CAPT. MILTON W. TROY, III, SC, USN, DIRECTOR, INTERNAL REVIEW AND EVALUATION DIVISION
FMO under ASN FM&C
It is common knowledge that the Navy, along with the rest of the Department of Defense (DoD), must demonstrate audit readiness on all four of its financial statements by September 30, 2017. Across both our military and our civilian workforces, we all have, at one point or another, directly influenced a financial transaction that ultimately impacted the DoD’s financial statements. Whether it is our afloat supply officers ordering a shipboard part for a weapon system or a government service employee filing a travel claim in the Defense Transportation System, these actions contribute to the DoD’s financial transaction universe. When executing these financial transactions, it is up to everyone to ensure they are traceable, supportable, repeatable and sustainable. This is the only way to ensure they are accurate and audit ready.
The Office of Financial Operations (FMO), under the Assistant Secretary of the Navy, Financial Management and Comptroller (ASN FM&C), has taken a transformative approach to lead the Department of the Navy’s (DoN’s) efforts of sustaining the highest standards of financial management. To achieve this, it is essential that a collaborative approach with the Navy’s non-financial workforce, especially our logistics and acquisition communities, are closely aligned with FMO along this journey that will continue well after September 2017. Commanders and managers throughout the DoN must incorporate these efforts with a sense of urgency because of the direct link of audit readiness to their organizations’ overall mission readiness. Their results will be the gauge for our overall success well beyond audit. FMO’s approach in the journey to audit readiness requires the DoN to produce, prove, and improve.
Upon request, the DoN must be able to produce timely financial and transactional data that populate our financial statements, as well as maintain the transaction universe required for audit. This is no small task given the complexity of our organization with the number of multiple business and information technology systems. In Fiscal Year 2011, DoD reported $684 billion in net cost of operations and $2 trillion in assets¹. We continue to work toward reducing the number of financial systems DoN uses to produce its statements. The recent Financial Improvement Audit Readiness (FIAR) Plan Status Report submitted by the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer reported that the Navy is downsizing the number of systems and eliminating redundant capabilities. As legacy systems are eliminated, their maintenance costs are also eliminated, as are tedious reconciliations needed for financial reporting. However, efficiently capturing our transaction universe, given the magnitude of the existing sources from our data, remains a challenge. The implementation of Navy Enterprise Resource Planning along with consistent analytic work with the DoN’s Budget Submitting Offices, Naval Supply Systems Command Business Systems Center and the Defense Finance and Accounting Service, FMO is better positioned to confidently produce its financial statements.
Financial statements are only relevant if the data that are populated can be proven to be accurate. To ensure data integrity, sound internal controls must be instituted in our business processes and our systems must demonstrate for each transaction time, purpose, and amount compliant with generally accepted accounting practices. For example, most if not all Supply Corps officers have ordered goods and/or services at some point in their career. In doing so, the funds were to be authorized for use during a specified timeframe. There had to be a legitimate and properly approved purpose that can be documented for why such goods and services were required. The amount of the service and the cost must be validated and proven to be accurate. To ensure this takes place, we institute repeatable and sustainable internal controls that drive our workforce to do things right with valid documentation to support our actions. Without the right internal controls that can be demonstrated anytime (internally or externally to an auditor), the integrity of our financial statements will be compromised.
In cases where a significant deficiency is discovered during an audit from the independent public accountant (IPA), a Notice of Findings and Recommendations (NFR) is submitted to the DoN.
Once received, FMO conducts a comprehensive analysis to determine the appropriate Office of Primary Responsibility with the direct influence to remediate and correct the NFR. Once remediation is complete, a thorough comprehensive validation package is to be submitted to IPA as proof that the finding is corrected.
The key to success of the DoN’s ability to produce and prove its financial statements lies within the continuous improvement of all its business processes. Instituting a culture of improving internal controls will result in not only audit readiness, but also mission readiness for our commanders and managers. Make no mistake. This is “commander’s business” that everyone, regardless of paygrade, has a part to play. Guidance from the Office of Management and Budget’s (OMB) Circular A-123 - Management’s Responsibility for Internal Control is very clear, “Management is responsible for developing and maintaining effective internal control. Effective internal control provides assurance that significant weaknesses in the design or operation of internal control, that could adversely affect the agency’s ability to meet its objectives, would be prevented or detected in a timely manner.” It further states, “Internal Control – organization, policies, and procedures – are tools to help program and financial managers achieve results and safeguard the integrity of their programs. This circular provides guidance on using the range of tools at the disposal of agency managers to achieve desired program results and meet the requirements of the Federal Managers’ Financial Integrity Act (FMFIA) of 1982. FMFIA encompasses accounting and administrative controls. Such controls include program, operational, and administrative areas, as well as accounting and financial management.” 1 This approach is the framework for how the DoN sustains not just audit readiness, but mission readiness. FMO’s Managers’ Internal Control Program (MICP) has put in place governance structures designed to collaborate with the Navy’s senior leadership to capture, monitor, and improve our control environment in support of the DoN’s annual Statement of Assurance (SOA). The Senior Management Council is made up of the DoN’s senior representatives from the Navy’s Echelon I organizations who work together to oversee the implementation and effectiveness of the DoN MICP, including identification of control deficiencies, remediation of corrective actions, and reporting in the DoN SOA. The Senior Assessment Team is made of the DoN’s major command comptrollers and assists management in the implementation of an internal control framework and fosters an organizational environment that supports continuous awareness of internal controls related to financial reporting and systems. However, it cannot not be over-emphasized that success is dependent on a manager’s responsibility at all echelons and commands, to identify, implement and test operational, financial, and systems controls through their respective MICPs. It is in the Supply Corps community’s DNA to incorporate internal controls in all of our business processes. By working hand in hand with local command MICPs and FMO, the Navy’s audit and mission readiness will improve.
The journey to the DoN’s audit readiness will certainly take time and will require a paradigm shift for its entire military and civilian workforce. Such a transformative approach aligns with Lines of Effort outlined in the Navy’s strategic guidance, A Design for Maintaining Maritime Superiority document. Whether it is an operational or a financial process, we must “test and refine concepts through focused war gaming, modeling, and simulations.” That statement captures our Financial Improvement and Audit Readiness efforts. We achieve “High Velocity Learning” by working across echelons to identify and adjust the internal controls in place so that they remain valid and accurate. We will “Strengthen Our Navy Team for the Future” by attaining a clean audit opinion that reassures the taxpayers and Congress that the DoD is a conscientious steward of public resources…now and in the future. By recognizing where these efforts align with the Navy’s strategic guidance, we not only become audit ready, but we will attain the Chief of Naval Operation’s desired outcome stated in the strategic guidance, “a Naval Force that produces leaders and teams who learn and adapt to achieve maximum possible performance, and who achieve and maintain high standards to be ready for decisive operations and combat.” By everyone at all levels doing business the right way, we can produce credible financial statements that are proven through traceable and credible data, all while constantly evaluating our business processes to make them better. The journey to audit readiness may be long, but our operational mission readiness is dependent on our success.
¹OMB Circular A-123; https://www.whitehouse.gov/omb/circulars_default