DOD Financial Management: Actions Are Needed on Audit Issues Related to the Marine Corps' 2012 Schedule of Budgetary Activity
Released: 2015-08-03T00:00:00

Letter

Background

The Marine Corps was established on November 10, 1775, to provide security to naval vessels and boarding parties and to conduct limited land engagements in support of naval operations. In fiscal year 2012, the Marine Corps reported that it had about 198,000 active duty marines, 39,000 reservists, and 22,000 civilian employees. At any given time, approximately 30,000 marines are deployed in operations supporting the nation’s defense or military operations other than war. The Commandant of the Marine Corps has overall responsibility for Marine Corps operations, including the operating forces and supporting bases, air stations, and installations. To support its core mission, the Marine Corps received $28.7 billion in General Fund appropriations for fiscal year 2012—or 16.6 percent of the Department of the Navy’s appropriations. Figure 1 shows the amounts of the Marine Corps’ appropriations, including allocations of funds from appropriations shared with the Navy.

Long-standing DOD Financial Management Weaknesses and Marine Corps SBR Audit Readiness History

The Marine Corps’ efforts to achieve audit readiness for its budgetary data were conducted within DOD’s overall high-risk environment. GAO’s High-Risk Series includes DOD risks related to weaknesses in financial management operations, business transformation, and business system modernization.

Long-standing DOD Financial Management Weaknesses

DOD has acknowledged that long-standing weaknesses in its internal controls, business systems, and processes have prevented it from demonstrating that its financial statements are reliable, including information on budgeted spending reported in its SBR. Our February 2015 High-Risk Series updates on DOD financial management, business transformation, and systems modernization reported that the department had made limited progress in resolving long-standing weaknesses in these areas. DOD has undertaken several financial management improvement initiatives over the years to address weaknesses in business systems, processes, and controls through its FIAR strategy, semiannual FIAR Plan Status Reports, and financial management reform methodology contained in the FIAR Guidance. DOD also spends billions of dollars annually to maintain key business processes and operations and acquire modern systems that are fundamental to achieving its business transformation goals, including systems that support key functions, such as personnel, financial management, health care, contract management, acquisition, supply chain, and logistics. However, progress in making system and process improvements has been slow, and weaknesses in these areas have adversely affected the efficiency and effectiveness of DOD operations and hindered DOD’s ability to achieve financial audit readiness.

While the department has made some progress toward demonstrating leadership commitment and developing capacity and action plans in all three areas, DOD continues to face challenges in monitoring corrective actions and demonstrating progress. In August 2013, we reported that DOD risk management policies associated with preparing auditable financial statements through the FIAR Plan are not in accordance with widely recognized guiding principles for effective risk management. For example, DOD has not addressed key risks associated with its component agencies’ reliance on service providers for significant aspects of their financial operations and their inability to maintain documentation to support transactions. In addition, DOD has continued to identify a department-wide need for qualified and experienced personnel—not only at working levels, but also in senior leadership positions—as a risk to achieving its financial management improvement and audit readiness goals. Because our related reports include numerous recommendations to DOD for addressing these and other financial management and audit readiness weaknesses, we are not making additional recommendations related to these matters in this report.

Marine Corps SBR Audit Readiness History

The Marine Corps initially asserted that it was ready to undergo an audit of its fiscal year 2009 General Fund SBR on September 15, 2008. However, after reviewing the status of the Marine Corps audit readiness efforts, on April 10, 2009, the DOD OIG reported that the Marine Corps’ assertion of audit readiness was not accurate and that the documentation supporting its assertion was not complete. Although the Marine Corps made progress toward audit readiness during fiscal year 2009, the DOD OIG reported that a number of issues led auditors to conclude that an audit of the Marine Corps’ fiscal year 2009 SBR would not have positive results. For example, the OIG stated that after 3 months of extensive effort by the Marine Corps, adequate supporting documentation was received for only 74 percent of the sampled budgetary transactions. The DOD OIG reported that unless the issues were resolved, the risk of a disclaimer of opinion would be high. The DOD OIG also reported that the Marine Corps had identified remediation activities that needed to be accomplished before an audit of its SBR was undertaken. The DOD OIG suggested that the Marine Corps consider requesting an audit of its fiscal year 2010 SBR. The OIG subsequently contracted for assistance from an audit firm in performing an audit of the Marine Corps’ fiscal year 2010 SBR. Because the Marine Corps asserted SBR audit readiness at the beginning of fiscal year 2010, it was not subject to DOD’s May 2010 FIAR Guidance, which required each DOD component to review its processes and controls to identify needed corrective actions and develop a financial improvement plan with roles, responsibilities, and milestone dates for completing actions on assessable units as part of a component-level, overall financial improvement and audit readiness plan.

In September 2011, we reported that the DOD OIG issued a disclaimer of opinion on the Marine Corps’ fiscal year 2010 SBR because the Marine Corps could not provide documentary support for transactions in a timely manner, and support for transactions was missing or incomplete. We also reported that the Marine Corps experienced difficulty identifying and providing complete populations of transactions that the auditors could confirm and use as a basis for substantive testing. In addition, the DOD OIG reported that the Marine Corps did not have adequate processes, systems, and controls over accounting for and reporting on the use of budgetary resources. Further, the Marine Corps could not provide evidence that reconciliations for key accounts and processes, such as the reconciliation (or matching) of payments (outlays) to bulk (estimated) obligations for shipments of household goods recorded in its Military Personnel appropriation account, were being performed. The OIG reported that Marine Corps management had not asserted that all corrective actions from eight previously identified material weaknesses had been completed. These weaknesses included, among others, deficiencies in financial management systems and deficiencies in controls over Fund Balance with Treasury and unobligated balances.

During its fiscal year 2011 SBR audit effort, the Marine Corps again experienced difficulty in identifying complete populations and providing supporting documentation for samples of transactions selected by the auditors for testing. In November 2011, the DOD OIG issued a disclaimer of opinion on the Marine Corps’ fiscal year 2011 SBR, basically for the same reasons as the fiscal year 2010 disclaimer. However, based on discussions with DOD Comptroller, Navy, and Marine Corps officials after the audit report was issued, the OIG decided to give the Marine Corps additional time to provide audit documentation that had not been obtained during the original time frame of the audit. Consequently, on December 29, 2011, the OIG extended the audit of the Marine Corps’ fiscal year 2011 SBR to March 31, 2012. Despite the extended testing period, the Marine Corps was still unable to provide timely and relevant supporting documentation necessary for completing audit procedures to determine whether the Marine Corps’ fiscal year 2011 SBR was presented fairly. As a result, the DOD OIG’s November 2011 disclaimer of opinion on the Marine Corps’ fiscal year 2011 SBR was not amended. For fiscal year 2012, the DOD OIG continued as the auditor with responsibility for issuing the audit opinion and contracted with an audit firm for assistance in performing an audit of the Marine Corps’ budgetary activity reported on a current year General Fund schedule, beginning with fiscal year 2012 appropriations.

Relationship of the Schedule of Budgetary Activity to the Statement of Budgetary Resources

The Marine Corps’ fiscal year 2012 General Fund Schedule is an interim, DOD component-level special report intended to provide a building block to an SBR audit through audits of consecutive fiscal year schedules of budgetary activity. The schedule of budgetary activity, like the SBR, is designed to provide information on budgeted spending authority as outlined in the President’s Budget, including budgetary resources, availability of budgetary resources, and how obligated resources have been used. The SBR and the schedule of budgetary activity aggregate account-level information reported in the Standard Form (SF)-133, Report on Budget Execution and Budgetary Resources, and summarize budgetary data reported in the Program and Financing schedules in the subsequent President’s Budget. Both the SBR and the schedule of budgetary activity consist of four separate, but related, sections that provide information about budgetary resources, the status of budgetary resources, changes in obligated balances, and outlays for major budgetary accounts. However, instead of covering the full range of SBR activity on current and expired appropriations that have not canceled, the first-year Schedule of Budgetary Activity covers only activity on current fiscal year appropriations. Subsequent fiscal year Schedules of Budgetary Activity would include activity in subsequent years’ appropriations, building toward an SBR. For example, in the second year, the fiscal year 2013 Schedule of Budgetary Activity would include fiscal year 2013 budgetary activity related to fiscal year 2012 and 2013 appropriations.

Budgetary Resources. This section of a first-year schedule of budgetary activity shows total budgetary resources made available to the agency for obligation during the current fiscal year only. It consists of new budget authority, reimbursements, and other income. The first-year schedule of budgetary activity does not include unobligated amounts from prior periods, commonly referred to as beginning balances. In contrast, the SBR includes unobligated amounts available from prior reporting periods; transfers available from prior year balances; and adjustments, such as recoveries of prior year obligations. In addition, the SBR includes all other information provided in this section of the schedule of budgetary activity.

Status of Budgetary Resources. This section of the schedule of budgetary activity and the SBR displays the status of budgetary resources at the end of the period and consists of obligations incurred and the unobligated balances at the end of the period that are available for future use. For the schedule of budgetary activity and the SBR, the total for this section must agree with the total for the Budgetary Resources section described above, as this section describes the status of total budgetary resources. In addition to the current year activity, the SBR includes obligations that are unavailable except to adjust or liquidate obligations chargeable to prior period appropriations.

Change in Obligated Balance. This section of the schedule of budgetary activity consists of obligations incurred in the current year, less current year outlays. In addition to current year activity, the SBR would also include unpaid obligations brought forward from the prior years and recoveries of prior year unpaid obligations.

Outlays. This section shows the relationship between obligations and outlays (also referred to as disbursements or expenditures) and discloses the payments made to liquidate obligations. Obligations are usually liquidated by means of cash payments (outlays), such as currency, checks, or electronic fund transfers. This section reconciles outlays with obligations incurred and the change in obligated balances during the year. The content of this section is the same for the SBR and the schedule of budgetary activity.

Basis of Accounting

The Office of Management and Budget (OMB) requires federal government financial statements, including the SBR, to be presented in accordance with GAAP for the federal government. The Federal Accounting Standards Advisory Board (FASAB) establishes GAAP for federal governmental entities. Federal government entities also are required to follow the U.S. Standard General Ledger (USSGL) Chart of Accounts, established by the Department of the Treasury (Treasury) for budgetary and proprietary accounting. Budgetary accounts related to the SBR and schedule of budgetary activity are used to recognize and track budget approval and execution, whereas proprietary accounts are used to recognize and track assets and liabilities reported on the Balance Sheet and revenue and expenses reported on the Statement of Net Cost.

The USSGL accounts with the most significance to the Marine Corps’ General Fund Schedule are those accounts related to budget authority, including Appropriations and Collections; Obligations for orders of goods and services; and Outlays, or cash payments for goods and services that have been delivered (received and accepted by the agency). Figure 2 shows the flow of budgetary resources from receipt of appropriations and collections through apportionment and allotment of funds, obligation of funds for orders of goods and services, and receipt and acceptance of goods and services to cash outlay or payment for the items received.

Purpose, Objectives, and Conduct of a Financial Statement Audit

Audits provide essential accountability and transparency over government programs. The purpose of a financial statement audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, which would include GAAP for the reporting entity. An audit conducted in accordance with GAGAS enables the auditor to form that opinion, which enhances the degree of confidence that intended users can place on the financial statements. OMB requires that audits of federal financial statements be performed in accordance with GAGAS and OMB Bulletin 07-04. For the federal government, OMB issues financial reporting requirements that are incorporated into GAAP and audit requirements for audits of federal financial statements that supplement GAGAS. OMB guidance is particularly important because of the unique requirements related to the preparation of the SBR and the consolidation of the federal government’s financial statements.

GAGAS provide a framework for performing high-quality audits with competence, integrity, objectivity, and independence to provide accountability and to help improve government operations and services. For financial audits, GAGAS incorporate the American Institute of Certified Public Accountants (AICPA) fieldwork and reporting standards and the related Statements on Auditing Standards (SAS), unless specifically excluded or modified by GAGAS. The SAS are codified into audit sections, referred to as AUs.

For this report, we generally refer to GAGAS and the specific, underlying AICPA standards, where appropriate. We also refer to the Financial Audit Manual, which is jointly approved and issued by GAO and federal agency inspectors general, for applicable audit guidance. The Financial Audit Manual presents a methodology for performing financial statement audits of federal entities in accordance with professional standards.

As the basis for the auditor’s opinion, GAGAS require the auditor to obtain reasonable assurance about whether the financial statements as a whole, or an element of the financial statements being audited in a Special Report, such as the Marine Corps’ Fiscal Year 2012 General Fund Schedule, are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high, but not absolute, level of assurance that is reached when the auditor has obtained sufficient, appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. In general, misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions that users make based on the financial statements. Judgments about materiality are made in light of surrounding circumstances and involve both qualitative and quantitative considerations. These judgments are affected by the auditor’s perception of the financial information needs of users of the financial statements, by the size or nature of a misstatement, or both. The auditor has no responsibility to obtain reasonable assurance that misstatements that are not material to the statements as a whole, whether caused by fraud or error, are detected.

Management is responsible for the fair presentation of financial statements that reflect the nature and operations of the entity. When undergoing an audit, management represents that the financial statements are fairly presented in conformity with GAAP. By doing so, management implicitly and explicitly makes assertions regarding the recognition, measurement, presentation, and disclosure of the information in the financial statements and related disclosures as a whole. In accordance with auditing standards, the auditor should assess the risk of material misstatement at the financial statement and relevant assertion levels, and design and perform audit procedures to reduce the risk of material misstatement to an acceptably low level. Auditing standards state that financial statement assertions used by the auditor about classes of transactions and events for the period under audit fall into the following categories.

Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.

Completeness. All transactions that should have been recorded were recorded.

Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately.

Cutoff. Transactions and events have been recorded in the correct accounting period.

Classification. Transactions and events have been recorded in the proper accounts. For the schedule of budgetary activity, this includes ensuring that transactions are recorded to the proper appropriation or fund.

In addition, federal agency management is responsible for establishing and maintaining internal controls to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with laws and regulations under the law commonly known as the Federal Managers’ Financial Integrity Act (FMFIA). FMFIA and OMB Circular No. A-123 require the head of each executive agency to annually report to the President and the Congress assurance statements, including assurance regarding the effectiveness of internal controls over financial reporting and, for designated large federal agencies like DOD, whether financial management systems conform to government-wide requirements mandated by the Federal Financial Management Improvement Act of 1996 (FFMIA).

In conducting a financial audit, the auditor develops the audit plan; assesses internal controls; performs testing; forms conclusions based on the audit evidence obtained; and based on that evidence, issues an opinion or a disclaimer. These four areas of work are referred to as the four phases of an audit.

In the planning phase, the auditor obtains an understanding of the audited entity’s operating environment, including business processes and the related systems and controls; reviews financial activity related to significant financial statement line items and accounts; assesses the risk of material misstatement; and develops an audit strategy. Planning continues throughout the audit as decisions are made about the risk of material misstatement and whether to perform additional procedures.

