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Weekly Updates[ILLUSTARTION OMITTED]
Only a few years ago, we could not have imagined the burdens being placed today on our military services. Their missions span the globe and include peacekeeping, humanitarian relief, emergency response, and warfighting. The services are transforming their abilities to respond to these new missions by applying resources more efficiently, encouraging innovation, and replacing outdated systems. We in the Department of Defense (DoD) financial community must also keep in step with the Department's transformation efforts and apply the same kind of forward thinking that fosters innovation and breeds efficiency.
Creating the FIAR Plan and Tool
In 2005, the Office of the Under Secretary of Defense (Comptroller) (OUSD(C)) established the Financial Improvement and Audit Readiness (FIAR) Directorate to oversee DoD-wide financial improvement and to produce the Department's plan for achieving auditability, called the FIAR Plan. The FIAR Plan consolidates major milestones from the financial improvement plans of the various DoD components. By collecting and reporting accomplishments against financial improvement goals semiannually, the FIAR Plan helps DoD managers gauge the Department's overall progress in implementing business, financial, and systems improvements that are critical to achieving financial statement audit readiness.
These critical improvements--or key milestones--are aligned with prescribed business rules that delineate the steps for reaching audit readiness. Often, these steps depend on business transformation efforts that are outside the scope of the FIAR Plan. In these cases, estimated completion dates under the FIAR Plan are aligned with the respective improvement efforts.
The FIAR Directorate maintains, updates, and aligns FIAR data using the FIAR Planning Tool, an Internet-based resource for DoD managers. The FIAR Tool allows DoD managers to organize and report on their key milestones, while giving real-time visibility into their identified deficiencies, corrective action plans, tasks, milestones, and progress. Since all information captured by the FIAR Tool is readable by any user, DoD managers can use that information to help them prepare and structure their own plans, and draw on solutions applied by other functional management teams.
The FIAR Tool has been highly effective in facilitating communication among DoD functional management team members, senior leaders, and other stakeholders. As the FIAR Plan has matured, the OUSD(C) has expanded the FIAR Tool to add and link multiple business transformation efforts within the Department, including critical tasks under the purview d the Business Transformation Agency.
Both the FIAR Plan and the FIAR Tool have become important parts of each DoD component's arsenal of resources for reporting, forecasting, and decision making. Though data may change as more information becomes available and as milestones are completed, the FIAR Directorate ensures that information captured is vetted for accuracy, timeliness, and reliability. Given this rigor, managers across the Department can rely on the information presented in the FIAR Plan and housed in the FIAR Tool when making daily management decisions. DoD managers also may look to these resources and to FIAR Directorate personnel for strategic guidance.
Using Lessons Learned to Achieve Continual Improvement
To assist with continual improvement, the FIAR Directorate captures the lessons and experiences of the components as they pursue audit readiness. Directorate personnel then modify processes and procedures Department-wide to reflect the best thinking and firsthand experience among the components.
Over the past two years, FIAR Directorate personnel have incorporated many lessons learned related to auditing the financial statements. In doing so, we have applied the Department's business rules for reaching audit readiness and integrated financial management improvements with systems improvements.
Three lessons learned stand out--and we address each in turn:
* Undergoing an initial audit and the cost of repeating an audit annually are expensive and require continually dedicated resources.
* DoD's Business Rules for planning financial management improvement should better incorporate the processes found in Office of Management and Budget Circular A-123, Appendix A, and then should be used in a cost-effective manner to verify that necessary internal controls are in place for achieving and sustaining audit readiness.
* Financial management improvements are highly dependent on the modernization of business and financial systems improvements.
Changing Audit Approach
Until the entire Department reaches auditability, DoD must find a more cost-effective way to confirm and sustain improvements until the entire Department reaches auditability. The audit strategy presented in earlier versions of the FIAR Plan focused on making incremental financial improvements--by financial statement line or entity--to achieve audit readiness. Lines were further organized into focus, priority, and other areas based on their material impact on the financial statements. The plan contemplated that once improvements for an individual line were completed, with readiness asserted to by the component head, the Department then would undertake an independent audit. This strategy assumed that by completing an audit on each line, the Department ultimately would be able to audit the full financial statements and achieve an unqualified audit opinion.
Some entities and lines have reached audit readiness and undergone an independent audit. Once an initial audit is complete, the Department then must repeat the audit annually to confirm that improvements are being sustained. After-action reviews from these early audits indicate that the process is both laborious and costly for the reporting entity.
Working closely with the internal and external audit communities--including the Government Accountability Office, the Office of Management and Budget (OMB), and the Office of the Inspector General, Department of Defense (OIG)--the Department has revised its audit strategy and refined its approach to auditability to be more cost effective without sacrificing accountability. The new audit strategy reflects two principal shifts in the approach to achieving audit readiness and, subsequently, an unqualified opinion on DoD's consolidated financial statements:
* Rather than focusing on each line from a financial statement, focus instead on a segment of the financial environment that remains constant and is material.
* Emphasize sustaining audit readiness in segments by completing an independent audit examination but not a full-scope audit. Then, apply the requirements in OMB Circular A123, Appendix A, as guidance for sustaining audit readiness until a given component's financial statements and ultimately the Department-wide statements are ready for audit.
Making Better Use of A-123 Processes
Under the FIAR Plan, Appendix A of OMB Circular A-123 serves as a continuous and repeatable mechanism to identify where additional controls are needed and to ensure that controls and action plans are in place and functioning. Using the FIAR Tool, each reporting component submits detailed corrective action plans related to risks and material weaknesses that are identified through the Appendix A process. These then are incorporated into the FIAR Plan.
Prior to the advent of the FIAR Plan, the Department used "business rules" to organize the process for examining its operations, diagnosing problems, planning corrective actions, and preparing for audit. When the FIAR Plan was first initiated, the Department used the business rules framework to establish and track sequential audit-related milestones. Those business rules were designed to review procedures, flow-chart processes, assess material risks, and identify material internal controls.
Over time, FIAR Directorate personnel identified a need to revise the business rules to implement Appendix A requirements. More importantly, they saw the value of using the processes under Appendix A, which were mandated for federal-wide compliance. The processes also constitute a cost-effective way to flow-chart processes, identify gaps, and mitigate risks within the Department's FIAR process.
The Department's annual Statement of Assurance, which is prepared in accordance with OMB Circular A-123, assesses the effectiveness of internal controls over financial reporting within an organization's key business processes. Similar to the steps used to conduct a financial audit, an annual Statement of Assurance over financial reporting necessitates flow-charting of key business processes that impact reported financial balances; identifies and assesses risks within the processes and related internal controls; tests controls believed to be effective and corrects controls found to be deficient; and reports on the results of the assessments and tests.
The Department will still follow the six phases identified in the accompanying sidebar to prepare and accomplish the audit of each segment. When a segment is determined by independent audit engagement to be ready for audit, the Department will use the Statement of Assurance process to capture component management confirmation that financial improvements and audit readiness are being sustained from year to year. This precludes the need and burdensome cost of annually securing and undergoing a full, independent audit.
Capitalizing on System Modernization
Currently, thousands of systems and processes exist in the Department, ranging from legacy paper processing to computer-based management systems. Few can interact with other systems; most do not meet requirements for auditability; and many do not provide the level of reliability, accuracy, and timeliness demanded by today's complex business environment.
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