Resolving the Active Component (AC) Permanent Change of Station (PCS) Financial Material Weakness and

Implementing a Corrective Action Plan (CAP)

ASMC National PDI Workshop #75New Orleans, LA

May 29, 2015

9:15 – 10:30 AM

Michael C. Versace, CDFMmichael.c.versace.civ@mail.milASA(FM&C), Army Budget Office

Leon Smith, LSS Black Belt leon.smith@calibresys.comCALIBRE Systems, Inc.

Workshop # 75 Description:

Key Points:• Describe the methodology, processes, and

tools to successfully resolve a material weakness

• Case Study: Change of Station (PCS) program material weakness

• Familiarize YOU, the attendee, with techniques to successfully identify and resolve a material weakness and pass audit attestation within your organization

• Audit Readiness: Benefits of correcting a material weakness

Financial Material Weaknesses:

1. Throughout Federal Agencies / Departments

2. Lack of internal controls

3. Potential for misuse of funds

4. May become an Anti-Deficiency Act (ADA) violation

YOU are the first line of defense to combat an organization’s material weakness

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Agenda

• What is a Material Weakness?

• Case Study: The Army’s PCS Material Weakness

o Anti-Deficiency Act (ADA) Violation: Catalyst for the Army’s Material Weakness

o Situation / Scope of the Army’s Material Weakness

o The Army’s Defects Inside the Material Weakness

• Methodology, Processes & Tools to resolve a Material Weakness

• Results of the PCS Case Study

• Highlights of a successful Corrective Action Plan (CAP)

• Benefits of Correcting a Material Weakness

• Lessons Learned

• Questions3

What is a Material Weakness?

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Office of Management & Budget (OMB)

Circular A-123:

• Management’s Responsibilities for Internal Controls:

• “A deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material non-compliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis.”

A Material Weakness can:

• Impair entities of the ability to achieve mission & objectives

• Show an inefficient use of resources

• Violate statutory or regulatory requirements

• Lack safeguards against fraud, waste and abuse, including:– Unauthorized use of property

– Misappropriation of funds

• Impair management’s ability to use timely information for decision making

• Permit unethical conduct and conflicts of interest

A material weakness can lead to a purpose, time & amount (ADA) violation

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Case Study: The Army’s Permanent Change of Station (PCS) Material Weakness

PCS Definition:

• In the United States Armed services, a PCS is the official relocation of an active duty military service member, along with dependents, to a different duty location

• A member’s PCS duration ends when a new PCS order is drafted, the member retires or separates from duty, or some other preemptive event

PCS Moves Include:

• A *move from your home to your first duty station upon entry in to service

• A move from one permanent duty station to another, and

• A move from final assigned duty station to home of record or location within the United States

* Note - Move examples include entitlements, such

as, member per diem, household good shipments, dislocation allowance and non-temporary storage allowances

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ADA Violation Was the Catalyst for the

Army’s Material Weakness1. Date of Violation: 30 Sept 2008, the Army did not have sufficient obligations established

to cover disbursements

2. 4th Quarter, 2009, the Army self-identified and reported the Material Weakness and initiated an investigation with the MPA stakeholders, leadership, DoD IG, GAO, and Congress

3. In FY 2010, the investigation concluded there were weaknesses in the Centrally Managed MPA Account and declared the PCS program a Material Weakness and recommended improvements to internal controls were requiredo 31 U.S.C. § 1341(a)(1)(A): “An officer or employee of the United States’ Government may not make or

authorize an expenditure or obligations exceeding an amount available in an appropriation or fund for the expenditure or obligation.”

4. In FY 2011, the Army MPA office stood up a project team that used techniques and procedures which were able to resolve the material weakness, pass the audit attestation, and continue the sustainment using a corrective action plan

Bad news does not get better with age7

Situation / Scope of the Army’s material Weakness (FY 2011)

1. Military Personnel is an annual appropriation available for the purpose of pay, benefits, allowances, housing subsistence, travel and training of service members on active duty

2. PCS is 4 % of the Army’s Military Personnel appropriation at ~ $2B

3. The Army active component does not currently have a central order writing system

4. The Army does not have a standardized order format

5. Some antiquated regulations have not updated and are old - in excess of 20+ years

6. 141 individual Army orders writing locations (posts, installations, forts, etc.) world-wide

7. Decentralized execution – field offices were incurring obligations against the appropriation and invoices were sent to the Defense Finance & Accounting Service (DFAS) for payment

