Bureau of Medicine and Surgery 2012 Navy Medicine Audit Readiness Training Symposium

Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training Symposium Key Audit Issues in Civilian Payroll June 4th, 2012

Key Audit Issues – Civilian Payroll • Context • Department of Defense (DoD) is required to assert audit readiness for its Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As a part of this effort, Civilian Payrollhas been identified as a business process that materially affects the SMA-Navy SBR. • Purpose • This will serve as open dialogue session regarding the key issues identified in successfully asserting Audit Readiness in Civilian Payroll. Solutions will be proposed for visibility and discussion where applicable. • Outcome • An understanding of the status of Civilian Payroll audit issues, including expectations for field level actions to facilitate successful completion of the Navy Medicine audit readiness plan. FOR OFFICIAL USE ONLY

Civilian Payroll Scope & Definition FOR OFFICIAL USE ONLY

Audit Readiness Timeline Control Testing Time Period Assessable Unit Assertion Interim Progress Milestones (90 Days, 50 %, 75 %) FOR OFFICIAL USE ONLY

Key Considerations when Auditing Payroll • Accurate Employee Records: An auditor will want to ensure that an organization has the proper procedures in place to accurately collect and record changes to employee pay scale, benefit elections, etc. • Complete Time & Attendance Information: An auditor will test the controls in place for the time certification process within an organization, to validate that time is accurately recorded, and proper documentation is retained. • Correctly Processed Payroll: An auditor will review documents such as a SAS70 or SSAE 16 to ensure that payroll is being processed correctly by third party service providers. • Assurance over Payroll Interfaces: An auditor will want to ensure that processed payroll data is entered into the general ledger correctly. FOR OFFICIAL USE ONLY

How an Auditor willAudit Payroll • Assessing and testing internal controls to determine if they are designed effectively to mitigate the risk of material misstatement: • Reviewing that timesheets are properly certified • Reviewing for authorization of employee personnel record changes (SF-52) • Reviewing SAS70 or SSAE16 for effective payroll processing controls • Validating that processes are in place to reconcile processed payroll data received to payroll data included in general ledger. • Performing substantive testing to ensure that supporting documentation is available to confirm transaction balances: • Reviewing support is available for leave or overtime included on time sheets • Validating that amounts on SF-52s are consistent with Master Employee Record (MER) • Recalculating payroll amounts in Gross Pay File • Re-performing payroll reconciliations. FOR OFFICIAL USE ONLY

Audit Readiness Team process for identifying potential audit issues • Assessing internal controls within each assessable business process to ensure that they meet certain “Key Control Objectives”: • Accounting transactions are properly authorized • Accounting transactions are for correct amounts • Accounting transaction occur in the proper period • Assessing internal controls within each assessable business process to determine if they are designed and operating effectively to mitigate the risk of material misstatement: • Design Effectiveness – Is the process set up correctly to prevent errors • Operating Effectiveness – Is the process being executed correctly to prevent errors • Validating that each transaction type within a business process has an identified and available “Key Supporting Document”. FOR OFFICIAL USE ONLY

Civilian Payroll at Navy Medicine • A high-level view of the business process was able to be captured. • Process touches all departments of Navy Medicine. • Wide variation exists in the process from activity to activity. • Need to validate & standardize processes across Navy Medicine. • Lack of a consistent access to systems data & capabilities seems to drive many audit issues: • SLDCADA • DCPS • CHOOSE (Treasury Dept.) • Dept. of Navy is in process of performing same standardization of civilian payroll across sub-commands; alignment with that plan is critical. FOR OFFICIAL USE ONLY

Civilian Payroll Working Group • Working Group Details • Held April 30 – May 4 at BUMED HQ. • Comprised of personnel in multiple positions, from multiple activities and regions. • Objectives were to address high priority civilian payroll process weaknesses. • Results • Standard Time & Attendance process • Updated Time & Attendance Instruction was vetted through attendees to ensure requirements could be met by all Activities • Reconciliation was decided on: • MER to SLDCADA • Gross Pay File to Work Year Personnel Cost (WYPC), Treasury, and the general ledger (STARS-FL) FOR OFFICIAL USE ONLY

Civilian Payroll Material Weaknesses • Material Weakness 1: Lack of Reconciliation Between the Standard Accounting and Reporting System – Field Level (STARS-FL), Defense Civilian Pay System (DCPS), and Treasury • Material Weakness 2: Time & Attendance Inconsistencies • General Causes: • Lack of Standard Processes; No SOP • Availability of Data • Multiple Error Possibilities FOR OFFICIAL USE ONLY

