[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-92]
INDUSTRY PERSPECTIVES ON ACHIEVING
AUDIT READINESS
__________
HEARING
BEFORE THE
PANEL ON DEFENSE FINANCIAL MANAGEMENT
AND AUDITABILITY REFORM
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
NOVEMBER 17, 2011
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
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PANEL ON DEFENSE FINANCIAL MANAGEMENT
AND AUDITABILITY REFORM
K. MICHAEL CONAWAY, Texas, Chairman
SCOTT RIGELL, Virginia ROBERT ANDREWS, New Jersey
STEVEN PALAZZO, Mississippi JOE COURTNEY, Connecticut
TODD YOUNG, Indiana TIM RYAN, Ohio
Paul Foderaro, Professional Staff Member
William Johnson, Professional Staff Member
Lauren Hauhn, Research Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2011
Page
Hearing:
Thursday, November 17, 2011, Industry Perspectives on Achieving
Audit Readiness................................................ 1
Appendix:
Thursday, November 17, 2011...................................... 21
----------
THURSDAY, NOVEMBER 17, 2011
INDUSTRY PERSPECTIVES ON ACHIEVING AUDIT READINESS
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Andrews, Hon. Robert, a Representative from New Jersey, Ranking
Member, Panel on Defense Financial Management and Auditability
Reform......................................................... 2
Conaway, Hon. K. Michael, a Representative from Texas, Chairman,
Panel on Defense Financial Management and Auditability Reform.. 1
WITNESSES
Boutelle, Joann, Partner, Deloitte and Touche LLP................ 3
Keeley, Mark, Partner, PricewaterhouseCoopers LLP................ 7
Porter, Tracy, Partner, Grant Thornton LLP....................... 5
APPENDIX
Prepared Statements:
Boutelle, Joann.............................................. 27
Conaway, Hon. K. Michael..................................... 25
Keeley, Mark................................................. 49
Porter, Tracy................................................ 37
Documents Submitted for the Record:
``DOD Audit Readiness Essentials,'' Submitted by Mark Keeley. 61
Witness Responses to Questions Asked During the Hearing:
[There were no Questions submitted during the hearing.]
Questions Submitted by Members Post Hearing:
[There were no Questions submitted post hearing.]
INDUSTRY PERSPECTIVES ON ACHIEVING AUDIT READINESS
----------
House of Representatives,
Committee on Armed Services,
Panel on Defense Financial Management and Auditability
Reform,
Washington, DC, Thursday, November 17, 2011.
The panel met, pursuant to call, at 8:00 a.m. in room 2212,
Rayburn House Office Building, Hon. K. Michael Conaway
(chairman of the panel) presiding.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE
FROM TEXAS, CHAIRMAN, PANEL ON DEFENSE MANAGEMENT AND
AUDITABILITY CONTROL
Mr. Conaway. Thanks to everyone for being here at our last
Panel on Defense meeting for the month of November. I would
like to welcome our witnesses this morning to bring us
industry's perspective on audit readiness.
Over the past 4 months we have heard from a variety of
witnesses within Government, including representatives from the
office of OSD [Office of the Secretary of Defense] and military
department comptrollers; the Department of Defense functional
communities; department Office of Inspector General; and the
GAO [Government Accountability Office] on the challenges that
the Department faces in achieving audit readiness and its
efforts to resolve these issues.
Today, as the Panel nears the completion of its work, we
turn to accounting firms that have experience out of the
private sector, as well as within Government, to get their
views on the impediments to DOD [Department of Defense]
achieving auditability and the actions needed to address these
challenges.
In addition to having experience performing work at various
other entities, these firms are involved in almost every aspect
of the Department's financial improvement and audit readiness
efforts, ranging from assisting DOD components in implementing
the FIAR [Financial Improvement and Audit Readiness] strategy,
to assisting the Office of the Under Secretary of Defense,
Comptroller, in performing its review of DOD's components'
progress, and actually performing certain audits themselves.
Therefore, they can provide a well-informed point of view
on the problems facing DOD as it works toward achieving
auditability on the statement of budgetary resources by 2014
and full financial statements by 2017.
Some of the challenges have been identified to date,
including sustaining leadership and effective oversight,
ensuring workforce competency and implementing the ERPs
[Enterprise Resource Planning], solving longstanding internal
control weaknesses, and managing organizational challenges
associated with having a large and complex organization such as
DOD.
The witnesses here today may or may not consider all these
issues as impediments to improving financial management and
audit readiness, or they may have slightly different take on
the issues, or they may identify other challenges altogether.
Most significantly, they may be able to provide alternative
options on how to overcome these weaknesses.
I look forward to hearing their testimony. I would now like
to introduce our witnesses. We have got Ms. JoAnn Boutelle,
partner with Deloitte and Touche; Ms. Tracy Porter, partner
with Grant Thornton; and Mr. Mark Keeley, partner with
PricewaterhouseCoopers.
Now I would like to turn to Rob Andrews for any opening
statement he would like to make.
[The prepared statement of Mr. Conaway can be found in the
Appendix on page 25.]
STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM NEW
JERSEY, RANKING MEMBER, PANEL ON DEFENSE FINANCIAL MANAGEMENT
AND AUDITABILITY CONTROL
Mr. Andrews. Well, good morning, Chairman.
Good morning, ladies and gentlemen. I am glad to have you
with us.
I will repeat something I have said as we have gone forward
in this process; that we are on the verge of making very
consequential decisions about the defense budget, either by
default, through the sequestration process, or through a more
deliberative mechanism through the Special Committee. But one
way or another there is big decisions ahead.
And one thing I think that we all understand is that bad
data lead to bad decisions, and bad recordkeeping systems lead
to bad data. And it is an unfortunate presumption that the
present state of affairs--because we do not have accurate
financial statements from the Department of Defense--gives us
too much bad data.
So this whole project is really not about some, you know,
metaphysical accounting exercise--with all due respect to the
chairman--don't want to insult accountants, but it is about a
much larger and more substantive problem, which is if--that are
we going to make these very consequential decisions with good
information or without good information.
And I am encouraged by much of what I have heard from the
Department of Defense and the Services and the various sub-
units of the Services that are responsible for making us audit-
ready by the statutory deadline.
