DOD Financial Management: Improvements Needed in the Navy's Audit Readiness Efforts for Fund Balance with Treasury
Highlights
What GAO Found
The Navy has made progress in performing audit readiness activities, including developing a financial improvement plan (FIP) for its Fund Balance with Treasury (FBWT). These activities are critical to the Navy's General Fund Statement of Budgetary Resources (SBR) improvement efforts. The Navy's FBWT FIP is particularly important as it addresses improvement efforts across multiple business processes, including contract and vendor payments and military and civilian payroll that provide significant input to the SBR. However, the Navy did not fully implement certain tasks in its FBWT FIP in accordance with the Department of Defense's (DOD) Financial Improvement and Audit Readiness (FIAR) Guidance. These included activities in all four key tasks of the Discovery phase, the first of the five FIAR guidance phases. In the Discovery phase, the reporting entity documents processes, prioritizes audit readiness efforts, assesses and tests controls, and evaluates supporting documentation.
Document processes. The Navy did not fully document its FBWT process in system narratives and flowcharts. For example, the Navy's analysis did not explain the complex process that occurs within the Defense Departmental Reporting System - B, including merging data and deleting duplicative transactions. In the Navy's case, the process analysis is particularly important because the Navy's transactions do not follow the typical flow of data used to produce financial statements. Without a complete FBWT process analysis and system narratives, internal controls and risks for each of the systems in the process may not be readily identified and appropriately tested.
Prioritize audit readiness efforts. The Navy did not prioritize FBWT audit readiness efforts or fully implement its audit readiness prioritization and strategy for key information systems prior to its assertion of audit readiness. The Navy's lack of prioritization of key information technology limits management's ability to focus audit readiness efforts on the systems with the highest risk.
Assess and test internal controls. Within the FBWT assertion package, the Navy did not document information technology general computer controls for significant systems or the hardware and software interfaces, as required. Also, the Navy did not identify internal controls by assessable units (e.g., information systems supporting financial statement line items or other discrete portions of the program). Identifying controls by assessable unit is important for determining whether assessable units, sub-assessable units, and associated systems are producing reliable information and helps link systems and controls to the transaction flows.
Evaluate supporting documentation. Although the Navy performed substantive tests for supporting documents, such testing may not provide sufficient evidence of the Navy's ability to produce documentation in a substantive manner for future audits. An evaluation of key supporting documentation is important for determining whether the Navy would be able to support amounts presented in the financial statements or provide an external auditor with sufficient and appropriate evidence to perform the audit.
Addressing these shortfalls is critical to achieving audit readiness.
Why GAO Did This Study
The National Defense Authorization Act for Fiscal Year 2014 mandates an audit of DOD's fiscal year 2018 department-wide financial statements. To help achieve this, the DOD Comptroller issued the FIAR Guidance to provide a standard methodology for DOD components to follow to improve financial management and achieve audit readiness, and designated the SBR as an audit priority. Full implementation of the Navy's General Fund FIP for FBWT is essential to achieving audit readiness for its General Fund SBR. The Navy asserted Statement of Budgetary Activity (SBA) audit readiness as of September 30, 2014, and in February 2016 received a disclaimer of opinion on the audit of its SBA for fiscal year 2015.
GAO is mandated to audit the U.S. government's consolidated financial statements, which cover activities and balances of executive branch agencies, including DOD. GAO's objective in this report was to determine the extent to which the Navy developed and implemented the Discovery phase of its General Fund FBWT FIP in accordance with the FIAR Guidance. GAO analyzed the Navy's FBWT FIP to determine whether it contained the tasks and activities required by the FIAR Guidance for the Discovery phase. GAO also reviewed the Navy's FBWT FIP key deliverables, such as process narratives and flowcharts, internal control assessments, and test results.
