	Background

Over the years, DOD has initiated several broad-based reform efforts to  address its long-standing financial management weaknesses. The plan focuses on three goals: (1) achieve and sustain  assurance on the effectiveness of internal controls, (2) develop and  implement financial management systems that support effective financial  management, and (3) achieve and sustain financial statement audit  readiness. The DOD Comptroller directed the DOD  components—including the Departments of the Army, Navy, and Air  Force and the Defense Logistics Agency—to use a standard process to  implement the FIAR Plan and aggressively modify their activities to  support and emphasize achievement of the priorities. For each assessable unit, a component is required to prepare a  FIP in accordance with the steps outlined in the FIAR Guidance. In our report issued this week, we concluded that the FIAR Guidance  provides a reasonable methodology for the DOD components to follow in  developing and implementing their FIPs. The FIAR  Guidance details the roles and responsibilities of the DOD components,  and prescribes a standard, systematic process that components should  follow to assess processes, controls, and systems, and identify and  correct weaknesses in order to achieve auditability for each of their  assessable units. The FIAR Guidance also requires the components to prepare and  implement corrective action plans for resolving the deficiencies identified  during testing and to document the results, which is consistent with  federal internal control standards and Office of Management and Budget  (OMB) guidance. Challenges for DOD Components’ Implementation of FIAR Guidance

Although the FIAR Guidance provides a reasonable methodology for  improving financial management within the department, 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. Our reviews of various DOD component efforts to achieve  audit readiness found that the components faced challenges in effectively  implementing the FIAR Guidance, resulting in unsupported conclusions of  audit readiness for Navy Civilian Pay, Air Force Military Equipment, and  the Marine Corps SBR. Our report includes recommendations for DOD to ensure  that components’ FIPs comply with the FIAR Guidance. However, the DOD IG issued a disclaimer of opinion on the  Marine Corps’ fiscal year 2010 SBR because the Marine Corps did not  provide timely and relevant supporting documentation for accounting  transactions and disbursements in key areas, which prevented the  auditors from completing the audit by the November 15, 2010, reporting  deadline. Further, in addressing the 70 audit findings and related 139  recommendations, we found that the Marine Corps did not develop an  effective overall corrective action plan that identified risks, prioritized  actions, and identified required resources in order to help ensure that  actions adequately respond to recommendations. Further details on  the Navy’s comments and our evaluation of them can be found in our  report. Issues with Navy and Marine Corps Processes for Reconciling Fund Balance with Treasury (FBWT)

Reconciling the FBWT account is a key financial management control. Issues with Implementation of Two of DOD’s Enterprise Resource Planning (ERP) Systems

The implementation of an integrated, audit-ready systems environment  through the deployment of ERP systems underlies all of DOD’s financial  improvement efforts and is crucial to achieving departmentwide audit  readiness. Improved Monitoring and Oversight of Component Financial Improvement Plans (FIP) Are Needed

In one report we issued this week, we found that weaknesses in the Navy  and Air Force FIAR Plan implementation efforts indicate that the  monitoring and oversight of such efforts have not been effective. Although we found that DOD and its military components had established  appropriate organizational structures for monitoring and oversight of audit  readiness efforts, oversight responsibilities were not always effectively  carried out. Specifically,  for these two FIPs that we reviewed, neither individual officials nor the  executive committees took sufficient action to ensure that the FIPs were  accurate or complied with the FIAR Guidance. In their reviews, both organizations identified issues with the FIPs  that were similar to those we had identified. Effective oversight and monitoring would also help ensure that lessons  learned from recent efforts would be sufficiently disseminated throughout  the department and applied to other financial improvement efforts. For example, the results of the Marine Corps’  SBR audit effort provide valuable lessons on preparing for a first-time  financial statement audit. As we recently testified, lessons learned from  this audit effort can provide a roadmap to help other DOD components  achieve audit readiness. Concluding Observations

With the FIAR Plan and related FIAR Guidance, DOD has established a  reasonable strategy and methodology for improving its financial  management.
Why GAO Did This Study

The Department of Defense (DOD) has initiated several efforts over the years to address its long-standing financial management weaknesses and ultimately achieve unqualified (clean) opinions on its financial statements. In 2005, the DOD Comptroller first issued the Financial Improvement and Audit Readiness (FIAR) Plan for improving financial management and reporting. In May 2010, the DOD Comptroller issued the FIAR Guidance to provide standardized guidance to DOD components for developing Financial Improvement Plans (FIP) to implement the FIAR Plan. GAO's testimony focuses on (1) progress made by the DOD Comptroller in developing and issuing the FIAR Guidance, (2) challenges faced by DOD components in implementing the FIAR Guidance, and (3) improvements needed in DOD's oversight and monitoring of FIAR implementation efforts. This statement is based on four audits that were undertaken at the request of this subcommittee and other congressional requesters to evaluate the progress DOD is making in implementing its FIAR Plan and FIAR Guidance. GAO addresses findings and recommendations from two reports being issued this week ( GAO-11-830 and GAO-11-851) and preliminary information from two ongoing audits. Each audit demonstrates some of the challenges DOD faces in improving its financial management and achieving the goal of auditable financial statements by 2017..

What GAO Found

In a report issued this week, GAO concluded that the FIAR Guidance provides a reasonable methodology for the DOD components to follow in developing and implementing 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. The FIAR Guidance also requires the components to prepare and implement corrective action plans for resolving the deficiencies identified during testing and to document the results, which is consistent with federal internal control standards and related guidance. DOD's ability to achieve audit readiness is dependent on the components' ability to effectively develop and implement FIPs in compliance with the FIAR Guidance. However, GAO's review of various DOD component efforts to achieve audit readiness found that the components experienced challenges in implementing the FIAR Guidance. Specifically: (1) The Navy and the Air Force had not adequately developed the two FIPs that GAO reviewed in accordance with the FIAR Guidance. As a result, they did not conduct sufficient control and substantive testing, and reached conclusions that were not supported by the testing results. (2) Auditors of the Marine Corps' Statement of Budgetary Resources (SBR) issued a disclaimer of opinion because the Marine Corps did not provide timely and relevant supporting documentation for accounting transactions and also reported that internal control weaknesses should be addressed. (3) GAO's preliminary work on the Navy's and Marine Corps' Fund Balance with Treasury (FBWT) reconciliation processes identified issues with their ability to reconcile FBWT--a key step in preparing the SBR. (4) Based on preliminary results, GAO identified issues in the implementation of two enterprise resource planning (ERP) systems by the Army and the Air Force. DOD has acknowledged that effective implementation of integrated systems is crucial to achieving departmentwide audit readiness. Although DOD and its military components had established organizational structures for monitoring and oversight of audit readiness efforts, GAO found that oversight responsibilities were not effectively carried out, resulting in the ineffective implementation of FIPs and unsupported conclusions of audit readiness. For the two FIPs that GAO reviewed, neither the designated officials nor the executive committees took sufficient action to ensure that the FIPs complied with the FIAR Guidance. Effective oversight would also help ensure that lessons learned from recent efforts would be disseminated throughout the department so that others could avoid similar problems. For example, the Marine Corps' SBR audit effort provide valuable lessons that, if effectively communicated and implemented, can provide a roadmap to help other DOD components achieve audit readiness.

What GAO Recommends

GAO recommends actions for components to comply with the FIAR Guidance, for the Marine Corps to develop appropriate corrective action plans, and for DOD to ensure that the services consider lessons learned. DOD concurred with GAO's recommendations related to implementing the component FIPs and with three of four recommendations related to the Marine Corps SBR. Further details on DOD's comments can be found in GAO's reports.