Defense Comptroller Robert Hale told a congressional committee this week he is “reasonably confident” DoD has the momentum to “meet the 2017 goals for audit readiness for all DoD financial statements.” Testifying with Elizabeth McGrath, DoD’s Deputy Chief Management Officer, before the House Armed Services Committee (HASC), Hale said DOD is making significant progress in improving financial management and is moving to sustain that progress while addressing significant challenges.
Hale said Secretary Panetta’s full support for DoD’s overall approach to audit readiness provides the leadership commitment necessary to “set the tone and priority for audit readiness.” In October 2011, Panetta directed the department to accelerate efforts to achieve full audit readiness by 2017.
Panetta directed Hale to prepare a revised plan to cut in half the time to achieve audit readiness for the Statement of Budgetary Resources (SBR)—the reported status of what budget authority DoD received, obligated, and spent. Hale said the revised plan emphasizes interim milestones and a heightened level of governance and accountability and includes: 1) detailed integration of service-provider plans; 2) more-focused discovery efforts to identify audit impediments; 3) concurrent work streams; and 4) increased emphasis on Defense Agencies.
Hale also responded to the major findings of the Defense Financial Management and Auditability Reform Panel, established by the HASC to address the ongoing challenges of DoD financial management. DoD finds the report “balanced and constructive,” Hale told the committee. He noted that the panel acknowledges the progress DoD is making and endorses the approach of the Financial Improvement and Audit Readiness (FIAR) plan.
The panel expressed concern that DoD’s asset valuation method has insufficient detail. Hale said DoD wants the components to achieve success on the SBR and on audits of the “Existence and Completeness” of assets (count and location) before addressing the balance sheet, but would continue to develop the approach to asset valuation.
Hale said the department is committed to sustaining “a strong defense financial management workforce.” He acknowledged that DoD needs to adapt training to the challenges of a changing business environment. To do this Hale said in the short term DoD will deliver “immediate practical training to both financial managers and non-financial operators on the importance of audit readiness.” For the long term, DoD is establishing a course-based certification program to “ensure that financial managers have the skill and experience in key areas of financial management.” Congress included the necessary legislative authority for this program in the FY2012 Defense Authorization Act.
DoD is well underway in fielding Enterprise Resource Planning (ERP) to achieve a “modern business environment” throughout the department, Hale said. But, he told the committee, DoD still faces major challenges. He said the department agrees with the panel on the importance of linking audit readiness more closely with ERP acquisition and implementation efforts and is now linking business outcomes to acquisition milestones. Hale also emphasized that the department is applying business process reengineering (BPR) methods early in the program lifecycle to improve cost estimating and requirements definition challenges in ERP acquisition. Hale agreed the department must deal with difficult challenges implementing ERP in the current legacy environment and the associated increased costs associated with high manual workloads and the need to re-input data.
Hale made a strong case for improving internal controls across organizations and functional areas to achieve auditability. “Business and financial information that is passed from system to system must be subject to a control environment,” he told the committee. He cited the need to achieve “sound internal controls over financial reporting,” but acknowledged that reporting is often poorly documented and inconsistently executed. To exert better internal controls, each military service, through its audit agency, has developed a strategy to focus “solely on evaluating controls and the organizational level.”
Improving financial information is not only a CFO effort, Hale emphasized. He said DoD is aware that successful financial management improvement will be achieved only if process improvements and enhanced training occurs throughout the entire organization, in both financial and non-financial communities: All organizations must play a role in ensuring the accuracy and proper accounting of financial data.
DoD’s current plan to achieve auditability seems to contain a paradox:
How is it possible that DoD’s financial data are going to be sufficiently available and reliable to support audit-readiness assertions for Statements of Budgetary Resources (SBRs) by FY 2014, but not sufficiently available and reliable by that time to support audit-readiness assertions for Balance Sheets and Income Statements?
The answer, of course, is that budgetary accounting (which is what you have to do to produce audit-ready SBRs) is different from financial accounting (which is what you have to do to produce audit-ready Balance Sheets and Income Statements). Federal agencies have always had to do budgetary accounting (budgets, after all, are what they run on), but with the passage of the CFO and GMRA laws in the early 1990s, all federal agencies had to start doing financial accounting as well, because the Congress decided federal agencies ought to report on their financial performance in the same way that private-sector businesses do (even though federal agencies are not trying to make money, which is what financial accounting is designed to measure).
Just over two years ago, at another hearing on DoD’s audit problems, Senator Tom Carper of Delaware did something interesting: He asked Mr. Hale to “please tell us if some of what the Congress is demanding in this area doesn’t make sense.”
Unfortunately, Mr. Hale didn’t take him up on his offer – and he still hasn’t.
Correction:
The hearing with Senator Carper
was in September 2010 – so just under a year and a half ago, not more than two years ago as stated in my post.