During the internal control phase, the auditor identifies and tests key internal controls and information technology system controls as a basis for determining the extent to which the auditor will be able to rely on controls in conducting the audit. Based on the information obtained during the planning and internal control phases, the auditor determines the nature, extent, and timing of substantive testing. Depending on the extent to which controls can be relied on for assurance of fair presentation of the financial statements, the auditor will perform more or less substantive testing.

In the testing phase, the auditor performs substantive testing of detail support for transactions and may also perform analytical procedures. In accordance with AU Section 318, these substantive procedures are performed to detect material misstatements at the relevant assertion level and include tests of classes of transactions, account balances, and disclosures.

During the reporting phase, the auditor reviews the body of evidence obtained, reviews the conclusions reached about that evidence, and determines the materiality of uncorrected misstatements and untested amounts as a basis for forming an opinion. Depending on issues identified during the audit, the auditor may decide to perform additional procedures to support a conclusion on the audit results.

The Audit of the Marine Corps’ Fiscal Year 2012 Schedule of Budgetary Activity Did Not Obtain Sufficient, Appropriate Evidence to Support the Audit Opinion

Our review of the audit documentation supporting the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule identified key areas where sufficient audit procedures were not performed, under professional auditing standards, and consequently sufficient, appropriate evidence was not obtained to support the reported audit opinion. Specifically, the audit documentation does not provide evidence that the auditors had (1) performed sufficient procedures to determine the completeness of budgetary transactions reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule, (2) performed sufficient procedures to determine the reliability of certain evidence used to support transactions included on the Marine Corps’ Schedule, (3) performed sufficient procedures to determine whether budget activity was recorded in the proper period and shipment obligations were properly recorded, and (4) properly considered and evaluated the audit evidence in concluding and reporting on the audit results.

On March 23, 2015, the DOD OIG announced the withdrawal of its Auditor’s Report on the Marine Corps’ Fiscal Year 2012 General Fund Schedule. In a memorandum to DOD and Marine Corps leadership, the OIG’s Deputy Inspector General for Auditing stated that subsequently discovered facts identified during the audit of the Marine Corps’ Fiscal Year 2014 General Fund Schedule caused the OIG to question the completeness of the information on which the OIG based its opinion. More specifically, the OIG reported that (1) suspense accounts, which the U.S. Treasury maintains and which are used to temporarily hold transactions that could not be posted to a valid appropriation, contained Marine Corps transactions; (2) it believes that this condition existed in fiscal year 2012; and (3) it was unable to determine whether such transactions were material in relation to the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Marine Corps transactions recorded to suspense accounts would not have been recorded in the Marine Corps’ Fiscal Year 2012 Schedule. At that time, the OIG indicated that once additional information has been gathered and analyzed, the fiscal year 2012 audit opinion will be revised in light of its analysis and reissued. In commenting on our report, the OIG stated that it would consider all relevant information, including the findings and recommendations in our report, the findings of the four ongoing audits of suspense accounts, and a report from the OIG’s Quality and Standards Office before deciding whether to reissue an opinion on the Marine Corps’ Fiscal year 2012 General Fund Schedule.

The OIG’s Procedures to Determine Completeness of Budgetary Transactions Were Insufficient

Auditing standards require, among other things, that the auditor (1) assess the risk of material misstatement at the relevant assertion level and (2) perform substantive procedures for all relevant assertions related to material classes of transactions, account balances and disclosures. Auditing standards further state that existence and completeness are always relevant assertions. Testing for completeness may be performed in a number of ways, including the following:

Tests of detail transactions. When testing detail transactions for the completeness assertion, the auditor should select from audit evidence indicating that an item should be included in the relevant financial statement amount and should investigate whether the item is so included. For example, the auditor would select from data sources outside or independent of the amounts being tested.

Reconciliations. In performing a reconciliation, the auditor reconciles two populations and tests reconciling items to determine whether the two populations are consistent. For example, reconciliation would provide evidence that the transactions recorded in one population, in the aggregate, were also recorded in the other population.

We noted several areas where there is a high risk of material misstatement related to the completeness of outlays and obligations reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule, for which the auditor either did not perform any testing procedures or did not perform sufficient procedures to determine whether there were material misstatements. Specifically, there is a high risk of material misstatement that nonpayroll transactions recorded in feeder systems may not be reported in the Marine Corps’ general ledger system—the Standard Accounting, Budgeting, and Reporting System (SABRS)—and transactions recorded in the current year may be improperly recorded to appropriations not included in the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

Figure 3 shows the business system data flow from the feeder systems through the Defense Cash and Accountability System (DCAS) to the Marine Corps’ SABRS general ledger system and through the Defense Departmental Reporting Systems (DDRS) to financial statements and the schedules of budgetary activity.

The Marine Corps has reported that over 90 percent of the financial transactions in SABRS originate in feeder systems and that it has 25 primary feeder systems. Typical tests for completeness might include (1) tracing of samples of transactions from significant feeder systems to ensure that the transactions were recorded in SABRS; (2) reconciling feeder system data to transactions in SABRS; and (3) confirming that rejected feeder system transactions were properly identified, isolated, and corrected in a timely manner. The audit documentation shows that the audit team reconciled the transfer of fiscal year 2012 civilian and military payroll data from the related payroll systems to SABRS and concluded that the military and civilian payroll populations in SABRS were sufficiently complete. However, the audit documentation does not include audit procedures to test the completeness of fiscal year 2012 nonpayroll feeder system data recorded in SABRS.

The risk of material misstatement in the Marine Corps’ Fiscal Year 2012 General Fund Schedule related to the transfer of transactions from nonpayroll feeder systems is high, we believe, based on the following conditions:

Nonpayroll feeder system transactions were material, accounting for about half of the Marine Corps’ reported fiscal year 2012 budgetary activity.

We identified examples of feeder system transactions that were not included in SABRS or were not included in SABRS on a timely basis.

The Marine Corps did not have adequate processes for determining whether all transactions in the nonpayroll feeder systems were included in SABRS.

There were reported internal control weaknesses that prevented the Marine Corps from reasonably assuring that all transactions in nonpayroll feeder systems were recorded in SABRS. For example, 11 of the Marine Corps’ open recommendations were related to weaknesses in controls over transfers of feeder system data to SABRS. Open Marine Corps’ recommendations, discussed later in this report, addressed actions to (1) assure the completeness of populations of transactions and account balances, (2) test interface controls between various feeder systems and the Marine Corps’ SABRS general ledger system, and (3) perform reconciliations of feeder system data to SABRS.

There were a significant number of rejected transactions. For example, the audit documentation related to the Marine Corps’ corrective actions on data transfers to SABRS included examples of daily reports of rejected feeder system transactions covering the months of April through July of 2012, each of which listed thousands of transactions that were rejected by SABRS. Our analysis of the rejected transactions determined that 70 percent of these transactions related to significant Marine Corps nonpayroll-related feeder systems involved with supply order and shipment transactions. In addition, the Marine Corps did not have a formal policy and control procedure for correcting errors that occur during data interface processing.

DOD’s November 2013 FIAR Status Report, issued 1 month prior to the OIG’s audit report on the Marine Corps’ Fiscal Year 2012 General Fund Schedule, showed that most Statement on Standards for Attestation Engagements (SSAE) No. 16 examinations of the effectiveness of controls over key DOD business feeder systems had not been completed, raising questions about the completeness and the integrity of the processes and underlying data residing in these systems.

With regard to the completeness of transaction data in SABRS, members of the audit team told us that they had performed certain other tests. First, the team indicated, and the audit documentation showed, that it traced data from SABRS through the financial reporting process to the Marine Corps’ Fiscal Year 2012 General Fund Schedule. As described in the audit documentation, this procedure would help confirm that data were not lost in processing from the general ledger to the Marine Corps’ Fiscal Year 2012 General Fund Schedule. However, it does not provide evidence concerning the completeness of the data residing in SABRS, most of which originate in business systems outside of SABRS.

Second, members of the audit team told us that they traced the Marine Corps’ SABRS general ledger system transaction data to transactions included in the Marine Corps’ Fund Balance with Treasury reconciliation process and did not identify any missing transactions. However, these procedures would not be effective for testing completeness of transactions recorded in SABRS because they begin with items that are already recorded in SABRS. Further, the audit documentation does not include evidence of a complete comparison of fiscal year 2012 SABRS transaction activity to fiscal year 2012 Fund Balance with Treasury reconciliations. For example, the audit documentation did not include a review of Marine Corps transactions submitted to Treasury by other federal agencies and other DOD components, such as the Army and U.S. Transportation Command, to determine whether they were properly recorded in SABRS.

Transactions Rejected during Transfers to SABRS

One reason that feeder system transactions may not be recorded in SABRS relates to rejected transactions. According to Defense Finance and Accounting Service (DFAS) officials, transactions originating in feeder and other systems that cannot be posted to a valid appropriation are rejected and temporarily held by the Marine Corps for research, and if not resolved within the month, are recorded to suspense accounts until they are investigated, resolved, and correctly recorded. Any Marine Corps budgetary transactions that were included in suspense accounts at the end of fiscal year 2012 were not included in the Marine Corps’ Fiscal Year 2012 General Fund Schedule. As noted earlier, in late March 2015, the OIG withdrew its opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule because it was unable to determine whether transactions recorded in suspense accounts maintained by Treasury that were not included in the Marine Corps’ Schedule were material to the Schedule.

As discussed later in this report, the Marine Corps had not yet addressed all information technology system recommendations from its fiscal years 2010 and 2011 SBR audits related to control weaknesses over data transfers between feeder systems and SABRS. One such recommendation relates to the lack of a formal policy and control procedure for correcting errors that occur during data interface processing, in which transactions flow from feeder systems through DCAS and ultimately into SABRS. Such a policy would help assure that identified errors and rejected transactions are reviewed by management, resolved, and resubmitted for processing. The audit documentation on the Marine Corps’ corrective actions for this recommendation shows that the Marine Corps took action to develop a report to monitor system rejects. However, the audit documentation used to support closing this recommendation does not include evidence that the auditors, in closing the recommendation, had performed procedures to (1) determine the causes of the rejected transactions as a basis for determining if appropriate corrective actions had been designed and implemented or (2) confirm that rejected feeder system transactions were properly resolved.

If audit procedures to confirm the completeness of transfers of nonpayroll feeder system data to SABRS are not sufficient, there may be undetected material amounts of transactions that are not properly included in the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Further, (1) populations used for substantive testing throughout the audit may not be complete, (2) sample sizes may not be appropriate, and (3) statistical tests may not be reliable for concluding on the results of the audit.

Transactions Recorded in Fiscal Year 2012 to Prior Year Appropriations

Another risk related to completeness is the risk that transactions recorded in fiscal year 2012 to prior year appropriations, which are excluded from the Marine Corps’ Fiscal Year 2012 General Fund Schedule, should have been charged to 2012 appropriations included in the Schedule. The Marine Corps’ Fiscal Year 2012 General Fund Schedule is represented to include only budgetary transactions recorded to fiscal year 2012 current appropriations. Typical tests for completeness of the general ledger with respect to such transactions would include examining appropriate evidence that samples of fiscal year 2012 budgetary transactions charged to prior year appropriations were properly charged to such prior year appropriations.

The audit documentation and discussions with the audit team did not disclose any testing of transactions related to fiscal year 2012 activity recorded to fiscal year 2011 and prior appropriations to determine whether there was evidence that such transactions should have been recorded to fiscal year 2012 appropriations. However, we believe the risk of material misstatement to the Marine Corps’ Fiscal Year 2012 General Fund Schedule related to transactions recorded in fiscal year 2012 to prior year appropriations that should have been charged to fiscal year 2012 appropriations is high based on numerous reported Marine Corps’ weaknesses in controls over accounting and financial reporting and the magnitude of fiscal year 2012 Marine Corps’ outlays that were recorded to prior fiscal year appropriations. For example, Treasury’s Combined Statement of Receipts, Outlays, and Balances, Fiscal Year 2012 includes data on federal agency fiscal year 2012 outlays that were recorded to prior fiscal year appropriation accounts. Our review of the reported Marine Corps’ fiscal year 2012 outlay activity determined that over $3.8 billion in such outlay activity was recorded to fiscal year 2011 appropriations.

Despite these reported conditions, there was no evidence in the audit documentation that the OIG assessed the risk of material misstatement associated with fiscal year 2012 appropriation activity being improperly recorded in a prior fiscal year appropriation account, and no evidence that the OIG performed tests for completeness with respect to fiscal year 2012 appropriation transactions that may be improperly recorded in prior year appropriations. In response to our concern, the OIG stated that the scope of its audit only covered fiscal year 2012 current activity. As such, fiscal year 2011 or prior activity would not be in the scope of the audit. However, absent testing to identify fiscal year 2012 transactions improperly recorded to fiscal year 2011 and prior appropriations, there may be material budgetary transactions that were improperly excluded from the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

The OIG Did Not Perform Sufficient Procedures to Determine the Reliability of Certain Evidence Used in Transaction Testing

Testing of detail transactions is a basic audit test designed to determine whether the recorded transactions are supported by sufficient, appropriate evidence. It involves comparing recorded information to supporting documents to determine whether the transaction is valid (authorized and approved) and is recorded in the proper period, to the proper appropriation, and at the proper amount. For example, if the sampled transaction is an outlay for an item purchased, the auditor would review documents, such as the original purchase order, invoice, receiving report, and payment voucher, to substantiate the validity and amount of the sampled transaction.

In some instances, the auditor may be unable to obtain sufficient, appropriate evidence to support a selected transaction. In such cases, the auditor should perform alternative procedures to determine whether the transaction was properly supported. For example, the auditor may confirm the details of the transaction with a third party. If the auditor is unable to obtain sufficient, appropriate evidence from alternative procedures, such items are generally treated as misstatements and are accumulated to determine whether such unsupported amounts are material in the aggregate.

In examining evidence supporting a transaction, the auditor should consider the reliability of the information to be used as audit evidence, such as electronic documents, including consideration of controls over their preparation and maintenance where relevant. Such consideration would normally include any information that raises doubts about the reliability of the evidence. Also, when the auditor uses information produced by the entity to perform audit procedures, the auditor should obtain audit evidence about the accuracy and completeness of the information, for example, by performing procedures to determine whether the related controls over the data are effective.

Auditing standards also state that the reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. Even when audit evidence is obtained from sources external to the entity, circumstances may exist that could affect the reliability of the information obtained. For example, audit evidence obtained from an independent external source may not be reliable if the source is not knowledgeable. This means that regardless of the source of the information, if the auditor has doubts about the reliability of information to be used as audit evidence or is aware of problems with the reliability of the data, the auditor should determine what modifications or additions to audit procedures are necessary to resolve the issues.

The audit documentation shows that the auditors had requested appropriate transaction documents from the Marine Corps, including orders, receiving reports, and invoices. However, the audit documentation also shows that when the Marine Corps was unable to provide the requested documents for a selected transaction, the auditors relied on data generated from other DOD agencies that provided goods or services as evidence to support the transaction. However, the auditors did not document their consideration of the reliability of the evidence provided from these other DOD agencies, although there was evidence that should have raised doubts about its reliability. In addition, the auditors relied on support produced from certain Marine Corps systems without obtaining sufficient evidence about the accuracy and completeness of the information.

