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Financial Improvement and Audit Readiness
at the Department of Defense

What is the financial improvement and audit readiness (FIAR) mission? The fiscal year (FY) 2010 FIAR Guidance states that the FIAR mission is "to improve the financial information most often used by DOD [Department of Defense] decision makers" so that it is accurate, reliable, and relevant and DOD entities are ready to be audited.

Considering that DOD has 3 million employees, FIAR is a very important role for the Department's accountants, budget and financial analysts, and disbursing, certifying, and accountable officials. What might be surprising is that the people who are responsible for the success of FIAR may include you.

Why FIAR?

Regardless of your background or functional area in DOD, FIAR should be easy to comprehend because most of us have a basic sense of good business practices and use them in our everyday lives. We plan, budget, expend, and prepare for and pay taxes.

If our bank information is unreliable, if we make a mistake entering our deposit amount, or if we draw a check prior to making a deposit, it will probably result in an account overdraft. This is true unless we have overdraft protection, which is an internal control mechanism to reduce risk. When we have faulty processes that cause bank overdrafts, we almost certainly will plan to correct the problem. You can think of this as "financial improvement."

Also as part of our everyday lives, we have to account for our financial data each year for tax purposes. For the most part, we are not allowed to guess but instead must keep accurate documentation for tax preparation and for a possible audit. Internal Revenue Service rules require that we collect original source documentation as proof and retain the information for at least 3 years after filing the return. You can think of this as "audit readiness."

DOD must annually produce financial statements because of the Chief Financial Officers Act of 1990. Audit readiness occurs when management asserts that the financial statements are ready for audit. This management assertion is necessary to comply with Section 1008 of the National Defense Authorization Act for FY 2002, which limits auditing to ensure the cost benefit to the public. The legislation mandates that financial statement audits be performed only when management asserts that its financial statements are reliable.

The FIAR responsibility extends to DOD business operations everywhere in the Department, including overseas and in deployment areas. This responsibility is also for processes and systems that include or affect financial data for business operations in areas such as acquisition, logistics, programming, contracting, medicine, depots, and personnel.

You May Be Responsible

People important to accomplishing the FIAR mission include contracting officials, resource managers, automated information system administrators, receiving officials, personnel officers, employee supervisors, commanders and supervisors of military personnel, and others listed in the DOD Financial Management Regulation (DOD FMR), which states—

The centralization of disbursing processes and the increased use of automated systems, coupled with the volume and complexity of business processes, reduces the ability of [DOD] disbursing officials to exercise direct personal control over all aspects of each business transaction. Accordingly, DOD recognizes that it is extremely difficult for any single official personally to ensure the accuracy, propriety, and legality of every payment. [Disbursing officers] must depend on certifying officers to ensure that a transaction has been processed through all designated responsible and authorized officials; is properly documented, is computed correctly according to source documents; and is not improper, unreasonable, or fraudulent according to the information available.

If your work includes any of the following operations as part of making decisions or conducting work, you are essential to accomplishing the FIAR mission:

  • Implementing, executing, or overseeing the purchase card or individual or centrally-billed travel card programs.
  • Operating or maintaining automated systems used to support an entitlement.
  • Certifying or disbursing processes.
  • Providing timely and accurate contract data.
  • Preparing contracts, modifications, or other documents that support payments.
  • Providing receipt data.
  • Assigning proper funding.
  • Maintaining a system of funds controls.
  • Updating personnel data to support payments.
  • Supervising time and attendance clerks.
  • Designating the proper accounting classification on an obligation document.
  • Inputting military personnel data for payments.
  • Supervising military members with responsibility for inputting data such as leave slips.
  • Ensuring personnel perform according to travel orders.

If you provide information to certifying officials, you are accountable and face pecuniary liability. The DOD FMR states, "To ensure that a payment is correct, personnel who provide information to certifying officers shall provide accurate information, data and services, and be held accountable for their actions, to include possible pecuniary liability."

Those providing information to certifying officials must ensure that the original document is retained according to DOD FMR guidance, which requires us to keep original disbursing office records, associated papers, and supporting documentation for 6 years and 3 months. Examples of these records are invoices, receiving reports, purchase orders or contracts, and lodging receipts. One of the biggest hindrances to achieving and sustaining audit readiness is that the original documentation is lost or is not retained according to DOD requirements.

We can return to our income tax example for comparison: Not having documentation that is adequate to support your tax return may cause you an additional tax assessment. This is a type of pecuniary liability in your everyday life and an example of the importance of document retention.

DOD Financial Management

Congress requires Federal agencies to produce auditable financial statements annually. This has its origins in the Constitution, which states, "A regular statement and account of the receipts and expenditures of all public money shall be published from time to time."

More recently, Congress enacted Section 1003 of the National Defense Authorization Act for FY 2010, which requires DOD to produce for Congress a FIAR Plan Status Report, indicating a schedule of actions for accomplishing audit readiness. Clearly, Congress expects DOD to accomplish FIAR.

Every 2 years, the Government Accountability Office prepares a report to Congress about its High-Risk Program. The program focuses on major Government programs that are at high risk for waste, fraud, abuse, or mismanagement or are in need of broad reform. The GAO High-Risk Program report for 2009 included DOD financial management on its High-Risk list, stating—

GAO first designated DOD financial management as high risk in 1995 due to pervasive financial and business management and system deficiencies that adversely affect the department's ability to control costs and ensure basic accountability to taxpayers, anticipate future costs and claims on budgetary resources, and prevent and detect fraud, abuse, waste, and mismanagement.

The DOD Inspector General (IG) reported DOD's financial management as a challenge in the FY 2009 DOD Agency Financial Report, stating, "Since the 1990s, DOD IG has identified financial management as a challenge area. The DOD's financial management problems are so significant they constitute the single largest and most challenging impediment to the U.S. Government's ability to obtain an unqualified opinion on its consolidated financial statements."

The Benefits of Enhancing FIAR

Obviously, the benefit of doing nothing to enhance FIAR would save any additional costs necessary to prepare for audit readiness and ultimately an audit. These costs include funds to pay for the performance of the actual audit by a public accountant. They also include any additional manpower costs to prepare for audit readiness and perform the audit.

On the other hand, as budgeted in FY 2010, doing something to enhance FIAR costs less than half a percent of the total Defense budget. "Cleaning up the DOD financial books," being audit ready, and ultimately achieving a favorable audit opinion will benefit DOD in several ways.

Not only will it improve the confidence that Congress, the audit community, and senior leaders have in DOD's financial information, but it will also improve the reliability of our budget justifications, related data for audits, and decisionmaking information in DOD business operations. Improved Congressional, audit community, and senior-leader confidence in our information is a highly desirable state.

Achieving a favorable audit will eventually improve DOD system integrity to the extent that we will be able to rely on timely and accurate data in all DOD business operations. It will also increase public confidence in DOD's use of taxpayer dollars.

Less than half of 1 percent of DOD's total budget seems worth the price for achieving confidence, integrity, and trust in the Department's financial information and business operations.

When you conduct any business for DOD, please be diligent in retaining original documents according to the procedures of your military service or DOD component. If you have a question, let us know by commenting on the FIAR blog at https://www.milsuite.mil/book/groups/fiar. Making FIAR work is everybody's business!

Peggy Johnson is an accountant in the Office of the Under Secretary of Defense (Comptroller), Financial Improvement and Audit Readiness. She has a B.S. degree from the University of Tennessee and an M.B.A. degree from Columbus College. She is a graduate of the Professional Military Comptroller School and is a recipient of the Secretary of Defense Medal for Meritorious Civilian Service.

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