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Reconciling Navy and Marine Corps Fund Balance with Treasury' which 
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United States Government Accountability Office: GAO: 

Report to Congressional Requesters: 

December 2011: 

DOD Financial Management: 

Ongoing Challenges with Reconciling Navy and Marine Corps Fund Balance 
with Treasury: 

GAO-12-132: 

GAO Highlights: 

Highlights of GAO-12-132, a report to congressional requesters. 

Why GAO Did This Study: 

In November 2010, the Department of Defense (DOD) Inspector General 
(IG) issued a disclaimer of opinion on the Department of the Navy’s 
financial statements because of pervasive, long-standing material 
internal-control weaknesses, including Fund Balance with Treasury 
(FBWT). In the federal government, an agency’s FBWT account is similar 
in concept to a corporate bank account. The difference is that instead 
of a cash balance, FBWT represents unexpended spending authority in 
appropriations. Because DOD relies heavily on budget information for 
day-to-day management decisions, in August 2009, the DOD Comptroller 
designated the Statement of Budgetary Resources (SBR) as an audit 
priority. FBWT will need to be auditable in order for the SBR to be 
reliable. GAO was asked to determine whether the Navy and the Marine 
Corps have implemented effective FBWT reconciliation processes. To 
assess these processes, GAO analyzed Navy and Marine Corps policies 
and procedures for FBWT reconciliations, and met with Navy, Marine 
Corps, and Defense Finance and Accounting Service (DFAS) officials. 
GAO also tested nongeneralizable samples of FBWT transactions and 
adjustments and reviewed associated supporting documentation. 

What GAO Found: 

Neither the Navy nor the Marine Corps have implemented effective 
processes for reconciling their FBWT. The Treasury Financial Manual 
and DOD’s Financial Management Regulation require DOD components to 
perform monthly FBWT reconciliations and maintain detailed 
reconciliation worksheets and documentation to provide an adequate 
audit trail for the resolution of differences. GAO’s Standards for 
Internal Control in the Federal Government states that the supervisory 
review and approval process is a key control activity for federal 
agencies. The Navy and the Marine Corps rely on the Defense Finance 
and Accounting Service located in Cleveland (DFAS-CL) to perform their 
FBWT reconciliation steps; however, GAO found numerous deficiencies in 
the FBWT process that impair the Navy’s and the Marine Corps’s ability 
to reconcile their FBWTs with Treasury records, including the 
following: 

* The Navy and Marine Corps rely on the data from Defense Cash 
Accountability System (DCAS) to reconcile their FBWT to Treasury’s 
records; however, they have not taken the necessary actions to ensure 
that the data are reliable. Specifically, DOD has not tested the 
application controls over DCAS since its implementation to determine 
if the system is processing data as intended. The Navy, the Marine 
Corps, and DFAS have identified a list of over 650 DCAS system change 
requests that needed to be addressed in order to correct DCAS data 
reliability and security problems or process required system updates; 
over 200 of these system change requests are deficiencies that affect 
audit readiness and 20 require immediate attention. 

* DFAS did not maintain adequate documentation for the 
nongeneralizable sample of items GAO tested to enable an independent 
evaluation of its efforts to research and resolve differences. In 
addition, there was no evidence of supervisory review and approval. 

* DFAS records forced-balance entries (plugs) to account for 
differences between Navy and Marine Corps appropriation balances and 
Treasury’s. 

DFAS is unable to reconcile the cash activity recorded in the Navy’s 
general ledger accounting systems to that recorded in DCAS. DFAS 
officials stated they acquired the Business Activity Monitoring (BAM) 
tool to perform this reconciliation; however, after 4 years of effort 
and $29 million, the BAM tool does not yet provide the information 
needed to identify and resolve the underlying causes of differences 
between DCAS and Navy general ledger systems. As of April 2011, there 
were more than $22 billion unmatched disbursements and collections 
affecting more than 10,000 lines of accounting. DOD IG officials 
stated they were performing substantive testing to confirm the balance 
of the Marine Corps FBWT as part of their audit of the Marine Corps’s 
Fiscal Year 2011 Statement of Budgetary Resources. This testing did 
not include internal control and did not provide assurance on the 
effectiveness of the Marine Corps’ FBWT reconciliation process. Navy, 
Marine Corps, and DFAS-CL officials agreed existing FBWT policies and 
procedures are inadequate. DFAS-CL and Navy officials stated the base 
realignment and closure changes 2006–2008 resulted in loss of 
experienced DFAS-CL personnel and that remaining staff have not 
received needed training. The Navy is developing a plan of action and 
milestones (POAM) to address weaknesses in audit readiness. 

What GAO Recommends: 

GAO is making six recommendations to improve Navy and Marine Corps 
policies and procedures to guide the FBWT reconciliation process, 
provide training to communicate these policies and procedures to 
staff, and resolve system deficiencies. DOD concurred with GAO’s 
recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-12-132]. For more 
information, contact Asif A.Khan at (202) 512-9869 or khana@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Navy and Marine Corps Processes for Reconciling FBWT Are Ineffective: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Objective, Scope, and Methodology: 

Appendix II: Comments from the Department of Defense: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Figure: 

Figure 1: Overview of the Navy and the Marine Corps FBWT 
Reconciliation Processes: 

Abbreviations: 

ADS: Automated Disbursing System: 

BAM: Business Activity Monitoring: 

DCAS: Defense Cash Accountability System: 

DCRM: Defense Check Reconciliation Module: 

DDRS-B: Defense Departmental Reporting System-Budgetary: 

DFAS: Defense Finance and Accounting Service: 

DFAS-CL: Defense Finance and Accounting Service-Cleveland: 

DOD: Department of Defense: 

DSSN: Disbursing Station Symbol Number: 

FBWT: Fund Balance with Treasury: 

FIAR: Financial Improvement and Audit Readiness: 

FMO: Office of Financial Operations: 

FMR: Financial Management Regulation: 

GOALS: Government On-Line Accounting Link: 

GWA: Government-Wide Accounting: 

IEEE: Institute of Electrical and Electronics Engineers: 

IG: Inspector General: 

IPAC: Intra-Governmental Payment and Collections: 

NDAA: National Defense Authorization Act: 

NERP: Navy Enterprise Resource Planning: 

NSMA: Navy Systems Management Activity: 

POAM: Plans of Action and Milestones: 

RFA: Accounting and Financial Systems Branch: 

SABRS: Standard Accounting, Budgeting, and Reporting System: 

STAR: Central Accounting System: 

STARS-FL: Standard Accounting and Reporting System-Field Level: 

STARS-HCM: Standard Accounting and Reporting System-Headquarters Level: 

SOP: standard-operating procedure: 

TCIS: Treasury Check Information System: 

UVT: User Validation Testing: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

December 20, 2011: 

Congressional Requesters: 

In November 2010, the Department of Defense (DOD) Inspector General 
(IG) issued a disclaimer of opinion[Footnote 1]on the Department of 
the Navy's fiscal year 2010 general fund[Footnote 2] financial 
statements because of pervasive long-standing material internal-
control weaknesses, including Fund Balance with Treasury (FBWT). 
[Footnote 3] In the federal government, an agency's FBWT account is 
similar in concept to a corporate bank account. The difference is that 
instead of a cash balance, FBWT represents remaining spending 
authority in appropriations.[Footnote 4] The DOD IG reported 
deficiencies associated with FBWT that included unmatched collections 
and disbursements,[Footnote 5] undistributed disbursements, and the 
Department of the Navy's inability to reconcile its fund records to 
the Department of the Treasury's records. The Navy and the Marine 
Corps, both of which are armed services that are components of the 
Department of the Navy, disclosed that they made unsupported 
reconciling adjustments to balance their FBWT records to Treasury's 
records. 

