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The Defense Finance and Accounting Service Financial Reporting Process for Other Defense Organizations’ General Funds DODIG-2018-041

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Objective:

We determined whether the Defense Finance and Accounting Service (DFAS) was properly accumulating and reporting Other Defense Organizations’ (ODOs’) General Fund financial data for the DoD Agency‐Wide financial statements. In addition, we followed up on the status of DFAS’s implementation of prior recommendations related to this audit objective.

Findings:

DFAS‐Indianapolis is responsible for compiling the ODOs’ General Funds financial statements. We determined that DFAS‐Indianapolis personnel did not properly accumulate and report the ODOs’General Fund financial data for the FY 2015 DoD Agency‐Wide Financial Statements. Specifically,

DFAS‐Indianapolis did not:

• develop a universe of the ODOs’ General Fund transactions;

• maintain a reconciled list of ODOs’ General Fund reporting entities and sub‐entities; and

•prepare the ODOs’General Fund financial statements that reflected the current reporting entities.

This occurred because DFAS‐Indianapolis personnel did not develop a process narrative (written explanation) of the control activities and a process map (detailed flowchart) of how the ODOs’ General Funds are compiled.1 In addition, DFAS‐Indianapolis personnel did not develop adequate standard operating procedures that identified the ODOs’entities and sub‐entities to accumulate and report the General Funds’financial data.

Additionally, DFAS‐Indianapolis personnel continue to prepare unsupported journal vouchers (JVs) to accumulate and report the ODOs’General Fund financial statements. DFAS‐Indianapolis personnel should also improve their process for justifying and reviewing JVs.

Furthermore, DFAS‐Indianapolis personnel did not prepare the required quarterly metric reports that included all the JVs prepared during the ODOs’General Fund compilation process. This occurred because DFAS‐Indianapolis personnel responsible for preparing the reports stated that they believed

that they were responsible for including only the JVs manually prepared by DFAS‐Indianapolis and not the system‐generated JVs created by the financial systems.

Since DFAS‐Indianapolis cannot properly accumulate and report its financial data for ODOs and the large number and dollar amount of unsupported JVs, it is increasingly probable that the ODOs’General Fund financial statements are materially misstated. Because the ODO General Fund financial statements are

part of the DoD Agency‐wide financial statements, there is also the increased risk that these statements are misstated.

Recommendations:

We recommend that the Under Secretary of Defense (Comptroller)/Deputy Chief Financial Officer:

• develop a universe of ODOs’ General Fund transactions; and

• request that the U.S. Treasury make payments directly to the Military Retirement Fund and the Medicare Eligible Retiree Health Care Fund.

We recommend that the Director, DFAS‐Indianapolis develop a process narrative and process map of the ODOs’General Fund compilation process. In addition, we recommend that the Director, DFAS‐Indianapolis develop adequate standard operating procedures (SOPs) that:

• provide the steps necessary to compile the ODOs’ General Fund financial statements;

• develop a list of the ODOs’ General Fund reporting entities and sub‐entities that reconcile to the

established reporting hierarchy for the Defense Departmental Reporting System–udited Financial

Statements; and

•prepare combining and consolidating financial statements that accurately reflect these reporting

entities.

We also recommend that the Director, DFAS‐Indianapolis develop a plan to reduce the number of JVs needed to compile the ODOs’General Funds financial statements. Furthermore, we recommend that the Director, DFAS‐Indianapolis revise the SOPs for preparing, approving, and reviewing JVs.

We recommend that the Director, DFAS Enterprise Solutions and Standards:

• categorize all the JVs in accordance with the DoD Financial Management Regulation (DoD FMR) and

prepare quarterly JV metric reports that include all of the JVs prepared during the ODOs’ compilation

process;2 and

• monitor the status of the open recommendation3 and, when appropriate, expedite the

implementation of the Department 97 Reconciliation and Reporting Tool and develop milestones for its

implementation.4

We recommend that the Director, DFAS Strategy, Policy, and Requirements, revise the DoD FMR to

include an accurate list of ODOs’ General Fund reporting entities and sub‐entities.

Management Comments and Our Response:

The Deputy Chief Financial Officer (DCFO) agreed with our finding and recommendation to develop a universe of ODO General Fund transactions (UoT). However, comments from the DCFO only partially addressed the recommendation; therefore, the recommendation is unresolved and remains open. The DCFO stated that his office is developing a UoT database to capture ODO General Fund transactions. He also stated that the database is able to reconcile to 97 percent of the transaction details to Defense Departmental Reporting System trial balances (unadjusted trial balances). However, DCFO’s comments did not discuss the status of the UoT database that supports the adjustments from the unadjusted trial balance to the adjusted trial balance, and the adjusted trial balance to the financial statements. In addition, the comments did not state what DoD organization is responsible for developing this portion of the UoT database and providing supporting documentation to the auditors. Therefore, we request that the DCFO provide additional comments on the status of the UoT database for these adjustments, and the DoD organization responsible for developing this portion of the database and providing the supporting documentation to the auditors. We also request that the DCFO provide an estimated completion date for this UoT database.

The DCFO disagreed with the recommendation to request that the U.S. Treasury make payments directly to the Military Retirement Fund and the Medicare Eligible Retirees Healthcare Fund. Comments from the DCFO and the additional documentation provided by the Office of Management and Budget to

respond to this recommendation explained why it would not be proper to make payments directly to these funds.