8. No one had situational awareness on the true population of daily order information

9. The Army’s process was posting periodic estimated bulk obligations that were adjusted based on actual disbursement data from DFAS– Disbursements were posted without a recorded original obligation

10. There was not any visibility of individual Service Member costs without extensive research

11. The Army did not have an understanding of adequacy of funds until closer to the end of each fiscal year

Don’t allow lack of internal controls to drive your operations – only you can prevent it

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The Army’s Defects Inside the Material Weakness

1. The inability to record Active Component PCS orders when issued

2. The inability to apply a reliable cost estimate and record obligations within a

timely manner (10 calendar days) in the financial system of record

3. The inability to reconcile individual disbursements with related obligations

265,000 orders published annually - $2B dollar program within the appropriation

Amount

Time

Purpose

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Methodology, Process & Tools to resolve Material Weakness

1. Analyze the organization’s skill sets – may require people with knowledge outside of your organization’s area of responsibility• Examples may include personnel from the finance, logistics, Information Technology, Human Resources,

Policy, Legal, and Audit community

2. Utilize all available tools for Continuous Process Improvement (CPI), but try not to be so rigid that it takes away from your objectives

3. W.I. I.F.M? (What’s In It For Me?): Know your stakeholders, and know them well• Not all stakeholders are on your side, stakeholder analysis is extremely critical

4. Establish a Plan of Action and Milestones and ensure efforts do not get engulfed by scope creep• Keep your eye on your end-state goals, adhere to timelines, and ensure you and others involved remain

accountable for their piece

• Don’t be afraid to report that previously established timelines are off-track, there may be a valid reason for it

5. Periodic leadership updates with measurable metrics outlining success is key to maintain their support

6. If you are able to, ensure you and your efforts are a part of a senior level steering committee • Ensures all leadership is engaged, and allows you to gain additional insight, assistance and direction

The right skill sets, knowing your customer, and leadership involvement and support are the keys to success

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“As-Is” Bulk Process “To-Be” Individual Process

Key Issues• Centralized funding and bulk obligations• Marginal corrective measures (key control

safeguards not in place)• No controls to determine if fraud, waste, and

abuse existed• Unable to meet auditability

Solutions• Centralized funding and individual obligation

transactions• Control measures in place (systems/people)• Monitoring potential for fraud, waste, and abuse• Improved process solution successfully

integrated and attested to resolve the material weakness and meet auditability

Problem #1• Had no internal controls to track recording of

individual orders• 265,000 base orders per year/1380 daily• $2 billion annual appropriation

Solution #1• Obligating individual orders at time of issuance

• Standard Document Number (SDN) is leveraged

end-to-end (issuance to reconciliation)

Problem #2• Could not apply a reliable cost estimate per

order nor post timely obligations

Solution #2• Calculating an individual reliable cost estimate

and can post an obligation within 10 calendar days (into the system of record)

Problem #3• Could not reconcile individual disbursements

with obligations

Solution #3• Reconciling individual disbursements with

obligations (leveraging SDN & business rules)

Results of the PCS Case Study“As-Is” to the “To-Be” – slide 1 of 2

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Amount

Time

Purpose

Performance

MeasureStandard Period Status Current Status Metric

OWA Orders Log

Submission Timeliness

OWAs to submit Orders

Logs within 2 daysEOM April 2015 96.5% of orders logs were received within two days

> = 95%

< > 90% - 94%

< = 89%

Obligation Timeliness

Orders to be obligated

within 10 days after order

publicationEOM April 2015

99.9% of orders were obligated within 10 days after

order publication

> = 95%

< > 90%-94%

< = 89%

Orders Log

Error Rate

Up to 10% error acceptance

rate (USAAA)

EOM April 201597.8% orders were processed error free

> = 90%

< > 87%-89%

< = 86%

Orders Log

Monthly Reconciliation

SDN must both match

between input master log

and output master logEOM April 2015 99.9% of SDN data matched both logs

> = 97%

< > 91-96%

< = 90%

Dashboards and Scorecards used routinely to reinforce improved financial process

Results of the PCS Case Study“As-Is” to the “To-Be” – slide 2 of 2

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Highlights of a Successful Corrective Action

Plan (CAP) – slide 1 of 21. Each improvement always requires sustainment and CPI

• When the material weakness has been corrected, do not leave it alone and assume it is gone forever

2. Conduct periodic quality control/assurance checks on all processes• May be internal (review of organization’s processes) or external (site-visit with stakeholders)

