For over a decade, DOD has dominated GAO’s list of federal programs and operations at high risk of being vulnerable to fraud, waste, abuse, and mismanagement. All of DOD’s programs on GAO’s High-Risk List relate to its business operations, including systems and processes related to the management of contracts, finances, the supply chain, and support infrastructure, as well as weapons system acquisition. Long-standing and pervasive weaknesses in DOD’s financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the financial status and cost of DOD activities to Congress and DOD decision makers, (2) adversely affected its operational efficiency in business areas such as major weapons system acquisition and support and logistics, and (3) left the department vulnerable to fraud, waste, and abuse. DOD is required by various statutes to improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and to produce annual audited financial statements. As noted above, DOD has been required since 1997 to prepare and issue annual departmentwide audited financial statements and, pursuant to various statutes, certain DOD components, including the military departments, are required to prepare and issue annual audited financial statements. DOD consolidates the component financial statements to prepare its departmentwide financial statements. As reflected in OMB requirements and DOD policy for preparation and audit of agency financial statements, DOD and its components must prepare their financial statements consistent with generally accepted accounting principles (GAAP) and establish and maintain effective internal control over financial reporting and compliance with laws and regulations. The DOD Office of Inspector General (OIG) is responsible for auditing the financial statements in accordance with GAGAS, which, among other things, requires the auditor to determine if the financial statements are fairly presented and properly supported by the agencies’ accounting records. DOD has undertaken a number of initiatives over the years, such as its Financial Improvement Initiative in 2003, to improve the department’s business operations, including financial management, and achieve unqualified (or “clean”) financial statement audit opinions. In 2005, the DOD Comptroller established the DOD FIAR Directorate to manage DOD-wide financial management improvement efforts and to integrate those efforts with transformation activities, such as those outlined in the department’s Enterprise Transition Plan, across the department. The FIAR Plan, which was first prepared in 2005, is DOD’s strategic plan and management tool for guiding, monitoring, and reporting on the department’s financial management improvement efforts. As such, the plan communicates incremental progress in addressing the department’s financial management weaknesses and achieving financial statement auditability. The plan focuses on three goals: (1) achieve and sustain unqualified assurance on the effectiveness of internal controls through the implementation of sustained improvements in business processes and controls addressing the material internal control weaknesses, (2) develop and implement financial management systems that support effective financial management, and (3) achieve and sustain financial statement audit readiness. The NDAA for Fiscal Year 2010 requires DOD to update and report on the FIAR Plan twice a year—no later than May 15 and November 15—and provide each update to OMB and Congress, among others. Consistent with prior GAO recommendations and the NDAA for Fiscal Year 2010, the DOD Comptroller issued the FIAR Guidance in May 2010 to provide standardized guidance for DOD components to follow in developing their FIPs. DOD components are expected to prepare a FIP in accordance with the FIAR Guidance for each of their assessable units. The FIPs are intended to both guide and document financial improvement efforts. While the name “FIP” indicates that it is a plan, as a component implements that plan, it must document the steps performed and the results of those steps, and retain that documentation within the FIP. Therefore, a FIP includes plans for testing controls and data, and documentation of the testing conducted, results of the testing, and any actions taken based on the results. When a component determines that it has completed sufficient financial improvement efforts for an assessable unit so that it is ready for audit, the FIP documentation is used to support the conclusion of audit readiness. A summary of the purpose of each DOD financial improvement document is provided below. The department intends to progress toward achieving financial statement auditability in five “waves” of concerted improvement activities within groups of end-to-end business processes, which are broken down into discrete units, called assessable units. Under the FIAR Plan Strategy, execution of the FIAR Guidance methodology for groups of assessable units across the five waves is intended to result in the preparation of various components’ financial statements through fiscal year 2017. The first three waves of the FIAR Plan Strategy focus on achieving the DOD Comptroller’s interim budgetary and asset accountability