In August 2009, the DOD Comptroller designated the Statement of 
Budgetary Resources as an audit priority because DOD relies heavily on 
budget information for day-to-day management decisions. In May 2010, 
DOD revised its Financial Improvement and Audit Readiness (FIAR) plan 
[Footnote 6] to focus the department's efforts on two priorities, one 
of which is to improve the reliability of budgetary information and 
processes to obtain unqualified (clean) opinions on the Statement of 
Budgetary Resources. The Statement of Budgetary Resources is designed 
to provide information on authorized budgeted spending authority as 
outlined in the Budget of the United States Government (President's 
Budget), including budgetary resources, availability of budgetary 
resources, and how budgetary resources have been used.[Footnote 7] 
Assurance over the reliability of FBWT transactions and the resulting 
balances will be necessary in order for the Statement of Budgetary 
Resources to be auditable. Effective reconciliation of the FBWT 
account with Treasury accounts--a process similar in concept to a 
checkbook reconciliation--represents a key control over the 
reliability of FBWT. 

In May 2011, the Navy reported that it will have the capability to 
conduct FBWT reconciliations by the fourth quarter of fiscal year 
2012, in anticipation for having its Statement of Budgetary Resources 
audit ready in the first quarter of fiscal year 2013. However, the DOD 
IG's first-ever audit of the Marine Corps's General Fund Fiscal Year 
2010 Combined Statement of Budgetary Resources resulted in a 
disclaimer of opinion for several reasons, including the DOD IG's 
inability to audit FBWT because of the Marine Corps's inability to 
provide supporting documentation for accounting transactions and 
disbursements. Because the reliability of FBWT is a very basic element 
of effective and reliable financial management information, the DOD 
IG's findings raise concerns about whether DOD will be able to 
validate [certify] that its consolidated financial statements are 
ready for audit by September 30, 2017, as required by the National 
Defense Authorization Act (NDAA) for Fiscal Year 2010.[Footnote 8] 

This report responds to the request that we determine whether the Navy 
and the Marine Corps have implemented effective reconciliation 
processes for FBWT. To perform our assessment, we analyzed Navy and 
Marine Corps policies and procedures, and met with officials from the 
Navy, the Marine Corps, and the Defense Finance and Accounting Service 
(DFAS). To further understand the effect of identified design control 
weaknesses, we selected several nongeneralizable samples and reviewed 
supporting documentation. Because the Marine Corps is currently 
undergoing an audit of its fiscal year 2011 Statement of Budgetary 
Resources and the DOD IG plans to test its FBWT, we did not test the 
Marine Corps's reconciliation of FBWT transactions to its general 
ledger. We conducted our performance audit from October 2010 through 
October 2011 in accordance with generally accepted government-auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. Appendix I 
provides further details on our scope and methodology. 

Background: 

The United States Navy and the United States Marine Corps are both 
armed services and components of the Department of the Navy. The 
Navy's mission is to maintain, train, and equip combat-ready Naval 
forces capable of winning wars, deterring aggression, and maintaining 
freedom of the seas. The Marine Corps performs a multifaceted mission 
of air, land, and sea support to the Navy and across all U.S. joint 
forces. The Department of the Navy reported $225.6 billion in fiscal 
year 2010 total budgetary resources and $165.3 billion in net outlays 
(spending).[Footnote 9] The amounts reported include Marine Corps's 
budgetary resources of $37.5 billion and $32.1 billion in net outlays. 
[Footnote 10] The Navy and Marine Corps disbursing offices[Footnote 
11] are responsible for collecting and disbursing funds on behalf of 
the Department of the Navy as well as obtaining, maintaining, and 
providing sufficient supporting documentation for such transactions. 
Disbursing offices also are responsible for reporting disbursements 
and collections to the paying center--the Defense Finance and 
Accounting Service located in Cleveland, Ohio, (DFAS-CL). DFAS-CL 
provides accounting, disbursing, and financial reporting services and 
performs the FBWT reconciliation for the Navy and the Marine Corps. 

Navy and Marine Corps Accounting Process: 

FBWT account reflects the available budget spending authority of 
federal agencies. Collection and disbursement activity increase or 
decrease the balance in this account. Navy and Marine Corps accounting 
processes for collections and disbursements are complex, involving a 
large volume of transactions that are handled by several disbursing 
and accounting offices and DFAS personnel. The accounting process for 
collections and disbursements begins when military commanders or other 
unit managers or their designees deposit collected funds or authorize 
a payment. These personnel submit deposit tickets to their disbursing 
offices to prepare collection vouchers for collections, such as fees 
collected by military hospitals. For disbursement transactions, 
payment authorization information is entered by the program and 
operations personnel into the appropriate DOD entitlement system, such 
as STARS-One Pay for Navy vendor payments. The entitlement system 
certifies the payment files and passes the information to the 
appropriate Disbursing System, such as the DOD's Automated Disbursing 
System (ADS). The Disbursing System initiates the payment via the 
Federal Reserve Bank and produces a daily statement of accountability. 
The disbursing officers input the daily statement of accountability 
and the collections and disbursements transaction level data daily 
into the Defense Cash Accountability System (DCAS), which feeds this 
information into the Navy's and the Marine Corps's general ledger 
accounting systems.[Footnote 12] At month-end, DFAS-CL generates the 
Statements of Transactions (Standard Form 1220) and Statement of 
Accountability (Standard Form 1219) reports from DCAS and provides 
them to the Department of Treasury to report Navy and Marine Corps 
cash collections and disbursements, which the Treasury uses to 
generate the Statements of Differences by itemizing differences 
between their records and the information reported by the agencies. 
The Statement of Differences is then used by the agencies as part of 
their FBWT reconciliation. 

FBWT Reconciliation Process: 

Reconciling FBWT activity records with Treasury records--a process 
similar to reconciling a check book to a bank statement--helps 
determine amounts spent as well as unexpended balances and is 
important to funds control. DOD's Financial Management Regulation 
(FMR) notes that reconciliation is a key control for maintaining the 
accuracy and reliability of the entity's FBWT records.[Footnote 13] 
The FMR defines reconciliation as a process that compares two sets of 
records (usually the balances of two accounts) and identifies, and 
explains the differences between the records or account balances. 
Differences, or reconciling items, may be caused by the timing of 
transactions, an invalid line of accounting, or insufficient detail. 
The FMR states that reconciliation is not complete until all 
differences are identified, accountability is assigned, differences 
are explained, and appropriate adjustments are made to records. 
[Footnote 14] Effective reconciliations are also important in 
preventing entity disbursements from exceeding appropriated amounts 
and providing an accurate measurement of the status of available 
budgetary resources.[Footnote 15] 

DFAS-CL executes the following five steps to perform the Navy and the 
Marine Corps monthly FBWT reconciliations: 

1. Defense Cash Accountability System (DCAS) To Treasury's Forms. 
[Footnote 16] This reconciliation step is intended to ensure that the 
transaction-level detail for cash activity recorded in DCAS (i.e., 
collections and disbursements) and reported on the Statement of 
Transactions (Standard Form 1220) is in balance with the summary-level 
cash activity data reported on the Statement of Accountability 
(Standard Form 1219). DFAS-CL relies on an automated control in DCAS 
to ensure that the 1219 and 1220 Statements are in balance before 
transmitting the forms to Treasury. 

2. DCAS to Treasury's Governmentwide Accounting (GWA) System. This 
reconciliation step is intended to ensure that the cash activity 
records are reliable (i.e., complete and accurate). DFAS-CL accesses 
Treasury's GWA and downloads the Agency Location Code Activity Report, 
which provides comparable transaction information to the Standard Form 
1220 by line of accounting.[Footnote 17] DFAS-CL compares the Treasury 
report to the Standard Form 1220 generated in the first step of the 
reconciliation process to identify differences, if any, that will 
require resolution. 

