The IPA Determined That the Navy Provided Sufficient Documentation to Support the Navy’s Schedule of Military Pay Activity for April 2013

Based on documentation provided by the Navy and the results of the  IPA’s audit procedures, the IPA concluded that information reported on  the Navy’s schedule of military pay activity for April 2013 (April 2013  schedule) reconciled to a complete and valid population of transactions. Based on our review, nothing  came to our attention that raised concerns regarding the adequacy of the  Navy’s documentation supporting military pay transactions reflected in its  April 2013 schedule beyond those identified by the IPA. The Navy’s Military Pay Assertion and Validation Efforts Identified Risks to Future Audit Readiness

While the IPA determined that the Navy provided sufficient documentation  to support its April 2013 schedule, the IPA also assessed the  effectiveness of 34 internal controls supporting the Navy’s assertion and  determined that 14 were either not designed effectively or not operating  effectively. However, because the Navy limited the scope of  the IPA examination to focus on a 1-month schedule of activity, its ability  to achieve auditability of a full year of activity, as required in future  Schedules of Budgetary Activity and SBRs, was not fully assessed. Further, because of the volume of transactions  during a 12-month period of activity, obtaining supporting documentation  may be more challenging than supporting transactions limited to a 1- month period of time. For example, preparing financial statements  involves additional financial reporting processes, such as reconciling the  Navy’s Fund Balance with Treasury, performing funds receipt and  distribution activities, and recording certain journal vouchers. However,  the Navy’s assurance regarding the audit readiness of these other key  processes is limited. In December 2014, the Navy  reported extensive deficiencies in controls associated with these  activities. Navy Coordination with the IPA, OIG, and DFAS Was Not Always Effective

			Management Representation Letter

Although the IPA completed its fieldwork in September 2014, its  examination report was not issued until January 2015, in part because of  the lack of effective coordination between the Navy and the IPA to ensure  that adequate management representations were provided to the IPA in a  timely manner. Without effective internal controls and  systems, auditors will likely be required to perform additional, more costly  procedures to obtain required assurance in future financial statement  audits, and the Navy’s ability to consistently produce timely, reliable  financial information will remain at risk. An audit of the  Navy’s fiscal year 2015 Schedule of Budgetary Activity, for which military  pay activity represents a significant portion of obligations and outlays, is  currently under way and is expected to provide feedback on efforts  necessary to achieve DOD’s goal of financial statement auditability  department-wide by September 30, 2017. While this audit provides a  milestone for measuring progress, we continue to stress the importance  of addressing fundamental systems and control deficiencies, which will  lead to lasting financial management improvements and, as a result,  provide greater assurance of future audit readiness. We recommend that the Secretary of the Navy direct the Assistant  Secretary of the Navy (Financial Management and Comptroller) to establish a policy to coordinate with auditors concerning the dating of  management representation letters and when they need to be  provided to auditors in future audits consistent with DOD FMR  requirements and establish milestones for assessing and effectively implementing  certain complementary controls identified by DFAS to help the Navy  achieve its military pay-related control objectives. Appendix I: Objectives, Scope, and Methodology

The objectives of our review were to determine the extent to which (1) the  Navy was able to provide sufficient documentation to support a complete  and valid population of detailed transactions reconcilable to its schedule  of military pay activity for April 2013, and (2) the Navy’s military pay  assertion and validation efforts, which include the IPA’s examination,  contribute to future audit readiness. To address our second objective, we reviewed documentation provided  by the Navy concerning (1) the Navy’s internal controls supporting its  military pay audit readiness assertion; (2) the status of the Navy’s actions  to address identified military pay-related internal control and information  technology system deficiencies; (3) audit readiness efforts of selected  military pay-related areas the Navy identified as outside of the scope of its  military pay audit readiness assertion; and (4) the Navy’s coordination  with the IPA, the DOD Office of Inspector General, and service providers  on selected matters, such as the management representation letter and  complementary controls, to identify areas where further improvements  can be made to contribute to future audit readiness.
Why GAO Did This Study

DOD continues to work toward achieving auditability of its financial statements. As part of that effort, the Navy in March 2013 asserted audit readiness of its military payroll activity, which represents a significant portion of its expenditures. Based on its examination, an IPA found that the Navy's assertion, which focused in part on a 1-month schedule of military pay activity, was fairly stated.
GAO was asked to assess the Navy's military pay audit readiness efforts. This report examines the extent to which (1) the Navy was able to provide sufficient documentation to support a complete and valid population of detailed transactions reconcilable to its schedule of military pay activity for April 2013 and (2) the Navy's military pay assertion and validation efforts contribute to future audit readiness. GAO reviewed the IPA's audit documentation and analyzed documentation that the Navy provided to the IPA; reviewed documentation on identified military pay control deficiencies and the status of the Navy's actions to address them; and interviewed Navy, IPA, and DFAS officials.

What GAO Found

Based on documentation provided by the Navy and the results of audit procedures, an independent public accountant (IPA) concluded that information reported on the Navy's schedule of military pay activity for April 2013 reconciled to a complete population of pay transactions that were adequately supported and valid. GAO reviewed the Navy's documentation and the IPA's related audit documentation. Nothing came to GAO's attention that raised concerns regarding the adequacy of the Navy's documentation beyond those the IPA identified and determined to be immaterial.
Both the IPA's examination and the Navy's assertion and validation efforts identified additional risks to the Navy's future audit readiness. For example, the IPA found that 14 of 34 military pay controls it examined were either not designed effectively or not operating effectively. Further, the Navy limited the scope of the IPA's examination to focus on 1 month of activity to address any deficiencies identified prior to the audit of its fiscal year 2015 Statement of Budgetary Activity, which is currently under way. However, because of the volume of transactions during a 12-month period, obtaining supporting documentation may be more challenging than supporting transactions limited to a 1-month period. In addition, the Navy identified extensive deficiencies in six personnel and other key systems it relies on to process and report military pay activity. Navy officials acknowledge that additional efforts are needed to fully address these deficiencies. Questions also exist regarding the audit readiness of certain related activities beyond the scope of the Navy's military pay activities—such as financial reporting controls related to reconciling the Navy's Fund Balance with Treasury—because of extensive deficiencies or because they have not been independently examined. Achieving audit readiness also requires coordination with the IPA, the Department of Defense (DOD) Office of Inspector General, and service providers; however, the Navy did not always effectively coordinate these activities. For example, GAO found that the Navy did not (1) establish milestones to assess the effectiveness of certain of its controls associated with payroll services provided by the Defense Finance and Accounting Service (DFAS) and (2) effectively coordinate efforts to ensure that the required management representation letter was provided to the IPA in a timely manner.
The audit of the Navy's fiscal year 2015 Schedule of Budgetary Activity, of which military pay activity represents a significant portion of reported obligations and outlays, is intended to help identify areas for additional focus, and facilitate efforts to achieve DOD's goal of financial statement auditability department-wide by September 30, 2017. However, without reliable controls and systems, auditors will likely need to perform additional, more costly procedures to obtain assurance in future audits, and the reliability of financial information for day-to-day decision making will remain at risk. GAO continues to stress the importance of addressing fundamental systems and control deficiencies, which will lead to lasting financial management improvements and, as a result, provide greater assurance of future audit readiness.

What GAO Recommends

GAO recommends that the Navy establish (1) milestones for assessing and implementing certain controls associated with payroll services provided by DFAS and (2) a policy to coordinate with auditors on providing required management representation letters in a timely manner. The Navy agreed with GAO's recommendations and described actions taken or under way to address them.