Coast Guard and the Financial Statement Audit

1. Coast Guard and the Financial Statement Audit March 9, 2006

2. CG and the Financial Statement AuditAgenda • What are the financial statements? • Financial Statement Assertions • Where we are today? • Systemic Problems • FY06 Audit • Way ahead

3. CG and the Financial Statement Audit What are the financial statements? • Balance Sheet • Shows basic relationships • Asset = Liabilities + Equities as of a point in time • Proprietary Only • Statement of Net Costs • Private sector income statement • Total revenues – Expenditures = Net Costs • Summarizes activity through a period of time • Proprietary Only • Statement of Changes in Net Position • Ties the net cost figure to the equities line on the balance sheet • Rolls forward the net position from one year to the next using activity throughout the year from the statement of net cost • Proprietary Only

4. CG and the Financial Statement Audit What are the financial statements? • Statement of Budgetary Resources • SF-133 • Top 3rd shows all your resources • Middle 3rd shows how your resources are being used (obligated vs. unobligated) • Bottom 3rd shows outlays • Shows activity throughout the year and at a point in time • Budgetary accounts only • Statement of Financing • Most difficult of all the financial statements • Ties the budgetary numbers from the Statement of Budgetary Resources back to the net cost figure on the Statement of Net Cost • Budgetary to proprietary reconciliation

5. CG and the Financial Statement AuditFinancial Reporting Assertions • Presentation and Disclosure • Existence or Occurrence • Rights and Obligations • Completeness and Accuracy • Valuation and Allocation Assertions apply to line items on the financial statements that map back to our processes

6. CG and the Financial Statement AuditAssertion Examples • Construction in Process • Accounts Receivable • Funds Control • PP&E • OM&S

7. CG and the Financial Statement Audit Our Financial World Sarbanes-Oxley Act DHS Financial Accountability Act Coast Guard Financial Reporting Processes Systems FMFIA Revised A-123 Commercial Auditor Focus on internal controls

8. CG and the Financial Statement AuditAudit History • 1990 • CFO Act passed • 1991-1998 7 years to build • USCG builds toward a clean audit • 1999 – Feb 2003 • Under DOT • No material weaknesses or reportable conditions • Mar 2003 – Present Rebuilding • Move to DHS • CG causes qualifications, material weaknesses, & reportable conditions • 2006 Additional Audit Opinion on Internal Controls

9. CG and the Financial Statement AuditOur Financial World • DHS received a disclaimer on the FY05 Financial Statements (Balance Sheet only) • Coast Guard was a major contributor to 10 material weaknesses and 1 reportable condition • Financial Management • Financial Reporting • Financial Systems • Fund Balance with Treasury • Plant Property and Equipment • Operating Materials and Supplies • Undelivered Orders, Accounts and Grants Payable and Disbursements • Actuarial Liabilities • Budgetary Accounting • Intragovernmental and Intradepartmental Balances • Environmental Liabilities (reportable condition) • KPMG Audit Report at: http://cgweb.comdt.uscg.mil/CG8/CG84/cg842/Overview.htm

10. Due Status Progress Program As of 21 Feb 2006 (Note 1) Financial Management Oversight Financial Reporting Financial Systems (Note 2) Funds Balance w/Treasury Actuarial Liability OM&S (Note 3) PP&E Undelivered Orders & Accounts Payable Budgetary Accounting Intra-governmental Balances Environmental Liabilities All FINCEN CG-8 FINCEN CG-1 CG-4 CG-8 FY07 Coast Guard Audit Dashboard FY07 FY07 FY06 FY06 FY07 FY07 All FY07 CG-8 FY07 CG-8 FY07 FY06 CG-4 /1: Indicates areas that have a complete plan, which is results focused to achieve success listed in the Coast Guard’s strategic remediation plan. Indicates that the plan is being successfully implemented. Indicates that a sufficient plan has not been provided or that the program is not achieving the plan. Arrows mark relative improvement since last report, regardless of whether or not progress has resulted in a change in dashboard color. /2 CG-841 provided a plan with system requirements totaling $23.1M. The requirements of the plan need to be further reviewed, approved, and scaled down to reflect only those items deemed essential for audit success by FY07. /3 66 of 650 field units complete. $46M excess removed to ICPs.

11. CG and the Financial Statement Audit Systemic Problems • Inadequate/incomplete policy and procedures • Poor data integrity • Multiple Processes/Systems/Decentralized • Oversight program/Accountability • Competency

12. Financial Systems/Processes and Infrastructure

13. Programmatic Material Weaknesses

14. CG and the Financial Statement AuditFY06 Audit • Held informal meetings with auditors and process owners • In process of developing audit plan/schedule • Formal kickoff scheduled for Mid March • Balance sheet only audit • Some internal control work will be involved

15. CG and the Financial Statement AuditWay Ahead • Establish Accountability at all levels • Cold Fusion Program, World Prosperity Program, Child Prodigy Program • Complete integration of financial systems • Establish financial management competency • Completing Planning-Formulating-Execution-Reporting Cycle • Internal Control Program • Process improvement • Program Level CFOs vs Resource or Budget Directors • Solicit input from the field In many cases as we address audit issues, we are also improving our processes and customer service

16. CG and the Financial Statement AuditClosing • On the road to success • Although the path maybe longer than we think • Manage Expectations • We will continue to uncover issues • Field plays a role in identifying and communicating problems before the auditors find them • Apply the financial reporting assertions to the activities that you perform • New way to look at our world of work • We will be a better organization as a result of the audit and our remediation activities