Reconciliation in Payroll Processing • Issue Detail • No standardized reconciliation occurring at Navy Medicine between Gross Pay File transmitted by DCPS, STARS-FL, and Treasury. • Reconciliation is required to ensure that amounts included in Gross Pay File are being accurately recorded in STARS-FL, as well as at Treasury. • Reconciliation should be performed on a bi-weekly pay period basis. • Path Forward • Activities will be responsible for reconciling the Master Employee Record (MER) to SLDCADA and the Gross Pay File (GPF) to the general ledger (STARS-FL) and Work Year Personnel Cost (WYPC). • Regions will be responsible for reconciling the GPF to the general ledger, WYPC, and Treasury. • Standardized SOP for Payroll Reconciliation to be drafted by August 2012. FOR OFFICIAL USE ONLY

Time & Attendance • Issue Detail • Variations exist across the enterprise in how Time & Attendance is recorded and certified. • Over time certification processes have shifted at the field level on a varying basis, creating no standard process. • Some activities have a decentralized process; others are centralized. • Path Forward • Decentralize, Decentralize, Decentralize • Timekeeping instruction updated to ensure requirements could be met by all activities. • Work with SLDCADA to have standardized profile (when possible) across Navy Medicine FOR OFFICIAL USE ONLY

In The Mean Time……. • DECENTRALIZE! • Communication (up and down the chain) • Work in progress • CIVPAY Audit Toolkit • Check sheet for timekeeping (employee, supervisor, CSR/SA) • Draft of Timekeeping instruction • Accrual basics • Region Recon tool • Activities Recon tool FOR OFFICIAL USE ONLY

Questions? FOR OFFICIAL USE ONLY

Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training Symposium Key Audit Issues in Consumables June 4th, 2012

Key Audit Issues – Consumables • Context • Department of Defense (DoD) is required to assert audit readiness for its Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As a part of this effort, Consumables has been identified as a business process that materially effects the SMA-Navy SBR. • Purpose • This will serve as open dialogue session regarding the key issues identified in successfully asserting Audit Readiness in Consumables. Solutions will be proposed for visibility and discussion where applicable. • Outcome • An understanding of the status of Consumables audit issues, including expectations for field level actions to facilitate successful completion of the Navy Medicine audit readiness plan. FOR OFFICIAL USE ONLY

Consumables Scope/Definition FOR OFFICIAL USE ONLY

Key Considerations when Auditing Consumable Goods • Making Accurate Payments: An auditor will want to validate that an organization has the proper procedures in place to ensure that payments made for consumable goods are for the right quantity at the most up-to-date price. • Standardized Receipt: An auditor will test the controls in place across the organization to ensure that there is standardization in the receipt process for consumable goods. Proper standard receipt and documentation of receipt are critical to ensure that payments aren’t made if goods aren’t received. • Proper Classification: An auditor will review accounting transactions to ensure that consumable goods are expensed, not capitalized, and are recorded in the right amount, in the proper period, with the appropriate financial detail. FOR OFFICIAL USE ONLY

How an Auditor willAudit Consumables • Assessing and testing internal controls to determine if they are designed effectively to mitigate the risk of material misstatement: • Review that orders are appropriately authorized • Review that processes are in place to appropriately record receipt, and maintain proof of receipt documentation • Review controls in place to ensure disbursements are accurately recorded for consumables received • Validate that a reconciliation occurs between order and disbursement • Performing substantive testing to ensure that supporting documentation is available to confirm transaction balances: • Review support of packing slips and DD250 to support disbursements • Validating that the order amount matches the total obligation amount • Re-performing calculation of disbursement amounts FOR OFFICIAL USE ONLY

Consumables at Navy Medicine • Process is well documented related to DMLSS, we may not have enough detail related to non-DMLSS and Purchase Card controls. • Warehousing of consumables seems to be well controlled but does add an extra step to process which has the potential to increase risk. • (e.g., receipt vs. acceptance) • Understanding the variation in Defense Medical Logistics Standard Support (DMLSS) capabilities across organization may affect controls. New DMLSS functionality (e.g., multiple appropriations) and training will help as commands come on board. • Navy Medicine Spend Analysis shows an increase in e-commerce. Continued decrease in the use of GCPC for purchasing medical supplies and use as a method of payment will improve audit readiness. FOR OFFICIAL USE ONLY