3. Defense Departmental Reporting System-Budgetary (DDRS-B)[Footnote 
18] to GWA System. This reconciliation step is intended to ensure that 
the appropriation balances are reliable. DFAS-CL accesses DDRS-B and 
generates the Standard Form 133, Report on Budget Execution and 
Budgetary Resources (which contains appropriation and fund account 
summary data).[Footnote 19] DFAS-CL accesses Treasury's GWA system and 
downloads the Account Statement Report, which provides the balance for 
each line of accounting. DFAS-CL compares the reports to identify 
differences, if any, that will require resolution. 

4. Statement of Differences Resolution. This reconciliation step is 
intended to resolve differences identified by Treasury between the 
military services (i.e., Navy and the Marine Corps), and financial 
institutions' and other agencies' reporting for checks issued, 
[Footnote 20] deposits-in-transit,[Footnote 21] and Intra-Governmental 
Payment and Collections (IPAC).[Footnote 22] Treasury mails DFAS-CL a 
hard copy of the Statement of Differences for checks issued. DFAS-CL 
accesses the Government On-Line Accounting Link System (GOALS) 
[Footnote 23] and downloads the Statement of Differences for the 
deposits-in-transit and IPAC transactions. DFAS-CL coordinates with 
the various Navy and Marine Corps disbursing offices, which are 
responsible for researching and resolving any differences identified. 
The Disbursing Offices are also responsible for maintaining all 
supporting documentation. 

5. DCAS to General-Ledger Accounting Systems. This reconciliation step 
is intended to ensure that the cash activity at the transaction level 
recorded in DCAS has been captured in the general-ledger accounting 
systems. For the Navy, DFAS-CL uses the Business Activity Monitoring 
(BAM) tool[Footnote 24] to upload and compare cash collections and 
disbursements recorded in DCAS and the general-ledger accounting 
systems by line of accounting. DFAS-CL uses BAM to research and 
resolve identified differences, if any. The Marine Corps's Accounting 
and Financial Systems Branch (RFA) runs a query in the general-ledger 
system--Standard Accounting, Budgeting, and Reporting System (SABRS)--
that generates a report that identifies differences between the daily 
cash activity recorded in DCAS and SABRS. The Marine Corps forwards 
the report to DFAS-CL to research and resolve any identified 
reconciliation differences. 

Figure 1 provides an overview of the Navy and Marine Corps FBWT 
reconciliation processes. 

Figure 1: Overview of the Navy and the Marine Corps FBWT 
Reconciliation Processes: 

[Refer to PDF for image: illustration] 

The illustration depicts the following systems and direction of 
reports between systems. 

Navy systems: 
STARS-HCM - Standard Accounting and Reporting System-—Headquarters-
Level Accounting System; 
STARS-FL - Standard Accounting and Reporting System-—Field Level; 
NERP - The Navy Enterprise Resource Planning system; 
DCRM - Defense Check Reconciliation Module. 

Marine Corps systems: 
SABRS - Standard Accounting, Budgeting, and Reporting System; 
DCRM - Defense Check Reconciliation Module. 

DFAS-CL systems: 
DCAS - Defense Cash Accountability System; 
DDRS-B - Defense Departmental Reporting System-—Budgetary; 
BAM - Business Activity Monitoring. 

Treasury systems: 
STAR - Central Accounting System; 
GWA - Government-Wide Accounting System; 
IPAC - Intra-Governmental Payment and Collections System; 
GOALS - Government On-Line Accounting Link System; 
TCIS -Treasury Check Information System
  
Reconciliation occurs between the following: 
DCAS and STAR[A]; 
DCAS and GWA; 
GWA and DDRS-B; 
STAR[A] and TCIS{b}; Financial Institutions. 

Source: GAO analysis of DFAS-CL, Navy, Marine Corps, and Treasury 
information.  

[A] STAR--Treasury's accounting and reporting system--is used to 
record cash collections and disbursements activity reported by the 
Navy and Marine Corps, deposit transactions reported by financial 
institutions via CA$HLINK II, and interagency transactions reported 
through the IPAC system. 

[B] TCIS is used to record all U.S. Treasury checks issued by the Navy 
and Marine Corps, and the clearance of those checks by the financial 
institutions. 

[End of figure] 

Navy and Marine Corps Processes for Reconciling FBWT Are Ineffective: 

Neither the Navy nor the Marine Corps have implemented effective 
processes for reconciling their FBWT. We found numerous deficiencies 
in the 5-step process that impair their abilities to reconcile their 
FBWT with Treasury records. DOD's Financial Management Regulation 
(FMR) and the Treasury Financial Manual require every Defense 
component with FBWT accounts to perform detailed monthly 
reconciliations at a level of detail sufficient for specific 
identification of differences to establish that the entity's FBWT 
general ledger accounts and the Treasury control totals are accurately 
stated.[Footnote 25],[Footnote 26] The FMR further requires DOD 
components to ensure that written standard-operating procedures are 
put into place to direct and document that a detailed FBWT 
reconciliation process is operating effectively.[Footnote 27] The FMR 
also states that a "forced-balance entry"[Footnote 28] is not an 
adequate reconciliation and requires DOD components to maintain 
detailed reconciliation worksheets and documentation to provide an 
adequate audit trail.[Footnote 29] Further, the GAO's Standards for 
Internal Control in the Federal Government state the supervisory 
review and approval process is a key control activity for federal 
agencies.[Footnote 30] Without effective reconciliations of FBWT 
collection and disbursement activity, the amount of funds available 
for expenditure may contain material misstatements; related accounting 
information may also be misstated, and the Department of the Navy is 
at increased risk of Antideficiency Act violations.[Footnote 31] 
Specifically, we found that: 

* The Navy and Marine Corps rely on the data from DCAS to reconcile 
their FBWT to Treasury's records; however, they have not taken the 
necessary actions to ensure that the data are reliable. Specifically, 
DOD has not tested the application controls over DCAS since its 
implementation to determine if the system is processing data as 
intended. 

* DFAS-CL did not maintain adequate documentation for the 
nongeneralizable sample of items we tested to enable an independent 
evaluation of its efforts to research and resolve differences. There 
was also no evidence of supervisory review and approval. 

* DFAS-CL currently records forced-balance entries to account for any 
differences between the Navy's and Marine Corps's appropriations 
balances to those reported by Treasury. These types of adjustments, 
made without supporting documentation but to force items into balance, 
are commonly referred to as "plugs" and can mask much larger problems 
in the accounting data. 

* DFAS-CL is currently unable to reconcile the cash activity recorded 
in the Navy's general-ledger accounting systems to that recorded in 
DCAS. The DOD IG officials stated that they were performing 
substantive testing to confirm the balance of the Marine Corps's FBWT 
as part of the fiscal year 2011 audit of the Marine Corps's Statement 
of Budgetary Resources. However, this testing did not include internal 
control and did not provide assurance on the effectiveness of the 
Marine Corps's FBWT reconciliation process. 

We also found that existing policies and procedures did not contain 
detailed information on the roles and responsibilities of 
organizations and personnel and the process for identifying, 
researching, and resolving discrepancies, including the required 
supporting documentation. The policies and procedures also did not 
require supervisory review and approval of reconciliation efforts and 
results. Further, with the exception of the recently issued Marine 
Corps procedures,[Footnote 32] there was no evidence that the policies 
and procedures being followed had been reviewed and approved by 
management. 

