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Report No. D-2008-055 February 22, 2008
Internal Controls over FY 2007
Army Adjusting Journal Vouchers
To obtain additional copies of this report, visit the Web site of the Department of
Defense Inspector General at http://www.dodig.mil/audit/reports or contact the
Secondary Reports Distribution Unit at (703) 604-8937 (DSN 664-8937) or fax
Suggestions for Future Audits
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ODIG-AUD (ATTN: Audit Suggestions) Department of Defense Inspector General 400 Army Navy Drive (Room 801) Arlington, VA 22202-4704 Acronyms ASA(FM&C) Assistant Secretary of the Army (Financial Management and Comptroller) CLRS-AFS Chief Financial Officer Load and Reconciliation System-Audited Financial Statements CLRS-FE Chief Financial Officer Load and Reconciliation System-Front End DDRS-AFS Defense Departmental Reporting System-Audited Financial Statements DFAS Defense Finance and Accounting Service OIG Office of Inspector General OUSD(C)/CFO Office of Under Secretary of Defense (Comptroller)/Chief Financial Officer SOP Standard Operating Procedure
DEPARTMENT OF DEFENSE
MEMORANDUM FOR DIRECTOR, DEFENSE FINANCE AND ACCOUNTING
SERVICESUBJECT: Report on Internal Controls over FY 2007 Army Adjusting Journal Vouchers (Report No. D-2008-055) Weare providing this report for information and use. We considered management comments on a draft of this report when preparing the final report. The comments on the draft ofthis report conformed to the requirements of DoD Directive 7650.3 and left no unresolved issues. Therefore, no additional comments are required.
We appreciate the courtesies extended to the staff. Questions should be directed to Mr. Jack L. Armstrong at (317) 510-4801, ext. 274 (DSN 699-4801) or Mr. Mark A. Ives at (317) 510-4801, ext. 260 (DSN 699-4801). The team members are listed inside the back cover.
By direction of the Deputy Inspector General for Auditing:
fJo17vv~ tJ~CPA Jt!fA/wt Patricia A. Marsh,
Who Should Read This Report and Why? Department of the Army and Defense Finance and Accounting Service (DFAS) personnel who are responsible for Army financial reporting should read this report. It discusses the adequacy of internal controls over the review and approval of adjusting journal vouchers made to Army accounting data during the third quarter of FY 2007.
Background. We performed this audit in support of Public Law 101-576, the “Chief Financial Officers Act of 1990,” November 15, 1990, as amended by Public Law 103the “Federal Financial Management Act of 1994,” October 13, 1994. This report is a result of work performed in support of the audits of the FY 2007 Army General Fund and Army Working Capital Fund Financial Statements.
The third quarter FY 2007 Army General Fund Financial Statements reported total assets of $304.4 billion, total liabilities of $70.0 billion, and budgetary resources of $268.4 billion. The third quarter FY 2007 Army Working Capital Fund Financial Statements reported total assets of $23.0 billion, total liabilities of $1.4 billion, and budgetary resources of $19.3 billion. Maintaining internal controls over the preparation and recording of accounting adjustments has been a long-standing problem at Defense Finance and Accounting Service Indianapolis Operations (referred to as “DFAS Indianapolis”).
Results. We reviewed the adjusting journal voucher review and approval process for 379 adjustments valued at $2.3 trillion made to Army accounting data in the first three quarters of FY 2007. DFAS Indianapolis officials did not properly review and approve 102 adjustments for $1.1 trillion made to the Army financial statement data prior to closing the accounting records. As a result, DFAS Indianapolis could process erroneous journal vouchers that can only be corrected at the request of the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, and would require the Assistant Secretary of the Army (Financial Management and Comptroller) to reconfirm the statements.