The Office of Management and Budget determined that accrual charges for pension and health benefits

need to be recognized in the budget as costs in general fund accounts and then transferred to the trust

funds and reported as income of the trust funds. Therefore, we consider this recommendation closed,

and no additional documentation or information is needed from the DCFO.

The DCFO, responding for the Director, DFAS‐Indianapolis, agreed with the recommendation to develop a process narrative and process map that describes the detailed processes for the ODOs’ General Fund compilation process. However, comments from the DCFO did not address the recommendation; therefore, the recommendation is unresolved and remains open. We request that the DCFO provide additional comments that include a process narrative and process map that describes the entire ODOs’ General Fund compilation process. We also ask that the DCFO provide an estimated completion date for providing the process narrative and process map.

The DCFO, responding for the Director, DFAS‐Indianapolis, agreed with the recommendations to develop adequate SOPs that provide the steps to:

• compile the ODO General Fund financial statements;

• develop a list of reporting entities and sub‐entities that can be reconciled to the established reporting

hierarchy; and

•prepare ODOs’General Fund financial statements that reflect the current reporting entities.

However, comments from the DCFO did not address the recommendations; therefore, the recommendations are unresolved and remain open. We request that the DCFO provide additional comments that include SOPs that provide the steps needed to compile the ODO General Fund financial statements, develop a list of reporting entities and sub‐entities that can be reconciled to the established reporting hierarchy, and prepare ODOs’General Fund financial statements that reflect the current reporting entities. We also request that the DCFO provide an estimated completion date for these recommendations.

The DCFO, responding for the Director, DFAS‐Indianapolis, agreed with our recommendations to develop a plan to reduce the number of JVs needed to compile the ODOs’ General Fund financial statements. However, comments from the DCFO did not address the recommendation; therefore, the recommendation is unresolved and remains open. We request that the DCFO provide additional comments that include a written plan for reducing the number of manual and system‐generated JVs needed to compile the ODOs’General Fund financial statements. We also request that the DCFO provide an estimated completion date for providing this plan.

The DCFO, responding for the Director, DFAS‐Indianapolis, agreed with our recommendations to update SOP 3057. The DCFO’s comments and the updated SOP 3057 addressed the specifics of the recommendations to require JVs made in the Defense Departmental Reporting System to have adequate supporting documentation and explain clear reasons for JV adjustments. Therefore, these recommendations are closed, and no additional information is required. However, comments from the DCFO did not address our recommendations to complete and sign checklists for JV reviews and to require signatures to be in the proper sequence. Therefore, these recommendations are unresolved and remain open. We request that the DCFO provide additional comments that include a revised SOP 3057 that requires a complete and signed JV checklist and requires the preparer, reviewer, and approver signatures to be in the proper sequence. We also request that the DCFO provide an estimated completion date for revising SOP 3057.

The DCFO, responding for the Director, DFAS Enterprise Solutions and Standards, agreed with the recommendation to categorize the system‐generated JVs in accordance with the DoD FMR. Therefore, the recommendation is resolved but will remain open. We will close the recommendation when we confirm that Defense Departmental Reporting System‐Budgetary assigns JV category codes to system generated JVs. The DCFO expects the system change to occur by September 30, 2019.

The DCFO, responding for the Director, DFAS Enterprise Solutions and Standards, agreed with our recommendation to prepare quarterly metrics reports that include system‐generated JVs. However, comments from the DCFO only partially addressed the recommendation; therefore, the recommendation is unresolved and remains open. We request that the DCFO provide additional comments that include metric reports that identify the source of the system‐generated JVs and the JV category, and define how the metric was calculated. We also request the DCFO provide an estimated completion date for providing these revised metric reports.

The DCFO, responding for the Director, DFAS Enterprise Solutions and Standards, agreed with our recommendation to monitor the status of the open recommendation, and to expedite the implementation of the Department 97 Reconciliation and Reporting Tool (DRRT). However, comments from the DCFO did not address the recommendation; therefore, the recommendation is unresolved and remains open. We request that the DCFO provide additional comments that states how they will expedite the implementation of the DRRT’ last phase and did not provide milestones for its implementation. We also ask that the DCFO provide an estimated completion date for this recommendation.

The DCFO, responding for the Director, DFAS Strategy, Policy, and Requirements, agreed with the recommendation to revise DoD FMR, Volume 6B, Chapter 1, “Introduction and Summary,”to include an accurate list of ODOs’General Fund reporting entities and sub‐entities and stated that chapter will be updated with a current list of ODO reporting entities and sub‐entities by January 17, 2018. Therefore, the recommendation is resolved, but will remain open. We will close the recommendation when we confirm that DoD FMR, Volume 6B, Chapter 1, “Introduction and Summary,”has been revised to include the current list of ODO reporting entities and sub‐entities.

 

1 Control activities are actions taken to minimize risk

2 DFAS‐IN JV metric reports, among other things, should show the number, amount, type of JV, and a statement on whether the JV is supported or unsupported.

3 DODIG Report No. D‐2012‐107, “efense Finance and Accounting Service Needs to Improve the Process for Reconciling the Other Defense Organizations’Fund Balance with Treasury,”July 9, 2012.

4 The Department 97 Reconciliation and Reporting Tool will warehouse transactional‐level data to support the ODOs’Fund Balance With Treasury.

This is a result of Project No. D2016-D000FP-0105.000.