But that is only half of the equation. I have been looking
forward to this morning because it is the other half of the
equation. We have been hearing from the people who are going to
be preparing to be audited. We are now going to hear from the
people who will be doing the audits and get your perspective on
the audit readiness and the steps that stand between us and
being totally audit-ready. So we are glad that you are here.
The spirit of this panel has always been to try to take
information and use it in the best way possible, and we are
glad that you are here to give us some of that information we
can use.
So thank you, Mr. Chairman. I look forward to the
testimony.
Mr. Conaway. Thanks, Rob.
Ms. Boutelle, your opening statement? And without
objection, all your statements will be entered in the record.
Your written statements will be entered in the record.
STATEMENT OF JOANN BOUTELLE, PARTNER, DELOITTE AND TOUCHE LLP
Ms. Boutelle. Thank you.
Chairman Conaway, Congressman Andrews and members of the
Panel, thank you for the opportunity to testify today.
I have had the unique experience over the last 26 years
serving in both Government and now industry. Prior to joining
Deloitte in 2004, I worked as the Deputy Chief Financial
Officer at DOD and before that at the Defense Finance and
Accounting Service.
While serving as the DCFO [Deputy Chief Financial Officer],
I recognized the managerial challenges caused by issues with
the integrity of DOD financial data and led efforts to improve
financial statements, business processes and systems.
It is from this experience that I offer my perspective on
two areas which I think are critical to DOD's achieving
auditability; first, an increase in sustained leadership
commitment and, second, a workforce with the applicable
financial and technical competencies.
I will talk about leadership first. A commitment from DOD
leadership starting at the Secretary's level is critical to
achieve audit readiness by 2017. This belief comes from
Deloitte's direct experience working with both commercial and
Government clients.
The chief financial officer and the DOD financial
management community have demonstrated leadership in addressing
the tough issues of fixing the Department's business processes
and systems.
However, the business owners must also be held accountable
to correct deficiencies that impact the Department's ability to
achieve their audit goals. Cross-functional ownership at the
senior levels cannot be forced by the CFO [Chief Financial
Officer], who is a peer to many of the business leaders. This
is a job for the Secretary and the Deputy Secretary, with
tangible and measurable objectives.
Secretary Panetta's recent announcement that he is now
personally involved in driving the Department to achieve audit
readiness is a major signal that this is a top priority of the
Department.
However, sustained participation from the Secretary and
Deputy Secretary is critical to reinforcing the message
throughout the Department that auditability is a top priority.
Let me provide an example where a director of an agency became
personally involved in achieving auditability. The Defense
Information Systems Agency, or DISA, started on a journey in
2005 to obtain an audit opinion on its financial statements.
The DISA director and others in leadership became personally
involved and actively drove the audit readiness efforts, and
recently DISA successfully completed an audit of their working
capital fund.
The ongoing involvement of the DISA director was a major
factor in their success.
Deloitte has seen similar examples in recent years on the
commercial side where corporate CEOs [Chief Executive Officers]
and COOs [Chief Operating Officers] aggressively led the
implementation of the Sarbanes-Oxley Act. These organizations
quickly learned that success required the full engagement of
senior executives, not only in finance, but in the business
units.
A similar pattern of sustained leadership engagement is
critical to the Department's ability to meet its aggressive
audit readiness time lines.
Now let me address the second critical area for success:
The need to improve the competencies of the DOD workforce.
Workforce development relating to financial management within
the DOD should include three areas.
First, there are the people who are directly involved in
the preparation of the Department's financial statements. There
should be an increased effort to hire CPAs [Certified Public
Accountants] into these key positions and also to incentivize
current qualified employees to take the CPA exam.
Second, there are those nonfinancial managers who in the
course of their daily jobs conduct activities that result in a
financial transaction. Not all of these people need to be
trained accountants, but they need to be trained to understand
their role in financial management and why controls and timely
processing of financial transactions are important to the
integrity of the financial data.
Third, there are those financial managers in DOD who are
directly involved in the financial statement audit and audit
readiness process.
Leading these efforts requires CPAs with experience in
complex financial statement audits. Getting to the first audit
opinion is the most difficult step, and meeting the need for
experienced audit professionals is critical to help DOD focus
their resources most effectively.
The DOD does not have a sufficient number of CPAs with this
experience. Since coming to Deloitte and working directly with
seasoned audit practitioners, I have come to appreciate the
difference between knowing how the Department processes and
accounts for financial and budgetary transactions and knowing
how to audit these transactions. DOD needs to recognize this
difference.
In conclusion, DOD and its industry partners share the same
goal--for DOD to achieve an unqualified audit opinion and for
them to meet their deadlines.
I want to thank the Panel for holding these important
hearings on defense financial management and for your laser-
focused attention on this very important issue.
I look forward to your questions.
[The prepared statement of Ms. Boutelle can be found in the
Appendix on page 27.]
Mr. Conaway. Thank you, Ms. Boutelle.
Ms. Porter.
STATEMENT OF TRACY PORTER, PARTNER, GRANT THORNTON LLP
Ms. Porter. Chairman Conaway, Ranking Member Andrews and
distinguished members of the Panel, good morning and thank you
for inviting me to testify today. I am pleased to be able to
share with you my perspective on the impediments to DOD
achieving audit readiness and the actions DOD needs to take to
become audit-ready.
As you know, Grant Thornton was recently retained to
perform the audit of the statement of budgetary resources of
the United States Marine Corps. The results of that audit
aren't the subject of my testimony today.
Instead, my views have been formed through years of
conducting audits and audit readiness engagements for the
Federal Government.
I know, for some, audit readiness at DOD may seem like a
struggle that will not soon be won. But I have seen significant
changes in recent past included a much stronger focus on
improving financial management and not simply because of the
audit.
Instead, there is a strong and sincere desire at DOD to
give defense managers and warfighters better financial
information with which to make their business decisions.
Improving financial management is the ultimate goal of
auditing the financial statements. But the road to an
unqualified opinion is often rocky. Too often organizations and
their stakeholders have unrealistic expectations about the
results of early audits.
Some of the expectations may derive from the term ``audit
readiness.'' When laymen hear the term ``audit readiness'' they
may assume it means an organization is likely to obtain an
unqualified opinion on its financial statements. It often
means, however, that the organization simply has enough
evidence ready to subject to the scrutiny of auditors, even
though the result may be a qualified opinion or even a
disclaimer.
