Department of the Navy

DON Business Transformation Update

“The Role of OMB A-123, Appendix A (Federal Version of Sarbanes-

Oxley)”Presented to:ASMC Washington Chapter

11 October 2006

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Accounting irregularities in the private sector led Congress to tighten reporting requirements for businesses. OMB Circular A-123 (Appendix A) establishes comparable Internal Controls reporting for the federal sector. FIAR, FIP, and Managers’ Internal Control Program are all integrated.

– Sarbanes-Oxley (SOX) Act of 2002 and FMFIA/OMB A-123- Enron, WorldCom, and Tyco accounting scandals resulted in a decline of

public trust- Public should also have trust in how their government is using taxpayer

dollars- Both Acts require management (CEOs, CFOs, Secretaries) to certify, or

attest to the effectiveness of internal control over financial reporting. However, SOX prescribes criminal penalties.

– Relationship to the DoD- DoD Component Heads must provide certification to OSD that controls are

effective- Reported separately in the Annual Statement of Assurance (SOA), under the

purview of FMFIA Over Financial Reporting- Implementation is integrated into the FIAR effort

– Relationship to DON Financial Improvement Program (FIP)- Serves as the “validation” process of the FIP- Provides sustainment of FIP efforts- Implementation of OMB A-123, Appendix A is integrated into DON FIP

effort

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A clean audit on private sector financial statements is mandatory and ingrained; it reflects high-quality financial information and organizational credibility.

Consider that:– In the private sector, achieving an unqualified or

“clean” opinion is considered normal business – but with some recent problems (e.g., Enron)

– If DON were a Fortune 500 Company, we would be #5, just above General Electric

– DoD is the most significant Cabinet-level Department without an acceptable audit opinion

– We apply rigor and discipline to operational missions (e.g., nuclear power, flight safety, etc.). Why not be as thoughtful, methodical, and accurate in financial management?

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Business process transformation recognizes the need for an enterprise-wide, integrated effort, aligning DON with the President’s Management Agenda, DoD Business Transformation, and Congressional intent.

Human Resources

Supply Management

Program Management

Materials Management

Financial Management

Human Resour

ces

Supply Mgmt

Program

Mgmt

Materials

Mgmt

Financial

Mgmt

DoD Business Enterprise Architecture(DoD Financial Improvement and Audit Readiness (FIAR))

People(NSPS)

Processes(Lean Six Sigma)

Internal Controls

(MICP/A-123)

Systems(Navy ERP)

DON Financial Improvement Program

Data/Stds(SFIS)

Systems(FAM)

Enterprise Transition Plan

DON Business TransformationCurrent

Environment(Stove-piped)

Future Environment(Integrated)

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The Department’s Business Transformation Program will continually mature as DoD’s Enterprise Transition Plan is executed.

As-Is EnvironmentExisting Processes

Discovery & CorrectionNon-standard Controls

Legacy SystemsAudit Disclaimers

“To-Be” EnvironmentBest Practices

A-123 Certified ControlsN-ERP

BTA/BEAUnqualified Audits Opinions

Transition PlanBusiness ProcessTransformation

DON Business Transformation Council Oversight

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Key Success Factors:– Business rules and documentation– Sound systems environment– Ready access to audit trails and audit evidence– A paradigm shift – management takes

ownership of the financial integrity of its processes

– Human Capital Processes supported by a performance-based culture

– Implementation, testing, and certification of Internal Controls over Financial Reporting (required by OMB A-123, Appendix A)

To summarize, DON’s Financial Improvement Program (DON FIP) integrates several initiatives advancing business processes, systems, and people.

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The methodical trail to an audit opinion prescribed by the FIAR process incorporates continual testing of controls, as A-123 Appendix A calls for. Focus Areas are at different stages along the audit continuum; Investments and Debt are the Focus Areas most advanced. FIAR/A-123/FIP are all inter-related.

FIA

R

FlowchartRisks

Controls

Test Controls

Ap

pe

nd

ix A

Statementof

Assurance

FIP

Fo

cus

Are

as

Discovery &

CorrectionValidation Assertion Assessment Audit

Real PropertyMilitary EquipmentAccounts Payable

Accounts ReceivableInventory and OM&S

Environmental LiabilitiesFECA Liability

Fund Balance with TreasuryAppropriations Received

InvestmentsDebt

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DON FIP Validation Approach Aligns with A-123 Financial Reporting Requirements

A-123 Certification in SOA / Audit Readiness

Process #4: Formulate Navy DERP Environmental Liability

File: NAVFAC Process Flow.vsdName: Environmental Liabilities - DERP & BRACDate: August 2005

NA

VF

AC

HQ

(A

naly

sts)

A

NORM snapshot, CTC extracted for future year EL by IR & MRP Sites

20.A

CTC estimates are used to determine non-current EL for

DERA & BRAC(See Note on BRAC)

21.

NAVFAC determines current EL using STARS,

& FIS obligation & expenditure data

22.

Determines 12 month rolling prediction

using CY execution data23.

Calculates and explains quarterly change amounts for DCI reporting

24.

Control #3, 15

Control #14

Controls #3, 13

Control #15

Risk/Control Point

DON Processes Established by Authoritative Guidance

Corrective Action

Process Improve-ment &

Standard-ization

Analyze Risks Assess Controls Document Findings

=

=

Con

tinu

ous

Mon

itor

ing

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To conclude: Internal Controls Over Financial Reporting (A-123, Appendix A) involves all business managers-- not just financial managers.

Keys to DoD/DON Success:- Awareness- Relevance- Execution