The following examples describe well-known, documented issues related to certain DOD systems that, in our view, raise significant doubts about the reliability of data from those processes and systems that the OIG relied on in its transaction testing.

DOD reported the Defense Logistics Agency’s (DLA) Military Standard Requisitioning and Issues Procedures (MILSTRIP) as a department-wide material weakness in its fiscal year 2012 agency financial report, stating that the department could not effectively account for transactions and balances in the MILSTRIP orders process. DOD’s reported target date for completing corrective actions was 2014.

U.S. Transportation Command had not yet asserted audit readiness, and it had not undergone an SSAE No. 16 examination as of the end of fiscal year 2012. Further, U.S. Transportation Command uses the Defense Enterprise Accounting and Management System (DEAMS) as its official billing system, and DEAMS had not yet undergone testing of its financial reporting controls. However, the DOD OIG had previously reported that DEAMS managers did not maintain an adequate general ledger chart of accounts and that DEAMS managers did not take the steps needed to ensure that DEAMS had the capability to record and track transaction data. As a result, instead of properly recording transactions, such as budget authority, obligations, collections, and disbursements (outlays) at the time of the related events, DEAMS managers relied on DFAS to record journal vouchers (adjusting entries) in DDRS and used other offline electronic processes, such as spreadsheets, to record accounting entries. According to the DOD OIG, because funds control accounting was not being managed in DEAMS, budget execution reports and SBRs were developed using budgetary status data that could not be traced to actual transaction data within the official accounting system. These weaknesses increase the risk of accounting, billing, and financial reporting errors. In disclaiming an opinion on DOD’s department-wide financial statements for fiscal year 2012, the OIG reported that DOD financial management and business feeder systems were unable to adequately support material amounts on the financial statements as of September 30, 2012. The OIG also reported that financial systems did not comply with FFMIA. DOD continued to report that the vast majority of the information needed to prepare the department’s financial statements originates in feeder systems that input data into its financial systems and that the effectiveness of controls over most feeder systems has not been tested to determine whether information in such systems is reliable.

These data integrity issues should have raised significant doubts about the reliability of the information used as evidence to support some of the Marine Corps’ transactions, and should have triggered an assessment of the evidence to determine if it was sufficiently reliable to support the selected transactions. In addition, the auditors should obtain evidence of the accuracy and completeness of audit evidence produced by Marine Corps systems that they rely on for audit testing. If the evidence is not sufficiently reliable, the related amounts recorded in the Marine Corps’ Fiscal Year 2012 General Fund Schedule should be considered misstatements and evaluated to determine whether such inadequately supported transactions are material.

Our review of the audit documentation for sample outlay transactions that the auditors indicated were properly supported by sufficient, appropriate evidence identified numerous instances where the auditors relied on data from certain Marine Corps and other DOD agency business systems and processes with data reliability issues. We were unable to determine the full extent of transactions supported by such evidence because the support for transaction samples that passed the auditor’s tests (i.e., were not identified as exceptions) was not always readily available. However, our review of the audit documentation identified the following examples of outlay transactions selected for substantive detail testing that were supported solely by data generated from these DOD business systems and processes.

When the Marine Corps could not provide original support for sample military supply order transactions, the audit firm relied on data from feeder systems and business processes with data reliability issues. These systems included the Marine Corps’ Supported Activities Supply System (SASSY) and other Defense agency business systems, including systems involved with DLA’s MILSTRIP business process. Our review of the OIG’s audit documentation for 257 outlay sample items that were retested by the OIG as part of its oversight of the audit firm’s substantive tests of Marine Corps outlays found that at least 42 of the 257 supply order outlay sample items (16 percent) shown as tested without exception were supported solely by data generated directly from such DOD systems and processes. As discussed later, OIG management accepted the same type of feeder systems data as sole support for 13 DLA MILSTRIP transactions and 1 U.S. Transportation Command shipment transaction in control tests for proper cutoff on fiscal year 2012 outlays.

Audit documentation on the results of substantive testing of 94 outlay sample items related to U.S. Transportation Command shipments of military supplies and equipment and shipments of household goods showed that 72 of the 94 shipment outlay sample items (77 percent) were supported solely by consolidated Interfund billings generated by U.S. Transportation Command systems. Interfund billings are transfers of funds between federal agency appropriations that are processed through Treasury’s Intergovernmental Payment and Collection (IPAC) system. Marine Corps Interfund billings included coded accounting lines for multiple transactions, generally without any of the original supporting documentation for the individual transactions. According to the audit documentation, the auditors concluded that 71 of the 72 outlay sample items were tested without exception. The one exception was a sample item for a fiscal year 2011 shipment that the auditors believed was outside the scope of the Marine Corps’ fiscal year 2012 audit and thus recorded an exception.

Figure 4 shows examples of source documents used in DLA’s MILSTRIP and U.S. Transportation Command’s shipment processes compared with the types of DOD system-generated data that the auditors relied on when the Marine Corps could not locate and provide the original transaction documentation to the auditors.

The data reliability issues related to these systems should have been identified in the auditor’s assessment of the risk of material misstatement, and appropriate audit procedures should have been performed to assess the reliability of such evidence and to determine the accuracy and completeness of evidence produced by Marine Corps’ systems. Absent performing sufficient procedures to assess the reliability of such information, there is insufficient evidence to support the accuracy and completeness of transactions that are based solely on this evidence.

Audit Procedures Were Not Sufficient to Determine Whether Budget Activity Was Recorded in the Proper Period and Whether Shipment Obligations Were Properly Recorded

The OIG’s audit documentation did not contain evidence of sufficient procedures for fiscal year 2012 cutoff testing and testing of shipment obligations.

Scope of Cutoff Testing Was Not Adequate to Assure Obligations and Outlays Were Recorded in the Proper Period

As noted previously, cutoff is one of the financial statement assertions that the auditor considers during a financial statement audit. The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period. Cutoff includes consideration of two aspects. The first aspect, which relates to the existence or occurrence assertion, is that all transactions recorded in the current period relate to the current period. The second aspect, which relates to the completeness assertion, is that all transactions that should have been recorded in the current period have been recorded in the current period and are properly included in the financial statements.

Although the OIG performed certain cutoff testing, our review of the audit documentation and discussions with the OIG determined that certain risks of material misstatement related to cutoff were not identified and addressed. The length of the cutoff period tested was not based on a complete assessment of the risk of material misstatement. Further, the auditors did not consider the lengthy transaction cycle for certain transactions that pose a higher risk of transactions being recorded to the wrong fiscal year appropriation. Specifically:

No cutoff testing procedures were performed related to the risk that fiscal year 2012 transactions may have been recorded improperly as fiscal year 2011 activity.

Given the lag time in properly recording certain types of transactions, risk exists that fiscal year 2012 transactions that were recorded after the cutoff period, or that certain types of transactions recorded during the end-of-year cutoff period, could be improperly charged to fiscal year 2013 appropriations.

Because of these risks and uncorrected Marine Corps accounting and financial reporting weaknesses, the risk of material misstatement was high and additional procedures should have been performed to determine whether budgetary activity related to fiscal year 2012 appropriations was recorded in the proper period. Further, because such additional cutoff procedures were not performed, there may be material transactions related to fiscal year 2012 appropriations that were not properly recorded in the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

The objective of cutoff testing is to obtain evidence about whether transactions were recorded in the proper accounting period. Cutoff tests, intended to test for completeness, determine whether transactions recorded prior to the fiscal year or after the end of the fiscal year should have been included in the year being audited. As previously discussed, the Marine Corps’ Fiscal Year 2012 General Fund Schedule was intended to cover current year activity on fiscal year 2012 appropriations. Typical cutoff tests for completeness include testing transactions recorded before the beginning of the reporting period and after the end of the reporting period to determine whether there are material amounts of transactions that should have been recorded in the current reporting period. Obtaining sufficient evidence of proper cutoff may also necessitate that the auditor perform other procedures. For example, if there is a risk that transactions may be recorded after the cutoff testing period or the audit completion date, such procedures may include examining open purchase orders, unpaid invoices, and contracts as of a date near the audit completion date, or estimating amounts that should be recorded in the current year based on appropriate evidence.

To assess the risk of material misstatement related to cutoff and determine the scope of cutoff testing with respect to budgetary activity, auditors would generally determine the length of transaction cycles from when a transaction occurs to when the transaction is properly recorded for significant business processes. Certain business processes may have short cycle times. For example, the transaction cycle for payroll is typically fairly short. For business processes with long cycle times, such as certain types of shipment transactions, obligations made in the last quarter of a fiscal year may not be recorded until the first month or the first quarter in the next fiscal year, or until the outlay is made, which could be several months into the next fiscal year. In such instances, obligations and outlays may not be recorded to the proper accounting period, particularly if subsequent adjustments were not recorded timely. Accordingly, as shown in figure 5, depending on the entity’s transaction cycle times and level of assessed risk of material misstatement, the auditor would plan cutoff testing that considers the length of significant transaction cycles with regard to the beginning and end of the accounting period audited.

Auditing standards provide detailed guidance on obtaining an understanding of the entity and its environment to (1) assess the risks of material misstatement at the financial statement and relevant assertion levels and identify risks by classes of transactions; account balances, and disclosures in the financial statements; (2) relate the risks to what could go wrong at the relevant assertion level; and (3) consider the significance and likelihood of material misstatement for each identified risk in order to design appropriate substantive tests.

Assessment of Risks of Material Misstatement Related to Cutoff Was Not Sufficiently Documented

As noted above, the auditor should assess the risk of material misstatement related to relevant assertions. In this case, the OIG identified proper cutoff as a risk of material misstatement. We agree with the OIG’s identification of cutoff as having a risk of material misstatement. Our assessment included consideration of the following factors that we believe result in a high risk of material misstatement related to cutoff.

There are identified examples of transactions being recorded in the wrong period—DOD reports of Antideficiency Act violations provided to GAO identified numerous DOD-wide instances of transactions that were recorded to the wrong period. DOD has also reported a violation of the act related to a late U.S. Transportation Command shipment billing that was recorded in the subsequent fiscal year. When the need for an adjustment was identified, funds allocated for shipments in the previous fiscal year had been exhausted. In addition, we previously reported that the Marine Corps’ use of bulk estimated obligations for shipments of household goods related to permanent change-of-station moves that generally take 2 or more fiscal years to fully liquidate (i.e., for the final payment or outlays to be made) poses a risk of Antideficiency Act violations if the estimated obligations are too low and outlays exceed the bulk obligation. The Army, the Navy, and the Air Force have each reported violations related to the use of bulk estimated obligations.

For certain types of transactions, such as certain U.S. Transportation Command billings, obligations sometimes may not be recorded until the outlay is made, which can be from a few days or weeks to several months or several years after the obligation should have been recorded.

For certain types of transactions, there may be an extended period between when the transaction occurred and when the transaction is recorded. For example, U.S. Transportation Command shipment billings that cover multiple fiscal years are initially charged to current fiscal year appropriations, and may not be analyzed and, for shipments related to prior year obligations, may not be properly charged to such prior year appropriations until several months after the end of the fiscal year.

There are reported internal control weaknesses related to reasonably assuring that all transactions are recorded in the proper period, particularly with regard to liquidations of estimated bulk obligations related to permanent change-of-station moves and U.S. Transportation Command billings.

AU Section 326 states that the auditor should obtain audit evidence to draw reasonable conclusions on which to base the audit opinion, including performing procedures to detect material misstatements at the relevant assertion level. As part of these procedures, the auditors must perform procedures to assess the risk of material misstatement at the financial statement and relevant assertion levels. AU Section 339 requires documentation of significant findings and issues, actions to address them, and conclusions reached. Although the above risks were known at the time of the audit, and the audit documentation includes a discussion of these risks, the documentation does not include evidence that the auditors appropriately considered these risks as a basis for designing and performing sufficient audit procedures to address these risks. For example, the audit documentation does not contain evidence that DOD OIG auditors performed procedures to assess the risk of proper cutoff and determine the nature, extent, and timing of substantive testing related to (1) the length of transaction cycles for significant volumes of transactions and (2) certain significant general ledger accounts.

The Length of the Fiscal Year- End Cutoff Period Tested Was Not Based on the Risk of Material Misstatement

Our review of the audit documentation determined that the OIG only performed testing of transactions recorded in October 2012 (the first month of fiscal year 2013) for cutoff purposes, based on the assumption noted in the audit documentation that there was a low risk that material amounts recorded in periods subsequent to October could relate to fiscal year 2012. However, there was no documented basis for this judgment. For example, during our discussions with OIG auditors, they told us that based on their experience and auditor judgment, they considered this risk to be low. The auditors did not document their understanding of the length of transaction cycles for significant categories of transactions and the pattern and volume of those transactions at fiscal year-end.

In addition, the audit documentation noted the process whereby U.S. Transportation Command submits summary Interfund billings through IPAC to the Marine Corps that are initially charged to the Marine Corps’ fiscal year 2012 appropriations and the Marine Corps’ subsequent analysis to determine the allocations of the underlying transactions to the appropriate fiscal year appropriations. However, the audit documentation did not include evidence that the auditors performed any procedures to (1) test the accuracy of the Marine Corps’ allocation of fiscal year 2012 shipment billings to previous fiscal year appropriations or (2) confirm that the related adjustments were recorded to ensure that the portion of the outlays that pertained to previous fiscal year appropriations, and in some cases, other military services, were excluded from the outlays reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Our analysis of U.S. Transportation Command billings and discussions with the auditors and the Marine Corps determined that the OIG was aware that the Marine Corps was performing analysis of approximately $21 million of fiscal year 2012 shipment billings in January 2013—4 months after the end of fiscal year 2012—to determine the extent of adjustments needed to record the related outlay transactions to fiscal year 2012 and prior appropriations.

Further, for an audit of budgetary transactions, auditors should test for proper classification to assure that transactions are recorded to the proper fiscal year appropriation or fund account. The OIG told us that testing performed for the audit of the Marine Corps’ Fiscal Year 2013 General Fund Schedule would identify any fiscal year 2013 transactions that should have been recorded to fiscal year 2012. The OIG stated that if any cut-off errors were identified during the fiscal year 2013 audit, it would then determine if a restatement of the Marine Corps’ Fiscal Year 2012 General Fund Schedule was needed. However, audit evidence obtained in the current year audit should be sufficient to support the auditor’s opinion.

The OIG auditors also stated that a normal audit reporting schedule in the federal environment requires issuance of the financial statements and the associated opinion 45 days after the fiscal year ends and this does not allow time for more testing. However, the OIG was not required to meet this reporting time frame for its audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule and had already significantly exceeded it. Given that this was a first-year audit of a 1-year schedule of budgetary activity, additional testing could either have confirmed that a 30-day window was appropriate and thus set a baseline, or would have shown that further efforts were needed by the Marine Corps to address processing delays so that the future 45-day reporting cycle could be met without increasing audit risk.