Navy, Marine Corps and DFAS-CL officials agreed that existing policies 
and procedures are inadequate. DFAS-CL and Navy officials also stated 
that the base realignment and closure changes in 2006 through 2008 
resulted in a loss of experienced DFAS-CL personnel and that the 
remaining staff have not received the needed training. The standards 
for internal control state that training is key for management to 
ensure that staff maintain a level of competence that allow them to 
accomplish their assigned duties. Officials from the Department of the 
Navy's Office of Financial Operations (FMO) stated that they are 
currently developing a Plans of Action and Milestones (POAM) to 
address weaknesses that affect the Navy's audit readiness, including 
reconciling the Navy's FBWT records. FMO officials stated that they 
plan to include in the POAM a requirement for the components to 
develop needed policies and procedures for the reconciliation of FBWT. 
The Navy expects to complete the initial version of its POAM by 
December 2011. With regard to DCAS testing and problems, DFAS-CL 
officials stated that the DOD Inspector General was reviewing the 
system as part of its audit of the Marine Corps Statement of Budgetary 
Resources. However, the IG stated that it was only focused on the 
design of the system and documented policies and procedures. As a 
result, its work would not be sufficient to assess the reliability of 
the system's controls and whether they are operating as intended. 

The following paragraphs provide more detail about the deficiencies we 
found in the 5-step FBWT reconciliation process. 

Step 1: DCAS. The Navy's and the Marine Corps's ability to effectively 
reconcile their FBWT accounts is dependent upon the reliability (i.e., 
completeness and accuracy) of the data in DCAS. However, the 
reliability of the data in DCAS is questionable due to the lack of 
system testing and extensive system deficiencies. The Navy, the Marine 
Corps and DFAS rely upon the application controls in DCAS to ensure 
that the data are reliable. Although changes have been made to the 
system, the application controls[Footnote 33] in DCAS have not been 
tested since the system was implemented. Therefore, the Navy, the 
Marine Corps, and DFAS do not have reasonable assurance that the 
system controls they are relying on to ensure that the data in DCAS 
are reliable and are working as intended. In addition, as of April 
2011, the Navy, the Marine Corps, and DFAS had identified a list of 
672 system change requests that needed to be addressed in order to 
correct DCAS' data reliability and security problems or process 
required system updates; 362 of which were submitted by the Marine 
Corps and DFAS-CL. Navy and DFAS officials stated that over 200 of the 
identified system change requests are deficiencies that affect audit 
readiness and identified the top 20 deficiencies that required 
immediate attention. For example, DCAS currently allows certain users 
to modify the dollar amount of previously posted transactions and 
other users to post transactions to invalid or closed appropriation 
accounts, and these transactions are being forwarded to Treasury for 
processing. In addition, DCAS users' roles and responsibilities have 
not been defined thus resulting in segregation-of-duties issues. 
However, the officials stated that a time frame for addressing the top 
20 issues had not yet been established. 

Step 2: DCAS to Treasury's GWA System. Our review of 3 reconciliation 
worksheets for October through December 2010 identified several 
deficiencies. For example, we found that the reconciliation 
spreadsheets showed the wrong journal voucher number for 2 of the 
adjustments and did not provide the journal voucher numbers for 
another 6 adjustments. From these reconciliation worksheets, we 
selected 15 journal vouchers that were created by DFAS-CL to resolve 
reconciliation differences and reviewed the related supporting 
documentation. Of the 15 journal vouchers, we found that only 2 were 
adequately supported. For the 13 unsupported journal vouchers, we 
found that: 

* Ten journal vouchers did not have underlying support justifying the 
adjustment made to correct disbursement transactions. In one instance, 
it was initially determined that the correction may have caused an 
Antideficiency Act violation, which must be investigated and the 
results of the investigation documented.[Footnote 34] DFAS-CL 
officials stated that they performed an investigation and determined 
that this was an accounting error, not an Antideficiency Act 
violation. However, DFAS-CL officials were unable to provide adequate 
documentation supporting their conclusions or that the required 
investigation was performed. 

* Three journal vouchers were made to comply with Treasury's guidance 
to clear transactions recorded in suspense accounts within 60 business 
days.[Footnote 35] DFAS-CL employees told us that they routinely 
transfer disbursement transactions from suspense to canceled or 
invalid appropriation accounts to meet the 60-day metric and then 
transfer them back to suspense accounts the following month until such 
time as the issue is actually resolved. 

Step 3: DDRS-B to Treasury's GWA System. DFAS-CL posts unsupported 
adjustments when differences occur in order to make balances agree. 
During fiscal year 2010, DFAS-CL processed a total of $22.1 million in 
disbursement adjustments and $952.6 million in collection adjustments 
to force Navy account balances in DDRS-B to agree with Treasury GWA 
system balances. Also during fiscal year 2010, DFAS-CL processed $32.1 
million in disbursement adjustments and $22.9 million in collection 
adjustments to force Marine Corps account balances in DDRS-B to agree 
with GWA system balances. DFAS-CL officials stated that the 
discrepancies usually result from timing differences related to the 
posting of the transactions. However, these officials also stated that 
they do not confirm whether these were timing differences or actual 
errors. 

Step 4: Statement of Differences Resolution. The supporting 
documentation maintained by DFAS-CL and Navy and Marine Corps 
disbursing offices does not provide a clear audit trail as to the 
cause and resolution of the differences identified by Treasury. DFAS-
CL officials stated that there is no supervisory review and approval 
of the work performed to research and resolve the differences. For 
example, DFAS-CL maintains reconciliation worksheets; however, these 
reconciliation worksheets do not provide detailed information on the 
underlying cause of the differences or the actions taken to resolve 
the differences as required by the DOD FMR.[Footnote 36] DFAS-CL does 
not obtain from the Navy and Marine Corps disbursing officers the 
initial documents (e.g., copies of canceled checks or deposit tickets) 
that resulted in the original transaction to complete its records. 
Instead, DFAS-CL primarily maintains email correspondence from the 
disbursing officers stating that the differences were resolved or will 
be resolved in the next month's Standard Form 1219 report by 
processing an adjustment. Based on our field work at five disbursing 
offices, we also found that the disbursing offices lack an adequate 
trail for the resolution of the statement of differences. While the 
disbursing officers generally maintained the original documents (e.g., 
copies of canceled checks or deposit tickets), they did not maintain 
documentation showing the underlying causes and the actions taken to 
resolve the differences. 

Step 5: DCAS to General Ledger Accounting System(s). The Navy has not 
been able to reconcile the data in its general ledger accounting 
systems to DCAS. DFAS officials stated that they acquired the Business 
Activity Monitoring (BAM) tool to reconcile the Navy's FBWT. DFAS-CL 
is in the process of implementing the first phase[Footnote 37] of the 
BAM tool to reconcile collection and disbursement information by 
appropriation from DCAS to the general ledger information uploaded to 
the BAM tool for three of the four general ledger accounting systems. 
[Footnote 38] DFAS officials stated that after 4 years of effort, they 
had spent nearly $29 million to modify BAM, including about $13 
million to facilitate Navy's FBWT reconciliations. DFAS officials 
stated that there have been schedule delays in implementing the BAM 
tool, which have affected the functionality currently provided by the 
tool. For example, as of April 2011, there were over $22 billion of 
unmatched transactions that were either collections or disbursements 
affecting more than 10,000 lines of accounting identified in the BAM 
tool without the information needed to identify and resolve the 
underlying causes of the differences between DCAS and the Navy's 
general-ledger accounting systems. 