Consumables Material Weaknesses • Material Weakness 1: Inconsistent use of the Disbursement Reconciliation Tool (DRT) in DMLSS • General Causes: • Uniform Compliance • Reliance on Systems Controls • Material Weakness 2: Inadequate proof of receipt • General Causes: • Lack of standardized documentation & process • Multiple control points FOR OFFICIAL USE ONLY

Inconsistent Use of the DRT in DMLSS • Issue Detail • The Audit Readiness team identified transactions where the Disbursement Reconciliation Tool (DRT) was not used. • The DRT is an enhanced business process within DMLSS that compares the dollar amount of goods received in DMLSS to the dollar amount disbursed in STARS-FL (EC610). • If the DRT is not used, amounts disbursed in STARS-FL may differ from the receipt amount recorded in DMLSS and will not be reviewed/reconciled. • Impact on Audit Readiness • The DRT is considered a critical control activity as it provides management with a systematic monitoring tool to identify and resolve errors between the logistics system and the system of record. Inconsistent use may cause misstatements in ‘Gross Outlays’ on the Statement of Budgetary Resources to go undetected. FOR OFFICIAL USE ONLY

Inconsistent Use of the DRT in DMLSS • Path Forward • Obligation balance in DMLSS must match FASTDATA: • DRT’s must be reviewed and corrective action taken to ensure that proper obligation authority is maintained in DMLSS: • Processed DRT’s update current year funds in DMLSS • Research variances before processing • Ensure disbursements posted to STARS-FL are received in DMLSS • Use the Disbursement Reconciliation Tool to identify problem disbursements, not passing the ‘DRT Check’: • DRT’s posted to tab 3, “Errors – Part 3”, may indicate obligations not in DMLSS or changes to the LOA after the initial obligation • DRT’s posted to tab 4, “Open – Part 4”, have not been fully receipted in DMLSS • Know and use the Disbursement Reconciliation Tool: • Require users to complete DRT eLearning course at: • https://jml149.dmlss.detrick.army.mil/resourcecenter (select E-learning Category) • Correct problems or procedures to ensure Transaction Excellence FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt • Issue Detail • The Assessable Unit team noted several Activities that do not keep packing slips or other similar shipping documentation on file. • Packing slips/shipping documentation should be maintained in order to validate that items received are correctly entered into DMLSS. • Impact on Audit Readiness • If packing slips/shipping documents are not retained on file, there is no proof of receipt of consumable goods. • Accuracy of the transactions in the general ledger can not be validatedwithout this proof of receipt. • Could result in incorrect amounts being recorded to accounts payable or disbursed to vendors, which could potentially lead to over- or understatement of either amount on the Statement of Budgetary resources FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt • Path Forward • Document receipt of goods and retain the evidence: • All material ordered receives proof of receipt • Develop a retention strategy to accommodate decentralized receiving practices • Electronic data retention is optimal, but not required • Perform spot checks to ensure compliance: • All documents must be accessible/retrievable • Test to ensure document matches DMLSS receipt and accounts payable in STARS-FL • Ensure receipts are electronically processed in DMLSS in a timely manner • Document receipt when final acceptance is not obtained: • Note when item is received at central location but not accepted by end user • Ensure appropriate resolution and proper documentation is provided for any returned material FOR OFFICIAL USE ONLY

Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training Symposium Key Audit Issues in Contracts Administration June 4th, 2012

Key Audit Issues – Contracts Administration • Context • Department of Defense (DoD) is required to assert audit readiness for its Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As a part of this effort, Contracts Administration has been identified as a business process that materially effects the SMA-Navy SBR. • Purpose • This will serve as open dialogue session regarding the key issues identified in successfully asserting Audit Readiness in Contracts Administration. Solutions will be proposed for visibility and discussion where applicable. • Outcome • An understanding of the status of Contracts Administration audit issues, including expectations for field level actions to facilitate successful completion of the Navy Medicine audit readiness plan. FOR OFFICIAL USE ONLY

Contract Administration Scope/Definition FOR OFFICIAL USE ONLY

Key Considerations when Auditing Contracts • Making Accurate Payments: An auditor will want to validate that an organization has the proper procedures in place to ensure that payments made for contracted goods or services are for the proper amount, are recorded to the proper accounting period, and that there are controls in place to properly authorize all payments. • Proper Accounts Payable Cut-Off: Auditors will specifically review goods or invoices receipted around financial reporting cut-off periods (end of quarter, end of year) to ensure that accounts payable reported at cut-off dates are accurate, represent valid amounts due to vendors, and recorded in the correct period. • Anti-Deficiency Act Considerations: Auditors will perform specific procedures to ensure that disbursements can be traced back to their corresponding obligations, and that they don’t exceed those obligations, that those obligations don’t exceed commitments, and that commitments don’t exceed apportioned funding authority. FOR OFFICIAL USE ONLY

