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. 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. It  details the roles and responsibilities of the DOD components, and  prescribes a standard, systematic process components should follow to  assess processes, controls, and systems, and identify and correct  weaknesses in order to achieve auditability. Overall, the procedures required by the  FIAR Guidance are consistent with selected procedures for conducting  financial statement audits, such as reconciling the population of  transactions to be tested, conducting tests of information systems  controls, and conducting internal control and substantive testing. The  FIAR Guidance also requires the components to correct the deficiencies  identified during testing and document the results, which is consistent  with federal internal control standards and OMB guidance. DOD’s ability to achieve audit readiness is highly dependent on the  components’ ability to effectively develop and implement FIPs in  compliance with the FIAR Guidance. Navy Civilian Pay and Air Force Military Equipment FIPs Were Not Adequately Developed and Implemented

The Navy and Air Force did not adequately develop and implement their  respective FIPs for Civilian Pay and Military Equipment in accordance  with the FIAR Guidance. Our review of these FIPs found similar  deficiencies in both of them. Also, neither  component had fully developed and implemented corrective action plans  to address deficiencies identified during implementation of the FIPs. As a result of these  deficiencies, neither FIP provided sufficient support for the components’  conclusions that the assessable units were ready to be audited. Specifically, our review of this  FIP found that the Navy did not (1) conduct sufficient control and  substantive testing, and reached conclusions that were not supported by  the testing results; (2) reconcile the population of transactions recorded in  the payroll system to those in the general ledger prior to testing; (3) fully  test information systems controls; (4) adequately develop and implement  corrective action plans; and (5) accurately assess and report the status of  its FIP work in terms of specific FIAR Plan metrics. Testing Was Insufficient and Did Not Support Conclusions. FIP Monitoring and Oversight Needs Improvement

DOD and its military components have established senior executive  committees as well as designated officials at the appropriate levels to  monitor and oversee their financial improvement efforts. Thus, the lack of adequate oversight  results in an inefficient FIP process and can impact the ability of  components to meet established milestones. As a result, both the Navy’s and Air Force’s conclusions of  audit readiness for civilian pay and military equipment, respectively, were  unsupported. If the DOD components are unable to achieve interim  FIAR milestones, DOD will need to consider the effect on its ability to  achieve departmentwide audit readiness by September 30, 2017. Recommendations for Executive Action

We are making 13 recommendations to the Secretary of Defense to  improve the development, implementation, documentation, and oversight  of the department’s financial management improvement efforts.   The Secretary of the Air Force to ensure that all responsible parties  within the Air Force, including the Assistant Secretary of the Air Force  (Financial Management and Comptroller) carry out their  responsibilities for ensuring that FIP development and implementation  complies with the FIAR Guidance and that the FIP contains sufficient  information to indicate audit readiness before it is signed. Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine whether (1) the Financial Improvement  and Audit Readiness (FIAR) Guidance provided a reasonable  methodology for the Department of Defense (DOD) components to  develop Financial Improvement Plans (FIP), (2) the DOD components  had adequately developed and implemented selected FIPs in accordance  with the FIAR Guidance, and (3) DOD is adequately monitoring and  overseeing the FIP process.
Why GAO Did This Study

The Department of Defense (DOD) has been required to prepare audited annual financial statements since 1997 but to date, has not been able to meet this requirement. The National Defense Authorization Act of Fiscal Year 2010 mandated that DOD be prepared to validate [certify] that its consolidated financial statements are audit-ready by September 30, 2017. In May 2010, DOD issued its Financial Improvement and Audit Readiness (FIAR) Guidance to provide a methodology for DOD components to follow to develop and implement their Financial Improvement Plans (FIPs) for achieving audit readiness. The DOD FIP is a framework for planning and tracking the steps and supporting documentation. GAO was asked to assess the FIP methodology provided in the FIAR Guidance, the development and implementation of selected components' FIPs, and DOD's monitoring and oversight of the FIP process. To do this, GAO analyzed the FIAR Guidance, reviewed two selected FIPs--Navy Civilian Pay and Air Force Military Equipment--and reviewed relevant documentation and interviewed DOD and component officials..

What GAO Found

The FIAR Guidance provides a reasonable methodology for DOD components to use in developing and implementing their FIPs. The Guidance details the roles and responsibilities of the DOD components, and prescribes a standard, systematic process to follow to assess processes, controls, and systems. Overall, the procedures required by the FIAR Guidance are consistent with selected procedures for conducting a financial audit, such as testing internal controls and information system controls. The Guidance also requires components to take actions to correct any deficiencies identified during testing and document the results. DOD's ability to achieve departmentwide audit readiness is highly dependent on its military components' ability to effectively develop and implement FIPs in compliance with the FIAR Guidance. The Navy and Air Force did not adequately develop and implement their respective FIPs for Civilian Pay and Military Equipment in accordance with the FIAR Guidance. GAO found similar deficiencies in both FIPs. For example, internal controls and information systems controls were not sufficiently tested or documented, and conclusions reached were not supported by the testing results. In addition, neither component had fully developed and implemented corrective action plans to address deficiencies identified during implementation of the FIPs. As a result, the FIPs did not provide sufficient support for the Navy's and Air Force's conclusions that Civilian Pay and Military Equipment were ready to be audited. DOD and its military components have assigned to senior executive committees and designated individuals appropriate oversight roles and responsibilities for their financial improvement efforts. However, neither oversight committees nor Navy and Air Force officials effectively carried out their oversight responsibilities for the two FIPs, which did not support the components' conclusions of audit readiness. However, once the components indicated audit readiness, both the DOD Office of Inspector General and the Undersecretary of Defense (Comptroller) performed reviews and concluded that the FIPs did not comply with the FIAR Guidance and did not demonstrate audit readiness. The lack of adequate oversight results in an ineffective FIP process and can impact the ability of components to meet established milestones. If the components are unable to achieve interim milestones, DOD will need to consider how these factors could affect its ability to achieve departmentwide auditability by the end of fiscal year 2017.

What GAO Recommends

GAO recommends that the Secretary of Defense take various actions to improve the development, implementation, documentation, and oversight of DOD's financial management improvement efforts. DOD generally concurred with the recommendations and commented on actions being taken to implement them.