The past has shown that receiving a qualified opinion or
disclaimer is often the first step most Federal agencies have
had to take before they really understand where the focus of
their audit remediation efforts need to be.
Like almost every action DOD takes, its audit will be the
single largest audit every undertaken. In addition to large,
the audit will be complex because DOD's operations span our
Nation's history, while the focus on audit readiness is
relatively recent.
Unlike most companies undergoing an audit for the first
time, DOD isn't audit-ready. The difference between the initial
audit readiness of DOD and most large companies stem from the
drive for profit. The profit drive ingrains in private sector
personnel that without financial managers' input to keep
business decisions, they don't have adequate understanding of
the availability of resources to carry out their operations.
That nature hasn't been part of the Government's way of doing
business. They just assume the funding will come.
While changing today's past practices are slow, the
financial statements still reflect transactions from the past.
So often obtaining that clean opinion for the first few years
is unrealistic. Just as expectations of audit readiness should
be managed, it should also be ensured that realistic deadlines
are imposed. In a publicly traded company, auditors are in an
organization every quarter and then they have 90 days at the
end of the fiscal year to complete the financial statement
audit.
Within the Federal Government, agencies have up to 45 days
after the end of the year to complete and submit their audited
statements to OMB [Office of Management and Budget]. In my
view, it is simply impractical to subject an organization as
complex as DOD to this unreasonable deadline for the first few
years that they are subjected to the audit, especially when the
publicly traded counterparts that are smaller and less complex
have twice as long to accomplish the same tasks.
Another challenge is DOD's reliance on a complex web of
service providers. Service providers perform financial
management functions such as transaction processing and systems
maintenance. In carrying out the functions, DOD agencies assume
the service providers have proper internal controls, while
service providers rightly assume that the policies and
procedures are residing within the agencies.
An effective manner for DOD to actually gain that
assurance, instead of having to assume, is to have the service
provider's internal controls audited by an independent party.
But it might surprise the Panel members to know that DOD
service providers aren't subjected to that audit, like the
service providers in other agencies.
In addition, DOD agencies and service providers need a
detailed agreement that documents what the service providers
are supposed to do for the agencies. That lack of agreement
results in poor controls and injects risk in every transaction.
Internal controls within DOD agencies themselves are also
weak, and it is another challenge that they face. The
organization as large and complex as DOD, they need a uniform
approach to internal controls that would greatly enhance their
financial management. The DOD controls environment is often far
from standard, resulting in a decentralized, ineffective
financial management environment. Without a uniform approach,
it is difficult to share and adopt lessons learned in all DOD
agencies and service providers.
The 2,200-plus business systems that DOD relies on to
perform its financial management is another challenge. This
would be difficult enough were such systems under some
standardization. Unfortunately, consistent policies on data
processing and management are not in place.
In my view, there are situations where DOD should not go
back and undo the sins of the past. When a proper justification
can be made, certain old transactions recorded in a financial
system would far outweigh their benefits. But standards and
policies and procedures need to be in place to govern systems
and the data that they maintain for current and future
transactions.
Human capital is another major challenge throughout the
Federal Government. The chain of command in the defense
community adds complexity to that challenge. Financial
management officials at headquarters often have no indirect or
no authority over the financial management officials in the
field. In addition, those field managers have more loyalty to
their commanders than to the headquarters-level staff. This
lack of financial management chain-of-command makes it
difficult to apply consistent financial management policies and
procedures.
I have discussed the challenges to audit readiness
asrequested. And though they are many, the talent and energy
being invested by DOD in improved financial management is
unprecedented. With DOD's continued leadership and attention,
and the support and pressure applied by panels such as this
one, I am sure we will be soon be reminiscing about just how
steep the climb was at one time.
That concludes my opening statement. I would be happy to
take any questions.
[The prepared statement of Ms. Porter can be found in the
Appendix on page 37.]
Mr. Conaway. Thank you, Ms. Porter.
Mr. Keeley.
STATEMENT OF MARK KEELEY, PARTNER, PRICEWATERHOUSECOOPERS LLP
Mr. Keeley. Chairman Conaway, Ranking Member Andrews and
members of the Panel, it is a pleasure to be here today to
share my perspectives about the impediments to the Department
of Defense achieving audit readiness and the actions the DOD
needs to take to become audit-ready.
My own audit readiness perspectives come from 27 years of
public accounting experience as a licensed CPA, including 20
years in the private sector and 7 years working here with the
DOD. My experience is primarily in information systems
auditing, but I will also offer an informed opinion today to
the extent that I am able on broad audit readiness matters
within the DOD.
The firm in which I am a partner, PricewaterhouseCoopers
LLP, has performed first-time audits of several Federal
Government departments and DOD entities, including the
financial statement audit of the United States Army Corps of
Engineers-Civil Works; the financial statement audit of an
intelligence community agency; and the service organization
audit of the Defense Information Systems Agency.
In addition, PwC [PricewaterhouseCoopers LLP] has been
providing audit readiness advice to the Office of the Under
Secretary of Defense Comptroller, Financial Improvement and
Audit Readiness Directorate, FIAR, for the past 3 years. In
this capacity, I have assisted with the development and
implementation of the FIAR guidance and helped develop and
teach the FIAR Directorate's 3-day audit readiness professional
development course to over 1,000 DOD professionals, including
financial leaders.
Most recently, I signed the unqualified examination opinion
on the successful audit readiness of the Air Force fund balance
with Treasury reconciliation process.
As I was preparing my testimony today, I happened to visit
the Department of Energy. The lobby of the Department
headquarters contains a prominent display about the Manhattan
Project and the role of Albert Einstein. The display reminded
me of a quotation by Albert Einstein that is relevant to
today's topic: ``We cannot solve the problems by using the same
kind of thinking we used when we created the problems.''
The DOD did not intend to create the audit readiness
challenges it has today. Rather, the DOD developed and
implemented processes and systems tailored to achieve its
overall functional mission. Audit-readiness then became an
imperative. Because of DOD's incumbent processes and systems
were not originally designed to meet audit readiness, a new
kind of thinking will be required for the DOD to address the
requirements of an audit-ready organization.
