oversight

DOD Financial Management: The Army Faces Significant Challenges in Achieving Audit Readiness for Its Military Pay

Published by the Government Accountability Office on 2012-03-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Committees




March 2012
             DOD FINANCIAL
             MANAGEMENT
             The Army Faces
             Significant Challenges
             in Achieving Audit
             Readiness for Its
             Military Pay




GAO-12-406
                                             March 2012

                                             DOD FINANCIAL MANAGEMENT
                                             The Army Faces Significant Challenges in Achieving
                                             Audit Readiness for Its Military Pay
Highlights of GAO-12-406, a report to
congressional committees




Why GAO Did This Study                       What GAO Found
The Defense Finance and Accounting           The Army could not readily identify the population of Army military payroll
Service-Indianapolis (DFAS-IN)               accounts given its existing procedures and systems. The Army and DFAS-IN did
reported that fiscal year 2010 active        not have an effective, repeatable process for identifying the population of active
Army military payroll totaled $46.1          duty payroll records. For example, it took 3 months and repeated attempts before
billion. However, for several years,         DFAS-IN could provide a population of service members who received active
GAO and others have reported                 duty Army military pay in fiscal year 2010. Further, because the Army does not
continuing deficiencies with Army            have an integrated military personnel and payroll system, it was necessary to
military payroll processes and controls,     compare the payroll file to active Army personnel records. However, the Defense
raising questions about the validity and
                                             Manpower Data Center (DMDC), DOD’s central repository for information on
accuracy of reported Army military pay
                                             DOD-affiliated personnel, did not have an effective process for comparing military
and whether it is auditable. The
Department of Defense (DOD) has
                                             pay account files with military personnel files to identify a valid population of
recently accelerated its Statement of        military payroll transactions. It took DMDC over 2 months and labor-intensive
Budgetary Resources audit readiness          research to compare and reconcile the total number of fiscal year 2010 active
goal by 3 months to 2014 and is              duty payroll accounts to its database of personnel files. DOD’s Financial
required to achieve audit readiness for      Improvement and Audit Readiness (FIAR) Guidance states that identifying the
a full set of DOD financial statements       population of transactions is a key task essential to achieving audit readiness.
by 2017. GAO performed basic audit           Without effective processes for identifying the population of Army military pay
procedures for the Army’s active duty        records and comparing military pay accounts to personnel records, the Army will
military payroll to assess the Army’s        have difficulty meeting DOD’s 2014 audit readiness goal for the Statement of
ability to (1) identify a valid population   Budgetary Resources.
of payroll transactions and (2) test a
sample of payroll transactions for           In addition, the Army does not have an efficient or effective process or system for
validity and accuracy. GAO reviewed          providing supporting documents for Army military payroll. For example, DFAS-IN
applicable laws and regulations,             had difficulty retrieving and providing usable Leave and Earnings Statement files
analyzed DOD and Army policies and           and the Army was unable to locate or provide supporting personnel documents
procedures, drew a statistical sample        for GAO’s statistical sample of fiscal year 2010 Army military pay accounts.
of payroll transactions to test their        GAO’s Standards for Internal Control in the Federal Government and DOD’s
accuracy and validity, and met with          FIAR Guidance provide that audited entities document transactions and events
DOD, DFAS-IN, Army, and Defense              and assure that supporting documentation can be identified, located, and
Manpower Data Center officials.              provided for examination. Although the Army deployed the Interactive Personnel
                                             Management System (iPERMS) as the Army’s Official Military Personnel File in
What GAO Recommends                          2007, it had not consistently or completely populated iPERMS with personnel
GAO is making four recommendations           records. At the end of September 2011, 6 months after receiving GAO’s 250
to help the Army develop the                 statistical sample items, the Army and DFAS-IN were able to provide complete
processes and controls necessary to          documentation for 2 of GAO’s sample items and provided partial documentation
achieve financial statement audit            for 3 items, but provided no documentation for 245 of GAO’s 250 sample items.
readiness, including identifying and
validating the population of military        The Army has begun several military pay audit readiness efforts that, if
payroll transactions and obtaining and       successfully implemented, could help increase the likelihood of meeting DOD’s
retaining necessary pay-affecting            2014 Statement of Budgetary Resources audit readiness goal and the 2017
documents. The Army concurred with           mandate for audit readiness on a complete set of DOD financial statements.
GAO’s four recommendations and               These efforts include documenting and testing payroll system application
noted actions it is taking.                  controls, documenting Army military pay business processes, identifying the
                                             range of supporting documents for military pay, and developing an integrated
                                             military personnel and payroll system. Most of these efforts are not yet
                                             documented and, therefore, there is no assurance that they will be implemented
View GAO-12-406. For more information,
contact Asif A. Khan at (202) 512-9869 or    timely and effectively.
khana@gao.gov.