priorities, while the remaining two waves are intended to complete actions needed to achieve full financial statement auditability. However, the department has not yet fully defined its strategy for completing waves 4 and 5, which focus on the auditability of most of the department’s financial statements such as the Balance Sheet and the Statement of Net Cost, and significant audit areas such as equipment valuation. The FIAR Guidance states that an analysis of significant reporting entities relevant to waves 4 and 5 will be included in a future version of the FIAR Guidance. For example, in relation to wave 4, the DOD Comptroller has identified weaknesses in DOD valuation of military equipment as an obstacle to achieving auditable balances in DOD financial statements, and the May 2011 FIAR Status Plan Report states that DOD plans to resolve the matter through the deployment of new business and financial management systems, a revised definition of military equipment, and through a change to GAAP related to accounting for the cost of military equipment. DOD plans to seek a change to GAAP and implement the change by September 30, 2017, but DOD has not yet prepared a detailed time line for implementing the changes within affected assessable units (assuming that any proposed changes to GAAP would be approved). The focus and scope of each wave include the following: Wave 1—Appropriations Received Audit focuses efforts on assessing and strengthening, as necessary, internal controls and business systems involved in the appropriations receipt and distribution process, including funding appropriated by Congress for the current fiscal year and related apportionment/reapportionment activity by OMB, as well as allotment and suballotment activity within the department. Wave 2—Statement of Budgetary Resources (SBR) Audit focuses efforts on assessing and strengthening, as necessary, the internal controls, processes, and business systems supporting the budgetary- related data (e.g., status of funds received, obligated, and expended) used for management decision making and reporting, including the SBR. In addition to fund balance with Treasury reporting and reconciliation, significant end-to-end business processes in this wave include procure- to-pay, hire-to-retire, order-to-cash, and budget-to-report. Wave 3—Mission-Critical Assets Existence and Completeness Audit focuses efforts on assessing and strengthening, as necessary, internal controls and business systems involved in ensuring that all assets (including military equipment, general equipment, real property, inventory, and operating materials and supplies) are recorded in the department’s accountable property systems of record, all of the reporting entities’ assets are recorded in those systems of record, reporting entities have the right (ownership) to report these assets, and the assets are consistently categorized, summarized, and reported. Wave 4—Full Audit Except for Legacy Asset Valuation focuses efforts on assessing and strengthening, as necessary, internal controls, processes, and business systems involved in the proprietary side of budgetary transactions covered by the Statement of Budgetary Resources effort of wave 2, including accounts receivable, revenue, accounts payable, expenses, environmental liabilities, and other liabilities. This wave also includes efforts to support valuation and reporting of new asset acquisitions. Wave 5—Full Financial Statement Audit focuses efforts on assessing and strengthening, as necessary, processes, internal controls, and business systems involved in supporting the valuations reported for legacy assets once efforts to ensure controls over the valuation of new assets acquired and the existence and completeness of all mission assets are deemed effective on a go-forward basis. Given the lack of documentation to support the values of the department’s legacy assets, federal accounting standards allow for the use of alternative methods to provide reasonable estimates for the cost of these assets. To guide the components in executing the strategy, the FIAR Guidance provides a set of mandatory, standardized phases and steps that the components must follow to develop and implement their FIPs to achieve audit readiness. This step-by-step methodology delineates FIP responsibilities between the components’ management and the auditors. For each assessable unit, management’s responsibilities focus on identifying, implementing, and documenting necessary financial management improvements during the first four phases of the FIAR Methodology, and sustaining those improvements through the fifth phase. For phases six and seven, after the DOD Comptroller’s initial review and approval of a FIP supporting audit readiness, the component engages an independent auditor to first perform an examination of the FIP and if validated, then an audit of the assessable unit and finally, the entity’s financial statements. After a component concludes that an assessable unit is ready for audit, a component continues to maintain the FIP to document the validation of audit readiness by an independent auditor and the sustainability of audit readiness through ongoing efforts by the component.