Since the CFO Act was passed in 1990, one of the most
significant changes in audit readiness thinking that has
already occurred in the DOD is the development and
implementation of a financial improvement and audit readiness
strategy. Rather than attempt to audit an entire component all
at once, the strategy prioritizes financial improvement work
into manageable waves of audit activity such as the statement
of budgetary resources.
The work ethic of DOD personnel is strong and the DOD can
accomplish any goal that it sets for itself. The 60-day SBR
[statement of budgetary resources] plans that are currently
being developed by each component will soon provide detailed
blueprints for how the DOD will meet the latest audit readiness
deadlines.
Based on PwC's experience, the DOD should continue to
improve its financial management and audit readiness efforts in
three ways. First, enhance the skills of personnel resources
through the addition of certified public accountants who have
financial statement audit experience, and also continue to
implement the Secretary of Defense Comptroller's financial
improvement and audit readiness professional development
program, as well as the financial management certification
program.
Number two--ensure that functional leaders and financial
leaders throughout the DOD, including the leaders of
components, as well as shared service organizations, are held
equally accountable for audit readiness. Third, ensure legacy
or ERP systems are configured to report data in the financial
statements as prescribed by generally accepted accounting
principles, or GAAP.
I would be pleased to expand further on these three mains
areas during the question and answer period, and I thank you
again for the opportunity to share my perspectives.
[The prepared statement of Mr. Keeley can be found in the
Appendix on page 49.]
Mr. Conaway. Well, thank you very much. It does occur to me
that this may be one of the few times we have five CPAs--there
may be some in the audience as well. Any CPAs in the audience?
Wow--seven. Steve and I are CPAs as well. So I want to get that
on there--just a personal plug.
[Laughter.]
And I am wearing my CPA cufflinks, too, by the way. Rob.
Mr. Andrews. I have my American flag cufflinks.
Mr. Conaway. Okay.
[Laughter.]
Todd, you have 5 minutes.
Mr. Young. Well, I am not a CPA, so I didn't understand all
the CPA humor, but I appreciate everyone being here this
morning. I was particularly interested, Ms. Porter, in your
comments related to internal controls and the internal control
environment within DOD, but also outside the various
stakeholders and service providers that DOD has. I don't know
how many entities provide services to DOD, but quite a large
number, I suspect.
To your knowledge, are any of those audited with respect to
their internal control processes and procedures right now--
something that you recommended we start doing?
Ms. Porter. Within DOD, there are two, I believe, current--
they are called SAS-70 or SSAE-16 audits. They are the audits
of the internal controls of the service providers. I believe
DISA has one and DFAS [Defense Finance and Accounting Services]
has an audit, but not as a service provider. There was one
more. It might be DCA [Defense Commissary Agency].
Mr. Young. That is all right.
Ms. Porter. DCIPS [Defense Civilian Intelligence Personnel
System] also has one.
Mr. Young. If I understood in your testimony, you actually
think that we should engage in more audits, broader audits,
more regular audits of those entities.
Ms. Porter. Of the service providers, yes.
Mr. Young. That would seem to result in a great expansion
of all the audit activity of DOD, which may well be justified.
It may be necessary, to your mind.
Are there some examples you can think of where had we
conducted audits of these service providers, it would have
mitigated some challenges that we are now experiencing?
Ms. Porter. The service providers operate the systems that
cut across all the military departments. So I will give you an
example. In the Marine Corps, DFAS actually processes the
transactions for the United States Marine Corps out of one of
their locations. A lot of the information that and the
challenges that occur during that audit, DFAS is taking those
lessons learned and moving them across the rest of their
organization. Had those audits of that service provider
happened prior to the Marine Corps audit, there would have been
a more consistent and advanced notice of those types of
improvements that needed to be made before the Marine Corps
audit got underway.
The other part to think about is each time that a service
provider--so let us say that the Army goes under audit
tomorrow. DFAS still has to be audited by the Army auditors as
well because there is not this independent report that each of
the auditors of the military services can look at and rely on.
Mr. Young. I see. Okay.
You also spoke, Ms. Porter, to some unique human-capital
challenges that our Armed Services face in light of the formal
chain of command and then their duties, which are within the
realm, in some cases, of financial management; so some people
following the marching orders of those in the field, others
listening to those at command. That seems like a pretty great
challenge. Is that unique, however, to the military?
I mean, within the private sector we have business units,
and we have, you know, all sorts of different boxes and
different people to look to.
I guess I am trying to get a sense of why this is a unique
challenge to the military? Maybe you could speak to that. If I
understand the problem maybe we can come up with a better way
to address it.
Ms. Porter. I think the problem is unique to the military
because the functional leaders, both at the command level--
don't understand how they actually play into the overall
financial management role. They don't understand how what they
do in making their purchases and the acceptance of--like a
receiving report at the field level really has an overall
implication up to the financial statements themselves.
And I think that--you know, the command level financial
managers understand there is a standard set of policies and
procedures. But what happens when they are down there is they
get implemented in a way that works for them, which isn't
necessarily the standardization across all the Department.
Mr. Young. It seems like that challenge could be one
experienced by private sector entities, though, right? And if
so, how is it typically addressed there?
Ms. Porter. I think the challenge could be addressed there,
but it is mitigated because the auditors are in with all parts
of the organization and have been for years. So everybody
understands their role and what they do to get to those audited
numbers. And right now this is all foreign to DOD.
Mr. Young. Okay. Thank you.
Mr. Conaway. Mr. Andrews.
Mr. Andrews. Thank you.
I thank the witnesses.
Mr. Keeley, you tell a story in your testimony about a
payroll audit requiring 8,000 hours in 1 year and then 400
hours the next year because of technological improvements that
were made. And that is in the context of your assessment of the
ERP situation generally.
Given what you know about the progress or lack thereof of
the ERP systems, how do you think we are doing? And what
suggestions might you make for us to expedite the process and
improve the quality?
Mr. Keeley. Thank you for the question, Congressman.
From my perspective, auditors are systems agnostic. So the
FIAR guide itself speaks to the need for the components to
improve, legacy systems or ERP solutions.
So the aspects that an auditor looks for in any system is
that the transactions are processed in accordance with GAAP,
they capture and retain the transaction data so that it can be
traced to the financial statements, and that transactions are
maintained in a reliable computer environment.