The audit documentation shows that the OIG tested only the transactions recorded in October 2013 that the Marine Corps applied against fiscal year 2012 appropriations to determine whether they should have been recorded to fiscal year 2012. The OIG did not test transactions recorded in October that were recorded against fiscal year 2013 appropriations to determine if these transactions were properly recorded. As a result, there is a risk that transactions posted to 2013 appropriations should have been recorded in fiscal year 2012 to fiscal year 2012 appropriations. For example, U.S. Transportation Command shipment billings initially recorded to fiscal year 2013 may not have been adjusted and may affect fiscal year 2012 appropriations.

Figure 6 shows a high-level illustration of the scope issue posed by the outlays that actually related to multiple fiscal year appropriations being recorded to fiscal year 2012 appropriations. The audit documentation on substantive testing results for shipment outlays showed that the auditors concluded that the recording of all shipment outlays that were made during fiscal year 2012 to fiscal year 2012 appropriations was accurate, even though the sample shipment outlay transaction documents generally identified allocations that needed to be made to various previous fiscal year appropriations. Support for some sampled shipment outlay transactions initially recorded to fiscal year 2012 appropriations included receiving reports that were dated in August 2011 and September 2011, indicating that they pertained to fiscal year 2011 or earlier appropriations. Further, the documentation on testing results did not include auditor comments that refer to additional procedures performed to ensure that necessary adjustments had been identified by the Marine Corps and that these adjustments were recorded by the close of the fiscal year 2012 accounting period.

The audit documentation also shows that the auditors did not perform any substantive cutoff testing for two general ledger accounts: the obligation account for delivered orders and the outlay account. The OIG told us that it did not test for proper cutoff of the obligation account for delivered orders because any errors identified would result in an adjustment to the obligation account for undelivered orders and would have no net effect on the Marine Corps’ Fiscal Year 2012 General Fund Schedule because the two obligation accounts are both reported on the “Obligations Incurred” line item of the Schedule. However, the OIG’s testing of the obligation account for delivered orders during fiscal year 2012 substantive testing identified 11 errors for which the corresponding adjustments were recorded to other general ledger accounts and were reported on different line items of the Marine Corps’ Fiscal Year 2012 Schedule. Thus, without testing obligations related to delivered orders for proper cutoff, there may be misstatements related to delivered orders that would not be detected by the audit.

With regard to cutoff testing of outlay transactions, the audit documentation showed that after the OIG’s tests of internal controls over proper cutoff for outlay transactions resulted in an unacceptably high error rate, the OIG requested that the Marine Corps provide documentation for a sample of 334 outlay transactions for substantive testing of end-of- period cutoff. According to OIG auditors, the Marine Corps responded that it was not able to provide support for this large substantive sample because it was responding to requests for support on sampled transactions that related to the audit of its Fiscal Year 2013 General Fund Schedule at that time. As a result, the OIG attempted to rely on its initial tests of the Marine Corps’ internal controls over proper cutoff and extended the time frame for completing its control tests to attempt to resolve the initial exceptions. The audit documentation included statements that the Marine Corps provided additional documentation and that the OIG determined that the documentation was sufficient to resolve all 21 transactions that were initially tested with exception (errors). Our review of Marine Corps documentation identified available support for 18 of the 21 transactions, and we determined that the support was sufficient to resolve only 6 of them. Given that we were unable to find adequate support for 12 transactions, we believe that controls were not effective. Further, even when control tests are effective, they do not eliminate the need for substantive testing.

The OIG Did Not Perform Sufficient Procedures to Reasonably Assure the Reliability of Reported Shipment Obligations

Shipment obligations pertain to shipments of military supplies and equipment and household goods related to permanent change-of-station relocations and related personnel mobilization and permanent change-of- station travel. The Marine Corps reported that it had $529.5 million in fiscal year 2012 shipment obligations. Depending on the type of shipment, the time between obligation and outlay varies. Obligations for shipments of household goods for military members and civilians who are deployed or relocated include amounts for storage costs and reshipment of the items when the personnel return. These obligations, which are funded by Military Personnel appropriations, typically liquidate over a period of 2 or more years. Obligations for shipments of military supplies and equipment, funded by Operation and Maintenance appropriations, and obligations for shipments funded by Procurement appropriations generally are liquidated within several days or a few weeks.

The audit documentation showed that the OIG had identified several audit risks associated with shipment transactions. For example, the OIG had determined that the Marine Corps (1) did not have sufficient documentation available to support its multiple obligation processes for shipment transactions and (2) was unable to match the liquidations (outlays) with corresponding obligations. The audit documentation also showed that the OIG had attempted to perform substantive testing of the Marine Corps’ shipment obligations; however, the Marine Corps was unable to provide support for $231.5 million of its reported $529.5 million in fiscal year 2012 shipment obligations. The audit documentation noted that the lack of supporting documentation related to the Marine Corps’ practice of recording (1) bulk estimated obligations for U.S. Transportation Command shipments and (2) obligations for commercial shipments either at the same time or after the associated payments were made. Further, because the Marine Corps was unable to match outlays for specific shipments to its bulk estimated obligations, the auditors could not determine the reliability of obligated balances through detail testing of transactions.

Given the identified issues related to the reliability of recorded transportation obligations, the Marine Corps developed a model to estimate the unliquidated obligations as of the end of the fiscal year. The model was based on historical outlay patterns, using outlay data for fiscal years 2008 through 2012. To illustrate, if historically 75 percent of the outlays relating to an appropriation were expended at the end of the first year, the model would estimate that the remaining 25 percent would be unliquidated obligations for the appropriation. The reliability of the model depends on several factors, including the reliability of the outlay data used in the model; the appropriateness of assumptions used in the model; and the consideration of factors that may affect historical patterns, such as the different outlay patterns for the different types of shipments.

The audit documentation stated that the OIG relied on the auditing standards in testing the Marine Corps’ estimated liquidations of shipment obligations. In auditing estimates, auditing standards state that the auditor’s objective is to obtain sufficient, appropriate evidence to provide reasonable assurance that the accounting estimates are reasonable in the circumstances. In assessing the reasonableness of the estimate, auditing standards state that the auditor normally concentrates on key factors and assumptions that include sensitivity to variations, deviations from historical patterns, susceptibility to misstatements and bias, and the entity’s historical experience related to the reliability of prior year estimates. The auditing standards also identify procedures that the auditor may consider when reviewing and testing the process used to develop management’s estimates, including controls over the process, and the relevance, reliability, and sufficiency of historical data used in the estimate.

The audit documentation showed that the OIG performed some review and analysis of the Marine Corps’ model for estimating obligated balances related to shipments and made minor adjustments to the model. However, the audit documentation did not contain evidence that the OIG sufficiently performed certain other procedures in AU Section 342 that we believe are important related to (1) identifying whether there were controls over the preparation of the Marine Corps’ accounting estimates and the testing of such controls and (2) considering whether sources of data and factors that management used in forming the assumptions were relevant, reliable, and sufficient for the purpose of the estimates based on information gathered in other audit tests. For example, the audit documentation did not contain evidence that the audit team validated the factors management used to form the accounting estimate or performed procedures to test controls over preparation of management’s estimates. The audit documentation stated that the auditors performed procedures to assure that the sources and data used in the estimating methodology were relevant, reliable, and sufficient. However, the documentation did not include evidence of sufficient audit procedures performed to provide assurance of the reliability of outlay transaction data used for determining obligation liquidation rates (referred to as the historical burn rates) as a basis for estimating the Marine Corps’ obligated balance for shipment transactions at the end of fiscal year 2012. The following examples summarize our concerns with respect to the sources and reliability of the data the OIG used to validate the Marine Corps’ model for estimating obligated balances related to shipments at the end of fiscal year 2012.

The audit documentation showed that the OIG could not validate the completeness of the population of the Marine Corps’ reported shipment obligations as a basis for estimating the balance of shipment obligations at the end of fiscal year 2012 because (1) about $213 million related to bulk estimated obligations for which specific supporting documentation was not available and (2) about $19 million related to obligations that were based on billings and payment amounts and it was not possible to determine additional obligation amounts for shipments that had been made but had not yet been billed. Further, the audit documentation stated that the Marine Corps was unable to match liquidations (outlays) to reported obligations.

The audit team did not perform procedures to confirm the reliability of U.S. Transportation Command system-generated Interfund billing data reported through IPAC, even though the DOD OIG had previously reported issues with the reliability of budgetary transactions reported by DEAMS and the OIG was aware that controls over other U.S. Transportation Command systems had not been tested.

The OIG performed limited internal control tests over shipment outlays for a 5-year period covering fiscal years 2008 through 2012. The audit documentation showed that the audit procedures relied on (1) Marine Corps fiscal year 2008 and 2009 outlay data that had not been audited, (2) fiscal year 2010 and 2011 outlay data included in SBRs for which the OIG disclaimed an opinion, and (3) fiscal year 2012 outlay data that were tested by comparing SABRS shipment outlay transactions to the dates and amounts on disbursement vouchers instead of original transaction support and concluded that there were no errors. However, these disbursement vouchers are used to record shipment outlay transactions in SABRS and thus do not provide independent assurance of the accuracy of the outlay transactions.

The audit documentation for internal control tests on outlays for each fiscal year used in the model consistently noted that the auditors were unable to determine the completeness of the shipment outlay populations used for testing. Further, the issues discussed in this report, such as those related to completeness and cutoff, may affect assurance of the reliability of outlay data used in the model.

The audit documentation did not show that the OIG sufficiently considered the effect that different types of shipment transactions liquidated at different rates might have on estimated obligation balances because the OIG could not determine the populations for the various shipment processes. Members of the audit team told us that they generalized their tests and did not separately test liquidations for different types of shipments.

Based on its audit of the Marine Corps’ accounting estimate of its fiscal year-end 2012 balance of shipment obligations, the OIG determined that the Marine Corps’ reported balance of obligations at the end of fiscal year 2012 was overstated, and the audit documentation indicated that the OIG proposed a downward adjustment of $53.7 million, which was recorded by the Marine Corps. However, the reliability of the estimated fiscal year- end obligated balance reported in the Marine Corps’ Fiscal Year 2012 General Fund Schedule is uncertain because of (1) the lack of assurance over the completeness and reliability of the shipment obligation and outlay data used to estimate the ending balance of obligations and (2) the application of a generalized liquidation rate for shipments that had significant differences in liquidation periods. As a result, obligations related to shipments reported in the Marine Corps’ Fiscal Year 2012 General Fund Schedule may not be complete and reliable.

As discussed later in this report, because of the significance of U.S. Transportation Command activity to DOD-wide audit readiness, in September 2013, the department initiated a DOD-wide Transportation Financial Auditability working group to document and test transportation processes, systems, and controls. The OIG is aware of this initiative. Accordingly, the OIG should have appropriately considered the risk associated with the Marine Corps’ shipment outlay transactions and performed sufficient procedures to assure the reliability of shipment outlay amounts reported in the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

The OIG Did Not Properly Consider and Evaluate Audit Evidence in Concluding on the Audit

The OIG’s conclusion on the results of the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule did not consider all known misstatements and untested amounts; explain the basis for certain significant assumptions and auditor judgments; or properly resolve disagreements among the audit team, statisticians, and OIG management.

The OIG’s Evaluation of Test Results Did Not Include All Known Misstatements or Consideration of Other Known Risk Factors

As discussed in the auditing standards, in evaluating whether the financial statements are presented fairly, in all material respects, in conformity with GAAP, the auditor must consider the effects, both individually and in the aggregate, of misstatements (both known and likely) that are not corrected by the entity. At the conclusion of the audit, the auditor accumulates identified misstatements and considers whether such misstatements are material to the entity’s financial statements. In addition to quantitative measures, the auditor is also required to consider qualitative factors when assessing the materiality of misstatements. Auditing standards further state that as the aggregate misstatement identified in testing approaches materiality, the risk that the financial statements could be materially misstated also increases; consequently, the auditor should consider the effect of undetected misstatements in concluding on whether the financial statements are fairly stated.

As previously discussed, in concluding on the audit, the auditor makes judgments about materiality in light of surrounding circumstances and qualitative and quantitative considerations. These judgments are affected by the auditor’s perception of the financial information needs of users of the financial statements by the size or nature of a misstatement, or both. As a basis for quantitative considerations on the results of testing, the auditor establishes a materiality level, or the maximum level of misstatement the auditor is willing to accept in concluding on the audit without the amount of misstatement being misleading to the users of the financial information. Federal government auditors generally set materiality for reporting on audit results at 3 percent of the materiality base. The materiality base is the element of the financial statement(s) that the auditor judges as most significant to the primary users of the statements. For the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule, the OIG used the reported Obligations Incurred line item amount of $27.5 billion as the materiality base. Accordingly, the OIG set materiality at 3 percent of the materiality base for the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule, which was $826 million.

The audit documentation showed that the OIG calculated the level of identified misstatement related to errors and untested amounts identified in its audit as approximately $773 million. Based on this evaluation, the auditors concluded that the aggregate of identified misstatements and untested amounts was not material to the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

Our review of the audit documentation found that the OIG’s analysis of its test results omitted certain known errors and untested amounts. Specifically, the OIG’s audit calculation of identified misstatements omitted $18.3 million in contract progress payment errors identified in tests of obligations and another $17.5 million related to insufficient documentation to conclude on tests of contract outlays—a total of $35.8 million. The audit documentation showed that the audit team had initially determined that it could not conclude on the accuracy of sampled contract outlay transactions for which there was no support that the goods and services paid for were received. Accordingly, the OIG audit team counted the related transaction amounts as untested and planned to include them in the calculation of identified misstatements. The audit documentation showed that OIG management made an assumption that the unsupported outlay transactions could be adjusted and reported as advance payments to avoid counting the amounts as untested. The audit documentation stated that because outlays and advances are reported on the same line item of the General Fund Schedule, the adjustment would have no net effect on the Schedule. However, advances typically require authorization in law or in contract and without documentation of such authorization the advance should be considered untested. Had the auditors included the contract progress payment errors as untested amounts, the identified misstatement would have totaled over $808 million. The OIG’s handling of differences of opinion between the audit team and OIG management is discussed further below.

Additionally, the audit documentation did not include evidence that the OIG considered potential undetected misstatements in concluding on the fair presentation of the Marine Corp’s Fiscal Year 2012 General Fund Schedule. Also, the audit documentation did not include evidence that the OIG considered qualitative factors in concluding on the effect of identified and potential undetected misstatements.

As noted above, the OIG’s identified misstatements and untested amounts are quantitatively near the calculated materiality. Based on the issues discussed above and other issues discussed previously in this report—including those related to (1) completeness of transactions reported in the Marine Corps’ Fiscal Year 2012 General Fund Schedule, (2) transaction cutoff, (3) estimation of obligations, and (4) reliance on information in other DOD systems—additional misstatements may exist that may have been identified had additional audit procedures been performed. Such further misstatements, when aggregated with identified misstatements, could be material. Consequently, sufficient, appropriate evidence was not obtained to support the conclusion that the Marine Corps’ Fiscal Year 2012 General Fund Schedule is presented fairly.