How an Auditor willAudit Contracts • Assessing and testing internal controls to determine if they are designed effectively to mitigate the risk of material misstatement: • Review that commitments have been properly authorized, including a funding authority check to ensure against over-obligation of funds • Review of proper separation of duties for receipt and acceptance of invoices for disbursement • Review of controls in place to match disbursements to obligations • Review of proper authorization of any modification or de-obligation (contract closeout) • Performing substantive testing to ensure that supporting documentation is available to confirm transaction balances: • Review support of commitments by matching to SF2276 or similar • Match amounts on contracts to obligation in STARS-FL • Support disbursement amounts by checking against invoices FOR OFFICIAL USE ONLY

Contracts Administration at Navy Medicine • Business process is well documented, with few gaps. There are some areas where roles are not well defined, such as receipt of goods. • System controls related to Wide Area Work Flow (WAWF), Funds Administration and Standardized Document Automation (FASTDATA), and Standard Procurement System (SPS) are an area that need additional focus; may need more information on user access and profile controls. Basic controls are in place. • We need better visibility over DFAS financial processes to better understand the controls in place to ensure that obligations and disbursements are recorded accurately and completely. • Areas of higher risk include unauthorized commitments, SPS deployment and use, and the use of Non-DoD contracts or assisted contracts. FOR OFFICIAL USE ONLY

Contracts AdministrationMaterial Weaknesses • Material Weakness 1: Inadequate proof of receipt • General Causes: • Lack of Compliance with Established Guidance for Receipt & Disbursement • Material Weakness 2: Inadequate documentation to support Closed Contracts • General Causes: • Full Implementation of Contract Closeout SOP • Access to Documentation FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt • Issue Detail • The Assessable Unit Team identified transactions of purchased goods, where the proof of receipt was insufficient, not retained for recordkeeping, or was not generated at time of delivery. • Without proof of receipt, it is difficult to determine whether goods have been received in accordance with the contracted statement of work. • Additionally, the proof of receipt is required to verify the quantity or services invoiced to the quantity or services actually received. • Impact on Audit Readiness • Proof of receipt documents are key supporting documents used to ensure that accounts payable are recorded properly and for the correct amount. • Lack of the appropriate type of receipt document could cause disbursements to be made for which no actual goods were received, overstating Gross Outlays. FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt • Path Forward • Have a conversation and come to agreement on the following: • What constitutes adequate proof of receipt documentation: • For supplies and equipment? The packing slip • For services? Timesheets for PSCs per COR SOP section 3.2.4, page 69 • Check invoicing clause in the contract for any special requirements • Where and in what format should it be stored? • How long should you keep it? • What do you need to make this happen? • What does the COR SOP say (section 3.2.4, page 69)? • Document the conversation and take the agreed upon action FOR OFFICIAL USE ONLY

Inadequate documentation to support Closed Contracts • Issue Detail • Based on prior testing, many contracts lacked evidence of communication by the vendor that the final invoice had been delivered prior to closing contracts. • Also, there were contracts closed that lacked the required DD1594 or other similar required forms. • Additionally, the process is designed so that forms are completed prior to de-obligations being posted to STARS-FL, and there is no check that these transactions are posted accurately. • Impact on Audit Readiness • Lack of sufficient documentation for closed contracts means that de-obligations could be posted incorrectly, causing an understatement of the ‘Unobligated Balances Available’ line item. FOR OFFICIAL USE ONLY

Inadequate documentation to support Closed Contracts • Path Forward • The Contracts Administration Assessable Unit Team will develop a “due diligence standard” that describes the efforts required of the contract closeout team to obtain contractor consent before consent is presumed. • Revise the Contract Closeout SOP to make the following steps clear: • CHECK to see if there are still funds on the contract • DEOBLIGATE any remaining funds using the SF-30 and procedures in the SOP • CHECK AGAIN to ensure the deobligation was posted correctly • COMPLETE the Contract Completion Statement (DD 1594) using the procedures in the SOP • Contracting officers must ensure there is a properly completed SF 1594 in every closed contract. FOR OFFICIAL USE ONLY

Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training Symposium Other Key Audit Issues June 4th, 2012

