Mr. Tony Hullinger

Director, Office of Audit Readiness

Defense Finance and Accounting

Service (DFAS)

What is So Critical About

Critical Capabilities?

Ms. Alaleh Jenkins

Assistant Deputy Chief Financial Officer,

Office of the Under Secretary of

Defense, Comptroller

ASMC National PDI, June 1, 2017(Session #64)

What is So Critical About Critical

Capabilities?

2

AGENDA

• DoD’s Process for Selecting Critical Capabilities

• Defining Critical Capabilities for Audit

• Processes for Monitoring Critical Capabilities

• What are We Doing About Critical Capabilities?

Further Explanation of Each Capability

Discussion on Challenges DoD is Facing with each Capability

Action Plans and Status of Addressing these Capabilities

DoD’s Process for Selecting Critical Capabilities

3

In 2015, the Department started honing in on the list of audit dealbreakers, monitoring the “high

risk” areas that:

a) Are “material” to the financial statements, and

b) May impact the ability to even enter the first full audit.

Mat

eri

alit

y

Level of Impact to Completion of the Audit

Universe of

Transactions

PP&E

Accountability

Journal

Vouchers

Environmental

Liabilities

Information

Technology

FBwT

4

Critical Capabilities

Defining Critical Capabilities for Audit

Critical

Capabilities

Journal Vouchers

Ability to provide a listing of JVs and other adjustments

Processes and tools exist to identify root causes of JVs

Environmental Liabilities

Listing of environmental liabilities exists, which reflects a due diligence approach to assessing all potential event-driven and asset-driven liabilities associated with DoD asset inventories

Property Accountability

A listing of all property assets exist, as well as documentation proving their existence

A value is placed on all assets in the property listing, which can be proved by available documentation

Fund Balance with Treasury

Processes and tools are in place to reconcile DoD’s ledger with Treasury’s records

Information Technology

Having system controls in place to support and protect the financial information being processed

Universe of Transactions

A listing of transactions exists for each financial statement line item

Reconciliations are in place for each financial statement line item

Processes for Monitoring Critical Capabilities

5

Critical Capabilities

Enhanced Policies and

Guidance

Oversight and

Communication

Attention on “Root

Cause” of Findings

• Alignment of Critical Capabilities

to Auditor Findings

• Focus Corrective Action Plans

on Addressing Root Causes

• DoD-wide tracking of Auditor

Findings and Remediation

Activities

• Aligning Findings to Annual SOA

process

• Make Hard Decisions on “Big

Rocks”

• Defense Accounting Solutions

Board

• New Accounting Policies

Environmental Liabilities

Property Deemed Cost

Accounting for Software/

Land

• FIAR Governance Board: Co-

chaired by DCMO and CFO

• Annual National Defense

Authorization Act (NDAA)

Ranking of DoD Components’

audit readiness

• Bimonthly scorecards for

Defense Agencies

• Enhanced communication and

collaboration with external

stakeholders

DoDIG, GAO, FASAB,

HASC/SASC

Prioritized Attention Impactful Solutions Improved Awareness

Universe of Transactions

Definition of the Critical Capability and Challenges the Department is Faced With

• Definition

– The entirety of underlying, individual, accounting transactions that support a financial statement line or

balance and must reconcile to general ledgers and feeder systems

• Challenges

– Complex list of non-integrated, legacy systems

– Data availability, data quality, and beginning balances

6

Methodology and Status of Approach

POC: Greg Little, Business Integration Office, OUSD(C)

POC Contact Info: (703) 614-7436, gregory.b.little2.civ@mail.mil

DFAS

1

UOT Tools

Army

Interim Universe

of Transactions

(iUOT)

Sep 2017 -

Existence and

Completeness for

Material Systems

Air Force

Statement of

Budgetary

Resources - Air

Force

Reconciliation

Tool (SBR-ART)

and Recons

Sep 2017 -

Existence for

DEAMS and Legacy

Systems and

Completeness for

GAFS-R

Navy

and

USMC

Navy Single

Point

Transaction

Universe

(NSPTU)

Sep 2017 -

Existence and

Completeness

Defense

Agencies

Auditable

Universe of

Data –

Intelligence Tool

(AUD-IT)

Jun 2017 - Existence

Dec 2017 -

Completeness

(SOCOM Pilot)

Information Technology

Definition of the Critical Capability and Challenges the Department is Faced With

• Capability Definition: Having system controls in place to support and protect the financial information being

processed and to produce and sustain an auditable financial statements.