Recommendations
GAO recommended that the Navy fully implement the FIAR Guidance for FBWT in the areas of process analysis, prioritization, internal control assessment and testing, and evaluation of supporting documentation to support audit readiness. The Navy concurred with all seven recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to prepare a level I quantitative drilldown in accordance with the FIAR Guidance. |
The Navy concurred with this recommendation and stated that it has actions planned, taken, or under way to prepare a quantitative drilldown. In September 2017, Navy provided a listing of certain systems (DCAS, GLs, DDRS-B, and DDRS-AFS) it considered as Level 1 assessable units. However, the listing did not include a drilldown from the financial statement amounts through DDRS-AFS, DDRS-B, and DCAS to the receipt and disbursement source systems. In July 2020, Navy officials stated that Navy is implementing a new system that will enable them to complete a quantitative drill down for its Fund Balance with Treasury (FBWT). The new system is not expected to be fully implemented until March 2021. In the interim, certain FBWT reconciliations are performed at DFAS, that may provide a drilldown capability of FBWT as reported in financial statements to the applicable general ledger amounts. In February 2021, a Navy financial management officer indicated that the new system (Advana) is scheduled to be operational June 30, 2021. As a result, Navy expects to be able to provide copies of Advana reconciliation reports during the 4th quarter of fiscal year 2021. The Advana reconciliation reports should drill down from financial statement FBWT amounts to general ledger balances. In September 2021, the Navy provided a year-to-date FBWT reconciliation workbook, using data from the new financial management system, Advana, which provides data to reconcile Treasury's account balances to the Navy's balances in Navy's financial reporting system (DDRS-B) and general ledger on a regular basis. The reconciliation also identifies supported and any unsupported differences with the Navy's FBWT General Ledger balances for further reconciliation efforts and provides the information in lieu of a quantitative drilldown. The Advana reconciliation workbook should provide the Navy with data needed to reconcile its FBWT account balances with Treasury on a regular basis and improve auditability. This action addresses the intent of our recommendation.
|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to prioritize audit readiness efforts for the key FBWT systems, prepare an audit strategy that identifies for each system (1) the Navy's plan for assessing the system to gain assurance that the system can be relied on; (2) the assessment types, including prioritizing the assessments based on qualitative and quantitative factors for each system; and (3) planned start and completion dates of these assessments for each system. |
The Navy concurred with this recommendation and stated that it has actions planned, taken, or under way to prioritize audit readiness efforts for key Fund Balance with Treasury (FBWT) systems. In September 2017, Navy provided documentation for three systems, but this documentation did not address corrective actions for ineffective controls and the expected completion dates. Further, during our audit, Navy provided a list of 22 relevant systems. In July 2020, Navy officials stated that they are preparing an audit strategy for each system, and documenting control activities and computer controls for significant systems. In July 2021, a Navy official indicated that they are compiling data from several organizations into a single summary document that will be attached to a memo signed by an SES at FMO. The estimated completion date is later in 2021 and is dependent on how quickly the document gets through the review process. In September 2021, Navy provided documentation including its Audit Relevant Systems Consolidation Action Plan, the Navy Audit Roadmap Dashboard, the MICP IT Scope of Testing, and the Navy Systems Matrix. Between these four documents, Navy provides its audit strategy and audit readiness prioritization for its FBWT IT systems, system assessment types, and assessment completion dates. Navy's preparation of audit strategy documentation for FBWT systems should improve its General Fund FBWT and SBR auditability.
|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to prepare, in accordance with FIAR Guidance, the documentation of control activities and information technology general computer controls for significant systems; system certifications or accreditations; system, end user, and systems documentation locations; and hardware, software, and interfaces. |
The Navy concurred with this recommendation and stated that it had actions planned, taken, or under way to document control activities, information technology general computer controls for significant systems, systems documentation locations, and hardware, software, and interfaces. In September 2017, Navy provided documentation for 3 systems, but the documentation did not include system certifications or accreditations; system, end user, and systems documentation locations; and hardware, software, and interfaces. Further, during our audit, Navy provided a list of 22 relevant systems. In July 2020, a Navy official told us that they are preparing an audit strategy for each system, and documenting control activities and computer controls for significant systems. In July 2021, a Navy official noted that they have accumulated information and documents from DFAS, Navy-FMS and DON-CIO about Navy systems audit efforts and are compiling the input from these organizations into a single summary document that will be attached to a memo signed by an SES at FMO. The estimated completion date is later in 2021 and is dependent on how quickly the document gets through the review process. In September 2021 the Navy provided documentation including its FBWT Key System General Control Status, Systems Matrix, and the Department of Navy's Enterprise IT Control Standards. Between these three documents, Navy provides its IT control activities and general computer controls for significant systems; system certifications; locations of system documentation, hardware, software, and end users; and system interfaces. This documentation should improve Navy's General Fund FBWT and SBR auditability.
