Bureau of Medicine and Surgery 2012 Navy Medicine Audit Readiness Training Symposium

1. Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training Symposium Contract Administration: Path to Audit Readiness June 5th – 6th, 2012

2. Audit Readiness • Context • DoD is required to assert audit readiness for the Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As part of Navy Medicine’s audit readiness effort, the Contracts Administrationbusiness process has been identified as an assessable unit for which assertion must take place. • Purpose • To discuss the Key Control Objectives (KCOs), Key Supporting Documents (KSDs), identified gaps and potential corrective actions for Contracts Administration. • Outcome • An understanding of the status of the Contracts Administration assessable unit, including major deficiencies and what can be done now at the field level to facilitate a successful financial statement audit. • Some assessable units may not require field action at this time. FOR OFFICIAL USE ONLY

3. Contracts Administration Scope/Definition FOR OFFICIAL USE ONLY

4. Audit Readiness Timeline Control Testing Time Period Assessable Unit Assertion Interim Progress Milestones (90 Days, 50 %, 75 %) FOR OFFICIAL USE ONLY

5. Audit Readiness Process FOR OFFICIAL USE ONLY

6. Key Control Objectives (KCOs) KCOs – Represent outcomes needed to achieve proper financial reporting and are a basis by which the effectiveness of control activities can be evaluated. FOR OFFICIAL USE ONLY

7. Key Control Objectives (KCOs) FOR OFFICIAL USE ONLY

8. Key Control Objectives (KCOs) FOR OFFICIAL USE ONLY

9. Key Supporting Documentation(KSDs) KSDs – Documentation retained to support individual financial transactions and accounting events. FOR OFFICIAL USE ONLY

10. Key Supporting Documentation(KSDs) FOR OFFICIAL USE ONLY

11. Deficiency Types • Material Weakness: A deficiency, or 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 timely. • Significant Deficiency: A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. • Control Deficiency: A deficiency that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely manner. FOR OFFICIAL USE ONLY

12. Considerations For Deficiency Type • Quantitative Materiality - Dollar impact or potential impact to the financial statements • Qualitative Materiality - Non-quantitative factors such as complexity of transactions, legal or regulatory concern or system deficiencies • Pervasiveness - Number of activities or transactions affected by the deficiency • Audit Dealbreaker- Issues that prevent an audit from occurring • Existing Guidance - Determining whether current policy or SOP is in place that meet financial reporting requirement FOR OFFICIAL USE ONLY

13. Contracts AdministrationMaterial Weaknesses • Material Weakness 1: Inadequate proof of receipt • General Causes: • Lack of Compliance with Established Guidance for Receipt & Disbursement • Material Weakness 2: Inadequate documentation to support Closed Contracts • General Causes: • Full Implementation of Contract Closeout SOP • Access to Documentation FOR OFFICIAL USE ONLY

14. Inadequate Proof of Receipt • Issue Detail • The Assessable Unit Team identified transactions of purchased goods, where the proof of receipt was insufficient, not retained for recordkeeping, or was not generated at time of delivery. • Without proof of receipt, it is difficult to determine whether goods have been received in accordance with the contracted statement of work. • Additionally, the proof of receipt is required to verify the quantity or services invoiced to the quantity or services actually received. • Impact on Audit Readiness • Proof of receipt documents are key supporting documents used to ensure that accounts payable are recorded properly and for the correct amount. • Lack of the appropriate type of receipt document could cause disbursements to be made for which no actual goods were received, overstating Gross Outlays. FOR OFFICIAL USE ONLY

15. Inadequate Proof of Receipt • Path Forward • A Corrective Action Plan will be Developed for implementation by the Activities. It must include: • Proper guidance via SOP or other Navy Medicine policy that designates what proof of receipt is required for different types of purchases (i.e., DD250 for goods, timesheets for personal services, etc.) • Optimally, an auditor vetted checklist for the certifier of invoices to review and sign-off on prior to certification of invoices for payment • Optimally, a built in segregation of duties between invoice receptor and invoice certifier (LPO) in WAWF • Clearly defined document retention policy for Proof of receipt support, consistent with Navy Medicine policies. FOR OFFICIAL USE ONLY

16. Inadequate documentation to support Closed Contracts • Issue Detail • Based on prior testing, many contracts lacked evidence of communication by the vendor that the final invoice had been delivered prior to closing contracts. • Also, there were contracts closed that lacked the required DD1594 or other similar required forms. • Additionally, the process is designed so that forms are completed prior to de-obligations being posted to STARS-FL, and there is no check that these transactions are posted accurately. • Impact on Audit Readiness • Lack of sufficient documentation for closed contracts means that de-obligations could be posted incorrectly, causing an understatement of the ‘Unobligated Balances Available’ line item. FOR OFFICIAL USE ONLY

17. Inadequate documentation to support Closed Contracts • Path Forward • The Contracts Administration Assessable Unit Team will document a formal Corrective Action Plan to address this issue. Any potential solutions must include: • A process that includes additional controls, after authorization of the de-obligaton via DD1594, that ensures that accounting transactions are recorded accurately in STARS-FL. • Optimally, a method for ensuring that transactions are not recorded in STARS-FL until a valid & authorized DD1594 is provided. This may require coordination with accounting services provider DFAS. • Optimally, coordination with other contracting agencies (NAVFAC, Fleet Logistics Command (FLC)) to ensure that adequate documentation is provided in a timely manner for potential contract close-out opportunities. • Continued implementation of Contract Closeout SOP. FOR OFFICIAL USE ONLY

18. Other Contracts Deficiencies • Significant Deficiency 1: Inconsistent use and lack of required approvals of the Request for Contractual Procurement form (NC 2276) • Control Deficiency 1: Significant delays in resolving rejected payments FOR OFFICIAL USE ONLY

19. Inconsistent Use and lack of approvals for NC2276s • Issue Detail • The Assessment Team identified some Activities that are using locally prepared forms instead of the NC2276 form. The NC2276s are not always filled out completely/accurately or contain required approvals • Impact on Audit Readiness • Incomplete or unapproved forms for Commitments could potentially lead to the risk of Anti-Deficiency Act violations • Path Forward / Potential Activity Actions • Complete NC2276 forms in accordance to the Contract Establishment SOP FOR OFFICIAL USE ONLY

20. Significant delays in resolving rejected payments • Issue Detail • The Assessment Team identified some Activities with attempted payments that failed pre-validation, and were listed on the IDA 128/129 report, that were over 30 days old. • Impact on Audit Readiness • Untimely resolutions to rejected payments could potentially lead to the risk of Prompt Pay Act violations resulting in interest payment penalties. • Path Forward / Potential Activity Actions • Resolve all rejected payments on the IDA 128/129 report within 30 days or less. • Follow the Daily/Non-Daily Accounting SOP. FOR OFFICIAL USE ONLY

21. Questions? FOR OFFICIAL USE ONLY