The example I used in my written testimony regarding the
8,000 hours that it took to test the 800 items really comes
from the spectrum of control that we need to achieve within the
systems environment, both legacy systems and the ERP.
And I have spoken to this point many times at the FIAR
directorate and elsewhere throughout the components. Based on
all my years as a systems auditor, the controls that are most
required for an information system are logical security and
programming.
If a component can prove to me that direct access to
programs and data is well-secured, that component is well on
its way to achieving at least some reliance on----
Mr. Andrews. Based upon your knowledge of the ERPs that are
in various stages of development, how do we stack up against
that criterion?
Mr. Keeley. My experience looking at the criteria is that
the ERPs are first focused on functionality. So it is perfectly
normal when you develop an ERP system to make sure it works.
That is what the Department of Defense has been primarily
focused on.
From my experience, the controls that I spoke to in terms
of logical security and program are often implemented after the
functionality is addressed. So from my perspective, the view of
controls and the testing of logical security programming and
operations needs to happen much more quickly. It should be
happening at the front end, in the middle and at the end. From
what I have seen, that is not happening.
Mr. Andrews. Now, Ms. Porter, you make reference to the
SSAE-16 standards, which I think you say are lacking in a lot
of the service provider areas.
What kind of changes would the service providers have to
adopt in order to comply with the SSAE-16 standards?
Ms. Porter. The first step in the process would be to
actually have those systems and their processes as a service
provider be examined under those standards.
Right now there is very few, there is one that was recently
awarded that is under way right now in the civilian pay
process. But that would be the first step.
Mr. Andrews. What do think that those examinations would
likely yield? And what changes would those examinations likely
provoke?
Ms. Porter. They would yield where there are deficiencies
in the controls around the information systems and the
transaction processing that those systems take place.
And the hopeful result that would come out of that would be
there would be changes made to those systems that would have an
impact across all the military services and would get them one
step closer to having that production of data at the
transaction level----
Mr. Andrews. You think those changes could likely be
achieved with existing resources or would they require new
resources for those service providers?
Ms. Porter. I think with the proper level of understanding
and training, I think they could be accomplished with the
service providers that are in place today.
I think they are definitely dedicated to making those
things happen.
Mr. Andrews. We think so too. We are encouraged by it.
Now, Ms. Boutelle, you sat on both sides of the equation
here, in your service, within the Department of Defense as well
as on the outside. And you claim, and I think you are right,
that increasing the number of CPAs that we have is an essential
priority.
Do you think that we have a compensation structure within
the Federal service that will facilitate that goal, or won't
it?
Ms. Boutelle. I think the compensation structure is fine.
There is a lot of opportunities to incentivize people to come
on board.
So I think if they take advantage of what is available to
them to actually target CPAs, perhaps sign-up bonuses, training
opportunities and things like that, I think that they can
attract strong CPAs into the workforces.
Mr. Andrews. We have attracted seven of them here this
morning, so that is a very good sign.
[Laughter.]
I also just wanted to comment about the ERPs that--and I
want to thank the chairman and Chairman McKeon and Ranking
Member Smith in response to our last hearing about some
concerns that GAO had raised about the ERPs.
Chairman Conaway and the other members I mentioned, along
with myself, signed a letter November 8th to the GAO asking
that the GAO update its work on the ERPs by the 31st of
December if they could.
So what deadline are we using?
Mr. Foderaro. The 31st of March.
Mr. Andrews. I am sorry, I am always an optimist. So that
we would have available to us their work; so as we deliberate
on the fiscal year 2013 bill we have that. So I wanted to thank
the chairman for his cooperation in that letter, and thank you
for writing it.
[Laughter.]
Thank you very much.
Mr. Conaway. Thanks, Rob.
Steve.
Mr. Palazzo. Well, good morning.
And for Todd, I am not going to say any CPA jokes, because
he just doesn't get our humor.
[Laughter.]
And I guess we will just start with Ms. Boutelle and just
go to the right.
I am interested in knowing--I was going to talk about ERPs.
And as a CPA myself I have been through the ERP process; not at
the level of a DOD audit. So I was going to talk on that.
But what I wanted to see is--you know, there have been some
dates out there. We are supposed to achieve audit readiness by
2017. Then all of a sudden Secretary Panetta came out and said,
``We can do this by 2014.'' Then all of a sudden there is
some--you know, there was an article--for another $1 billion we
could do it by 2017.
So in you all's opinion, what is a true, accurate date? You
know, where do you think we are actually going to be able to
achieve audit readiness? What are some of the most important
factors in preparing us for audit achievability and any
weaknesses and strengths along the way?
And you can expand or summarize however you want.
Ms. Boutelle. Good question. That is a question that has
been asked for years, right? And I think that until the
business leaders become more engaged in fixing the business
processes and systems that the progress is not going to be made
as aggressively as it needs to.
So to the point of what needs to be done, besides
leadership involvement, I think there is something to be said
for the ERPs, but to build the ERPs off of standard processes,
standard data, they need to focus more on the business
enterprise architecture in the Department, a wonderful tool
that would allow them to build the processes so that there is
one place of truth for how to do business with the Department--
or within the Department--and would allow them then to test all
of the ERPs that are being developed against that one standard
truth.
So I think that that would certainly help. But I do think
that the biggest challenge is getting the owners of the
processes. So, again, whether you are talking about a payroll
transaction, you are talking about receiving goods or services,
you are talking about issuing inventory, transporting equipment
material, all of those are business processes and those
transactions are the type of transactions where the impediments
are.
And so to fix them, to meet audit criteria, is what should
be the major focus going on in the Department.
Mr. Palazzo. Just real quickly: 2017 or 2014----
Ms. Boutelle. So----
Mr. Palazzo [continuing]. Or somewhere in between?
Ms. Boutelle. So I actually think 2014 is very aggressive.
I just think that is very aggressive given all of the details
that they need to work.
But somewhere between 2014 and 2017, I think, should be
doable if they put the resources and the attention on it that
is needed.
Mr. Palazzo. Thank you.
Ms. Porter.
Ms. Porter. I would agree with Ms. Boutelle that you need
that sustained leadership to continue and you need that
leadership to get out to the field level so that they really do
understand what their role is in the overall financial
management process.
The other thing I think that is going to be key to this is
transaction level detail, regardless of where that transaction
level detail comes from--because you can't do an audit without
it. And the other thing that you need is the documentation that
is going to support the transaction level detail.
