DOD IG concludes . . .

Marine Corps Faces 'Material Weaknesses,' Violated Antideficiency Act

By   / December 2, 2010

The Marine Corps is struggling with "material weaknesses" that could hinder the service's financial reporting ability, according to a previously unreleased report by the Defense Department inspector general's office.

The report points to eight previously identified areas of deficiencies that remain problematic and identifies two new areas of weaknesses: advances and prepayments, and military pay.

"These financial management deficiencies may cause inaccurate management information," the inspector general's office writes. "As a result, Marine Corps management decisions based in whole or in part on this information may be adversely affected."

The inspector general's office also concluded the Marine Corps committed two violations of the Antideficiency Act.

These findings are laid out in a short memo and report that constitute a disclaimer to the audit of the Marine Corps' statement of budgetary resources for fiscal year 2010. The Marine Corps project was the first attempted audit of a military branch in DOD's effort to become audit ready by the congressional deadline of September 2017.

The Nov. 8 memo, signed by Assistant Inspector General Patricia Marsh for Defense Business Operations, includes a related "Report on Internal Control and Compliance With Laws and Regulations." Both were attached to U.S. Marine Corps' financial report for FY-10, which was obtained by Inside the Pentagon.

The inspector general's office writes that the Marines did not provide enough information to enable the auditors to offer an opinion on the financial statement.

"Because the Marine Corps did not provide timely and relevant audit supporting documentation, we were unable to perform sufficient procedures to determine compliance with laws and regulations related to financial reporting," the report states, adding that auditors were also precluded from fully assessing "internal control over financial reporting and compliance or to follow up on the following previously identified material weaknesses."

This lack of documentation also prevented the inspector general's office, which conducted the audit in conjunction with an independent auditing firm, from completing the assessment by the Nov. 15 deadline. "As a result, we are unable to determine whether material amounts on the Marine Corps General Fund FY 2010 Combined Statement of Budgetary Resources were fairly presented," the inspector general's office writes, noting that they are not expressing an opinion.

"We are unable to express an opinion on the Marine Corps General Fund FY 2010 and FY 2009 Combined Statement of Budgetary Resources because of limitations on the scope of our work," the memo states. "Thus, the financial statement may be unreliable."

A Pentagon spokeswoman said the disclaimer opinion was not surprising.

"We knew going into the audit that the Marine Corps was not perfect, but felt that they have made enough process and control improvements to be auditable," the spokeswoman told ITP. "DOD believes that the issues described by the auditors confirm that the Marine Corps has made great progress, but that there is still some work to be done."

The spokeswoman noted that the audit is a difficult undertaking. "When we look at the details of the audit report and in discussions with the auditors we are encouraged and satisfied with the effort to date and look forward to working with the Marine Corps to address the remaining issues and proving to the external auditor that the financial reporting is sound," she said.

Pentagon officials will decide whether they want to release an out-of-cycle opinion for FY-10, or drop the audit and continue on to the FY-11 cycle. A decision is expected later this month once the department reviews the results of the Marine Corps' remediation plan, which was submitted at the start of October.

Interested parties appear split on this issue. Defense and service officials previously told ITP that if it is feasible, they would like to see the audit completed. Members of the Defense Audit Advisory Committee advocated chalking the audit up to a learning experience, and moving on to the FY-11 audit.

In an interview this week, a congressional source said Congress does not want the department to waste time and resources on a tardy audit that is not ready.

"We don't want them throwing a whole bunch of auditors out after something to get data that's so late that it's useless," the source said. "What they need to do is have systems in place that will get them data that's useful in a timely manner."

The congressional source was not surprised by the disclaimer. "It sort of speaks for itself that they're not ready," the source said. "There is a reason that they're not ready, and it's because it's really hard and their systems to be better than they are."

The source added that Congress has been working to help the department deal with their systematic issues, by creating the chief management officer positions and mandating business process re-engineering.

Rep. Mike Conaway (R-TX), a House Armed Services Committee member who has been following the audit closely, said the Marines had put in a "Herculean effort" to get the audit done this year, and he was proud of the effort, even though it resulted in a disclaimer. He noted that the Marines understand and are working to fix the issues.

Conaway noted that it is important for DOD to become audit ready given the department spends so many taxpayer dollars.

"They may spend every nickel correctly, but they can't tell us that," Conaway said in a Nov. 30 interview. "Most folks are shocked when they begin to understand that the Department of Defense is not auditable."

The evaluation of the service's finances comes nearly two decades after Congress mandated in the 1990 Chief Financial Officers Act that all federal agencies produce auditable financial statements.

According to the report, the auditors identified two new areas of material weaknesses. A material weakness is a "deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis."

In the first area, the auditors found that the Marine Corps incorrectly recorded contract financing payments and unpaid delivery orders as advances. The military department also "overstated its paid undelivered orders because it recorded a reversing entry without posting the originating entry," the report states.

The second issue focuses on military pay. The auditors found the Marine Corps "uses temporary standard document numbers to record net payroll while it uses permanent standard document numbers to account for gross payroll and withholding amounts. The Marine Corps did not reconcile these two sets of standard document numbers to ensure the temporary standard document numbers net to zero." This information could also creep into financial information reported by DOD as a whole.

The report also highlights other material weaknesses that the Marine Corps needs to continue to work on. The management of the component said that it "has not asserted that all corrective actions from previously identified material deficiencies have been completed," according to the report.

The ongoing weaknesses include problems in the financial management systems, in which the Marines need to ensure that accurate data is being transferred from feeder systems, and in the fund balance with the Department of Treasury.

The report notes that although the Marine Corps made progress in its accounts receivable, audit trails continue to be inadequate and "the accounts receivable subsidiary ledgers did not reconcile with the Marine Corps' general ledger." The report also states the Marine Corps was improperly recording expenses, and that the Navy did not itemize and report costs as required by federal financial accounting standards. In addition, the Marine Corps general fund appropriations received line was misstated.

Further, the inspector general's office notes that the auditors found the Marine Corps violated the Antideficiency Act. According to the report, the Marine Corps violated part of federal law that says "DOD and its agents are prohibited from making or authorizing expenditures of obligations exceeding an apportionment or the amount permitted by prescribed regulations."

The Marines also did not comply with the section of federal law that "limits the Marine Corps and its agents to making or authorizing only expenditures or obligations that do not exceed the available appropriations or funds. Additionally, the Marine Corps or its agents may not contract or obligate for the payment of money before an appropriation is made available for that contract or obligation unless otherwise authorized by law," the report states.

The report does not include any recommendations, noting that it's because "previous audit reports contained recommendations for corrective actions or because audit projects currently in progress will include appropriate recommendations."

The memo notes that the inspector general's office provided a draft of the report to the Marine Corps' assistant deputy commandant, programs and resources, who did not provide technical comments.

The inspector general's office did not respond to a request to comment by press time (Dec. 1). -- Jordana Mishory