounts without adequate documentation to support the JVs.

DOD acknowledged in its November 2016 FIAR Plan Status Report that it still faces a significant challenge in reducing the number and amount of unsupported JVs. The November 2016 FIAR Plan Status Report also set a December 2016 completion date for the Army to (1) perform JV root cause analyses for all financial statements for all JVs and (2) implement corrective action plans and verify successful implementation of DFAS’s corrective actions.

Army’s Financial Systems

As shown in figure 1, the Army uses multiple systems to document, record, and report activities at the transaction level, which are then consolidated and uploaded into DOD’s reporting system known as the Defense Departmental Reporting System (DDRS). JVs can be used to record accounting entries and make any necessary corrections or adjustments within any of these systems at the transaction level or consolidated level. JVs can also be manually entered or system generated in the accounting systems. Manual JVs are those prepared by DFAS personnel to adjust errors identified during financial statement compilation, to record necessary accounting entries caused by system limitations or timing differences, and to prepare required month- and year- end closing accounting entries. System-generated JVs are those automatically generated based on system change requests and without manual involvement by DFAS personnel.

The General Fund Enterprise Business System (GFEBS) is the Army’s primary accounting system used to record the majority of the Army’s activities, including budget execution, procurement, civilian pay, collections, and disbursements. The Army also has a separate accounting system for supply-related transactions called the Global Combat Support System (GCSS). Accounting entries for transactions recorded in GCSS are sent to GFEBS to consolidate all of the Army’s transaction data into a single accounting system. Then, at month’s end, all the information in GFEBS is uploaded into the budgetary module of DDRS known as the Defense Departmental Reporting System-Budgetary (DDRS-B).

The Army also has several legacy systems that continue to process transactions but were not designed to interface with GFEBS as the accounting formats are not compatible. Therefore, at each month’s end, the balances for the legacy systems are configured into a format that can be read by DDRS-B and crosswalks to the accounts within the DDRS-B accounting system before they are sent to DDRS-B. Once the balances have been uploaded, DDRS-B performs edit checks to identify any errors that may exist. DFAS personnel then pull the data into the Electronic Error Correction and Transaction Analysis (ELECTRA) application to review any errors identified during the edit checks and use ELECTRA to create a JV to be uploaded into DDRS-B that makes necessary corrections or adjustments.

After the Army has consolidated all information into DDRS-B from both GFEBS and legacy systems each month, DFAS personnel will review the information to determine whether any additional JVs are necessary to correct errors identified during the reconciliation process or to record any JVs that could not be processed prior to the upload into DDRS-B.

On a quarterly basis after all necessary corrections are made, all information in DDRS-B is consolidated and uploaded into a second module within DDRS known as the Defense Departmental Reporting System-Audited Financial Statements (DDRS-AFS), which is used to prepare the financial statements. At this level, additional JVs can be made if DFAS personnel determine that further corrections are necessary or if information is received subsequent to the upload from DDRS-B.

The Working Group Has Identified Some Root Causes but Has Not Started Analyses of the Majority of Unsupported Journal Vouchers

The Working Group has been actively working toward implementing new processes to support JVs and eliminate unsupported JVs in the Army’s general fund. From October 2016 to March 2017, the Working Group, based on DFAS-produced metrics, reported that it had identified more than 121,000 unsupported JVs totaling $455 billion.

The Working Group prioritized its identifying of root causes of unsupported JVs based upon factors such as potential correction complexity, materiality, and volume. In the May 2017 FIAR Plan Status Report, DOD stated that the Army had completed its root cause analyses for all JVs. However, we found that the analyses have been performed on only a small percentage of the total number of unsupported JVs that existed as of March 2017 and cannot be considered completed for all unsupported JVs. In addition, members of the Working Group confirmed as of June 2017 that the Working Group has not yet performed all analyses necessary and stated that the Working Group’s efforts will be an ongoing, iterative process because of anticipated new challenges that continually arise from new business processes or programs.

A critical capability to achieve auditability, described in the April 2016 FIAR Guidance, is that all material JVs be supported and the population of accounting entries reconcile with each financial statement line item as well as the originating system of the accounting entry. As highlighted in figure 2, the Working Group focused its efforts on manual JVs processed at the consolidated level within DDRS-B as these JVs were consistent with its prioritization method in conducting the analyses and getting the financial statements audit ready.