• Challenges:

– The DoD relies on nearly 200 modern ERP and aging legacy feeder systems hosted on a wide variety of

platforms and architectures, all of which are in scope for on-going and upcoming audits.

– DoD systems are loosely integrated, point or organization-specific solutions that do not always align with

established DoD business enterprise architecture standards or one another.

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Methodology and Status of Approach

• - Fully Utilize ERP Capabilities: Identifying and enabling certain capabilities will automate some

processes, increase data quality and consistency, and improve transaction integrity and traceability.

• - "Sunset" Legacy Systems: Identifying and retiring older systems whose capabilities can be

replaced by newer, more sustainable systems, like ERPs, will help streamline and standardize

business processes and information.

• - IT Systems Controls (access and segregation of duties controls): DCFO & DCMO are considering

available technology solutions to automate the access request and approval process. In addition,

DCFO has undertaken an initiative to develop cross application segregation of duties guidance.

POC: James Davila, Staff Accountant, OUSD(C) DCFO, FIAR Directorate

POC Contact Info: james.r.davila2.civ@mail.mil; (703) 571-1654

DCFO

2

Fund Balance with Treasury (FBwT)

Definition of the Critical Capability and Challenges the Department is Faced With

• Definition

– An asset line on the Balance Sheet that represents the aggregate amount of funds in the Defense Department’s accounting ledger

that must be reconciled with the Treasury Department’s accounts

• Challenges

– Detailed transactions spread across several systems

– Treasury does not maintain/report data at the limit level, making it harder to reconcile at the Defense Agency level

8

Methodology and Status of Approach – Getting Audit Ready by FY 2018

• FBwT Reconciliation Tools:

• Beginning Balances

– Reconciling prior years with Components to determine

supportability

– Developed strategy leveraging AUD-IT universe to support

beginning balances from FY13 forward

• Problem Disbursements

– Developing and implementing Improvement Plans to meet

target goals

– Processes and controls in place (continuous improvement

through root cause analysis)

DFAS

3

FBwT Reconciliation Tools

Army Army Fund Balance with Treasury (AFT) System

Air Force Columbus Cash Accountability System (CCAS-AF)

Navy and USMC Navy Fund Balance with Treasury (NFT) System

Defense Agencies Department 97 Reconciliation and Reporting Tool (DRRT)

• Cash Management Report Differences:

– Identified root causes and implemented a process to

identify and resolve errors - improves auditability and error

correction process

– Implemented DCART (Disbursement Collections

Automation Research Tool) to automate and facilitate

research of Unmatched Disbursements

– Enhancing and enforcing data standards

• Suspense Accounts

– Implemented a standard process and improved controls

o Reduction of 87% in Clearing Accounts since Dec

2015

• Statement of Differences (SoDs)

– Implementing controls to track, research, and resolve SoDs

within 60 days (ECD: Sep 2017)

– Working to resolve overaged SoDs (greater than 60 days)

by Sep 2017

o Reduction of 62% in overaged SoDs since Aug 2016

POC: Donna Davis, Audit Program Management Office, Enterprise Solutions and Standards, DFAS

POC Contact Info: (317) 212–7239, donna.c.davis16.civ@mail.mil

Fund Balance with Treasury

9

Methodology and Status of Approach – Future State

• Cash Accountability

– Defense Cash Accountability System (DCAS) will serve as the Enterprise reconciliation tool

o Phase 1: ERP transition to Treasury Direct Disbursing (TDD)

Automated reconciliation process in development (ECD: Aug 2017). Additional TDD deployment

planned for Defense Agency Initiative (DAI) customers after the August implementation

o Phase 2: Transition to Daily Reporting

Daily reporting for Disbursements and Collections in requirements definition phase (ECD: 2018)

• Data Standardization

– Global Exchange Service (GEX) will be the broker between the standard interfaces validating SLOA/SFIS elements

and providing feedback

– ERPs and Disbursing Systems must be SFIS ready and receive/send standard file format

– ERPs and Disbursing systems must generate required Standard Report Format (SRF) to Treasury via GEX

– Collections go through collection channels to Treasury, to the Collection Information Repository to GEX, to DCAS

and to the ERPs

DFAS

3

POC: Donna Davis, Audit Program Management Office, Enterprise Solutions and Standards, DFAS

POC Contact Info: (317) 212–7239, donna.c.davis16.civ@mail.mil

ERPs/Accounting Systems

Entitling Systems (MOCAS, OnePay, DCPS, etc.)