                                                                                     United States Government Accountability Office
Contents


Letter                                                                                        1
               Background                                                                     5
               Process and System Weaknesses Hindered Army’s Ability to
                 Identify a Valid Population of Military Payroll Transactions               12
               The Army Was Unable to Provide Documentation to Support the
                 Validity and Accuracy of a Sample of Payroll Transactions                  16
               Conclusions                                                                  26
               Recommendations for Executive Action                                         27
               Agency Comments and Our Evaluation                                           28

Appendix I     Objectives, Scope, and Methodology                                           31



Appendix II    Comments from the Department of the Army                                     35



Appendix III   GAO Contact and Staff Acknowledgments                                        38



Figures
               Figure 1: Army Process for Creating a Military Pay Record for an
                        Enlisted Service Member                                               8
               Figure 2: Overview of Major Systems Involved in Processing Active
                        Army Military Payroll                                               11
               Figure 3: Test Results for 5 of 250 Soldier Pay Account Sample
                        Items                                                               21




               Page i                               GAO-12-406 Army Military Pay Audit Readiness
Abbreviations

ARISS           Army Recruiting Information Support System
ASA (M&RA)      Assistant Secretary of the Army for Manpower and
                Reserve Affairs
COBOL           Common Business Oriented Language
CFO             Chief Financial Officer
CIGIE           Council of the Inspectors General on Integrity and
                Efficiency
DA              Department of the Army
DD              Defense Department
DDRS-AFS        Defense Departmental Reporting System–Audited
                Financial Statements
DDRS-B          Defense Departmental Reporting System–Budgetary
DFAS-IN         Defense Finance and Accounting Service in Indianapolis
DIMHRS          Defense Integrated Military Human Resource System
DJMS–AC         Defense Joint Military Pay System–Active Component
DMDC            Defense Manpower Data Center
DMPO            Defense Military Pay Office
DOD             Department of Defense
EFT             Electronic funds transfer
FAM             Financial Audit Manual
FIAR            Financial Improvement and Audit Readiness
FIP             Financial Improvement Plan
FISCAM          Federal Information System Controls Audit Manual
FMR             Financial Management Regulation
FSA             Family Separation Allowance
GAAP            Generally Accepted Accounting Principles
GWOT            Global War on Terrorism
HRC             Human Resources Command
iPERMS          Interactive Personnel Management System
IPPS-A          Integrated Personnel and Pay System–Army
MEPS            Military Entrance Processing Station
MPRJ            Military Personnel Records Jacket
Mil Pay Ops     Military Pay Operations
NARA            National Archives and Records Administration
NDAA            National Defense Authorization Act
OMPF            Official Military Personnel File
OUSD(C)         Office of the Under Secretary of Defense (Comptroller)
                and Chief Financial Officer
PCIE            President’s Council on Integrity and Efficiency
PDF             Adobe Portable Document Format



Page ii                           GAO-12-406 Army Military Pay Audit Readiness
RECBASS             Reception Battalion Automated Support System
SRD-1               Standard Financial System (STANFINS) Redesign
                    Subsystem-1
SSAE                Statements on Standards for Attestation Engagements
SSN                 Social Security Number
STANFINS            Standard Financial System
USD (P&R)           Under Secretary of Defense for Personnel and
                    Readiness
USMEPCOM            U.S. Military Entrance Processing Command




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Page iii                                     GAO-12-406 Army Military Pay Audit Readiness
United States Government Accountability Office
Washington, DC 20548




                                   March 22, 2012

                                   Congressional Committees

                                   According to the Defense Finance and Accounting Service in Indianapolis
                                   (DFAS-IN), fiscal year 2010 active Army military payroll totaled $46.1
                                   billion. For years, we and others have reported continuing deficiencies
                                   with Department of the Army military payroll processes and controls. In
                                   November 2003, we reported that weaknesses in processes and controls
                                   resulted in over- and underpayments to mobilized Army National Guard
                                   personnel. 1 In April 2006, we reported that pay problems rooted in
                                   complex, cumbersome processes used to pay Army soldiers from initial
                                   mobilization through active duty deployment to demobilization resulted in
                                   military debt to battle-injured soldiers. 2 In June 2009, we reported that the
                                   Army did not have effective controls for processing and accounting for
                                   military personnel federal payroll taxes because of weaknesses in its
                                   procedures and controls for assuring accurate and timely documentation
                                   of transactions. 3 In July 2011, the Department of Defense (DOD)
                                   Inspector General reported that the Defense Finance and Accounting
                                   Service (DFAS) 4 made potentially invalid active duty military payroll
                                   payments of $4.2 million from January 2005 through December 2009 for
                                   the Army, the Navy, and the Air Force. 5