In our efforts to evaluate the implementation of the BAM tool, we 
found that DFAS did not have documentation of the system[Footnote 39] 
and user validation[Footnote 40] testing of the BAM tool. DFAS 
officials stated that they performed system and user validation 
testing of the BAM tool to help ensure that it would provide the 
required reconciliation functionality; however, they did not maintain 
supporting documentation for the testing plan, design, procedures, or 
results, as recommended by the Institute of Electrical and Electronics 
Engineers (IEEE).[Footnote 41] The standards for internal control also 
require agencies to clearly document significant events and have the 
documentation readily available for examination.[Footnote 42] Because 
of the lack of supporting documentation, DFAS does not have evidence 
that an adequate testing methodology was designed and followed and 
that any deficiencies identified during testing were addressed. In 
addition, we found that the approved BAM tool system requirements 
cannot be traced to the system requirements that were tested during 
user validation testing. The BAM tool program manager agreed and 
stated that DFAS will need to develop a requirements-traceability 
matrix to map approved system requirements to the requirements tested. 
Because of the lack of traceability, DFAS-CL does not have reasonable 
assurance that all the BAM tool system requirements were tested and 
that the tool will function as intended. 

As stated earlier, DOD IG reported during the fiscal year 2010 
Statement of Budgetary Resources audit effort that it was not able to 
audit the Marine Corps's FBWT because of the lack of a FBWT 
reconciliation. DOD IG officials stated that they were performing 
substantive testing to confirm the balance of the Marine Corps's FBWT 
as part of the fiscal year 2011 Statement of Budgetary Resources 
audit. However, this testing did not include internal control testing 
and did not provide assurance on the effectiveness of the Marine 
Corps's FBWT reconciliation process. 

Conclusions: 

The Navy and the Marine Corps recognize the importance of reconciling 
their FBWT to improve their budgetary information and obtain an audit 
opinion on their Statement of Budgetary Resources, which is one of the 
main priorities of DOD's current audit readiness strategy. However, 
the lack of (1) an effective FBWT reconciliation process, (2) adequate 
policies and procedures to guide the FBWT reconciliation processes, 
and (3) assurance over the reliability of the data in DCAS, all 
increase the risk that misstatements could occur in Navy and Marine 
Corps FBWT accounts and other related financial information and not be 
timely detected and addressed. These deficiencies also increase the 
risk of Antideficiency Act violations. Specifically, as of April 2011, 
the Navy and DFAS officials stated that they had identified over 200 
deficiencies in DCAS related to audit-readiness problems. Navy 
officials stated that they are developing a plan to address the 
deficiencies affecting the Navy's ability to achieve audit readiness, 
including reconciling their FBWT. Considering the deficiencies 
identified in this report can help inform these officials as they 
develop and implement their plan. If the Navy and the Marine Corps are 
unable to effectively reconcile their FBWT, the Department of the 
Navy's ability to assert audit readiness for its Statement of 
Budgetary Resources by the first quarter of fiscal year 2013 could be 
jeopardized. 

Recommendations: 

We are making six recommendations to the Secretary of Defense to 
implement processes to reconcile the Navy's and the Marine Corps's 
FBWT. 

To help ensure that the Navy and Marine Corps implement effective FBWT 
reconciliation processes, we recommend that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) and the Secretary 
of the Navy to take the following actions: 

* develop and implement policies and standard-operating procedures to 
guide the FBWT reconciliation process--including the assignment of 
specific roles and responsibilities, supervisory review and approval, 
and documentation requirements--and: 

* develop and implement a training curriculum for staff performing 
FBWT reconciliations to communicate the policies and procedures. 

To ensure that the data in DCAS are reliable, we recommend that the 
Secretary of Defense direct the Director of the Defense Logistics 
Agency to: 

* perform periodic testing of the system and timely address any 
deficiencies identified; and: 

* prioritize the known deficiencies and address those that affect 
audit readiness, including the ability to reconcile FBWT accounts. 

To ensure that the BAM tool system and user validation testing are 
adequately documented, we recommend the Under Secretary of Defense 
(Comptroller) direct the Director of the DFAS to: 

* maintain supporting documentation for the BAM tool system 
requirements and user-validation testing--including the methodology, 
performance, and detailed results of the testing--and: 

* develop and maintain a traceability matrix to track approved BAM 
tool system requirements to those tested by the contractor to ensure 
that all requirements are tested. 

Agency Comments and Our Evaluation: 

We received written comments from the DOD Deputy Chief Financial 
Officer, which are reprinted in appendix II. In commenting on the 
report, the Deputy Chief Financial Officer concurred with the six 
recommendations in our draft report and also stated the view that the 
Marine Corps is further ahead in its Fund Balance with Treasury (FBWT) 
reconciliation process than the report suggests. Specifically, he 
commented that the independent auditors found the FBWT reconciliation 
process and universe of transactions to be satisfactory and began 
testing the balance for fiscal year 2011. 

During fiscal year 2011, the Marine Corps demonstrated some progress 
on its FBWT reconciliation, as recognized in our report and in the 
Deputy Chief Financial Officer's letter. For example, the Marine Corps 
developed a standard-operating procedure (SOP) for its FBWT 
reconciliation. However, as discussed in our report, we found that the 
SOP lacked certain key reconciliation controls, such as the 
documentation required to support the resolution of differences. We 
also reported deficiencies in the Marine Corps reconciliation, such as 
the lack of reliability of the DCAS system, which is used for 
recording daily cash activity, and deficiencies in documentation 
supporting the reconciliation steps. 

As part of the Marine Corps fiscal year 2011 audit of the Statement of 
Budgetary Resources, the auditor reported that it was comfortable with 
the completeness of the universe of FBWT transactions and so could 
begin detailed testing. However, as discussed in our report, the 
auditor could not test the effectiveness of the FBWT reconciliation 
controls due to the inadequate procedures and lack of documentation. 

On November 22, 2011, the DOD IG issued a disclaimer of opinion for 
the Marine Corps fiscal year 2011 Statement of Budgetary Resources 
because of the lack of relevant and timely supporting documentation. 

We are encouraged by the Department of the Navy's efforts to develop a 
plan to address weaknesses related to the audit readiness and its 
projection that it will achieve FBWT auditability by fiscal year 2013. 

We are sending copies of this report to the Secretary of Defense, the 
Under Secretary of Defense (Comptroller/Chief Financial Officer), the 
Secretary of the Navy; the Assistant Secretary of the Navy for 
Financial Management and Comptroller; the Commandant of the Marine 
Corps; Assistant Deputy Commandant, Programs and Resources Department 
of the Marine Corps; the Directors of DFAS, DFAS-Cleveland, DFAS-
Indianapolis; and appropriate congressional committees. In addition, 
the report is available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-9869 or khana@gao.gov. Contact points for our 
Office of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix III. 

Signed by: 

Asif A. Khan: 
Director, Financial Management and Assurance: 

List of Congressional Requesters: 

The Honorable Thomas R. Carper:
Chair:
The Honorable Scott P. Brown:
Ranking Member:
Subcommittee on Federal Financial Management, Government Information, 
Federal Services, and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate: 

The Honorable Claire McCaskill:
Chair:
Subcommittee on Contracting Oversight:
Committee on Homeland Security and Governmental Affairs:
United States Senate: 

The Honorable Tom Coburn:
Ranking Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate: 

The Honorable John McCain:
United States Senate: 

The Honorable Todd Platts:
Chairman:
The Honorable Edolphus Towns:
Ranking Member:
Subcommittee on Government Organization, Efficiency and Financial 
Management:
Committee on Oversight and Government Reform:
House of Representatives: 

[End of section] 

Appendix I: Objective, Scope, and Methodology: 

To determine whether the Navy and the Marine Corps have effective Fund 
Balance with Treasury (FBWT) reconciliation processes, we analyzed 
Navy and Marine Corps policies and procedures using relevant criteria, 
including the Department of Defense's (DOD) Financial Management 
Regulation, the Department of the Treasury's Financial Manual, and 
GAO's Standards for Internal Control in the Federal Government. 
[Footnote 43] To further understand the effect of identified design 
control weaknesses, we selected several nongeneralizable samples from 
the Department of the Navy's FBWT transactions and adjustments, and 
reviewed supporting documentation, such as journal vouchers, copies of 
canceled checks, and deposit tickets. Because the Marine Corps was 
undergoing an audit of its fiscal year 2011 Statement of Budgetary 
Resources and the DOD IG planned to test its FBWT, we did not test the 
Marine Corps's reconciliation of FBWT transactions to the general 
ledger. Specifically, we obtained and reviewed: 

* the reconciliation worksheets for October through December 2010 for 
the Defense Cash Accountability System (DCAS) to Treasury's Government-
Wide Accounting System reconciliation step (Based on our review of the 
reconciliation worksheets, we selected five journal vouchers related 
to adjustments from each month and requested supporting documentation. 
We focused on the first 3 months of fiscal year 2011 since the IG had 
recently conducted an audit of the Department of the Navy's fiscal 
year 2010 financial statements.) 