The OIG Did Not Follow Guidance in Its Audit Handbook for Statistician Review and Certification of Sample Results

The OIG’s Audit Handbook describes roles and responsibilities of its Quantitative Methods Division’s (QMD) technical support of DOD audits. QMD’s roles in support of financial audits include technical assistance in determining the appropriate population as a basis for ensuring defensible results, guidance on statistical sampling methods, design of a sampling plan, and analysis of sample results. The OIG’s Audit Handbook states that the QMD analyst will attend project debriefs and exit conferences and answer any questions about the quantitative (statistical) sampling approach and the uses and limits of the quantitative results. In addition, the QMD analyst will help the audit team correctly present quantitative results in the audit report and will certify the defensibility of the significant quantitative methods used in the audit report. However, the audit documentation showed that QMD did not sign off as certifying the auditors’ projections of sample results because of concerns about the auditors mixing two methods for making statistical estimates. Instead, QMD added a note to the certification form, stating that it expressed no opinion as to the application (i.e., projection) of results with respect to the evaluation of sample results against materiality. QMD officials told us that the reason they did not sign off on the auditors’ materiality assessment is that they were not included in the materiality assessment process and did not know the basis for the auditor judgments made. QMD officials explained that this was unusual and stated that they are generally included in auditor assessments of materiality.

Significant Auditor Judgments Made in Determining the Audit Opinion Were Not Documented

Auditing standards recognize that auditors must use professional judgment in concluding on an audit. Auditors also are required to document significant decisions in their audit documentation. The audit documentation for the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule showed inconsistencies and conflicting conclusions between the audit team and OIG management regarding the scope of audit testing and the OIG’s conclusions on the results of audit testing, including testing for cutoff, shipment obligations and outlays, and acceptance of unaudited system-generated data for substantive testing of transactions. These conflicting conclusions indicate that significant auditor judgments had been made regarding the audit results and audit conclusion, but the audit documentation did not include a reconciliation or explanation for the conflicting statements. Further, these undocumented auditor judgments related to decisions made by OIG management that overturned the audit team’s test results and conclusions. The following examples illustrate this issue.

The audit team’s conclusions on cutoff testing stated that because the Marine Corps did not have controls for assuring that obligations were recorded in the proper period, the team was unable to gain assurance of the completeness of populations used for this testing and, as a result, was unable to conclude on the completeness of the Obligations Incurred and the Outlays line items or the fair presentation of the Obligations Incurred line item in the Marine Corps’ Fiscal Year 2012 General Fund Schedule. The audit documentation did not contain any further audit procedures that were performed or auditor explanations that indicated that this issue had been resolved. Further, because the Obligations Incurred line item, reported at nearly $27.5 billion, represents all but about $1.9 billion of the Marine Corps’ fiscal year 2012 budgetary resources, the inability to conclude on the fair presentation of this line item would mean that the extent of fair presentation of the Marine Corps’ Fiscal Year 2012 General Fund Schedule also could not be determined. Further, the audit documentation did not show OIG management’s basis for determining that cutoff testing was sufficient.

The audit documentation related to the OIG’s application of the Marine Corps’ model for estimating the year-end balance of shipment obligations included at least six individual workpapers in which the audit team had concluded that it was unable to gain assurance as to the completeness of populations used for testing historical (fiscal year 2008 through 2011) shipment liquidation transactions (outlays). In concluding on the testing for this category of transactions, the audit team stated that this issue posed a scope limitation. However, as previously discussed, the OIG ultimately relied on historical liquidations data for determining a “burn rate” (liquidation or outlay rate) for fiscal year 2012 as a basis for assessing the reasonableness of reported fiscal year-end 2012 obligated balances. We found no documentation of the basis for the OIG management decision that the limited procedures performed were reliable for use in estimating year- end obligated balances. This is a significant issue because shipment obligations reported by the Marine Corps as totaling over $529 million represent two-thirds of the materiality threshold used by the OIG to conclude on the audit. As previously discussed, identified misstatements and untested amounts were quantitatively near the calculated materiality without considering this amount.

In addition, our review of the audit documentation identified numerous e- mail communications during the months of November and December 2013, shortly before the audit report was issued, that indicate there was a disagreement between the audit team and OIG management regarding whether there was sufficient, appropriate audit evidence to support an unqualified (“clean”) audit opinion. The e-mails showed that the audit team did not believe it had the evidentiary support for the clean opinion and was asking for OIG management guidance regarding the basis for issuing an unqualified opinion. The e-mails also showed that OIG management instructed the audit team that a decision was made that the Marine Corps had “earned” an unqualified opinion and that the audit documentation needed to be updated to support the clean opinion. The audit documentation did not include an explanation of the basis for the OIG management judgment related to the opinion. Consequently, the audit documentation showed a gap between the audit team’s conclusions relating to a disclaimer and the clean opinion that was reported by the OIG in December 2013.

Audit quality control standards (designated QC by the AICPA) state that audit organizations should establish policies and procedures for addressing and resolving differences of opinion within the engagement team; with those consulted; and, when applicable, between the engagement partner and the engagement quality control reviewer. Such policies and procedures should enable a member of the engagement team to document his or her disagreement with the conclusions reached after appropriate consultation. Such policies and procedures should require that (1) conclusions reached be documented and implemented and (2) the audit report not be released until the matter is resolved. Our review of the OIG’s Audit Handbook and the DOD Audit Manual, and discussions with the OIG Audit Policy and Oversight officials, determined that the OIG does not have policies and procedures for resolving disagreements between the audit team and OIG management.

The Marine Corps Has Not Taken Timely Actions to Address Identified Accounting, Reporting, and System-Related Internal Control Weaknesses

The OIG issued 177 recommendations to address deficiencies in internal controls over Marine Corps’ accounting and financial reporting and information technology system general operating controls as a result of its audits of the Marine Corps’ fiscal year 2010 and 2011 SBRs and the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Based on our review of OIG documentation, 130 (73 percent) of these recommendations had not been fully addressed by the end of the fiscal year 2012 Marine Corps audit. This includes 22 recommendations that we determined the OIG closed prior to verifying and documenting that implementation of the recommended controls was complete and fully addressed the recommendations. In addition, we made 3 recommendations to the Marine Corps in our September 2011 report on the Marine Corps’ fiscal year 2010 SBR audit results, all of which remained open as of March 2015. The Marine Corps has improved its remediation plan and strengthened its monitoring process and is taking a more risk-based approach to corrective actions. However, significant uncorrected control weaknesses continue to impair the Marine Corps’ ability to produce consistent, reliable, and sustainable financial information for day-to-day decision making on its missions and operations. The lack of reliable financial information and systems, processes, and controls also impedes the Marine Corps’ ability to achieve sustainable, cost-effective audit efforts.

The Marine Corps Has Made Limited Progress in Addressing Internal Control Weaknesses Identified by the OIG

Our review of the OIG’s documentation on the status of actions to address its recommendations to Marine Corps management resulting from its fiscal years 2010 through 2012 audits of the Marine Corps budgetary activity showed that as of the end of its audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule, 130 of the 177 recommendations issued had not been fully addressed. The 130 open recommendations included 16 recommendations that were issued from August 2012 through February 2013 to address deficiencies identified in the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule. The majority of the 130 open recommendations related to the Marine Corps’ fiscal year 2010 first-year SBR audit. In addition to presenting impediments to the Marine Corps’ financial management operations, the weaknesses that gave rise to these recommendations also impede the Marine Corps’ ability to respond to audits and the auditors’ ability rely on the Marine Corps’ internal controls in planning and conducting audits. This results in the auditors having to perform labor-intensive substantive tests of larger samples of transactions that consume more time and resources than would be required if the Marine Corps’ internal controls were effective. While it is important for the Marine Corps to address these recommendations timely, Marine Corps officials told us that progress has been limited because Remediation Team staff are used to support financial audits and the Marine Corps has experienced difficulty hiring additional qualified staff. Table 1 summarizes our analysis of the OIG’s documentation on the status of Marine Corps actions taken to address the OIG recommendations from the fiscal year 2010 through 2012 audits.

OIG managers told us that their policy is to evaluate corrective actions on OIG and GAO recommendations and close them as appropriate. However, as noted in table 1, we determined that 22 recommendations that the OIG had closed should have remained open. Our analysis of the audit documentation on the Marine Corps’ corrective actions determined that support was not sufficient for closing these recommendations for the following reasons.

Four recommendations called for development of written policy and procedures and the implementation of the related control procedures. The documentation on the Marine Corps’ actions only supported the development of the written policy and procedures. There was no documented evidence that the policy and procedures as designed had been effectively implemented.

Six recommendations related to the completeness and accuracy of data transfers from DOD business systems to the Marine Corps’ SABRS general ledger system were closed without any evidence of procedures being performed to confirm that the data transferred to SABRS were complete.

Four recommendations were closed because the auditors’ substantive testing did not identify any related exceptions, even though there was no documentary evidence that the Marine Corps had designed and implemented corrective actions.

The remaining eight recommendations were closed without sufficient documentation that actions were completed and verified as effective.

The auditors told us that they planned to test implementation of several controls in a subsequent audit. However, absent evidence that the new controls had been effectively implemented, closing these recommendations creates a risk that corrective actions needed may not be completed and that the related weaknesses will continue to exist.

Significant Uncorrected Internal Control Weaknesses Pose a Risk to Sound Financial Management Processes and Sustainable Audit Efforts

Our review of the Marine Corps’ open recommendations identified numerous uncorrected financial reporting and information system control weaknesses that if effectively resolved, would significantly improve the Marine Corps’ ability to achieve reliable financial reporting and more efficient audit efforts. The following examples summarize recommendations related to significant weaknesses that had not yet been corrected and thus impair the Marine Corps’ ability to generate reliable financial management information on an ongoing basis for decision making and achieve and sustain auditable budgetary information.

Sixteen of the Marine Corps’ open recommendations related to weaknesses in controls for assuring completeness, including transfers of feeder system data to its SABRS general ledger system and timely recording of transactions. These open recommendations addressed actions to (1) assure completeness of populations of transactions and account balances, (2) test interface controls between various feeder systems and the Marine Corps’ SABRS general ledger system, and (3) perform reconciliations of feeder system data to SABRS.

Thirty-five open recommendations related to weaknesses in controls over the reliability of feeder system data, including systems security, access controls, and data processing controls. Open recommendations related to data reliability include recommendations to (1) implement periodic review of input processing and edit checks that could produce exception reports; (2) ensure timely, accurate recording of transactions; and (3) strengthen information system data integrity and access controls.

Forty-three open recommendations related to weaknesses in controls for assuring proper support for obligations and outlays. These weaknesses affect the support for MILSTRIP, shipment, and contract transactions. Open recommendations related to the reliability of reported obligations and outlays include actions to (1) ensure proper recording of obligation and outlay transactions; (2) reconcile shipment outlays to obligation transactions; (3) periodically review accrued delivered orders and identify amounts that should be deobligated; (4) review support for existing bulk estimated obligation documents and adjust the beginning obligated balance, as appropriate; (5) ensure supporting documentation traces to and supports amounts recorded in SABRS; and (6) improve monitoring controls over IPAC transactions.

In addition to achieving improvements in the overall integrity and reliability of its financial operations and information, the Marine Corps would benefit from resolving these significant control weaknesses because (1) strengthened processes and controls would provide a basis for the auditors to reduce sample sizes and (2) strengthening controls for assuring the reliability of feeder system data would reduce efforts to locate original support for transactions, thereby reducing the Marine Corps’ efforts to respond to requests for large samples and auditor efforts to perform labor-intensive substantive tests of larger samples of transactions that consume more time and resources than would be required if the Marine Corps’ internal controls were effective. Further, developing audit support agreements with other DOD components that support the Marine Corps’ mission by providing services and supplies as well as the related obligation and outlay data would help support the Marine Corps’ efforts to respond to its financial audits. For example, such agreements could assist the Marine Corps in documenting mission- related processes, systems, and controls and taking appropriate actions to address any weaknesses identified in such efforts. The overall benefit from these efforts would be financial management improvement.

In August 2014, we followed up with Marine Corps officials to discuss their progress on addressing open recommendations from the Marine Corps’ fiscal years 2010 through 2012 audits. Of the 75 open accounting and financial reporting recommendations, our analysis showed that in February 2014, the auditors closed 48 recommendations and consolidated and reopened 22 of them as new recommendations associated with performance of the audit of the Marine Corps’ Fiscal Year 2013 General Fund Schedule. The officials told us that the purpose of this effort was to clarify finding and recommendation language to help the Marine Corps identify underlying control weaknesses and develop appropriate corrective actions to resolve the causes of the weaknesses. In reissuing the consolidated recommendations, the auditors grouped findings with similar causes and remediation steps into an overall recommendation. However, our analysis determined that the other 27 recommendations were closed by the auditors. Documentation that the Marine Corps provided us in August 2014 stated that the weaknesses remained, including those related to 6 recommendations for correcting weaknesses associated with use of bulk estimated obligations; 10 recommendations for timely fund manager reviews, including review of “stale” obligations (obligations without activity for more than 120 days) to see if they are needed or should be deobligated; and 6 recommendations related to timely correction of DDRS financial reporting errors and monthly management reviews of all journal vouchers for proper recording. The auditors did not consolidate or close any of the previously issued information technology system recommendations during this period.

The auditors told us that their decision to close these 27 recommendations was based on the results of substantive testing performed for the audit of the Marine Corps’ Fiscal Year 2013 General Fund Schedule. The auditors explained that nothing related to the previously identified weaknesses came to their attention during their substantive testing for the Marine Corps’ fiscal year 2013 audit. However, the absence of identified misstatements alone is not sufficient for determining whether internal control weaknesses have been remediated.

Regardless of whether the number of recommendations to address control weaknesses has been reduced, for example, because the auditors consolidated them, timely and effective actions to resolve underlying causes of control deficiencies related to (1) completeness of data transferred from DOD feeder systems to the Marine Corps’ SABRS general ledger system, (2) reliability of financial data and information generated by DOD feeder systems, and (3) ensuring availability of supporting documentation for obligations and outlays will be critical to achieving sustainable financial management improvement and financial audit efforts.

The Marine Corps Has Made Progress in Addressing Previous GAO Audit Recommendations

Our September 2011 report on the Marine Corps’ fiscal year 2010 SBR audit results included three recommendations to the Marine Corps. While the Marine Corps has made progress in addressing our recommendations, all three recommendations remain open.

The Marine Corps has not yet fully addressed our recommendations that it (1) use the results of its fiscal year 2010 and 2011 SBR audits to develop a comprehensive, risk-based plan for designing and implementing corrective actions that provide sustainable solutions for SBR auditor recommendations; (2) review Marine Corps SBR remediation actions under way and confirm that the actions are fully responsive to the auditor recommendations; and (3) develop and implement timely and effective agreements for audit support with the appropriate DOD components in accordance with the FIAR Guidance where remediation actions require a coordinated effort.

The Marine Corps has established the Risk and Compliance Branch to support its audit readiness efforts. The Marine Corps also assigned new leadership to its Remediation Team and moved the team under the Risk and Compliance Branch to provide more focus on remediation of identified weaknesses. The Remediation Team is responsible for coordinating, monitoring, and validating the design and effectiveness of corrective actions to address audit recommendations and findings from management and internal reviews.