                                   These reported continuing deficiencies in Army payroll processes and
                                   controls have called into question the extent to which the Army’s military



                                   1
                                    GAO, Military Pay: Army National Guard Personnel Mobilized to Active Duty Experienced
                                   Significant Pay Problems, GAO-04-89 (Washington, D.C.: Nov. 13, 2003).
                                   2
                                    GAO, Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have Struggled to
                                   Resolve Military Debts, GAO-06-494 (Washington, D.C.: Apr. 27, 2006).
                                   3
                                    GAO, Military Pay: The Defense Finance and Accounting Service–Indianapolis Could
                                   Improve Control Activities over Its Processing of Active Duty Army Military Personnel
                                   Federal Payroll Taxes, GAO-09-557R (Washington, D.C.: June 18, 2009).
                                   4
                                    DFAS refers to DFAS-Indianapolis, which processes military pay for the Army and the Air
                                   Force, and DFAS-Cleveland, which processes military pay for the Navy and the Marine
                                   Corps.
                                   5
                                    DOD Inspector General, Active Duty Military Personnel Accounts Were Generally Valid
                                   and Secure, but DoD May have Made Improper Payments, D-2011-093 (Arlington, VA:
                                   July 27, 2011).




                                   Page 1                                      GAO-12-406 Army Military Pay Audit Readiness
payroll transactions are valid and accurate and whether the Army’s
military payroll as a whole is auditable. The Army’s military pay is material
to all of the Army’s financial statements and comprises about 20 percent
of the Army’s $233.8 billion in reported fiscal year 2010 net outlays. 6
Accordingly, Army active duty military payroll is significant to both Army
and DOD efforts to meet DOD’s 2014 Statement of Budgetary Resources
audit readiness goal.

The Chief Financial Officers Act of 1990, as amended, established
requirements for 24 agencies, including DOD, to prepare annual financial
statements and have them audited. 7 As we have previously reported,
DOD’s many challenges in resolving its pervasive and long-standing
weaknesses in financial management, business operations, and systems
have inhibited its ability to meet this requirement. 8 DOD has undertaken
numerous financial management improvement initiatives over the years,
but it continues to receive disclaimers of opinion on its financial
statements.

The National Defense Authorization Act (NDAA) for Fiscal Year 2010
mandated that DOD be prepared to validate (certify) that its consolidated
financial statements are ready for audit by September 30, 2017. 9 The
NDAA for fiscal year 2010 also mandated that DOD develop and maintain
a Financial Improvement and Audit Readiness (FIAR) Plan that includes,
among other things, the specific actions to be taken and costs associated
with correcting the financial management deficiencies that impair the
department’s ability to prepare timely, reliable, and complete financial




6
 Outlays during a fiscal year may be for payment of obligations incurred in prior years or in
the same year. Net outlays are disbursements net of offsetting collections.
7
 Pub. L. No. 101-576, § 303, 104 Stat. 2838, 2849, (Nov. 15, 1990), codified, as amended
at 31 U.S.C. § 3515.
8
 GAO, DOD Financial Management: Numerous Challenges Must Be Addressed to
Improve Auditability, GAO-11-864T (Washington, D.C.: July 28, 2011); DOD Financial
Management: Numerous Challenges Must Be Addressed to Improve Reliability of
Financial Information, GAO-11-835T (Washington, D.C.: July 27, 2011); and High-Risk
Series: An Update, GAO-11-278 (Washington, D.C.: February 2011).
9
Pub. L. No. 111-84, § 1003, 123 Stat. 2190, 2439-40 (Oct. 28, 2009).




Page 2                                        GAO-12-406 Army Military Pay Audit Readiness
management information. 10 Military pay is significant to departmentwide
financial statements. Further, other military components, such as the Air
Force and the Navy, share some of the same process and system risks
as the Army.

In May 2011, the Army reported that it expected to be ready for an audit
of its Statement of Budgetary Resources by the first quarter of fiscal year
2015. The Army also reported that its military pay would be audit ready by
the first quarter of fiscal year 2015. On October 13, 2011, the Secretary of
Defense directed the department to achieve audit readiness for the
Statement of Budgetary Resources by the end of fiscal year 2014 as an
interim milestone for DOD to meet the legal requirement in the NDAA for
Fiscal Year 2010 to achieve full audit readiness for all DOD financial
statements by 2017. 11 This new goal would accelerate the time frames for
audit readiness of the Army’s Statement of Budgetary Resources,
including Army military pay, by 3 months. Military pay audit readiness is
an important element of this goal.

