As part of audit process . . .

Marine Corps Tightens Internal Controls, Awaits Auditors' Evaluation

November 04, 2010

The Marine Corps has implemented a series of internal changes as part of a remediation plan to correct problems found by the Defense Department inspector general's office during the first audit of the service's statement of budgetary resources.

These changes include eliminating the ability of operating force units to input accrual transactions ahead of delivery and automating temporary standard document number transactions, according to Col. Karl Hackbarth, the Marine Corps director of the fiscal division of programs and resources, and Alex Hardisson, the Marine Corps' risk and compliance manager and its audit lead.

In an interview with Inside the Pentagon, Hackbarth and Hardisson discussed the audit, which is not going to be completed by the Nov. 15 due date. The audit, which is the DOD's first attempt to audit a military department's statement of budgetary resources, will result in a "disclaimer" opinion. DOD is deciding whether it will issue an out-of-cycle opinion for the fiscal year 2010 statement of budgetary resources, or leave the FY-10 audit incomplete and start focusing on the FY-11 edition.

Submitted to the DOD IG on Oct. 1, the Marine Corps' remediation plan is designed to lay out how the service intends to fix problems brought up in the audit and the steps the service has already taken. Hardisson said that a number of the fixes began in advance of the formal plan.

"We've got to identify the universe of transactions that are impacted by these findings," Hackbarth said. "The next thing we have to do is fix those errors that are identified, and then finally, based on identifying the universe of transactions, based on those fixes, we have to do the root cause analysis to figure out why is this happening."

Hardisson said that all three of those aspects -- identifying the transactions impacted, fixing errors and analyzing problems -- are all described in the service's remediation efforts.

"The auditors have been provided documentation to show support for remediation actions which succinctly detail: a) all transactions that may be impacted by an auditor finding; b) varying levels of analysis that was performed to ascertain the validity of these transactions, their associated counts and amounts; c) corrective actions that have been initiated to address audit findings and prevent these from occurring in the future; and d) test the effectiveness of corrective actions," Hardisson said in a e-mail to ITP following the interview.

Hardisson said a number of system change requests have already been implemented. These system change requests "are being analyzed for accuracy and completeness in relation to concluded remediation efforts." The auditors are currently evaluating them.

The Marine Corps' remediation plan responded to 11 notifications of findings and recommendations by the DOD IG and the outside auditor, Grant Thornton. The department had concurred in "principle with the findings, respective of weaknesses that were primarily in the realm of internal control issues," Hardisson said.

Hackbarth said the Marine Corps grouped the 11 notifications of findings and recommendations into five groups.

The first set of findings and recommendations focuses on bulk obligations. Hackbarth said the audit found that the Marine Corps did not have adequate supporting documentation to substantiate bulk obligations.

Hardisson said that although the "initial baseline for establishing the bulk obligations was sound," the Marine Corps found "a lack of continued and/or effective monitoring of bulk estimates as the years progressed." To fix this, the service has issued improved guidance, implemented "clearly defined monitoring procedures and frequency requirements," and started using trend analysis techniques that "impart greater confidence and control on balances that pertain to bulk estimates."

The second set of findings and recommendations focuses on accruals, which are transactions where something is "committed, obligated and expensed at the same time in the accounting system," Hackbarth explained. To solve this issue, the Marine Corps has eliminated the ability of operating force units to input those kinds of transactions all together.

Hardisson said that elimination forces the Marine Corps to book the accrual upon delivery of receipt of goods and services -- not ahead of schedule.

"What the auditors had found was a very small subset of business that occurs in that arena where they are recognizing an accrual." Hardisson said, noting that it was not a big volume of transactions. He added that this finding, however, did not affect the overall amount of the financial statement.

The third set focuses on temporary standard document numbers, or SDNs, which are recorded to detail specific transactions and events in the service's core accounting system. Hackbarth explained that in certain instances, such as when the Army makes a payment to a Marine, there's a period of time before that payment properly posts.

Hardisson said that the temporary SDN acts like a placeholder, "so later on we can reconcile that to the individual Marine. But it still reflects a disbursement that was made based on some payment that was made."

Hackbarth said they are automating a lot more of the transactions, so that "they'll simply bypass the temporary SDN."

The fourth set of notifications is about progress payments, which deal with "large contracts where payments were made during the course of the contract actions being accomplished," Hackbarth said.

Hackbarth said that the Marine Corps has changed the way that they characterize progress payments in the accounting record. Hardisson said there was a change at the general ledger level "in effectively reclassifying progress payments from one [general ledger] account to another [general ledger] account." Hardisson said this also had a net effect of zero.

The fifth set of notifications focused on timely recording and review of transactions. Hackbarth said the Marine Corps tightened internal controls as a means of fixing these problems.

Hackbarth said the planned disclaimer is coming because the remediation is "of such a volume and such scope that they won't be able to get through it by 15 November."

"If more time would be available, the Marine Corps is confident that the remediation efforts that have taken root will be proved out and the auditors can continue finalizing their testing to the point that perhaps an opinion can be rendered," Hardisson said.

The Marine Corps is currently waiting on the auditors to provide them with a sample from the active duty military payroll, which should be forthcoming. Hardisson said this sample "would include a list of transactions pertaining to pay and allowances, deductions, etc., for an unknown amount of individual service members."

That payroll sample would enable the Marine Corps to start testing its processes.

Opinion wanted

Hackbarth said with all the time and energy invested into the audit, the Marine Corps would like to receive an opinion for FY-10. However, he added that the service is prepared to take a disclaimer for FY-10, and move toward an opinion for FY-11.

Hackbarth said that to begin the process of auditing its books, the Marine Corps organized a number of training conferences with the goal of going into extreme detail about mapping out transactions and understanding them.

Hackbarth said he personally would "absolutely" like to see the FY-10 audit completed. He added that he is confident that FY-11's audit will result in an opinion.

Hackbarth emphasized that the audit is a "huge effort," complicated by both the size of the Marine Corps, as well as the level of detail required.

"The intent of what we're trying to do in terms of preparing for a clean audit and now working through an audit is really to provide better decision support capability for commanders," Hackbarth said. He noted that at the basis of that are "accurate, timely, reliable business transactions."

He said he welcomes the findings that were provided by the auditors.

"Findings show where you might have weaknesses in internal controls, where you might have weaknesses in processes and where you might have weaknesses in systems," Hackbarth said. "We welcome them, and they give us the opportunity to make our enterprise more effective and efficient." -- Jordana Mishory