* the reconciliation worksheets and journal vouchers for September 
2010 fiscal year-end and February 2011, which was the most recently 
completed reconciliation at the time of our walkthrough for the 
Defense Departmental Reporting System-Budgetary to Treasury's 
Government-Wide Accounting System reconciliation step. (Because the 
Defense Finance and Accounting Service (DFAS) resolves identified 
differences by posting forced-balance entries (plugs), we did not 
review reconciliation spreadsheets and journal vouchers for additional 
months); and: 

* the Statement of Differences reports for the months of October 2010 
through March 2011 because of aged differences identified by Treasury 
for checks issued and the large volume of transactions for deposits. 
We selected and reviewed available supporting documentation maintained 
by DFAS located at Cleveland (DFAS-CL) for discrepancies identified 
for 45 checks issued and 10 deposits. Because DFAS-CL officials 
informed us that the supporting documentation was maintained by the 
Navy and Marine Corps disbursing offices, we selected and reviewed 
available supporting documentation for an additional 27 checks issued 
and 61 deposits for the same period from five disbursing offices. We 
selected the three Navy disbursing offices located at DFAS-CL 
(disbursing location 8522) and Norfolk, Virginia, (disbursing 
locations 6870 and 8371) because, according to the Navy Disbursing 
Officer in Norfolk, these three disbursing offices accounted for 
approximately 93 percent of the Navy's disbursements and collections. 
In addition, we selected two Marine Corps disbursing offices located 
at DFAS-CL (disbursing location 6102) and Camp LeJeune, North 
Carolina, (disbursing location 6092) because they are two of the four 
largest Marine Corps disbursing stations. 

To determine if the application controls[Footnote 44] over the DCAS 
[Footnote 45] were operating as intended, we interviewed Business 
Transformation Agency[Footnote 46] officials--the system owner--to 
obtain an understanding of the DCAS application controls related to 
the Treasury reporting operations and the extent to which DOD has 
tested these controls. In addition, we obtained and reviewed the 
system change requests to determine whether any of the problems 
identified would significantly affect DFAS' ability to reconcile the 
Navy's and Marine Corps's FBWT records. 

To determine the implementation status of the Business Activity 
Monitoring tool,[Footnote 47] we obtained and reviewed the managed 
services contract, Functional Requirements Document, and Initial 
Operating Capability[Footnote 48] reports, and available documentation 
on user validation tests.[Footnote 49] We interviewed DFAS officials 
located in Cleveland and Indiana, including the Business Activity 
Monitoring program manager regarding the implementation status, the 
scope and results of user validation tests, and limitations in the 
tool's functionality. 

We met with Navy, Marine Corps, and DFAS officials throughout our work 
to assess FBWT reconciliation processes. We conducted our performance 
audit from October 2010 through October 2011 in accordance with 
generally accepted auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based 
on our audit objectives. We believe the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

[End of section] 

Appendix II: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
Comptroller: 
1100 Defense Pentagon: 
Washington, DC 20301-1100: 

December 6, 2011: 

Mr. Asif A. Khan: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Khan: 

This is the Department of Defense (DoD) response to the Government 
Accountability Office (GAO) draft report GAO-12-132, "DoD Financial 
Management: Ongoing Challenges with Reconciling Navy and Marine Corps 
Fund Balance with Treasury,” released November 2, 2011 (GAO Code 
198658). Our responses to the recommendations and our additional 
detailed comments are enclosed with this letter. The Department is 
already implementing many of the actions noted in our response. 

While we agree with the recommendations in your draft report, the U.S. 
Marine Corps (USMC) is further ahead in its Fund Balance with Treasury 
reconciliation process than the report suggests. The USMC is able to 
account for all appropriations balances in the accounting system and 
all reconciling items with Treasury. 

We appreciate the opportunity to provide comments and trust you will 
consider them in developing your final report. We look forward to your 
continued cooperation and dialogue toward our common goal of improving 
financial management and systems throughout the Department of the 
Navy, and ultimately throughout the Department of Defense. My point of 
contact for this effort is Mr. Joseph Quinn. He can be reached at 571-
256-2678 or at joseph.quinn@osd.mil. 

Sincerely, 

Signed by: 

Mark E. Easton: 
Deputy Chief Financial Officer: 

Enclosures: As stated: 

cc:
Assistant Secretary of the Navy for Financial Management and 
Comptroller: 
Director, Defense Finance and Accounting Service: 

[End of letter] 

GAO Draft Report Dated November 2, 2011: 
GAO-12-132 (GAO Code 198658): 

"DOD Financial Management: Ongoing Challenges With Reconciling Navy 
And Marine Corps Fund Balance With Treasury" 

Department Of Defense Responses To The GAO Recommendations: 

Recommendation 1: That the Secretary of Defense direct the Secretary 
of the Navy to take the following actions: develop and implement 
policies and standard operating procedures to guide the FBWT 
reconciliation process, including the assignment of specific roles and 
responsibilities, supervisory review and approval, and documentation 
requirements. 

DoD Response: Concur. On behalf of the Secretary of Defense, the Under 
Secretary of Defense (Comptroller)/Chief Financial Officer 
(USD(C)/CFO) directed the U.S. Marine Corps (USMC) to develop Fund 
Balance with Treasury (FBWT) policies and standard operating 
procedures (SOPs) to guide the current reconciliation process for the 
USMC that are in use today.
The USMC policies, SOP, and FBWT reconciliation process were evaluated 
and accepted by Grant Thornton (GT), the Independent Public Auditor 
(IPA) firm supporting the Department of Defense Inspector General 
audit of the USMC Fiscal Year (FY) 2011 Statement of Budgetary
Resources (SBR). The USMC policies and operating procedures include 
the assignment of specific roles and responsibilities, supervisory 
review and approval, and document requirements. 

The USMC demonstrated to the independent auditors an effective process 
for FBWT reconciliation and has delivered the detailed universe of 
transactions to validate the financial statement amounts. The auditors 
found the FBWT reconciliation and universe of transactions to be 
satisfactory and commenced sample testing of the balance for FY 2011. 

The Department of the Navy (DON) and the Defense Finance and 
Accounting Service (DFAS), its service provider, are working to 
implement a fully automated FBWT reconciliation process and associated 
SOPs leveraging the successes achieved by the USMC through the FY 2011 
SBR audit engagement. The DON projects achieving an independently 
auditable DON FBWT reconciliation process, in coordination with DFAS, 
by the second quarter of FY 2013. The DON will leverage the 
documentation developed by the USMC to prepare and strengthen
DON-wide policies and SOPs to guide the FBWT reconciliation process, 
including the assignment of specific roles and responsibilities, 
supervisory review and approval, and documentation requirements. The 
DON expects to have this completed by the second quarter FY
2013. The DON integrated Plan of Actions and Milestones (POAM) 
identifies action items to ensure these requirements are addressed. 

