For fiscal year 2011, of the 24 agencies covered by the Chief Financial  Officers Act of 1990 (CFO Act), DOD was the only agency to receive a  disclaimer of opinion on all of its financial statements.Inspector General (IG) reported that  the department’s fiscal year 2011 financial statements would not  substantially conform to generally accepted accounting principles;
DOD’s financial management and feeder systems were unable to  adequately support material amounts on the financial statements; and  long-standing material internal control weaknesses identified in prior  audits continued to exist, including material weaknesses in areas such  as financial management systems, Fund Balance with Treasury,  Accounts Receivable, and General Property, Plant, and Equipment. Challenges in Achieving Audit Readiness

GAO’s recent work highlights the types of challenges facing DOD as it  strives to attain audit readiness and reengineer its business processes  and systems. The urgency in addressing these challenges  has been increased by the recent efforts to accelerate audit readiness  time frames, in particular attaining audit readiness for the department’s  SBR by fiscal year 2014. DOD has generally agreed  with these recommendations and is taking corrective actions in response. Reported DOD Progress toward Audit Readiness for the Statement of Budgetary Resources

The Secretary of Defense’s direction to achieve audit readiness for the  SBR by the end of 2014 necessitated that DOD’s components revise  some of their plans and put more focus on short-term efforts to develop  accurate data for the SBR in order to achieve this new accelerated goal. Further, in a February 2012 briefing on its accelerated plans, DOD  indicated that 7 of 24 material general fund Defense Agencies and Other  Defense Organizations are either already sustaining SBR audits or are  ready to have their SBRs audited. These accomplishments represent  important positive steps. Our recent reports highlight some of  the difficulties that the components have experienced recently related to  achieving an auditable SBR, including  the Army’s inability to locate and provide supporting documentation  for its military pay;  the Navy’s and the Marine Corps’ inability to reconcile their Fund  Balance with Treasury accounts; and the Marine Corps’ inability to provide sufficient documentation to  auditors of its SBR. GAO has made prior recommendations to  address these issues. The Marine Corps received disclaimers of opinion from its auditors on its  fiscal year 2010 and 2011 SBRs because it could not provide supporting  documentation in a timely manner, and support for transactions was  missing or incomplete. The plan also provided interim milestones for DOD components  such as the Army, Navy, Air Force, Defense Logistics Agency, and other  defense agencies. For example, the May 2011 FIAR  Plan Status Report indicated that the Air Force had planned to validate its  audit readiness for many SBR-related assessable units in fiscal year 2016  and that its full SBR would not be ready for audit until 2017. However, the  February 2012 briefing on the accelerated plans indicated that most of the  Air Force’s SBR assessable units will be audit-ready in fiscal years 2013  or 2014. DOD considers the successful  implementation of these ERP systems critical to transforming its business  operations and addressing long-standing weaknesses in areas such as  financial and supply-chain management and business systems  modernization. DOD officials have also stated that these systems are  critical to ensuring the department meets its mandated September 30,  2017, goal to have auditable departmentwide financial statements. However, DFAS users of these systems told us that they were having  difficulties using the systems to perform their daily operations. Challenges in Developing and Implementing DOD’s Business Enterprise Architecture and Investment Control Processes

Improving the department’s business environment through efforts such as  DOD’s business enterprise architecture and improved business systems  management is an important part of helping DOD achieve auditability. In  June 2011, we reported that DOD had continued to make progress in  implementing a comprehensive business enterprise architecture,  transition plan, and improved investment control processes. The act further  states that these efforts should ensure that (1) the business process to be  supported by the defense business system modernization will be as  streamlined and efficient as practicable and (2) the need to tailor  commercial-off-the-shelf systems to meet unique requirements or  incorporate unique interfaces has been eliminated or reduced to the  maximum extent practicable.investments we reviewed, DOD and the military departments used DOD’s  Business Process Reengineering Guidance (dated April 2011) to assess   In June 2011, we reported that, for those  whether the investments complied with the business-process  reengineering requirement. We also reported in June 2011 that while DOD and the military  departments largely followed DOD’s guidance, they did not perform the  key step of validating the results of these reengineering assessments to  ensure that they, among other things, accurately assessed process  weaknesses and identified opportunities to streamline and improve  affected processes. We have work underway to evaluate DOD’s efforts to improve its  business system investment process, including its efforts to address the  act’s business process reengineering requirement. DOD faces considerable implementation challenges and has much work  to do if it is to meet the goals of an auditable SBR by fiscal year 2014 and  a complete set of auditable financial statements by fiscal year 2017.
Why GAO Did This Study