In December 2015, DFAS began requiring a form to be attached to all manual DDRS-B JVs that serves as a checklist of all documents necessary to be included for a JV to be considered supported. However, as indicated on the metrics provided through March 2017, manual unsupported JVs were still being recorded in DDRS-B. Further, as of March 2017, the Working Group had not included in its root cause analyses (1) any unsupported JVs at the transaction level, such as within GFEBS, which are mostly attributed to year-end closing accounting entries; (2) any unsupported JVs within DDRS-AFS, which are used to prepare the financial statements; or (3) system-generated JVs. As a result, a significant number of JVs still require analyses.

Our review of the population of unsupported JVs from October 2016 to March 2017 found that system-generated JVs made up 90 percent in dollar value and 97 percent in number of total unsupported JVs. In July 2016, the DOD OIG similarly found that the Working Group had not been analyzing its system-generated JVs and recommended that the Working Group periodically review system-generated JVs to understand the reasons for the JVs and to verify the support for the JVs. Acting on the DOD OIG’s recommendation, members of the Working Group indicated that in March 2017, the Working Group began including system- generated JVs in its population of JVs to analyze but had not yet begun its analyses or identified any root causes. In addition, members of the Working Group stated that in February 2017, the Working Group began planning a new initiative called the Business Mission Area Champions (BMAC) Initiative. This initiative is to expand the Working Group’s analyses of root causes for JVs beyond those recorded at the consolidated level within DDRS-B and begin analyzing transaction-level JVs recorded in its systems that feed into DDRS-B before consolidation, such as GFEBS. However, as of May 2017, no details have been developed, such as planned actions or timelines. Therefore, because of the recent inclusion of the large population of system-generated JVs in the total population and because the BMAC Initiative is not yet under way, a significant amount of analyses remains to fully identify root causes and ultimately correct the Army’s overall unsupported JV issue. Figure 3 summarizes the progress of the Working Group’s root cause analyses of unsupported JVs as of March 2017.

According to OMB Circular A-123, agencies should perform a root cause analysis of the deficiencies to ensure that subsequent strategies and plans address the root cause of the problem and not just the symptoms. Identifying and developing an understanding of the root cause is management’s responsibility. In addition, Standards for Internal Control in the Federal Government states that management should complete and document corrective actions to remediate control deficiencies on a timely basis. Because it has not yet performed root cause analyses on the majority of unsupported JVs, the Working Group has not been able to identify appropriate corrective actions to eliminate such unsupported JVs and ultimately help produce auditable financial statements for the Army’s general fund.

The Working Group Has Developed Corrective Action Plans for All Identified Root Causes but Is Not Sufficiently Monitoring Implementation

As of March 2017, members of the Working Group reported that the Working Group had developed 38 corrective action plans to address all of the identified root causes of unsupported manual JVs at the consolidated level in DDRS-B for the Army’s general fund. According to these members, of the 38 corrective action plans developed, 18 have been implemented. In addition, because the root cause analyses have been limited, the Working Group has not yet been able to determine how many more corrective action plans will need to be developed to resolve the unsupported JV issue.

Further, we found that the Working Group’s monitoring of corrective action plan implementation does not include a method that sufficiently identifies the progress that has been made toward fully addressing the issue of unsupported JVs or to what extent each implemented corrective action plan has reduced unsupported JVs. The April 2016 FIAR Guidance provides specific tasks for DOD reporting entities, including the Army, to complete so that DOD can achieve its audit readiness objective. One of these tasks specific to JVs is to describe plans for implementing corrective actions to address the root causes of unsupported JVs. In addition, the Implementation Guide for OMB Circular A-123 recommends that management identify measurable indicators to better assess progress and more rapidly make course corrections to ensure timely and effective resolution of identified issues. In order to monitor whether a corrective action plan was implemented effectively, members of the Working Group stated that the Working Group uses metrics to monitor implementation of corrective actions for unsupported manual JVs at the consolidated level in DDRS-B. DFAS creates monthly metrics reports of DDRS-B accounting entries that include all unsupported and supported JVs for the month.