If you put all of those things together, you can achieve
the 2014 and the 2017 goal with the right amount of focus and
the right sustainment across the Department.
Mr. Keeley. Congressman, I have two points to make on this
topic.
From my perspective, the first one is methodology. In order
to achieve the date, the methodology has to be ingrained
throughout the Department. In the FIAR methodology, it is very
straightforward and basic. We need to identify and document
financial processes, test internal controls, test
documentation, find gaps and correct them.
The most important aspect right now is testing. We have
spent a lot of time documenting processes. And I have seen
volumes of them. And people are documenting everything they do
that is critical to the mission, and that is very important.
We need to extract the financial aspects and get down to
testing. That is my first point.
The second point I would mention is the skill of the people
to apply this approach. People are definitely hard-working; and
there is a strong work ethic throughout DOD. But it comes down
to judgment. When you look at workarounds in an ERP solution,
how you are going to test that workaround. It comes down to
pure judgment, and that only comes from experience.
The word ``judgment'' appears in the Government
Accountability Office financial audit manual and the yellow
book of Government and audit standards 270 times out of 1,300
pages.
So judgment is critical to being able to test and execute
and achieve the 2014 date.
Mr. Palazzo. I am out of time. I yield back.
Mr. Conaway. All right. Thanks.
Ms. Porter, you mentioned the--to flesh out, just for the
record, the impact of having the service providers be audited
by each of the--because the service providers don't have their
own audit that other accountants can rely upon, each of the
various entities would in effect have to come in and audit that
service provider itself.
Can you walk us through why it would be less expensive
audit-hour-wise and cost to the taxpayer if those service
providers had documentation audits that they could give to the
various branches and other components that the auditors there
could rely on?
Ms. Porter. What that means is that, if those independent-
service-provider audits are available, the auditors of the
statements themselves of the service organizations could rely
on that work. There would only be--as long as that service
provider audit covered the right period of time.
So I will give you an example for the Marine Corps. If DFAS
had had a service-provider audit that covered the last 9 months
of the fiscal year, we would not have had to go in to the DFAS
to look at their controls or look at the controls of the
systems that they operate, such as the defense civilian pay
system or the defense cash accountability system.
Instead, we could have used the audit of that service
provider and relied upon that report. That is assuming that
that service provider's report was an unqualified opinion or
that it identified where the weaknesses were, because then what
that would allow us to do is then focus back into the
Department what were the mitigating controls that they had in
place to compensate for the weaknesses of the service provider.
Mr. Conaway. Mr. Keeley, you mentioned the other day, in a
conversation that we had--or today, in fact--that you are
``systems-agnostic.'' That was your phrase.
Flesh that out. In the sense of you can audit, if the
controls are there, no matter what the system, whether it is an
ERP or a hand-posted set of books, if the controls are there,
you can audit that.
Would you, kind of, walk us through what you meant by that?
Mr. Keeley. Yes. The controls need to be there. What we
often find--and I will use an example of what I have seen in
the field--is the earlier testimony you have received about
ERPs talks about 2,200 or so systems throughout the DOD.
Now, auditors are not afraid of size. So we can go in and
look at the systems that need to be audited. But one aspect of
the ERP solutions is to consolidate the data so that you don't
have duplication of data.
One area of systems that causes a great deal of problem in
an audit, when you have data in duplicate systems, an auditor
doesn't know which to choose. And so, in working with business
folks, if the business folks have data in a legacy system and
an ERP system, it is difficult to first reconcile that
information and then nail down a population.
We spend a great deal of time identifying the absolute
population upon which we can test. And if we can't identify the
population, we cannot move forward.
So, less may be more in the case of the ERP consolidation;
so I applaud the effort. But that is much more of a business
decision. I do not want an audit to impede the DOD's
warfighting mission. If you need 2,000 systems to achieve the
mission, I can audit it.
So it is a matter of determining how much reliance I can
place on that system.
And the financial information systems audit manual has 424
points to it. We all, as auditors, apply judgment to those
points and we can address primarily half of them to get you to
at least some reliance on internal controls and be much more
efficient using judgment.
Mr. Conaway. That reliance on internal controls, just for
the record, drove the drop in audit hours from 8,000 audit
hours to 400 audit hours in that previous example.
Mr. Keeley. That is a perfect example. If we go from no
reliance on a system, because, for instance, if security is not
locked down, to at least some reliance, the change in
substantive testing is exponential.
Mr. Conaway. All right.
Ms. Boutelle, based on your experience, we talk about the
workforce and the need for CPAs with a specific background in
either financial statement audit or financial statement
preparations. We have got a lot of folks, CPAs, in the system
now.
Is it all or none? Do you have to hire these folks from the
outside totally, or can you cross-train or retrain or help get
experience for the folks who are already on the team who know
the way that these are going on, to help get them the skills
necessary to be able to fill some of those slots that are
lacking?
Ms. Boutelle. So I think that they could work side by side
with trained audit professionals. I think that the three firms
here at the table have people on board helping in different
places in DOD. I think, if they paired up some of their CPAs
with the folks working audit readiness or even the audits, and
they worked closely and they had a defined approach for how
they would do that, I think that the experience gained by the
current CPAs in the Government--that would enhance their
capability to help the Department move forward.
I do think that--you know, I am a CPA having spent most of
my time in the Government. And I am not as proficient in audit
as these two colleagues next to me. You know, I have lots of
wonderful audit practitioners back at Deloitte that I have
learned a lot from in the 7 years that I have been there.
So I do think that bringing in more seasoned audit
practitioners to help guide the approach and then letting the
folks within the Government learn from them would be a doable
approach.
Mr. Conaway. Thanks.
We are going to have time for another round. Rob?
Mr. Andrews. I really don't have another round of questions
at this time.
Mr. Conaway. Okay.
Todd, Scott, or Steve?
Ms. Porter, the real-world example you were giving us about
publicly held companies provide, or produce quarterly financial
statements, and your firm is in their shop--well, some level of
engagement with those quarterly reports.
But that is not happening in the Federal--is there a
similar process that could go on in the Department of Defense,
in this example, that would shorten the timeframe needed to
close out the books in November? I mean is there a way to look
at what you do in the private sector with those quarterly
reviews that you do and the impact it has on the year-end
audits? Could that same model work in some altered form in a
Federal agency?