Over the years, the Department of Defense (DOD) has initiated several efforts intended to improve its financial management operations and ultimately achieve an unqualified (clean) opinion on its financial statements. These efforts have fallen short of sustained improvement in financial management and financial statement auditability.
In this statement, GAO provides its assessment of DODs progress toward: (1) producing an auditable Statement of Budgetary Resources (SBR) by fiscal year 2014 and a complete set of auditable financial statements by fiscal year 2017, including the development of interim milestones for both aforementioned audit readiness goals; (2) acquiring and implementing new enterprise resource programs and other critical financial management systems; (3) reengineering business processes and instituting needed controls; and (4) implementing a comprehensive business enterprise architecture and transition plan, and improved investment control processes.
This statement is primarily based on GAOs prior work related to the departments efforts to achieve audit readiness, implement modern business systems, and reengineer its business processes. GAO also obtained and compared key milestones in a February 2012 DOD briefing on its updated plans to accelerate achieving SBR auditability with the May 2011 Financial Improvement and Audit Readiness plan but did not independently verify the updated information in the February 2012 briefing.

What GAO Found

GAOs recent work highlights the types of challenges facing the Department of Defense (DOD) as it strives to attain audit readiness and reengineer its business processes and systems. The urgency in addressing these challenges has been increased by the goals of an auditable DOD Statement of Budgetary Resources (SBR) by the end of fiscal year 2014 and a complete set of auditable financial statements by the end of fiscal year 2017. For example, GAOs 2011 reporting highlights difficulties the DOD components experienced in attempting to achieve an auditable SBR. These include:
tthe Navys and the Air Forces premature assertions of audit readiness and missed interim milestones;
the Armys inability to locate and provide supporting documentation for its military pay;
the Navys and Marine Corps inability to reconcile their Fund Balance with Treasury (FBWT) accounts; and
the Marine Corps inability to receive an opinion on both its fiscal years 2010 and 2011 SBRs because it could not provide supporting documentation in a timely manner, and support for transactions was missing or incomplete.
In a February 2012 briefing on its updated plans, DOD accelerated milestones for its components in some cases, significantlyto accomplish the 2014 SBR goal. For example, the Air Force had planned to validate its audit readiness for many SBR-related items in fiscal year 2016; however, the departments February 2012 accelerated plans show that most of the Air Forces SBR line items will be audit-ready in fiscal years 2013 or 2014. Also, in its February 2012 update DOD shows that 7 of 24 material general fund Defense Agencies and Other Defense Organizations have either already had SBR audits or are ready to have their SBRs audited, which represent important positive steps.
DOD has stated it considers the successful implementation of its enterprise resource planning (ERP) systems critical to transforming its business operations, addressing long-standing weaknesses, and ensuring the department meets its mandated September 30, 2017 auditability goals. However, in 2011, GAO reported that independent assessments of two of these systemsthe Armys and Air Forces new general ledger systemsidentified operational problems, gaps in capabilities that required manual workarounds, and training that was not focused on system operation. Moreover, users of these systems had difficulties using these systems to perform daily operations. GAO also reported in 2011 on numerous weaknesses in DODs enterprise architecture and business processes that affect DODs auditability. For example, while DOD continued to update its corporate enterprise architecture, it had not yet augmented its corporate architecture with complete, coherent subsidiary architectures for DOD components such as the military departments. Also, while DOD and the military departments largely followed DODs Business Process Reengineering Guidance to assess business system investments, they had not yet performed the key step of validating assessment results.

What GAO Recommends

GAO has made prior recommendations to address these issues. DOD has generally agreed with these recommendations and is taking corrective actions in response. GAO has work underway to evaluate DODs continuing efforts in these areas.