Recommendation 2: That the Secretary of Defense direct the Secretary 
of the Navy to take the following actions: develop and implement a 
training curriculum for staff performing FBWT reconciliations to 
communicate the policies and procedures. 

DoD Response: Concur. On behalf of the Secretary of Defense, the 
USD(C)/CFO has directed the DON to work closely with DFAS, its 
principal service provider, to assure proper training for staff across 
the DON, its Commands, and its service providers at each level of the 
fund execution recording and reporting processes. The DON projects 
completion for the development and implementation of a training 
curriculum for staff performing DON FBWT reconciliations, in 
coordination with DFAS, by the third quarter of FY 2013. The DON 
integrated POAM identifies action items to ensure these requirements 
are addressed and support a sustainable and independently auditable 
business process. 

Recommendation 3: That the Secretary of Defense direct the Director of 
the Defense Logistics Agency to perform periodic testing of the system 
and timely address any deficiencies identified. 

DoD Response: Concur. On behalf of the Secretary of Defense, the 
USD(C)/CFO has directed the Defense Logistics Agency (DLA) to perform 
periodic testing of the system and timely address any deficiencies 
identified. Testing will be in place in time for the Defense Cash
Accountability System (DCAS) business enterprise information system to 
support the Secretary of Defense's accelerated audit readiness of the 
General Fund Statement of Budgetary Resources by the end of FY 2014. 

Recommendation 4: That the Secretary of Defense direct the Director of 
the Defense Logistics Agency to prioritize the known deficiencies and 
address those that affect audit readiness, including the ability to 
reconcile FBWT accounts. 

DoD Response: Concur. On behalf of the Secretary of Defense, 
USD(C)ICFO has directed DLA to follow the GAO's recommendation and 
review the system enhancements cited in the audit. DLA identified 20 
system enhancements with audit readiness impacts versus the 200 
identified in the report. DFAS is verifying the audit impacts and 
recommending prioritization of System Change Requests (SCRs) to the 
Configuration Control Board (CCB) to mitigate the potential audit 
issues. The CCB has DFAS representation for each military service and 
Defense agency and assigns priorities to the DCAS project management 
office (PMO). This process will continue to be employed in reviewing 
all future system deficiencies and/or SCRs to ensure prioritization is 
placed on those having audit readiness impact. In addition, an effort 
is currently underway by the DCAS PMO to address the maintenance 
release process and increase the number of SCRs that are implemented 
with each release. This will allow for a greater volume of
SCRs to be prioritized and for audit- and FBWT-related discrepancies 
to be more expeditiously addressed. The expected results are 
efficiencies gained through: 

* Aligning and consolidating similar SCRs addressing the same 
subsystem into each release, thereby reducing the number of releases 
and test events for a given subsystem; 

* More focused development and testing based on specific configuration 
items; and; 

* Reducing coding and testing efforts for each release. 

Based on action taken to date, the current February 2012 maintenance 
release has been rescheduled for implementation in December 2011. 

Recommendation 5: That the Under Secretary of Defense (Comptroller) 
direct the Director of the DFAS to maintain supporting documentation 
for the BAM tool system requirements and user validation testing, 
including the methodology, performance, and detailed results of the 
testing. 

DoD Response: Concur. On behalf of the Secretary of Defense, the 
USD(C)/CFO has directed DFAS to maintain supporting documentation for 
the Business Activity Monitoring tool system requirements and user 
validation testing, including the methodology, performance, and 
detailed results of testing. DFAS recognizes the need for more 
stringent quality assurance procedures and is in the process of 
implementing such procedures. Formal test scripts will identify test 
conditions and expected outcomes for each requirement. The 
Requirements Traceability Matrix will tie each requirement to a test 
condition, ensuring 100% coverage. Test results and any associated 
activity (code changes, retesting, requirements change) will be 
documented for each test condition. The DFAS estimated completion for 
required actions is April 2012. 

Recommendation 6: That the Under Secretary of Defense (Comptroller) 
direct the Director of the DFAS to develop and maintain a traceability 
matrix to track approved BAM tool system requirements to those tested 
by the contractor to ensure that all requirements are tested. 

DoD Response: Concur. On behalf of the Secretary of Defense, the 
USD(C)/CFO has directed DFAS to recognize the need for more stringent 
quality assurance procedures. The Office of the Under Secretary of 
Defense (Comptroller) is in the process of implementing such
procedures concurrently with the DON audit readiness assertion 
timeline to achieve audit confidence for the reconciliation of FBWT 
across the DON. The requirements and any modifications to the quality 
assurance procedures are being controlled by a configuration 
management process and an automated tool. Formal test plans, test 
scripts, and a requirements traceability matrix will be used. Test 
results and final reports will be thoroughly documented and archived. 
The DFAS estimated completion for required actions is April 2012. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Asif A. Khan, (202) 512-9869 or khana@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Nabajyoti (Naba) Barkakati, 
Chief Technologist; Katherine Lenane, Assistant General Counsel; 
William (Tyler) Benson; Vanessa Estevez; Jason Kirwan; Richard D. 
Mayfield; Carol T. Nguyen; Omar V. Torres, Auditor in Charge; and 
Yiming I. (Ivy) Wu made key contributions to this report. 

[End of section] 

Footnotes: 

[1] In a disclaimer of opinion, the auditor does not express an 
opinion on the financial statements. A disclaimer of opinion is 
appropriate when the audit scope is not sufficient to enable the 
auditor to express an opinion, or when there are material 
uncertainties involving a "scope limitation"--a situation where the 
auditor is unable to obtain sufficient appropriate audit evidence. 

[2] General Fund accounts in the U.S. Treasury holding all federal 
money not allocated by law to any other fund account. 

[3] A material weakness is a significant deficiency, or combination of 
significant deficiencies, that results in more than a remote 
likelihood that a material misstatement of the financial statements 
will not be prevented or detected. 

[4] An appropriation provides an agency with budgetary authority to 
incur obligations and make payments from the Treasury for specified 
purposes. 

[5] Unmatched collections and disbursements are transactions that have 
been received and accepted by an accounting office, but have not been 
matched to the correct detail obligation or appropriation. 

[6] The FIAR Plan, which was first prepared in 2005, is DOD's 
strategic plan and management tool for guiding, monitoring, and 
reporting on the department's financial-management improvement 
efforts. As such, the plan communicates incremental progress in 
addressing the department's financial management weaknesses and 
achieving financial statement auditability. 

[7] Budgetary resources include the amount available to enter into new 
obligations and to liquidate them. Budgetary resources are made up of 
new budget authority (including direct spending authority provided in 
existing statute and obligation limitations) and unobligated balances 
of budget authority provided in previous years. 

[8] Pub. L. No. 111-84, § 1003(a),(b), 123 Stat. 2190, 2439-40 (Oct. 
28, 2009). 

[9] Department of the Navy, Fiscal Year 2010 Department of the Navy 
Annual Financial Report, Statement of Budgetary Resources (November 
2010). 

[10] U.S. Marine Corps, Financial Report, Fiscal Year 2010, Statement 
of Budgetary Resources (November 2010). 

[11] The disbursing offices are identified by a unique four-digit 
disbursing station symbol number (DSSN), which is assigned by the 
Department of the Treasury. The disbursing offices utilize the DSSN 
identification to report its collections and disbursements data to 
DFAS. 