DOD stated that the Marine Corps disagreed with our recommendation to develop a comprehensive, risk-based corrective action plan, stating that it was too prescriptive with regard to identifying roles and responsibilities and including performance indicators to measure performance against action plan objectives. However, under its new Risk and Compliance Branch, the Marine Corps subsequently developed a detailed remediation process that includes elements of a comprehensive, risk-based plan as called for in our recommendation. For example, according to the Marine Corps, it now identifies weaknesses associated with audit findings that the auditors grouped by categories and works with process owners and stakeholders to understand the causes of the weaknesses and develop corrective action plans that will be effective in resolving them. Our review of the Marine Corps’ new remediation process found that Marine Corps officials also had assigned a high, medium, or low priority to each recommendation based on risk; however, they had not yet developed written criteria or guidance for determining how to apply these priorities in order to focus corrective actions on the most significant areas of weakness.

In response to our second recommendation, as part of the new remediation process, the Marine Corps also incorporated an independent stakeholder review and monitoring role with responsibility for ensuring that corrective actions fully address auditor recommendations as well as any recommendations resulting from internal management reviews. However, the Marine Corps has not yet provided documentation of the stakeholder reviews to demonstrate that this action is fully implemented and operating as intended.

With regard to our third recommendation, Marine Corps officials told us that they have initiated efforts to develop agreements for audit readiness support with the appropriate DOD components. For example, they have a draft audit support agreement with DLA that covers audit support related to DLA-performed business processes that generate financial information that the Marine Corps will rely on for financial statement reporting and audit purposes. These DLA business processes include (1) receiving and accepting goods, (2) storing material, (3) issuing and distributing material, (4) disposing of material, and (5) updating accountability records. Marine Corps officials told us that where audit support depends on DOD-wide systems, processes, and controls related to MILSTRIP and U.S. Transportation Command shipments, they believe the DOD Comptroller and FIAR Directorate should take the lead in developing the service-level agreements.

The Marine Corps Audit Identified Significant Challenges for DOD- Wide Financial Improvement and Audit Readiness Efforts

Our review of the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule identified major areas where key Marine Corps business processes depended on other DOD agencies’ business processes and feeder systems with data reliability issues that transferred financial data and information to its general ledger system. Because other DOD components also rely on many of those same DOD agencies’ business processes and feeder systems, these issues will likely present DOD-wide challenges related to (1) ensuring the completeness of populations used for transaction testing and the proper cutoff of transactions for the accounting period, (2) determining the reliability of feeder system data transferred to the general ledger system, and (3) determining the reliability of reported obligations and outlays. These DOD-wide challenges have been known for many years. Since December 2011, DOD’s FIAR Guidance has included these challenges in a list of “dealbreakers” that if not effectively resolved, would pose a significant challenge to achieving financial management improvement as well as audit readiness. To the extent that these challenges are not resolved, they will pose serious obstacles to the military services, which are currently undergoing first-time audits of their fiscal year 2015 General Fund schedules of budgetary activity, and could also pose obstacles to DOD’s efforts to achieve audit readiness on a full set of financial statements for fiscal year 2018.

Completeness of Populations and Proper Cutoff Are Critical to DOD- Wide Audit Readiness

In May 2014, we reported that DOD had an inventory of 2,329 business systems, including 286 financial management systems; 702 logistics systems; 730 human resources management systems (including payroll systems); and numerous acquisition, logistics, and other business systems. The vast majority of the department’s financial transactions originate in these business systems that then feed financial transaction data—including data for military and civilian payroll, supplies and procurements, travel, work orders, and shipments—to DOD general ledger systems. As identified in our review of the Marine Corps’ fiscal year 2012 audit, performing tests to assure the completeness and reliability of DOD business systems data and performing periodic reconciliations of business system data to general ledger systems are necessary to provide reasonable assurance that military service and defense agency financial statements include all transactions and balances that should have been recorded for the period. This will be a challenge across DOD given the large number of feeder systems and the fact that the controls over most systems have not yet been tested. Without assurance of completeness of populations used for audit testing, auditor sampling and testing results will not provide the reasonable assurance necessary for concluding on an audit and forming an opinion. DOD’s FIAR Guidance continues to identify the inability to provide assurance of complete populations (i.e., reconcile the general ledger to transaction detail, including feeder system detail) as an audit readiness dealbreaker.

As a subset of completeness, proper fiscal year-end cutoff of transaction activity and assurance that appropriation data are recorded to the proper fiscal year are essential to ensuring that the financial statements and the schedules of budgetary activity include all data for the accounting period audited. As previously discussed, the population of transactions for shipments of household goods and military items used in the Marine Corps’ fiscal year 2012 audit contained liquidations (outlays) related to one or more previous fiscal year appropriations. Because the Marine Corps was unable to reconcile its fiscal year 2012 bulk estimated obligations to the related outlays, and outlays recorded to fiscal year 2012 included outlays that were properly chargeable to prior fiscal year appropriations, the populations of obligations and outlays provided to the auditors for sampling and testing were not consistent with the reported scope of its Fiscal Year 2012 General Fund Schedule. Since the other military services also use bulk estimated obligations to fund their business processes whose transaction cycles cover multiple fiscal years, the inability to segregate outlays by appropriation fiscal year poses a significant risk to the integrity of their schedules of budgetary activity, particularly with regard to first-year schedules. For example, when bulk estimated obligations liquidate over several fiscal years, identifying a population of transactions that relates to a first- or even a second-year schedule of budgetary activity is problematic. This issue poses a significant audit readiness challenge for the other military services’ first- time audits of their schedules of budgetary activity, which have been initiated for fiscal year 2015.

The Reliability of DOD System-Generated Data Has Not Been Validated

The Marine Corps’ fiscal year 2012 audit demonstrated the difficulty in performing a fully substantive audit. For example, when the Marine Corps was unable to provide documentary support for certain transactions, it attempted to rely on (1) data and information generated by DLA systems and processes that support MILSTRIP transactions and (2) information generated by U.S. Transportation Command systems and processes for shipments of military items and household goods. This is directly contrary to the DOD FIAR Guidance on audit dealbreakers related to DOD feeder systems, which states that substantive testing of transactions to supporting documentation cannot overcome ineffective or missing information technology system controls when transaction evidence is electronic and only maintained within a system or the key supporting evidence is system-generated reports.

The other military services and some DOD agencies use these same mission support agencies’ business processes and systems to issue and ship military supplies and equipment and ship household goods, and they make payments (outlays) based on billings generated by these agencies’ business feeder systems. To the extent that the other military services are unable to locate original support for tested transactions, there is a potential risk that if DOD mission support agencies’ systems and processes are not tested to reasonably assure the reliability of transaction data, the other military services’ and DOD will experience the same problem as the Marine Corps. Accordingly, DOD’s FIAR Guidance recognizes that for large volumes of transactions, it is more effective and efficient to rely on internal controls, including information system controls, rather than planning to fully rely on substantive testing of larger numbers of sampled transactions for which documentary support must be located and provided to the auditors. Since December 2011, DOD’s FIAR Guidance has stated that DOD mission support agencies are responsible for resolving dealbreakers related to their information systems, processes, and controls and obtaining SSAE No. 16 examinations. However, because of uncorrected accounting, reporting, and information system weaknesses, the Marine Corps has relied primarily on costly, labor-intensive efforts to locate and provide documentary support for substantive tests of transactions.

According to DOD’s November 2014 FIAR Plan Status Report, DLA and U.S. Transportation Command are still in the beginning stages of their audit readiness efforts. As a result, the military services and defense agencies have asserted audit readiness for their fiscal year 2015 schedules of budgetary activity without these mission-support agencies having undergone SSAE No. 16 examinations.

Until these support agencies’ systems, controls, and processes have been tested and are deemed reliable for financial management reporting and audit purposes, the Marine Corps, the other military services, and defense agencies that rely on these systems and processes may experience the same challenges we identified in the Marine Corps’ fiscal year 2012 audit with regard to providing support for shipment transactions in audits of their fiscal year 2015 General Fund schedules of budgetary activity.

Ability to Assure the Reliability of Reported Obligations and Outlays Is Questionable

The Marine Corps’ fiscal year 2012 audit identified serious issues regarding the reliability of reported obligations and outlays. These issues relate to effective processes and controls for reasonably assuring (1) proper cutoff of beginning- and end-of-period obligations and outlays and (2) reported shipment obligations and outlays reflect activity for the accounting period audited. Because the Marine Corps and other military services record shipment obligations and outlays that occurred during each accounting period to current year appropriations, subsequent research and analysis are required to determine the appropriate fiscal year appropriation to be charged and to make necessary adjustments to both obligations and outlays. If the billings are made after the end of the accounting period and research to determine the proper appropriations to be charged extends several months into the next accounting period, first- and second-year schedules of budgetary activity may reflect activity outside the scope of the schedule.

To address audit readiness concerns related to shipment obligations and outlays, in September 2013, the DOD Comptroller and the Office of the Under Secretary of Defense (Acquisition, Technology and Logistics), Office for Transportation Policy, established the DOD-wide Transportation Financial Auditability Working Group to facilitate DOD component audit readiness in the department’s freight (military equipment and supplies and materials) and personal property (household goods) process areas. The Working Group is approaching the transportation audit readiness issues in two phases: (1) developing an obligation methodology with enterprise guidance based on FIAR requirements and input from financial management function representatives and (2) achieving overall improvements in transportation processes, systems, and controls. The DOD Comptroller reviewed and approved an obligation methodology to provide direction on establishing policies and procedures for managing transportation transactions funded with bulk estimated obligations.

In July 2014, the Transportation Working Group distributed the obligation methodology to the Army, the Navy, the Marine Corps, the Air Force, U.S. Transportation Command, DLA, and DFAS. The obligation methodology was intended to provide a baseline for DOD components, including the military services, DLA, and U.S. Transportation Command, to develop and refine corrective action plans in preparation for the audits of their fiscal year 2015 schedules of budgetary activity.

Overall transportation business function improvements focus on long- standing transportation financial issues across DOD that require in-depth process analysis and development of standard processes and procedures across the department. The first six focus areas relate to management of transportation account code usage from obligation to payment. The remaining focus areas, which cover information systems, bill payment and expenditure processes, and key supporting documentation, will begin in fiscal year 2015. Efforts to improve business processes, establish business rules (i.e., policy), and achieve systems integration are expected to be completed in fiscal year 2019 or 2020, to support sustainment of auditability. While these are important efforts, until DOD components and service agencies implement effective processes and controls to ensure that shipment obligations and outlays are recorded to the proper fiscal years, they will face significant challenges in audits of their schedules of budgetary activity and, ultimately, their SBRs.

Conclusions

The unqualified opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule initially reported by the DOD OIG was not supported by sufficient audit procedures or sufficient, appropriate audit evidence. Specifically, the OIG did not (1) perform sufficient procedures to determine the completeness of transactions reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule, (2) perform sufficient procedures to determine the reliability of certain evidence used to support transactions in the Marine Corps’ Schedule, (3) perform sufficient procedures to determine whether budget activity was recorded in the proper period and whether shipment obligations were properly recorded, and (4) properly consider and evaluate the audit evidence in concluding and reporting on the result of the audit. As a result, the OIG did not obtain sufficient, appropriate evidence to support the reported audit opinion. Further, the DOD OIG lacked policy and procedures for resolving disagreements among the audit team and documenting the basis for the resolution of such disagreements.

The OIG withdrew its opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule because of issues identified in the audit of the Marine Corps’ Fiscal Year 2014 General Fund Schedule that raised questions concerning the completeness of transactions in the Fiscal Year 2012 Schedule on which its opinion was based. At that time, the OIG indicated that once additional information has been gathered and analyzed, the fiscal year 2012 audit opinion will be revisited in light of its analysis and reissued. In commenting on our report, the OIG stated that it would consider all relevant information, including the findings and recommendations in our report and the findings of the four ongoing audits of suspense accounts as well as a report from the OIG’s Quality and Standards Office before deciding whether to reissue an opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

The Marine Corps made limited progress on resolving uncorrected financial management weaknesses. Consequently, inadequate risk management efforts will likely pose continuing challenges to its auditability. Moreover, the concerns identified with the Marine Corps audit also pose significant challenges to DOD-wide audits because the other military services and DOD components rely on many of the same supporting agencies’ business processes and feeder systems to carry out their missions and operations. For example, unless DOD and the military services can provide assurance of (1) completeness of general ledger data and the populations of budgetary transactions used in audit testing, along with proper cutoff and reporting of transactions to the appropriate fiscal year; (2) reliability of financial data generated by DOD agencies’ business processes and systems; and (3) proper recording of obligations and outlays, they will be unable to generate auditable schedules of budgetary activity and ultimately auditable sets of financial statements. The ultimate goal of financial audits is to provide accountability over DOD’s vast resources along with reliable information to support management decisions on DOD’s missions and operations. Achieving a clean audit opinion would be a normal outcome of sound financial management systems, processes, and controls.

Recommendations for Executive Action

To improve the quality of DOD’s financial statement audits and ensure that corrective actions to address audit recommendations are fully and effectively implemented prior to their closure, we are making the following three recommendations to the Department of Defense Inspector General: In addition to analyzing additional information related to the withdrawal of the auditor’s opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule, reconsider the conclusions made in the OIG’s initial audit report based on the findings in our report before determining whether the auditor’s opinion should be reissued or revised, or whether additional work should be performed.

Develop and document a quality assurance process for elevating disagreements between the audit team and OIG management to ensure appropriate, objective resolution of the disagreements.

Ensure that Marine Corps corrective actions fully address audit recommendations and document auditor review of the actions taken before closing the related recommendations.

Agency Comments and Our Evaluation

We provided a draft of this report to the DOD OIG, the Marine Corps, and the Office of the DOD Comptroller. We received written comments from each of these entities, which are reprinted in appendixes II through IV, respectively We summarize and evaluate the OIG’s, Marine Corps’, and Office of the DOD Comptroller’s comments below, and we provide detailed responses to the OIG’s comments following the comment letter in appendix II. We made technical corrections and clarifications in the body of our report, where appropriate.

DOD OIG Comments and Our Evaluation

In commenting on our report, the DOD OIG agreed with our three recommendations directed to it but generally disagreed with our findings that the OIG did not perform sufficient procedures, under professional standards, and consequently did not obtain sufficient, appropriate audit evidence to support its audit opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule. The OIG stated that it believed its report was supported when it was issued on December 20, 2013. The OIG provided comments on (1) the use of professional judgment, (2) completeness of transactions, (3) reliability of evidence, (4) cutoff testing, (6) reliability of recorded obligations, (7) materiality and audit conclusions, and (8) resolution of differences within the audit team. The OIG also commented on our oversight of the Marine Corps’ fiscal years 2012 through 2014 audits.