The JVs used to create these metrics are the same JVs that the Working Group uses to conduct its JV root cause analyses. However, the metrics organize the JVs into broad categories that do not provide enough details to link to the categories that the Working Group uses. For example, the metrics use broad categories, such as data calls or correcting entries to classify the JVs, whereas the root cause analyses are conducted at a more detailed level, such as for a specific transaction. The Working Group was unable to demonstrate to us which metric category was affected by the corrective action plan implemented for each root cause identified. In addition, the Working Group’s reported progress was based on an increase in the percentage of supported JVs in relation to the total population of JVs from October 2016 to March 2017 as reported in the metrics. However, during this period, the metrics also show an increase in the actual number and dollar amount of manual unsupported JVs. Specifically, based on the Working Group’s reporting method, the percentage of unsupported manual JVs decreased in relation to the total population of manual JVs from October 2016 to March 2017 by 8 percent in the number of JVs and 14 percent in the dollar value of JVs. However, the actual number and dollar value of the unsupported manual JVs reported on the October 2016 and March 2017 metrics increased from 329 to 462 and from a total of $3.3 billion and $7.0 billion, respectively. Because the metrics used to monitor corrective action plans do not clearly indicate which JVs are affected by a specific root cause identified, resolved JVs cannot be tied to an implemented corrective action plan. Therefore, the Working Group is unable to demonstrate to what extent it has moved closer to eliminating and reducing unsupported JVs and to what extent the Army’s financial statements are becoming auditable for fiscal year 2018.

In addition, according to members of the Working Group as of March 2017, 16 of the 20 remaining corrective action plans developed are pending implementation because they require system changes, which need to be negotiated with the contractor selected to make the system changes. Therefore, the Working Group has developed temporary mitigating procedures to support those JVs required to be recorded until system changes are implemented. For example, one of the root causes that the Working Group identified was a JV recorded in DDRS-B related to the accounting entry to record a customer refund from a prior year purchase. When DFAS personnel record an accounting entry for a customer refund from a prior year purchase into GFEBS, the system erroneously records the transaction as a current year refund, through the reimbursements and other income earned—collected account, rather than as a current year obligation and outlay as required by OMB Circular A-11, Preparation, Submission, and Execution of the Budget. Until this system change is made to GFEBS so that it can differentiate between the return of a prior year purchase or a current year purchase, DFAS has to reverse each entry and record the current year obligation and outlay with an additional JV into DDRS-B to correct the error made and include with the JV an explanation of the situation as well as detail level transactions to support the JV. DFAS considers this type of support to be a temporary solution; however, until system changes are made, the Working Group will be unable to implement the corrective action plans developed and resolve the root causes identified or determine whether the corrective action plan developed for this issue will be effective.

Conclusions

Since 2015, the Working Group has been analyzing manual unsupported JVs in DDRS-B to determine their root causes and to concentrate its efforts on getting the Army’s financial statements audit ready. As of March 2017, the Working Group had not analyzed system-generated JVs that constitute 90 percent of the total dollar value or 97 percent of the total number of unsupported JVs because of the volume and potential correction complexity of these JVs. Also, the Working Group had not analyzed unsupported JVs at the transaction level or in DDRS-AFS. Although we recognize that these efforts will be an ongoing, iterative process, until the Working Group has identified and completed its analyses of root causes for all unsupported JVs, the Army will not be able to correct the overall unsupported JV issue.

As of March 2017, the Working Group had developed 38 corrective action plans and verified successful implementation of 18 corrective action plans to address the issue of unsupported JVs in the Army’s general fund. However, because the Working Group’s root cause analyses were limited to a small percentage of the total unsupported JVs, the development of corrective action plans was likewise limited. In addition, the metrics used to analyze JVs and monitor implemented corrective actions are not designed to provide the level of detail necessary to sufficiently monitor whether root causes identified are resolved through corrective action plans. As a result, the Army cannot determine to what extent it has reduced unsupported JVs in its general fund and how much more effort is required to fully address the issue and help ensure that the Army’s financial statements will be auditable for fiscal year 2018.