Ms. Porter. Well, first, let me say I am not advocating
quarterly reports for the Federal Government. I really don't
want to be on the record of saying that because everyone will--
--
[Laughter.]
Mr. Conaway. That was not----
[Laughter.]
Ms. Porter. Yes. But what I think that does is it adds a
discipline and an exposure to the auditors that the DOD hasn't
experienced so far because they are in there having the
conversations. They are having discussions around what are your
management controls that you use?
And this is where it is not the auditors that are driving
what the civilian agencies or even the commercial entities are
doing. Management understands what they need to operate their
business from a control perspective. And the auditors figure
out how to use that information to get what they need to
conduct the audit, to give management the feedback back as to
whether they are using accurate financial information to make
their decisions.
It has been, from a DOD and a Government perspective, for
years, but proprietary accounts weren't looked at. They only
focused on the budgetary sides of the transactions. And that
was often driven by what overseers were asking them to report
back up on.
So as they have tried to get themselves in tune to both
sides of the transactions, the budgetary and the proprietary
side, there has been a learning curve. And sometimes that
learning curve has been impeded by not having the true
understanding of what level of detail, what an auditor actually
looks for, and they don't have that in the commercial entities
because they are so involved with each other all the time.
Mr. Conaway. All right. Mr. Keeley, any comments in regard
to that?
Mr. Keeley. No. Are you----
Mr. Conaway. Well, just that, you know, field work being
done more regularly throughout the year--would that reduce the
number of total audit hours?
One of the things we are obviously going to--at some point
in time, get to a running rate in which the controls are in
place; the systems are working and sustainability of the audits
year in and year out is going to be the key.
That first audit, you can't maintain the level of intensity
to get to that first audit year after year after year after
year, I don't think.
Once you have got this thing running, what would be the
role of the auditors during the normal process?
Mr. Keeley. Well, yes, Congressman, my view is that
continuous auditing has always been a bit of an enigma, even in
the private sector. Yes, auditors are in the field, and we can
do early substantive testing.
But from my experience in the private sector 7 years before
I came down here, the private-sector companies have teams of
specialized accountants. They have tax departments with tax
accountants. They have statutory accountants focused on
compliance reporting. And then they have GAAP accountants.
So they have entire teams in the field supplemented, of
course, with internal audit. And they work at the companies.
They are the companies' employees.
Our auditors, to the extent we can interact with them
throughout the year and actually perform the testing I was
talking about, definitely expedites the audit.
There are accounting standards and rules that allow us to
perform early testing and still rely on it for the year end.
So it is definitely difficult to do, but it is done
throughout the community.
Mr. Conaway. Ms. Boutelle--I have got one more question for
Ms. Porter--but, first, Ms. Boutelle, given your experience in
both sides of the shop, is there a way to create a chain-of-
command responsibility at Department of Defense, other than
have whoever the current Secretary of Defense is saying, day
after day after day, get this done--in other words, can there.
You know, Bob Hale has, or the Assistant Secretary of State--
Comptroller really doesn't have command reach into all these
other places.
So, given that org chart that is in place--and we are going
to make a lot of changes to it--is there a way that we can get
to a point or a system that holds all the folks at the various
levels accountable for making sure this gets done, so that--any
thoughts on that?
Ms. Boutelle. I think, with the Secretary's involvement and
whoever the Secretary is, going forward, has to be involved. I
think that that will send a very strong message.
Now, I understand that the reality is that the Secretary is
not going to meet with the business owners on a monthly basis,
most likely, but some periodic forum would be beneficial.
The Chief Management Officer and the Deputy Chief
Management Officer, I think, having responsibility for the
business processes, the systems, would also be a very strong
marriage between those two roles, the CMO and the DCMO, with
Bob Hale in driving this, that maybe between the two of them--I
know Beth McGrath has got tremendous knowledge of the systems
and the processes.
I think coming together with Bob Hale they make a pretty
formidable team. They have got to have the power, though, to
direct changes within the business areas. And without that,
they cannot be as successful as they need to be.
Mr. Conaway. Ms. Porter, I can't let you off the hook. What
can you share with us, if anything, about the Marine Corps
audit that--and you may not be able to talk to us about this
year's Marine Corps audit, but can you share with us a
perspective on the difference between where the Marine Corps
was this time last year and where the Marine Corps is today,
without telegraphing too much what is going to happen shortly?
I couldn't let you off the hook.
Ms. Porter. Sure.
So last year's audit, in fiscal year 2010, we had a big
struggle at the beginning of the audit. We didn't get very far
into the testing beyond beginning balances. We basically tested
no current year transactions.
For the fiscal year 2011 audit--well, let me go back to
fiscal year 2010. There were also quite a few findings and
recommendations that came out of the audit that the Marine
Corps started immediately to undertake remediation actions to
while the audit was still under way.
In fiscal year 2011, you could see that there was an
improvement in the process, they better understood what we were
looking for, they were better able to produce reconciliations
and tie-outs of data that we had a big struggle with in the
previous year. It is not perfect because they still had some
struggles this year. We thought it might be a little bit
better. But they are moving in the right direction.
We have also got to a lot more current year testing this
year than we did in the past. So you definitely see that they
are becoming more accustomed to understanding what we are
looking for. We are also becoming more accustomed to how they
do business and what documentation they have.
And so I see progress every year. And I also see them
taking those lessons learned to the other Services.
Mr. Conaway. All right. Typically, you know, in a
commercial entity you give a set of financial statements. You
also give them a statement of weakness of internal controls--
did you see adequate remediation for the stuff that you
discovered in the 2010 audit, Marine Corps make--without
specific details--but make adequate process at addressing those
weaknesses and moving as far as you thought they could move in
the time they had to move it?
Ms. Porter. We issued two different sets of findings and
recommendations to the Marine Corps last year, one associated
with information technology and one associated with the
financial statement controls themselves.
So the information technology piece, we did see quite a bit
of changes and were able to test those actions that they took
last year. And before we had to cut off testing I would say
there was probably another 20 to 30 percent of them that are
ready to be tested right now, that the action actually took
place after we stopped testing.