During our review of the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule, we had numerous discussions with the OIG, beginning at the end of February 2013, regarding the key areas discussed in our report. In drafting our report, we carefully considered the responses to our concerns that the OIG provided during these discussions. Such OIG responses were generally consistent with the OIG’s written comments on our draft report. Accordingly, the OIG’s comments do not raise issues that we had not already considered and appropriately addressed in our work. Further, our findings are consistent with the requirements in professional auditing standards cited in our report.

In addition, the OIG referred, in several places, to additional procedures applied in the audits of the Marine Corps’ Fiscal Years 2013 and 2014 General Fund Schedules. The OIG stated that certain audit testing in subsequent audits was expanded to address GAO concerns. We understand that the results of subsequent, expanded audits may provide additional insights into risks and the extent of any misstatements that may exist in the key areas discussed in our report. However, our findings in this report are focused on the adequacy of audit procedures applied and documented as part of the OIG’s audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

Use of Professional Judgment

The OIG commented that auditing standards recognize that the auditor needs to make professional judgments throughout the audit. We acknowledge that auditing standards recognize the need for professional judgment in conducting an audit. However, auditing standards also include requirements that the auditor needs to fulfill in order to comply with such standards. Auditor requirements in the standards are clearly denoted with the terms “must,” “is required to,” and “should.”

Our report includes references to the relevant requirements in auditing standards and the basis for our determination that in certain key audit areas, the OIG did not perform sufficient procedures, under such standards, and consequently did not obtain sufficient, appropriate audit evidence to support its audit opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Specifically, we found that the OIG did not perform sufficient procedures to determine the completeness of transactions reported on the Marine Corps’ Schedule, perform sufficient procedures to determine the reliability of certain evidence used to support transactions included on the Schedule, perform sufficient procedures to determine whether budgetary activity was recorded in the proper period and shipment obligations were properly recorded, and properly consider and evaluate the audit evidence in concluding and reporting on the results of the audit.

As stated in our report, had sufficient audit procedures been performed in key areas of concern that we identified, additional misstatements may have been identified that when aggregated with already identified misstatements, could be material to the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

Completeness of Transactions

The OIG stated that in its professional judgment, it reduced the risk of material misstatement related to completeness of outlays and obligations to an acceptable level. In our report, we noted several areas where, in our view, there is a high risk of material misstatement related to completeness of outlays and obligations and provided the supporting reasons (e.g., ineffective processes and controls, material amounts involved, and known prior misstatements). As noted in our report, auditing standards require that the auditor design and perform audit procedures to reduce the risk of material misstatement to an acceptably low level. Also, such standards require that the auditor(1) assess the risk of material misstatement at the relevant assertion level and (2) perform substantive procedures for all relevant assertions related to material classes of transactions, account balances, and disclosures to determine whether there is evidence of any material misstatements. Auditing standards further state that existence and completeness are always relevant assertions.

We found that the OIG did not perform sufficient procedures to determine whether (1) material amounts of fiscal year 2012 obligations and outlays were improperly charged to fiscal year 2011 and prior appropriations, and (2) all nonpayroll feeder system transactions (representing about half of the reported fiscal year 2012 budgetary activity) were properly included in the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

The OIG also mentioned that the March 23, 2015, withdrawal of its unqualified opinion report on the Marine Corps’ Fiscal Year 2012 General Fund Schedule was not related to the completeness concerns discussed in our report. However, our concerns related to the risk that all transactions that should have been included in the Marine Corps’ Fiscal Year 2012 General Fund Schedule were not included in the Schedule, which includes the risk that suspense account transactions were not appropriately included in the Marine Corps’ Schedule.

Reliability of Evidence

In response to our finding that the OIG did not perform sufficient procedures to determine the reliability of certain evidence used to support transactions in the Marine Corps’ Fiscal Year 2012 General Fund Schedule, the OIG stated that it believes that audit evidence used to test the Schedule was appropriate and permissible under the auditing standards. As discussed in our report, auditing standards require that in examining evidence supporting a transaction, the auditor should consider the reliability of the information used as audit evidence, such as electronic documents, including consideration of controls over its preparation and maintenance, where relevant. Such consideration would normally include any information that raises doubts about the reliability of the evidence. If the auditor has doubts about the reliability of information to be used as audit evidence or is aware of problems with the reliability of the data, the auditor should determine what modifications or additions to the audit procedures are necessary to resolve the issues. Also, when the auditor uses entity-produced information in performing audit testing or procedures to support audit testing, the audit standards require that the auditor obtain evidence about the accuracy and completeness of the information, for example, by performing procedures to determine whether the related controls over the data are effective.

As noted in our report, the auditors did not document their consideration of the reliability of the audit evidence provided by other DOD agencies, although there was evidence that should have raised doubt about the reliability of the audit evidence. In addition, the auditors relied on support produced by certain Marine Corps systems without obtaining sufficient evidence about the accuracy and completeness of this information.

Cutoff Testing

The OIG commented that it believed that the cutoff testing performed on outlays was both sufficient and in accordance with auditing standards. While the OIG comments described certain cutoff tests that were performed, the OIG, as discussed in our report, did not (1) sufficiently document its assessment of the risk of material misstatement related to cutoff, (2) perform sufficient cutoff testing procedures with respect to certain risks (e.g., fiscal year 2012 appropriation transactions that may be inappropriately recorded as fiscal year 2011 transactions), and (3) perform sufficient cutoff testing procedures with respect to certain types of transactions (e.g., transactions with known long transaction cycles). Consequently, there may be misstatements related to cutoff that would not have been detected by the OIG’s audit procedures. As noted above, auditing standards require that the auditor design and perform audit procedures to reduce the risk of material misstatement to an acceptably low level.

The OIG also stated that the risk of material misstatement related to cutoff was low, based on the results of the audits of the Marine Corps’ fiscal years 2011, 2012, and 2013 (first quarter) budgetary activity. Further, the OIG stated that additional procedures performed during the fiscal years 2013 and 2014 audits did not indicate there was a high risk of material misstatement. In our view, there was a high risk of material misstatement related to cutoff for the reasons included in our report and the fact that cutoff testing was not performed in prior year audits. While we agree that subsequent audits may provide additional information for understanding the risk of material misstatement related to cutoff, we believe that certain cutoff risks were not adequately addressed during the fiscal year 2012 audit. Also, we do not believe that the documentation adequately addressed the auditor’s assessment of the risk of material misstatement, including any other considerations beyond the information documented in the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

Reliability of Recorded Obligations

The OIG commented that it believes that sufficient audit procedures were performed to determine whether the accounting estimate for transportation shipments was reasonable in the context of the Schedule taken as a whole. As discussed in our report, the audit documentation showed that the OIG had identified several audit risks associated with the Marine Corps’ accounting for shipment transactions. For example, the Marine Corps (1) did not have sufficient documentation available to support its multiple obligation processes for shipment transactions and (2) was unable to match the liquidations (outlays) with corresponding obligations. The audit documentation also showed that the OIG had attempted to perform substantive detail testing of the Marine Corps’ shipment obligations; however, the Marine Corps was unable to provide support for $231.5 million of its reported $529.5 million in fiscal year 2012 shipment obligations.

As stated in our report, auditing standards identify procedures that the auditor may consider when reviewing and testing the process used to develop management’s estimates, including controls over the process and the relevance, reliability, and sufficiency of historical data used in the estimate. The OIG commented that it had performed four of the nine procedures enumerated in the auditing standards. In addition, the auditing standards state that the auditor’s objective is to obtain sufficient, appropriate evidence to provide reasonable assurance that the accounting estimates are reasonable in the circumstances. In assessing the reasonableness of an estimate, auditing standards state that the auditor normally concentrates on key factors and assumptions that include sensitivity to variations, deviations from historical patterns, susceptibility to misstatements and bias, and the entity’s historical experience related to the reliability of prior year estimates. As stated in our report, the audit documentation did not contain evidence that the OIG sufficiently performed certain other procedures enumerated in the auditing standards that we believe are important related to (1) identifying whether there were controls over the preparation of the accounting estimates and supporting data that may be useful in the evaluation and (2) considering whether sources of data and factors that management used in forming the assumptions were relevant, reliable, and sufficient for the purpose of determining the estimates based on information gathered in other audit tests.

Materiality and Audit Conclusions

The OIG stated that it believes the results of the audit work were properly considered and that it appropriately evaluated the audit evidence in accordance with all applicable auditing standards to conclude and report on the results of the audit of Marine Corps’ Fiscal Year 2012 General Fund Schedule. The OIG stated that its calculation of misstatements related to errors and untested amounts totaled approximately $773 million. The OIG also stated that all known misstatements or known risk factors were appropriately considered. The OIG stated that even if it included the $35.8 million that we reported related to unsupported contract payment transactions, the revised misstatements would total approximately $808.8 million, which is still below the overall materiality threshold of $826 million that the OIG had established for the audit.

As discussed in our report, auditing standards state that in evaluating whether the financial statements are presented fairly, in all material respects, in conformity with GAAP, the auditor must consider the effects, both individually and in the aggregate, of misstatements (both known and likely) that are not corrected by the entity. At the conclusion of the audit, the auditor accumulates identified misstatements and considers whether such misstatements are material to the entity’s financial statements. Auditing standards further state that as the aggregate misstatement approaches materiality, the risk that the financial statements could be materially misstated also increases; consequently, the auditor should consider the effect of undetected misstatements, in concluding on whether the financial statements are fairly stated. Because the OIG’s previously noted calculation of misstatements totaling $773 million represents nearly 94 percent of its $826 million materiality threshold for the audit, in accordance with auditing standards, the OIG should have determined an amount for undetected misstatements and included this amount in its materiality calculation for concluding on the results of the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule. However, the OIG did not do so.

Further, had sufficient audit procedures been performed in the key areas of concern that we identified, additional misstatements may have been identified that, when aggregated with already identified misstatements, could be material to the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Consequently, in the absence of such additional procedures, we do not believe that the OIG obtained sufficient, appropriate evidence to reduce the risk of material misstatement to an appropriately low level.

Resolution of Differences within the OIG Audit Team

The OIG agreed with our recommendation that it develop and document a quality assurance process for elevating disagreements between the audit team and OIG management to ensure appropriate, objective resolution of the disagreements. The OIG also stated that it was developing a formalized process for elevating such disagreements.

GAO Oversight and Timely Input

The OIG commented that we did not always provide timely input on the results of our oversight of the OIG’s audits of the Marine Corps’ Fiscal Years 2012 and 2013 General Fund Schedules and that the OIG was encouraged by the interaction that took place between GAO and the OIG as part of the audit of the Marine Corps’ Fiscal Year 2014 General Fund Schedule. For the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule, we provided comments to the OIG as we identified issues and concerns about its audit. For example, on May 1, 2013, when the OIG was in the process of concluding on the fiscal year 2012 audit results, we informed the OIG that audit procedures were not performed to test cutoff, and that cutoff is a key assertion that must be tested to provide audit evidence related to the completeness of transactions included in financial statements for the period audited. On May 30, 2013, the OIG made a decision to include cutoff as one of the additional areas it planned to test in its audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule. In addition, as the OIG has noted, audit testing was expanded in subsequent audits based on the concerns we identified with the fiscal year 2012 Marine Corps audit.

Marine Corps Comments and Our Evaluation

The Marine Corps agreed overall with our discussion of actions needed on the issues related to the audit of its fiscal year 2012 General Fund Schedule. However, the Marine Corps did not agree with certain findings with respect to (1) support for certain audit sample items, and (2) progress in addressing audit recommendations. We acknowledge the Marine Corps’ continuing efforts to improve accountability over its financial management systems and internal controls.

Support for Certain Sample Items

The Marine Corps stated that although the OIG may have deliberated with it on requiring an additional cutoff sample of 334 outlay transactions, the Marine Corps was not issued the additional samples and was not asked to provide supporting documentation. The discussion in our report is supported by the OIG’s audit documentation and a discussion with the auditors. Our review of the OIG’s audit documentation found that on September 6, 2013, the OIG e-mailed two, separate statistical samples for cutoff testing of obligations and outlays to the Marine Corps and requested that the Marine Corps provide the requested supporting documentation by close of business on September 13, 2013. The audit documentation shows that the Marine Corps responded to the obligation sample. However, OIG auditors told us that Marine Corps officials advised them that they could not respond to the request for additional fiscal year 2012 outlay samples because Marine Corps staff was responding to samples for the fiscal year 2013 Marine Corps audit, and sufficient staff were not available to respond to samples from both audits.

Progress in Addressing Audit Recommendations

The Marine Corps acknowledged that much work remains to fully mitigate its internal control weaknesses. However, the Marine Corps commented that it does not agree with our assertion that significant, uncorrected control weaknesses continue to impair the Marine Corps’ ability to produce consistent, reliable, and sustainable financial information for day- to-day decision making on its missions and operations. The objective of internal control is to provide reasonable assurance of (1) the effectiveness and efficiency of the entity’s operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations. An operating environment with significant, uncorrected weaknesses in internal controls lacks this assurance. In addition, the nature of the Marine Corps’ material weaknesses in internal control, which the OIG reported, include (1) financial management systems that do not comply with FFMIA requirements related to compliance with GAAP for federal government entities and the USSGL and (2) ineffective financial management oversight with regard to identifying and correcting accounting errors. The existence of such material weaknesses demonstrates that the Marine Corps does not have reasonable assurance of the reliability of its financial management operations.

Further, the Marine Corps stated that in addition to the 11 accounting and financial reporting recommendations that were closed by the OIG, it had remediated an additional 17 accounting and financial reporting recommendations and was awaiting validation testing from the OIG or an audit firm. The Marine Corps also stated that based on reinforced coordination with its information technology stakeholders and testing through the completion of the audit of its Fiscal Year 2014 Schedule, 94 of 95 information technology system recommendations were remediated. We have not assessed the corrective actions taken subsequent to the December 20, 2013, issuance of the audit report on the Marine Corps’ Fiscal Year 2012 General Fund Schedule and our update in August 2014.

Office of the DOD Comptroller Comments and Our Evaluation

The Office of the DOD Comptroller generally agreed with the findings in our report related to DOD-wide audit readiness implications and summarized efforts that are planned or under way to test controls over business processes and financial-related systems to help ensure the reliability of data used for DOD financial audits. However, the Office of the DOD Comptroller stated that our report does not recognize many of the corrections and improvements made by the Marine Corps or the value of lessons learned from the Marine Corps audits. We acknowledge DOD’s continuing efforts to become audit ready.