Daily (PAM & CIR)

Treasury

Target State -All Treasury

Direct Disbursing

(majority of DoD disbursement

processes)

CollectionsCashier

Disbursements/CollectionsCash & Investments Held Outside Treasury

DCAS Reconciliation Tool

Property Accountability

Definition of the Critical Capability and Challenges the Department is Faced With

• Definition

– A valid listing of all PP&E and supporting documentation to confirm its existence, completeness,

rights, and value

• Challenges

– Size - DoD has vast amounts of PP&E that is geographically dispersed around the world,

including space, the bottom of the ocean, war zones, etc.

– Complexity - PP&E is owned by 50 different DOD entities, often with multiple users

– Systems – Data integrity is challenged by ~ 200 systems related to financial reporting

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Methodology and Status of Approach

• Existence and completeness – first priority – we must know what we have and where it is

• Rights - we established policies and business rules to determine which DoD entity has rights to

report an asset

• Valuation - we are leveraging SFFAS 50 for opening balance valuation

• We continue to coordinate with FASAB and develop DOD-wide policies and guidance

• Go-forward should take precedence over opening balances - processes, systems, and controls that

are compliant with SFFAS 6 and SFFAS 10 must in place before opening balances are established

POC: Brian Sykes, Staff Accountant, OUSD(C) FIAR

POC Contact Info: (703) 695-5902; brian.a.sykes4.civ@mail.mil

DCFO

4

Journal Vouchers (JVs)

Definition of the Critical Capability and Challenges the Department is Faced With

• Definition:

– Ability to provide supporting documentation for all JVs, and identify root causes to remediate JVs and adjustments

– Processes and tools exist to identify root causes of JVs

• Challenges

– The Department processes thousands of accounting adjustments (many unsupported) against DoD financial data

– The Department’s financial transactions are spread across hundreds of systems and processes

– Remediation efforts required are complex, require systemic changes, and necessitate coordination of multiple

stakeholders

– Resource limitations

11

Methodology and Status of Approach

• Support unsupported adjustments

– Developed catalog and checklist to standardize and build internal controls around the JV process

– Developed narratives and periodic review process to support systemically processed JVs in Defense Departmental

Reporting System

– Expand training requirements related to accounting and financial reporting (ECD: Jun 2017)

• Eliminate JVs to maximum extent possible

– Identify root cause for deficiency resulting in JVs and implement remediation plans

– Recording data calls and adjustments closest to source accounting system general ledgers as possible

– Performing and enforcing edits to ensure data quality standards and trial balances are in balance (Treasury Tie

Points)

– Prioritizing system changes to eliminate need for on-the-top adjustments

POC: Frank Crawford, Director, Accounting Mission Area, Enterprise Solutions and Standards, DFAS

POC Contact Info: (317) 212-3996, frank.m.crawford2.civ@mail.mil

DFAS

5

Environmental Liabilities

Definition of the Critical Capability and Challenges the Department is Faced With

12

Methodology and Status of Approach

DCFO

6

• Definition

– Listing of environmental liabilities exists, which reflects a due diligence approach to assessing

all potential event-driven and asset-driven liabilities associated with DoD asset inventories

• Challenges

– Size – DoD has a vast array of PP&E assets, several of which contain hazardous materials

which pose a potentially harmful impact on the surrounding environment

– Complexity – There are many different types of potential environmental liabilities and the rules

and regulations driving those decision points are varied and difficult to implement

– Systems – Data integral to establishing future liabilities estimates is not always required for

asset recording and reporting purposes or included in Component APSRs

• Existence and completeness – first priority – we must know where our exposure is and be

prepared to communicate which assets do and do not pose an environmental risk

• Valuation - many of our environmental liabilities are long-term and require the use of estimating

technologies that increase audit risk

• We’ve established policy that outlines requirements and best practices to consider when leveraging

estimating technologies to project environmental liabilities IAW GAAP

• Go-forward should focus on refinement of cost estimating methodologies, supported by sound

internal control environments

POC: Brian Sykes, Staff Accountant, OUSD(C) FIAR

POC Contact Info: (703) 695-5902; brian.a.sykes4.civ@mail.mil

We need stay committed to the audit, remain focused on

the priorities and continue to monitor progress.