Other Key Audit Areas & Issues • Context • FY2014 is the deadline for DoD to assert audit readiness for its Statement of Budgetary Resources (SBR) (business processes) • Navy Medicine is working on ten assessable units in total • We have covered three and will now discuss audit issues identified in other areas. • Purpose • This will serve as open dialogue session regarding the key issues identified in successfully asserting Audit Readiness in for Navy Medicine. Solutions will be proposed for visibility and discussion where applicable. • Outcome • An understanding of the status of other key audit issues, including expectations for field level actions to facilitate successful completion of the Navy Medicine audit readiness plan. FOR OFFICIAL USE ONLY

Material Weaknesses and Other Audit Issues • Material Weakness 1: Unfilled customer orders are not being recorded for Federal and Non-Federal Receivables • Material Weakness 2: Receivables not recorded until collections are received for Federal/Non-Federal Receivables and RWO-P transactions • Material Weakness 3: Supporting documentation for the disbursements associated with RWO-Grantor transactions is not adequate or missing • Other Audit Issues: • DD577 Policy, Usage & Retention • Document Retention & Audit Response to Document Requests FOR OFFICIAL USE ONLY

Unfilled customer orders are not recorded • Issue Detail • An amount for unfilled customer orders is not recorded in STARS-FL • Recording an amount for unfilled customer orders establish reimbursable authority for the Activity • Not recording unfilled customer orders means that a cost transfer is necessary at the time of collection • This is a departure from GAAP and the audit standards • Impact on Audit Readiness • Authority to provide services is not reflected on the financial statements timely • “Change in Unfilled Customer Order" line item on the SBR is materially misstated FOR OFFICIAL USE ONLY

Unfilled customer orders are not recorded • Path Forward • Develop formal Corrective Action Plan(s) • Potential Solutions: • Federal Receivables: • Consider changing the process to have customers prepay for services with a reconciliation at year-end • Non-Federal Receivables: • Evaluate the ability to derive and record expected authority from services covered by OHI FOR OFFICIAL USE ONLY

Receivables are not recorded until collections are received • Issue Detail • Account Receivable amounts are not recorded in STARS-FL until collections occur • Various DoD and TMA policies provide conflicting guidance and that do not satisfy accounting standards • DOD Comptroller policy states all DHP-funded activities should record a receivable when a claim is established • This is a departure from GAAP and the audit standards • Impact on Audit Readiness • Accounts receivable balances are not recorded or are not recorded in the proper accounting period • The SBR is materially misstated FOR OFFICIAL USE ONLY

Receivables are not recorded until collections are received • Path Forward • Develop formal Corrective Action Plan(s) • Potential solutions may vary between Federal and Non-Federal processes • Solution should include two key phases: • Phase One: Address guidance conflicts and deficiencies to establish a GAAP compliant, achievable, sustainable ‘to-be’ business process • Phase Two: Develop plan for implementing ‘to-be’ process across the organization, including: • Timeline for implementation • Actions necessary to implement new process • Roles and responsibilities for affective personnel • Reporting requirements to document process with Audit Readiness PMO FOR OFFICIAL USE ONLY

Lack of supporting documentation for RWO disbursements • Issue Detail • RWO disbursements are initiated by the Performer agency and processed by DFAS with minimal direct Navy Medicine oversight • RWO disbursements are being made without supporting documentation for the receipt of goods/services • A process to verify correct recording of RWO disbursements is not currently defined or in place • Disbursements related to RWO-G were $36 Million in Q1 of FY12 • Impact on Audit Readiness • Transactions cannot be validated by an auditor FOR OFFICIAL USE ONLY

Lack of supporting documentation for RWO disbursements • Path Forward • Develop formal Corrective Action Plan(s) • Potential solutions must include: • Standardized and accessible key supporting documents for disbursements • Coordination with trading partners to ensure that documentation includes a valid quantified measure of cost for services provided • A defined process to obtain and review supporting documents from service providers FOR OFFICIAL USE ONLY

Lack of consistent policy for DD-577 usage & retention • Issue Detail • The DD-577, Appointment Record, is used to identify and maintain a record of certifying and accountable officers • DD-577 usage is generally high across Navy Medicine Activities • Navy Medicine does not have a standard policy for the use, management and retention of the DD-577 • Impact on Audit Readiness • Authorization of transactions by accountable officers’ will be a key measure of auditability for each business process within Navy Medicine • Naval Audit Service audit readiness spot checks included reviewing DD-577s for all transactions selected FOR OFFICIAL USE ONLY

Bureau of Medicine and Surgery 2012 Navy Medicine Audit Readiness Training Symposium