Our report includes several examples where the DOD Comptroller and its FIAR Team had developed appropriate audit readiness guidance several years ago to help DOD components and mission support agencies, such as DLA, effectively respond to requirements under professional auditing standards in their audit readiness efforts. Our report also states that certain DOD components, such as the mission support agencies, have not followed the FIAR Guidance regarding audit readiness timelines for supporting DOD components with regard to assuring that their own processes, systems, and controls are effective and can be relied on to support their DOD customers’ audits. To the extent that the other DOD military services and DOD agencies rely on these support agencies, they are likely to experience similar challenges as the Marine Corps with regard to having reliable information for decision making on their missions and operations and achieving auditability of their budgetary information.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Defense, the DOD Inspector General, the Under Secretary of Defense (Acquisition, Technology and Logistics); the Under Secretary of Defense (Comptroller)/Chief Financial Officer; the Deputy Chief Financial Officer; the Under Secretary of Defense (Personnel and Readiness); the Director of the Defense Finance and Accounting Service; the Director for Financial Improvement and Audit Readiness; the FIAR Governance Board; the Assistant Secretaries (Financial Management and Comptroller) of the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; the Director of the Office of Management and Budget; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-9869 or khana@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) determine the extent to which the audit was performed in accordance with professional auditing standards; (2) analyze the status of the Marine Corps’ actions to address identified accounting, financial reporting, and information technology system control weaknesses; and (3) identify any implications to the Department of Defense (DOD) based on the Marine Corps’ Fiscal Year 2012 General Fund Schedule of Budgetary Activity (General Fund Schedule) audit results.

To address our first objective, we analyzed auditor documentation, test results, and conclusions to determine the extent to which the work complied with professional auditing standards. As our criteria, we used professional audit standards issued by the American Institute of Certified Public Accountants, which are consistent with generally accepted government auditing standards, and considered additional guidance in the GAO/President’s Council on Integrity and Efficiency Financial Audit Manual. We followed the guidance in Section 650 of the Financial Audit Manual for relying on the work of others. We reviewed the Marine Corps’ Office of Inspector General (OIG) audit contracts and statements of work and the Marine Corps’ management representation letters, which contain assertions about the reliability of its financial reporting in accordance with generally accepted accounting principles, related to the audits of the Marine Corps’ Fiscal Year 2012 General Fund Schedule and its Fiscal Years 2011 and 2010 General Fund Statements of Budgetary Resources. In addition, we reviewed the OIG Marine Corps Auditor Reports, including the audit opinions, and Reports on Internal Control and Compliance with Laws and Regulations as well as the auditor’s reports to Marine Corps management that included detailed auditor findings and recommendations, and the Marine Corps’ responses to the auditor’s reports.

We also reviewed the audit documentation related to planning, executing, concluding, and reporting on the audit. We retested selected auditor sample items for significant classes of transactions, such as civilian and military payroll, unpaid obligations related to undelivered orders and delivered orders, and outlays (payments or liquidations of the orders received) to determine if we agreed with the auditors’ conclusions on tests of those sample items. Throughout our audit, we discussed the concerns we identified regarding the conduct of the audit with OIG and independent public accounting firm auditors, including concerns about (1) completeness of reported budgetary transactions, (2) the reliability of data generated by DOD feeder systems, (3) proper fiscal year cutoff and the reliability of reported shipment obligations, and (4) the auditors’ conclusions on the audit as well as the basis for auditor judgments made during the audit.

To analyze the status of the Marine Corps’ actions to address audit recommendations on identified accounting, financial reporting, and information technology system control weaknesses, we used federal internal control standards as our criteria. We assessed the status of the Marine Corps’ corrective actions on recommendations from the Marine Corps’ fiscal years 2010 through 2012 audits. We met with Marine Corps officials to discuss corrective action plans and actions completed and under way as well as their process for monitoring corrective actions. We reviewed auditor support for closed recommendations to determine whether the (1) corrective actions had been appropriately designed to address reported weaknesses and (2) documentation on closed recommendations confirmed that actions to address them had been completed.

To identify any DOD-wide implications of the Marine Corps’ Fiscal Year 2012 General Fund Schedule audit results, we considered our findings with regard to the conduct of the Marine Corps audit and the status of Marine Corps actions to address auditor recommendations as well as November 2014 Financial Improvement and Audit Readiness (FIAR) Plan Status Report information on the status of DOD military service and DOD mission support agency audit readiness efforts. We gave particular consideration to audit readiness issues we identified with regard to assuring the (1) completeness of populations and proper cutoff, (2) reliability of financial data and information generated by DOD business processes and feeder systems, and (3) reliability of reported obligations and outlays. We considered whether DOD agencies and the other military services relied on many of the same systems, processes, and controls as the Marine Corps and would be likely to experience similar issues in their audits.

We conducted this performance audit from July 2012 through July 2015 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 Defense Office of Inspector General

GAO Comments

1. Material misstatements. The OIG stated that we did not identify any material misstatements that were excluded from its conclusions on the audit. It was not our objective to audit the Marine Corps’ Fiscal Year 2012 General Fund Schedule of Budgetary Activity (General Fund Schedule). Consequently, we did not perform audit tests to determine whether material misstatements occurred. As stated in our report, the OIG did not perform sufficient audit procedures, under professional standards, and consequently did not obtain sufficient, appropriate evidence to support its opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule of Budgetary Activity (General Fund Schedule). Had sufficient audit procedures been performed in key areas of concern that we identified, additional misstatements may have been identified that when aggregated with the already identified misstatements, could be material to the Marine Corps’ Fiscal year 2012 General Fund Schedule. 2. Rejected transactions. The OIG stated that figure 3 in our draft report indicated that rejected transactions were removed from the Standard Accounting, Budgeting and Reporting System (SABRS) with no process to eventually include corrected transactions in SABRS. Because figure 3 depicts feeder system data flow, we revised the arrow related to the flow of rejected transactions to show that, if handled correctly, the rejected transactions would be corrected and, entered into SABRS. However, as discussed in our report, the OIG did not perform sufficient procedures to reasonably assure that rejected transactions were properly resolved and entered into SABRS before closing a related audit recommendation. 3. Reconciliation of SABRS to Fund Balance with Treasury. The OIG stated that we expressed concern that it did not complete a full comparison of fiscal year SABRS transaction activity to the Marine Corps’ fiscal year 2012 Fund Balance with Treasury reconciliation. The OIG stated that such a comparison is an acceptable procedure for gaining assurance of completeness, but it is not a required audit procedure. We referred to such testing as an example of one of the types of audit procedures that may be performed to determine whether recorded transactions are complete.

The OIG also stated that it had traced selected transactions to the reconciliation. However, as stated in our report, these procedures would not be effective for testing completeness of transactions recorded in SABRS because they begin with items that are already recorded in SABRS. 4. Fiscal year 2012 activity recorded to fiscal year 2011 appropriations. The OIG stated that our example of $3.8 billion in Marine Corps fiscal year 2012 outlays that was recorded to fiscal year 2011 appropriations as reported by the Department of the Treasury, overstated the risk to the Marine Corps’ Fiscal Year 2012 General Fund Schedule. The OIG stated that the Marine Corps fiscal year 2012 outlay activity would include charges to 1-year appropriations as well as multiyear appropriations. We specifically excluded multiyear appropriations in calculating the $3.8 billion amount in our example. We included this example in our report because it illustrates that the amount of such transactions charged to prior year appropriations was material. As stated in our report, we believe the risk of material misstatement to the Marine Corps’ Fiscal Year 2012 General Fund Schedule related to transactions recorded in fiscal year 2012 to prior year appropriations that should have been charged to fiscal year 2012 appropriations is high based on numerous reported Marine Corps’ weaknesses in controls over accounting and financial reporting and the magnitude of fiscal year 2012 Marine Corps’ outlays that were recorded to prior fiscal year appropriations. Accordingly, testing of such transactions was necessary to determine whether there were any material misstatements.

In addition, the OIG stated that the audit of the Marine Corps’ Fiscal Year 2012 Schedule appropriately excluded fiscal year 2012 transactions recorded to fiscal year 2011 because the Schedule only included current year appropriations. However, the scope of a first- year audit of a schedule of budgetary activity would appropriately include a determination of whether transactions related to current fiscal year appropriations were improperly charged to prior year appropriations, and, therefore, improperly excluded from the schedule. 5. Consideration of DOD agencies as third parties. The OIG stated that the auditing standards permit the use of both internal and external evidence and state that evidence from a knowledgeable source that is independent is generally more reliable than evidence obtained only from internal sources. Further, the OIG stated that based on its audit approach, it does not consider information obtained from the Defense Logistics Agency (DLA) and U.S. Transportation Command to be internal evidence. Instead, the OIG considered these DOD agencies to be third parties with respect to the Marine Corps. As stated in our report, in examining evidence supporting a transaction, the auditor should consider the reliability of the information used as audit evidence, such as electronic documents, including consideration of controls over its preparation and maintenance where relevant. Such consideration would normally include any information that raises doubts about the reliability of the evidence. If the auditor has doubts about the reliability of information to be used as audit evidence or is aware of issues with the reliability of the data, the auditor should determine what modifications or additions to the audit procedures are necessary to resolve the issues. Also, as discussed in our report, there were well-known, documented issues that should have raised significant doubts about the reliability of the data from DLA and U.S. Transportation Command systems and processes that the OIG relied on in its transaction testing for the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule. 6. Military Standard Requisitioning and Issue Procedures (MILSTRIP) material weakness. The OIG stated that although it agrees that there are weaknesses surrounding MILSTRIP processes, DOD’s fiscal year 2012 Agency Financial Report does not conclude that the data within the system is unreliable and that the reported weaknesses would not prevent the auditors from using the MILSTRIP information to complete the audit tests. We disagree. As discussed in our report, DOD reported DLA’s MILSTRIP process as a department- wide material weakness, stating that the department could not effectively account for transactions and balances in the MILSTRIP orders process. Because this and other factors should have raised doubts about the reliability of MILSTRIP process data, auditors should determine what modifications or additions to the audit procedures are necessary to resolve the issues. 7. Relevance of OIG report on Defense Enterprise Accounting and Management System (DEAMS). The OIG stated that auditing standards do not require a Statement on Standards for Attestation Engagements (SSAE) No. 16 examination of system information in order for the results to be used to corroborate data from another entity and that the Marine Corps did not rely solely on DEAMS for its financial statement reporting. However, the concern raised in our report was that the OIG used information from DEAMS as audit evidence and DEAMS had known data reliability issues. As discussed above, if there are doubts about the reliability of information to be used in audit testing, auditors should determine what modifications or additions are needed to the audit procedures to resolve the issues. 8. Relevance of disclaimer on DOD financial statements. The OIG stated that although it issued a disclaimer on DOD’s department-wide financial statements for fiscal year 2012, its audit effort on the department-wide statements did not include any tests of DEAMS or MILSTRIP data that were used to corroborate the Marine Corps transactions. The OIG stated that as a result, there was no direct connection between the results of the DOD department-wide financial statement audit report and the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule. As discussed in our report, in disclaiming an opinion on DOD’s department-wide financial statements for fiscal year 2012, the OIG reported that DOD financial management and business feeder systems were unable to adequately support material amounts on the financial statements as of September 30, 2012. The well-known, documented issues related to these systems should have raised significant doubts about the reliability of the data used in testing and the OIG should have determined what modifications or additions were needed to the audit procedures to resolve the issues. 9. Reallocation of shipment outlays. The OIG stated that it agrees with us that some transactions may be recorded in the wrong period, although the Marine Corps did not report and the OIG did not identify any material instances where the Marine Corps recorded transactions in an improper period. As discussed in our report, the OIG’s audit documentation did not include evidence that the OIG performed any procedures to (1) test the accuracy of the Marine Corps’ allocation of fiscal year 2012 shipment billings to previous fiscal year appropriations or (2) confirm that the related adjustments were recorded to ensure that the portion of the outlays that pertained to previous fiscal year appropriations, and in some cases, other military services, were excluded from the outlays reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule.

The OIG also stated that our draft report was misleading regarding the discussion of $21 million of fiscal year 2012 shipment billings the Marine Corps was analyzing in January 2013 to determine the extent of adjustments needed to the Marine Corps reported fiscal year 2012 outlays. The OIG stated that our auditors were present during a series of meetings to assess this situation. The meetings the OIG referred to were held in November and December 2014, which was after the OIG had issued its opinion on the Marine Corps’ Fiscal Year 2012 General Fund Schedule. 10. Cutoff control testing on outlays. The OIG stated that it was able to resolve 7 transactions that its initial testing had determined were exceptions (errors) and that the other 14 transactions were supported by evidence obtained from DLA, an agency external to the Marine Corps. We revisited Marine Corps documentation that was available for 18 of the 21 transactions and determined that the additional support was sufficient for 6 of the 18 transactions. We revised the discussion in our report accordingly. However, because support for the other 12 transactions was not sufficient, we continue to believe that controls over cutoff for outlays were not effective and the OIG should have performed substantive detail tests of cutoff for outlays. 11. Adjustments to progress payment transactions. The OIG stated that while the Marine Corps may not always properly record certain progress payment transactions the OIG obtained evidence that an outlay occurred related to a valid obligation. The OIG stated its position that for purposes of the Marine Corps’ Fiscal year 2012 General Fund Schedule, if support for progress payment outlays could not be obtained, adjusting the outlay transaction to an advance payment would have no net effect on the Marine Corps’ schedule. The OIG stated that it considered such occurrences as a compliance issue. However, as stated in our report, the audit documentation showed that the audit team had initially determined that it could not conclude on the accuracy of sampled contract outlay transactions for which there was no support that the goods and services paid for were received. More specifically, the audit documentation showed that the audit team could not determine the validity of certain progress payment obligations because the contract information provided to them by the Marine Corps did not contain sufficient detail to make such a determination. Further, the audit documentation showed that the tested contractor invoices were related to progress payments and the audit team had determined that progress payments should not be recorded as advances. The audit team planned to include the unsupported contract obligations and outlays in its overall calculation of misstatements. The audit documentation also showed that OIG management subsequently made an assumption that the unsupported outlay transactions could be adjusted and reported as advance payments to avoid counting the amounts as untested. As stated in our report, the audit documentation did not include a reconciliation or explanation for such conflicting statements between OIG management and the audit team. 12. Quantitative Methods Division (QMD) certification. The OIG commented that it disagreed with the discussion in our report regarding QMD’s certification of statistical sampling and stated that although QMD expressed some concern with the statistical methods used by the audit firm, QMD confirmed that the statistical projections were calculated accurately and signed the certification. As stated in our report, we reviewed the documentation on QMD’s certification and held discussions with QMD statisticians regarding reasons why they added a note that qualified their certification. Specifically, the note stated that QMD expresses no opinion as to the application of results with respect to the evaluation of the sample results against materiality. QMD officials told us that they qualified their certification because the auditors mixed two methods for making statistical estimates, QMD was not included in the materiality assessment process, and as a result, they did not know the basis for the auditor judgments that were made. QMD officials also told us that this was unusual and that they are generally included in auditor assessments of materiality to help the auditors interpret sampling results.

Appendix III: Comments from the United States Marine Corps

Appendix IV: Comments from the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Robert F. Dacey (Chief Accountant), Gayle L. Fischer (Assistant Director), Richard Mayfield (Auditor-in-Charge), Michael Bingham, Gloria Cano, Jeremy Choi, Francine DelVecchio, Doreen Eng, Donald D. Holzinger, Pierre Kamga, Jason Kelly, Jason Kirwan, Richard Larsen, Gregory Marchand (Assistant General Counsel), Quang Nguyen, Brian Paige, Heather Rasmussen, Robert Sharpe, Eric Stalcup, and Ivy Wu made key contributions to this report.