Recommendations for Executive Action

We are making the following two recommendations to the Army: The Assistant Secretary of the Army for Financial Management and Comptroller should ensure that the Working Group identifies and analyzes the full population of manual unsupported JVs at the transaction level and in DDRS-AFS and determines the root causes for these JVs. (Recommendation 1)

The Assistant Secretary of the Army for Financial Management and Comptroller should work with DFAS to enhance the monthly JV metrics report or develop another method to sufficiently monitor the extent to which the Working Group has identified the root causes of unsupported JVs and to determine the extent to which unsupported JVs are being reduced based on the implemented corrective actions. (Recommendation 2)

Agency Comments

We provided a draft of this report to the Army for review and comment. In its written comments, reprinted in appendix II, the Army concurred with our recommendations and provided information on actions it has taken or plans to take to address them.

We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense (Comptroller) and Chief Financial Officer, the Deputy Chief Financial Officer, the Director of Financial Improvement and Audit Readiness, the Secretary of the Army, and the Director of the Defense Finance and Accounting Service. 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. Key contributors to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to report on the extent to which the Journal Voucher Working Group (Working Group) had, as of March 2017, (1) performed analyses to determine the root causes of unsupported journal vouchers (JV) for the Department of the Army’s (Army) general fund and (2) developed and monitored the implementation of corrective action plans to address identified root causes of unsupported JVs.

To address our first objective, we reviewed our prior relevant reports and reports by the Department of Defense (DOD) and DOD’s Office of Inspector General to gain an understanding of the nature of the issues identified related to the Army’s unsupported JVs for its general fund and how they affect DOD’s audit readiness as described in the Financial Improvement and Audit Readiness (FIAR) Guidance. We also reviewed various Army, Defense Finance and Accounting Service, and DOD financial reporting guidance; performed walk-throughs of the JV process; and interviewed agency officials to gain an understanding of the processes for recording JVs and analyzing causes of unsupported JVs, including (1) the various types of JVs recorded and reasons why the JVs are unsupported, (2) parties responsible for preparing and approving JVs, and (3) requirements for determining and documenting the root causes of unsupported JVs and monitoring such efforts.

Further, we obtained the Working Group’s root cause analyses performed and completed as of March 2017. We analyzed the documentation provided and interviewed agency officials to determine the extent to which (1) root cause analyses have been performed for all unsupported JVs of the Army’s general fund and (2) root causes had been identified to address the issue of unsupported JVs. We also reviewed documentation provided to determine whether the Working Group was including all unsupported JVs in the population used for analyses.

To address our second objective, we obtained the Working Group’s documentation of corrective action plans developed and implemented as of March 2017 to address the root causes identified by the Working Group. We inquired about the development and the status and implementation of each corrective action plan. We also inquired about the steps the Working Group has taken to validate and monitor the effectiveness of corrective action plans that have been implemented to address root causes identified. We also inquired about how the Working Group measures its progress using the monthly JV metrics reports, which the Working Group identified as its primary source for monitoring progress, and analyzed the JV metrics reports from October 2016 to March 2017. Further, we inquired of the reasons why corrective action plans had not been fully implemented.

We also interviewed members of the Working Group to confirm our understanding of any limitations or challenges identified during the root cause analyses. We obtained their views on these or other concerns and reviewed relevant documentation supporting their evaluation of the root causes, efforts to address the root causes, and the potential impact on the Army’s financial management and future auditability.

We interviewed Army officials about efforts to monitor the effectiveness of the Working Group’s corrective action plans to determine what actions, if any, the Army has taken to monitor the corrective action plans regarding deficiencies related to unsupported JVs. We considered whether the Working Group’s efforts for developing and monitoring the implementation of corrective action plans addressing identified deficiencies followed the relevant criteria contained in internal control standards; Office of Management and Budget Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control; and DOD FIAR Guidance.

We conducted this performance audit from December 2015 to October 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Comments from the Department of the Army

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, the following individuals made key contributions to this report: Lynda Downing (Assistant Director), Francine DelVecchio, Natasha Guerra, Cole Haase, Jason Kelly, and David Scouten.