Management Comments and Audit Response. The Director of DFAS Indianapolis Operations generally concurred with the intent of all recommendations. The Director
stated that DFAS Indianapolis Operations will:
• create a standardized journal voucher log to readily identify journal vouchers above required approval thresholds and
• provide a journal voucher log that lists journal vouchers requiring approval and perform an internal review to ensure that the appropriate signatures are present on the journal vouchers.
DFAS Indianapolis personnel provided the journal voucher logs signed by senior DFAS Indianapolis and Army managers for the fourth quarter FY 2007. We reviewed the journal voucher logs and concluded that the internal DFAS review effectively ensured that journal vouchers were approved at the proper management level. During subsequent quarterly journal voucher reviews, we will confirm that the journal voucher logs identify journal vouchers above the required thresholds and that the logs are properly prepared and signed by senior managers. (See the Finding section for a discussion of management comments and the Management Comments section for the complete text of the comments.)
Management Comments Defense Finance and Accounting Service 13 Background We performed this audit in support of Public Law 101-576, the “Chief Financial Officers Act of 1990,” November 15, 1990, as amended by Public Law 103-356, the “Federal Financial Management Act of 1994,” October 13, 1994. The Department of Defense Office of Inspector General (DoD OIG) is required to audit the annual financial statements of the Department of Defense. This report is a result of work performed in support of the audit of the FY 2007 Army General Fund Financial Statements.
Defense Finance and Accounting Service Indianapolis Operations. The Defense Finance and Accounting Service Indianapolis Operations (referred to as “DFAS Indianapolis”) provides finance and accounting support to the Army.
Support includes maintaining accounting records for the Department of the Army (for example, departmental accounting records). DFAS Indianapolis also prepares financial statements using general ledger trial balances and financial data on the status of appropriations submitted by DoD field accounting activities and other sources.
Army Financial Statements. The third quarter FY 2007 Army Financial Statements consisted of the consolidated balance sheet, consolidated statements of changes in net position, combined statements of budgetary resources, statement of custodial activity, and supporting footnotes for the Army General Fund and the Army Working Capital Fund. The third quarter FY 2007 Army General Fund Financial Statements reported total assets of $304.3 billion, total liabilities of $70.0 billion, and budgetary resources of $268.4 billion. The third quarter FY 2007 Army Working Capital Fund Financial Statements reported total assets of $23.0 billion, total liabilities of $1.4 billion, and budgetary resources of $19.3 billion.
DFAS Financial Systems. DFAS Indianapolis uses three financial reporting systems to compile the Army financial statements. These systems are the Defense Departmental Reporting System-Audited Financial Statements (DDRS-AFS), the Chief Financial Officer Load and Reconciliation System-Audited Financial Statements (CLRS-AFS), and the Chief Financial Officer Load and Reconciliation System-Front End (CLRS-FE).
CLRS Journal Voucher Adjustments. DFAS Indianapolis uses CLRS-AFS and CLRS-FE to compile data from the field and provide a venue for processing errors and editing, balancing, reconciling, and adjusting balances. The final result is a set of trial balances that are reasonable, comprehensive, and suitable for financial reporting. DFAS Indianapolis uses CLRS adjustments to force general ledger accounting data to match the certified status data. The adjustments are recorded into a database that is used to record general ledger adjustments. This database, along with beginning balances and budgetary report data, is combined into a single file containing data needed for financial statement preparation.
CLRS converts this file to U.S. Government Standard General Ledger accounts, enabling preparation of the financial statements.
1 DDRS Journal Voucher Adjustments. DFAS Indianapolis uses DDRS-AFS to compile the Army General Fund and Army Working Capital Fund quarterly and annual financial statements and to make adjustments to accounting records.
DFAS Indianapolis accountants prepare journal voucher adjustments primarily to force general ledger accounting data to match budgetary accounting data, to force intragovernmental transactions between trading partners to match, and to correct discrepancies between sources of accounting data.
Journal Voucher Preparation. DFAS Indianapolis accountants prepare quarterly journal vouchers primarily for correcting entries and source entries.