For the financial statement findings, it is a little more
difficult to address because we haven't yet been able to
conduct the test of the current year transactions, which--
associated with those findings--which would actually in fact
tell us whether the remediation actions worked.
Mr. Conaway. All right. Okay.
Rob, other questions?
Mr. Andrews. Well, just as a concluding comment, think Ms.
Porter's limited sneak preview of the Marine Corps audit, which
shows reason for optimism. And the chairman's question about
sustaining the progress we have made beyond this Secretary of
Defense I think is the core challenge facing this panel.
I think Secretary Panetta deserves enormous praise for
giving this effort such a high priority. But there will be
another Secretary of Defense soon. There always is.
Mr. Conaway. Maybe even another president.
Mr. Andrews. Maybe. That is right. And whether there is
another president or this one, there is--you know, secretaries
do change.
And I do think that our key mission is to try to build into
the culture of the institution and the structure of the
institution a high priority on this audit readiness, because if
we have to rely upon the leadership priorities of the person
who is going to be secretary, I just don't think we are ever
going to achieve what we need to do, because, you know,
priorities come and go.
So the chairman and I have talked about this before. Think
all members of the Panel and members of the public should be
thinking about advice they could give us on institutionalizing
the progress that we have seen right now.
I think very much of that is attributable to the chairman's
focus, laser-like focus on this issue for several years, and on
Secretary Panetta's admirable response to that. But we want to
make this a principle that extends beyond individuals to a more
embedded culture in the organization. However we can do that, I
think we will have made great progress.
And I do appreciate the contribution of the three witnesses
here this morning. Thank you.
Mr. Conaway. Well, I want to echo Rob's praise of Secretary
Panetta, unprecedented forward leap and commitment to this
issue. And I am really tickled to death he has made that.
Just quickly, just kind of maybe a yes or no, have we got
enough forward momentum toward this goal that this is actually
going to happen? In other words, can we--we get beyond that
tipping point where, yes, it is going to behard, and, yes, it
may take a while, but have we got past that point where we
really are going to make this happen, in your all's
perspective?
Mark.
Mr. Keeley. Yes, sir, I believe so. One of the topics I
talked about in my testimony was the lessons learned. So we
have a great deal of lessons learned from the Marine Corps,
from the Army Corps, from DISA and others. And we are always
looking back at those lessons and applying them going forward.
So applying the lessons and speeding the training and
momentum is certainly achievable.
Mr. Conaway. Okay.
Tracy, your perspective?
Ms. Porter. I do think the goals are there. I think the
sustainment across the Department at the lower levels so that
it doesn't go away when the Secretary changes is critical to
make this leap forward that they are trying to get to.
So with that right amount of focus and with those lessons
continuing to being learned and nobody backing off from that
progress and just keeping that pressure on, because you take
the pressure of the audit readiness or the pressure of the
audit off, the way things work right now aren't yet well
ingrained in everybody within the Services. So they will
immediately fall back to their old way of doing business.
So you have to just keep this pressure and this momentum in
order to keep us going in the direction that they need to go.
Mr. Conaway. JoAnn, your comments?
Ms. Boutelle. I agree with Ms. Porter. I think that you
have to keep the pressure on. I think that the momentum is
there, it is moving, you have brought tremendous attention to
this topic. But there is a ways for them to go for the business
owners to truly embrace and understand their responsibility.
So, again, I think that they can make it if you keep the
pressure on them.
Mr. Conaway. All right.
Well, thank you three. I appreciate the witnesses today.
And we did not telegraph that question. We try to make sure
this panel keeps existing. No.
[Laughter.]
One of our big issues is how do we put in place the right
kind of attention at the committee so that when Rob and I are
doing something else or going somewhere else, that pressure and
that commitment from our side on the oversight piece remains in
place in the appropriate manner to make sure we do our part of
that.
Again, thank the witnesses for being here this morning.
We are adjourned.
[Whereupon, at 8:56 a.m., the panel was adjourned.]
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A P P E N D I X
November 17, 2011
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
November 17, 2011
=======================================================================
Statement of Hon. K. Michael Conaway
Chairman, Panel on Defense Financial Management and Auditability Reform
Hearing on
Industry Perspectives on Achieving Audit Readiness
November 17, 2011
I'd like to welcome everyone to today's hearing on Industry
Perspectives on Achieving Audit Readiness. Over the past 4
months, we have heard from a variety of witnesses within
Government, including representatives from the offices of the
OSD and Military Department Comptrollers, the DOD functional
communities, the DOD Office of Inspector General (OIG), and the
GAO on the challenges the Department faces in achieving audit
readiness and its efforts to resolve these issues. Today, as
the Panel nears the completion of its work, we turn to
accounting firms that have experience out in the private
sector, as well as within Government, to get their views on the
impediments to DOD achieving auditability and the actions
needed to address these challenges.
In addition to having experience performing work at various
other entities, these firms are involved in almost every aspect
of DOD's financial improvement and audit readiness (FIAR)
effort, ranging from assisting DOD components in implementing
the FIAR strategy, to assisting the Office of the Under
Secretary of Defense (Comptroller) in performing its review of
the DOD components' progress, to actually performing certain
audits themselves. Therefore, they can provide a well informed
point of view on the problems facing DOD as it works towards
achieving auditability on the Statement of Budgetary Resources
by 2014 and the full set of financial statements by 2017.
Some of the challenges that have been identified to date
include sustaining leadership and effective oversight, ensuring
workforce competency, implementing Enterprise Resource Planning
(ERP) systems, resolving long-standing internal control
weaknesses, and managing organizational challenges associated
with having a large and complex organization such as DOD. The
witnesses here today may or may not consider all of these
issues as impediments to improving financial management and
achieving audit readiness, or they may have a slightly
different take on the issues, or they may identify different
challenges all together. Most significantly, they may be able
to provide alternative options on how to overcome these
weaknesses. That is why I look forward to hearing their expert
views on the issues confronting DOD and possible courses of
action to address these challenges.
I would like to thank our witnesses in advance for their
testimony and agreeing to be with us this morning. We have with
us today:
LMs. JoAnn Boutelle, Partner, Deloitte &
Touche LLP;
LMs. Tracy Porter, Partner, Grant Thornton
LLP; and
LMr. Mark Keeley, Partner,
PricewaterhouseCoopers LLP.
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November 17, 2011
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