3. Continue that all stakeholders and leadership remain informed through periodic strategic communication

4. Ensure continuity with existing personnel• Maintain a plan of action to quickly train during instances of employee turnover occur

5. Scorecard, dashboard, or measure your process whenever you are able to do so• Meaningful measurable metrics provide “two-way street communication” with leadership and

stakeholders

• Assists leadership with tools to make informed decisions, and may provide stakeholders with information they need to adjust their processes for improvement

6. Don’t be selfish: share your improvement processes and successes with others• It’s ok for to disseminate your best practices to improve another organization’s processes (win-win

for everyone)

7. Repeat, repeat, repeat: ALWAYS keep leadership well informed along the way

All material weakness corrections require some level of continuous process improvement

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USAAA Recommendation Action Taken Status

1. Maintain an errors log (at both order

writing activities and the PCS Support

Team) for tracking and resolving data

issues with orders

Implemented business rule to maintain an errors log at both

order writing activities and the PCS Support Staff-NCR

PCS Support Staff-NCR conducts daily orders log error

inventory/reconciliation

2. Record a default (temporary)

obligation in the financial system of

record when PCS Support Staff-NCR

returns an errors log to an order

writing activity

Implemented business rule to record a default (temporary)

obligation in STANFINS when PCS Support Staff-NCR

returns an errors log to an order writing activity

3. Compare the month in the SDN to

the fiscal year in the movement

designator code (MDC) and take

corrective action, if required

Implemented business rule to check the month in the SDN

to the fiscal year in the movement designator code (MDC)

4. Perform periodic testing of the order

writing activity universe to ensure all

orders are captured and new problems

are identified

Conduct quarterly OWA quality assurance checks. To date,

we have visited 24 OWAs (Normally 2 -3 installations per

quarter)

Highlights of a Successful Corrective Action Plan (CAP) – slide 2 of 2

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Benefits of Correcting a Material Weakness

1. Builds leadership confidence with regards to achievement of objectives

2. Allows an organization to gain intelligence on effectiveness of operations

3. Helps reduce risk factors that hinder an organization’s progress

4. Ensures effective internal controls over financial reporting are in place and are in compliance

with laws and regulations

5. Fraud, Waste & Abuse: Provides oversight of the mismanagement of funds

6. Ensures financial information is presented timely, is relevant and is accurate for well informed

decision making

7. Helps improve budget forecasting and execution

8. In most instances, enables you to document measureable savings and cost avoidance

• The Army captures PCS cost savings in memorandums and improves future forecasting

9. Set priorities, actions and goals for an organization to achieve their outlined objectives

Most importantly: A material weakness outlines best practices to achieve success

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Lessons Learned1. Maintain communication channels with all key stakeholders and establish regular Integrated

Process Reviews with auditors

2. Employ process changes first, when a systemic solution is not available

3. Have a clear problem statement, and don’t immediately jump to solution

• Keep an open mind – where you think you might end up may not be where you actually end up

4. Learn the process you are correcting

5. If initiating a team, ensure all have the right skill sets needed – you may have to go outside of your area of responsibility for this

6. Maintain strategic and routine communication with leaders, stakeholders, and process owners

• They are your customer, well-informed = happy to support

7. Avoid the “Silo-Effect,” when your situation crosses over to other teams or organizations

• Never avoid or fear working jointly with other teams, agencies, and services

• Engage in knowledge sharing with others to share your experiences and best practices

8. Establish a working document, like Business Rules, to codify your processes

• Policies and Regulations may not be up-to-date or change as quickly as your process does

9. Codify your achievements, savings and document your results

10. Keep your eye on the prize – stay focused on the objective of your mission and avoid going down any “rat-holes” along the way

11. You have a day job – always to be sure to maintain a well-balanced window between “mission creep” and your established timeline

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Questions?

For Additional Information, please check out the following materials:

• US Government Accounting Office House Report B-318724, Subject: Department of the Army-The Fiscal Year 2008 Military Personnel, Army Appropriation and the Anti-Deficiency Act http://www.gao.gov/assets/390/389199.pdf

• RM Resource Management, Calendar Year 2014, 3rd quarter. Article: Pathway To Success: The Army’s Journey to Resolve the Permanent Change of Station Program Material Weakness

• Fiscal Year 2014 U.S. Army Annual Statement of Assurance, Tab B-2, Internal Control Reporting Category: Comptroller and Resource Management

• U.S. Army Audit Agency Attestation Report: A-2014-0101-FMF, 4 Sept 2014, Examination of Interim Solution for Recording Permanent Change of Station Costs

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