Correcting entry journal vouchers correct errors identified during the reports review process. Source entry journal vouchers record accounting entries that, due to system limitations or timing differences, have not been otherwise recorded.
Source entry journal vouchers are generally used for month-end and year-end closing purposes. DoD Regulation 7000.14R, “Financial Management Regulation,” volume 6A, chapter 2, requires that all journal vouchers be supported with proper documentation, in either hard copy or electronic form.
This documentation must be sufficient for the approving official or auditors to clearly understand the reason for the journal voucher. DoD Regulation 7000.14R identifies which organizational levels within DFAS Indianapolis must approve journal vouchers.
Objective Our overall objective was to determine whether journal vouchers prepared during the first three quarters of FY 2007 were approved in a timely manner and at the organization levels specified in DoD Regulation 7000.14R. We reviewed the managers’ internal control program as it related to the audit objectives. See Appendix A for a discussion of the scope and methodology and for prior coverage related to the objective.
Review of Internal Controls We identified a material internal control weakness for DFAS Indianapolis as defined by DoD Instruction 5010.40, “Managers’ Internal Control Program Procedures,” January 4, 2006. Specifically, DFAS Indianapolis did not ensure that appropriate management officials reviewed and approved all journal vouchers adjusting Army accounting records in a timely manner. See the finding for further details on the material internal control weakness. A copy of the report will be provided to the senior official responsible for management controls at DFAS Indianapolis.
Journal Voucher Review Requirements Performance Accountability Report Schedule. In a memorandum dated March 19, 2007, the OUSD(C)/CFO issued the “Fiscal Year Financial Statement Performance Accountability Report Schedule” that lists the actions required to prepare the FY 2007 quarterly and annual financial statements and the required completion dates. The schedule establishes deadlines for the Components 1 to provide the quarterly financial statements and notes to the OUSD(C)/CFO. The submission deadlines are the 16th day following the close of the first three quarters and the 20th day following the close of the fiscal year. The OUSD(C)/CFO considers the financial statements and notes final on the submission deadline dates. After the submission deadlines, only adjustments requested by the OUSD(C)/CFO may be made to the financial statements. We refer to this process as closing the accounting records. The schedule also requires the ASA(FM&C) to provide signed confirmation letters to DFAS and the DoD Office of Inspector General, indicating that he reviewed and concurred with the quarterly and annual FY 2007 statements and notes submitted to the OUSD(C)/CFO.
Financial Management Regulation. DoD Regulation 7000.14R, volume 6A, chapter 2, “Financial Reports Roles and Responsibilities,” March 2002, prescribes the procedures for preparation, support, approval thresholds, and managerial oversight of journal vouchers. DoD Regulation 7000.14R states that a primary reason for the managerial review and approval of journal vouchers is to certify that supporting documentation is present and adequate. Table 1. shows the approval thresholds for adjusting journal vouchers.
1 The Components are DoD entities that prepare stand-alone financial statements.
DFAS Indianapolis Journal Voucher Policy. DFAS Indianapolis Standard Operating Procedure No. DA800, “Standard Operating Procedure for Journal Vouchers,” February 2006 (the SOP), provides instructions for preparing, approving, processing, and controlling journal voucher adjustments. This guidance includes the following.
FY 2007 Journal Vouchers We reviewed 379 Army General Fund and Army Working Capital Fund journal vouchers with total debits of $2.3 trillion processed by DFAS Indianapolis for the first three quarters of FY 2007. Of the 379 journal vouchers we reviewed, 177 were below the $500 million threshold and 202 were above. All of the
* Journal Voucher Included in the 102 journal vouchers that were not properly approved before the closure of the accounting records were 3 journal vouchers totaling $347.8 billion that were never approved by the appropriate senior managers. One of these journal vouchers was prepared to reduce the FY 2007 beginning balance of military equipment by $305.5 billion to match the FY 2006 ending balance.