|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to prepare an internal control assessment document for each assessable unit, summarizing control activities that are appropriately designed and in place. |
The Navy concurred with this recommendation and stated that it had actions planned, taken, or under way to prepare an internal control assessment document. In September 2017, Navy provided support for actions taken to address this recommendation. However, the documentation provided did not summarize controls by assessable unit (DCAS, DDRS-B, or other systems). Instead controls were listed by function (Treasury Reporting, Audit Readiness, and Departmental Reporting). In July 2020, a Navy official stated that documentation of overall Fund Balance with Treasury (FBWT) controls was in process and they are finalizing the Risk Control Matrix for FBWT to include controls at DFAS and at Treasury. In February 2021, a Navy financial management officer noted that a contract support team is working on updating the Process Cycle Memo and corresponding Risk Control Matrix for the end to end Budget to Report cycle and includes Funds Receipt, FBWT and Financial reporting. In September 2021, the Navy provided a Risk Control Matrix that identifies internal controls for each phase of the FBWT process. The matrix identifies Risks, Control Objectives, and Control Description for each phase of the FBWT process. The matrix also identifies whether the control is currently in process, the control owner and performer, frequency, and effectiveness of control. The Risk Control Matrix should improve the Navy's SBR auditability for its General Fund FBWT. Navy's actions address the intent of this recommendation.
|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to perform sufficient testing for supporting documentation to reasonably determine whether such documentation, including that for key reconciliations, is available in a sustainable manner for future audit efforts. |
The Navy concurred with this recommendation and stated that it had actions planned, taken, or under way to test the effectiveness of Fund Balance with Treasury (FBWT) controls, which includes assessing the availability of supporting documentation. In September 2017, Navy provided documentation related to Treasury Reporting and FBWT Audit Readiness through September 2016. However, the documentation provided did not clearly indicate whether testing for supporting documentation was performed. In May 2019, Navy provided a listing of key FBWT reconciliations performed at the end of fiscal year 2018 and verification that supporting documentation for such reconciliations was saved in a document sharing system and was available for future audit efforts. Navy's verification that supporting documentation for key FBWT reconciliations exists and is available in a sustainable manner for future audits should improve Navy's audit readiness.
|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to, for each fiscal year expected to be under audit, identify and address unusual and invalid transactions, abnormal balances, and missing data fields in the universe of collection and disbursement transactions. |
The Navy concurred with this recommendation and stated that it had actions planned, taken, or under way to obtain monthly data from Defense Finance and Accounting Service on invalid Fund Balance with Treasury (FBWT) transactions. In September 2017, Navy provided information related to its efforts to address this recommendation, but the support provided did not include testing for FY 17 data. In May 2019, Navy provided support evidencing their review of unusual and invalid transactions. A Navy official indicated that unusual and invalid transactions are primarily due to missing data fields and that these transactions are identified and addressed as part of their monthly FBWT reconciliation process. The support provided also showed a monthly review by management of balances of unusual and invalid transactions, as well as an aging of the balances for trend analysis. Navy's implementation of these controls should improve their General Fund financial statement audit readiness.
|
| Department of the Navy | To improve the Navy's implementation of the FIAR Guidance for its General Fund FBWT FIP and facilitate efforts to achieve SBR auditability, the Secretary of the Navy should direct the Assistant Secretary of the Navy, Financial Management and Comptroller, to update FBWT data flowcharts and narratives to fully describe the flow of data from the Navy's receipt of collection and disbursement transaction information through the financial statement line items, including the reversal of general ledger trial balance data generated by the automated system and other entries made within Defense Departmental Reporting System - Budgetary. |
The Navy concurred with this recommendations and stated that it had actions planned, taken, or under way to develop procedures and documentation that describe the processes associated with the flow of data. In September 2017, Navy provided documentation related to system process narratives, but these narratives did not describe data flow in detail or include flowcharts with sources of collections and disbursements, registering in DCAS, posting to GLs, flow to DDRS-B, JVs in DDRS-B, flow to DDRS-AFS, and JVs in DDRS-AFS to the financial statements. In May 2019, Navy provided an updated Fund Balance with Treasury (FBWT) Process Cycle Memorandum (PCM). The updated PCM contains a comprehensive narrative of the Navy's FBWT business process of recording, registering, and reconciling the funds received, collected, and disbursed. Also, the PCM provides a flow of financial transaction data from source documentation to the Navy's Financial Statements. The Navy's updated PCM should improve implementation of the FIAR Guidance for its General Fund FBWT and facilitate efforts to achieve financial statement auditability.
|