Business case due in May

CFO Council, DOD Launch Studies To Find Cost-Effective Audit Options

November 24, 2010

Amid Pentagon concerns that the cost of using required accounting methods outweighs the benefits, two studies are examining more affordable ways to provide accounting information.

The U.S. Chief Financial Officers Council is in the process of "reviewing alternative federal reporting models that can increase transparency while maintaining sound internal controls," according to a new Defense Department report on financial improvement and audit readiness.

The report also states that DOD is engaging in an internal business case analysis set to be turned into Congress in May 2011 that examines alternatives to these standards.

Pentagon Comptroller Robert Hale has griped that current accounting and audit standards have forced DOD to spend considerable sums maintaining information that is not used for any other purpose.

"Hundreds of millions of dollars is not acceptable because no one uses it," Hale said Monday at a meeting of the Defense Audit Advisory Committee.

According to the recent Financial Improvement and Audit Readiness Plan Status Report released by Hale earlier this month, DOD's audit-readiness process requires "the expenditure of a significant amount of DOD funds to obtain and maintain information -- especially valuation information -- that is rarely used by DOD managers."

The comptroller "has noted the department's sensitivity to the cost of obtaining information solely for the purposes of proprietary accounting, financial reporting or auditable financial statements, when this information is not used by management," the report states. "Of most concern is the cost to develop auditable historical costs for balance sheet assets, such as military equipment (e.g., ships, aircraft, combat vehicles), as well as the cost to audit the balance sheet."

Congress has mandated that DOD become audit ready by September 2017. This deadline comes 27 years after federal law mandated that federal agencies have their financial statements audited. The department has completed audits for a handful of its agencies, and is in the midst of its first audit of a military service; it just issued a disclaimer for the Marine Corps' statement of budgetary resources for fiscal year 2010.

DOD has noted that it is committed to improving financial management while prioritizing information used for decision making. The department has currently prioritized budget information and mission-critical asset information.

The financial improvement report notes that DOD is not the only agency worrying about the cost of maintaining information for audits that is otherwise rarely used.

To find a potential solution, the CFO Council, which consists of CFOs and deputy CFOs of the largest federal agencies and senior officials from the Office of Management and Budget and the Treasury Department, has launched a government-wide review. According to a DOD spokeswoman, the review began last year and an initial version was completed earlier this fall.

The initial review "resulted in the newly established Statement of Spending that will be piloted by a limited number of CFO Act Agencies during FY-11," the spokeswoman said in response to questions from Inside the Pentagon.

The spokeswoman said there is a plan to finalize that review. She added that the council is still deliberating what the pilot will consist of and whether DOD will be one of the agencies involved.

The spokeswoman noted that in addition to a new statement of spending, which "provides the public on information on how and when tax dollars are spent," the CFO Council Task Force has also proposed government-wide audits that focus on "items material to the government-wide financial statements," and internal control that identify high-risk areas.

After the CFO review is completed, DOD will report to Congress on "a cost-effective approach to achieving fully auditable statements," according to the financial improvement report.

On the other hand, the department's pending business case analysis "will document whether historical acquisition cost information is used in the department for decision-making, evaluate alternatives for valuing DOD assets and include an analysis of the most-cost-beneficial alternative," according to the financial improvement report.

The report states that DOD is analyzing three alternatives. The first option calls for DOD to "accept the recorded values for existing assets and capture and maintain transaction data to support the costs of future acquisitions." Under the second alternative, DOD would "accept the recorded values for existing assets and use estimated costs for future acquisitions" in accordance with federal financial accounting standards.

The third option calls for eliminating "balance sheet reporting by expensing asset costs or request[ing] a Federal Accounting Standards Advisory Board change to the federal accounting standards."

This business case analysis is being led by the accounting and finance policy directorate in the comptroller's shop, and supported by the acquisition directorate. It will be presented in the May 2011 Financial Improvement and Audit Readiness Plan Status Report.

The business case was requested by the Senate Armed Services Committee in its report accompanying the FY-11 defense authorization bill. It remains unclear whether Congress will pass the legislation in this year's lame-duck session.

"Regardless of whether there is an [National Defense Authorization Act] for FY-11 or whether this provision is in the final act, the DOD will perform the business case," the DOD spokeswoman said.

To prepare the business case, interviews will be held with decision makers within the Office of the Secretary of Defense and other federal agencies to determine if "historical acquisition cost information is used for decision-making," the report states.

During the Nov. 22 meeting of the Defense Audit Advisory Committee, Hale said that historical cost information on a balance sheet is just not being used to manage in the department. He said the department wants to establish a cost-effective approach to gather that data because the value of the information is too low to be expending large amounts of money.

Hale's presentation noted that the business case should include how the information would benefit managers. It should also estimate the costs to "capture and report the information under each alternative through interviews with senior managers" and "the costs to audit the information under each alternative through extrapolation of current and recent audit efforts."

Hale's office is also discussing the issue with OMB, Congress and the Government Accountability Office. -- Jordana Mishory