[12] The Navy has four general ledger accounting systems: the Standard 
Accounting and Reporting System-Field Level (STARS-FL), the Standard 
Accounting and Reporting System-Headquarters Level (STARS-HCM), the 
Navy Enterprise Resource Planning (NERP) system, and the Navy Systems 
Management Activity (NSMA). The Marine Corps's general ledger 
accounting system is the Standard Accounting, Budgeting, and Reporting 
System (SABRS). 

[13] DOD Financial Management Regulation 7000.14R (FMR), Volume 4, 
Chapter 2, Accounting for Cash and Fund Balances with Treasury, 
Section 020701 (Dec. 2009). 

[14] DOD FMR, Vol. 4, Ch. 2, Sec. 020102.B.7. 

[15] DOD FMR, Vol. 4, Ch. 2, Sec. 020701. 

[16] DCAS is the central repository of DOD cash activity that is 
reported to the Department of Treasury. 

[17] DOD uses a line of accounting to accumulate appropriation, 
budget, and management information, such as (1) department code, and 
(2) fiscal year and appropriation account. 

[18] DDRS-B is a Web-based application that replaced many of the 
legacy departmental budgetary reporting systems. 

[19] The Standard Form 133 Report on Budget Execution and Budgetary 
Resources fulfills the requirement in 31 U.S.C. §§ 1511-1514 that the 
President review federal expenditures at least four times a year. An 
agencywide Standard Form 133 should generally agree with an agency's 
Statement of Budgetary Resources. 

[20] Checks-issued differences are discrepancies between the check-
issued data from the financial institutions and the check-issued 
detail information submitted by the Navy and the Marine Corps to 
Treasury through the Defense Check Reconciliation Module (DCRM) 
system, and the Navy's and Marine Corps's Standard From 1219. 

[21] Deposits in transit differences are discrepancies between the 
deposit information on the Navy's and Marine Corps's Standard Form 
1219 and the deposit data reported by the financial institutions to 
Treasury through the CA$HLINK II system. 

[22] IPAC differences are discrepancies between the data on the Navy's 
and Marine Corps's Standard Forms 1219 and 1220, and the interagency 
transactions reported by other federal agencies to Treasury through 
the IPAC system. 

[23] GOALS is the governmentwide network that provides automated 
financial reporting directly to the Financial Management Services, 
within the Department of Treasury and the Office of Management and 
Budget. GOALS also provides agencies with reports on collection and 
disbursement activity and FBWT transactions. 

[24] The BAM tool will be used to monitor and reconcile the Navy's 
general fund transactions. However, since NSMA contains classified 
information, DFAS-CL has not determined if it will use the BAM tool to 
reconcile this information. 

[25] DOD FMR, Vol. 4, Ch. 2, Sec. 0207, and Treasury Financial Manual, 
Volume I, Part 2, Chapter 5100, Reconciling Fund Balance with Treasury 
Accounts (Oct. 18, 1999). 

[26] DOD, FMR, Vol. 4, Ch. 2, Sec. 020705. 

[27] DOD, FMR, Vol. 4, Ch. 2, Sec. 020708. 

[28] A "forced-balance entry" represents any amount posted, usually at 
a summary level, to eliminate differences between the component 
agency's general ledger balance and the Treasury's control total. 

[29] DOD FMR, Vol. 4, Ch. 2, Sec. 020706, and 020102, B.4 and B.5. 

[30] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[31] An Antideficiency Act violation occurs when one or more of the 
following happens: (1) overobligation or overexpenditure of an 
appropriation or fund account (31 U.S.C. § 1341(a)); (2) entering into 
a contract or making an obligation in advance of an appropriation, 
unless specifically authorized by law (31 U.S.C. § 1341(a)); (3) 
acceptance of voluntary service, unless authorized by law (31 U.S.C. § 
1342); or (4) overobligation or overexpenditure of (a) an 
apportionment or reapportionment, or (b) amounts permitted by the 
administrative control of funds regulations (31 U.S.C. § 1517(a)). 

[32] Marine Corps and DFAS, Fund Balance with Treasury (FBWT) 
Reconciliation Process (July 22, 2011). 

[33] Application controls, sometimes referred to as business controls, 
are incorporated directly into computer applications to help ensure 
the validity, completeness, accuracy, and confidentiality of data 
during application processing and reporting. For example, a system 
edit used to prevent or detect a duplicate entry is an application 
control. 

[34] Department of Defense, Financial Management Regulation, 7000.14R, 
Volume 14, Chapter 3, "Preliminary Reviews of Potential Violations" 
(November 2010). 

[35] Department of Treasury, Treasury Financial Manual, Bulletin No. 
2007-07, "Suspense "F" Account Discontinuance and Waiver Policy" (June 
20, 2007). As of June 15, 2011, this bulleting was rescinded and 
replaced with an updated bulletin, which retains the 60 business days 
deadline. Department of Treasury, Treasury Financial Manual, Bulletin 
No. 2011-06, "Reporting Suspense Account Activity Using F3875 and 
F3885 and Using Default Accounts F3500 and F3502 as a Governmentwide 
Accounting (GWA) Reporter" (June 15, 2011). 

[36] DOD FMR, Vol. 4, Ch. 2, Sec. 020701 and 020706. 

[37] DFAS officials told us that they were planning to implement the 
BAM tool in two phases; however, DFAS has not yet defined the system 
requirements for the second phase or developed an implementation 
schedule. DFAS has reported that the second phase of the BAM tool 
implementation will automate the Navy's DCAS and DDRS-B 
reconciliations to the GWA system as well as other reconciliation 
capabilities. 

[38] The three systems being addressed in the first phase are the 
Standard Accounting and Reporting System-Field Level (STARS-FL), the 
Standard Accounting and Reporting System-Headquarters Level (STARS-
HCM), and the Navy Enterprise Resource Planning (NERP). 

[39] System testing is a testing conducted on a complete, integrated 
system to evaluate the system's compliance with its specified 
requirements. 

[40] User Validation Testing (UVT) is a process to obtain confirmation 
that a system meets mutually agreed-upon requirements. The results of 
these tests give confidence to the users as to how the system will 
perform in production. 

[41] IEEE, Standard for Software Verification and Validation, IEEE Std 
1012TM-2004. The IEEE is a nonprofit, technical professional 
organization that develops standards for a broad range of global 
industries, including the information technology and information 
assurance industries, and is a leading source for defining best 
practices. 

[42] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].  

[43] DOD Financial Management Regulation 7000.14R (FMR), Volume 4, 
Chapter 2, "Accounting for Cash and Fund Balance with Treasury" 
(December 2009); Department of the Treasury, Treasury Financial 
Manual, vol. 1, part 2, chap. 5100, "Reconciling Fund Balance with 
Treasury Accounts (October 18, 1999); "and GAO, Standards for Internal 
Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
November 1999). 

[44] Application controls, sometimes referred to as business controls, 
are incorporated directly into computer applications to help ensure 
the validity, completeness, accuracy, and confidentiality of data 
during application processing and reporting. For example, a system 
edit used to prevent or detect a duplicate entry is an application 
control. 

[45] Defense Cash Accountability System is the department's central 
repository for cash collections and disbursement activity reported to 
the Treasury. 

[46] The Business Transformation Agency was recently disestablished, 
and its responsibilities as the DCAS system owner were reassigned to 
the Defense Logistic Agency. 

[47] DFAS-CL is implementing the Business Activity Monitoring tool to 
facilitate its reconciliation of the Defense Cash Accountability 
System to the Navy's general ledger accounting systems. 

[48] Initial operational capability is achieved when a system is 
implemented with some minimal capabilities and additional capabilities 
are planned before the system is determined to have reached full 
operational capability. 

[49] User Validation Testing (UVT) is a process to obtain confirmation 
that a system meets mutually agreed-upon requirements. The results of 
these tests give confidence to the users as to how the system will 
perform in production. 

[End of section] 

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