This report was initiated under our mandate to audit the U.S.
government’s financial statements. 12 Our objectives were to perform basic
audit procedures necessary to conclude about the validity and accuracy
of Army’s active duty military payroll. Those basic audit procedures
included (1) identifying a valid population of military payroll transactions
and (2) testing a sample of payroll transactions for validity and accuracy.

To address our first objective, we obtained the population of Army active
duty military payroll records from the Defense Finance and Accounting
Service, Indianapolis (DFAS-IN). Because the Army does not have an
integrated military personnel and payroll system, we worked with the
Defense Manpower Data Center (DMDC) (DOD’s central source for
personnel information) to match DFAS-IN payroll accounts to DMDC



10
  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.
11
 DOD, Secretary of Defense Memorandum, “Improving Financial Information and
Achieving Audit Readiness,” October 13, 2011.
12
     31 U.S.C. §§ 331(e), 717(b)(1).




Page 3                                    GAO-12-406 Army Military Pay Audit Readiness
personnel records to determine whether the population of Army military
payroll accounts was in agreement with the population of personnel
records in DMDC. 13 Nearly all of the identified differences related to
service members in separation status. However, we referred six
unresolved duplicate items to DMDC and Army Human Resources
Command for further research and correction. To address our second
objective, we used the population of matched personnel and payroll
records to select a statistical sample of 250 soldiers for testing payroll
accuracy for the sampled items. We requested 12 months of fiscal year
2010 Leave and Earnings Statements for each soldier in our sample, the
most recent data available, to compare pay transactions with supporting
Army personnel documents indicating such information as military orders,
special duty and expertise entitlements, marital status, and dependent
information. We focused on key steps to be followed in establishing
military personnel records on specific pay and allowance amounts. We
interviewed Army Personnel, Human Resources Command, and Finance
Command officials and visited a Military Enlistment Program Station in
Indianapolis, Indiana, and a military reception battalion at a training
installation at Ft. Jackson, South Carolina, to document the processes for
capturing pay-related information and setting up military personnel
records. In addition, we interviewed finance officials at Defense Military
Pay Offices at two Army field installations to gain an understanding of
how pay accounts are established, adjusted, and documented.

We conducted this performance audit from June 2010 through March
2012 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
that 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. Other matters identified in
our work that merit management’s attention will be reported in a separate
letter to Army management.




13
  We relied on work performed by DMDC because we reviewed its quality control
procedures and found them to be adequate for our audit purposes.




Page 4                                    GAO-12-406 Army Military Pay Audit Readiness
                         The United States Army is responsible for land-based military operations.
Background               It is the largest and oldest established branch of the U.S. military. The
                         modern Army has its roots in the Continental Army, which was formed on
                         June 14, 1775, before the establishment of the United States, to meet the
                         demands of the American Revolutionary War. The Army’s mission is to
                         fight and win our nation’s wars by providing prompt, sustained land
                         dominance across the full range of military operations and spectrum of
                         conflict in support of combatant commands. The Army does this by
                         organizing, equipping, and training forces; accomplishing missions
                         assigned by the President, the Secretary of Defense, and combatant
                         commanders; and transforming for the future.

                         For fiscal year 2010, Congress appropriated more than $52 billion to the
                         “Military Personnel, Army” appropriation, which is a 1-year appropriation
                         available for the pay, benefits, incentives, allowances, housing,
                         subsistence, travel, and training primarily for active duty service
                         members. 14 The Defense Finance and Accounting Service in
                         Indianapolis, Indiana (DFAS-IN) is responsible for accounting,
                         disbursement, and reporting for the Army’s military personnel costs using
                         the Defense Joint Military Pay System-Active Component (DJMS-AC).
                         According to DFAS-IN, of the $52 billion in fiscal year 2010 military
                         personnel appropriations, the Army’s nearly 680,000 service members
                         received $46.1 billion in pay and allowances. To provide payroll support
                         to the vast number of active Army service members, DFAS-IN has over
                         40 Defense Military Pay Offices within the United States that provide
                         finance services to military personnel in designated geographical areas.


Statement of Budgetary   The Statement of Budgetary Resources is the only financial statement
Resources                predominantly derived from an entity’s budgetary accounts in accordance
                         with budgetary accounting rules, which are incorporated into generally
                         accepted accounting principles (GAAP) for the federal government. The
                         Statement of Budgetary Resources is designed to provide information on
                         authorized budgeted spending authority as reported in the Budget of the
                         United States Government (President’s Budget), including budgetary




                         14
                          Department of Defense Appropriations Act, 2010, Pub. L. No. 111-118, 123 Stat. 3409,
                         3410, 3458 (Dec. 19, 2009); Supplemental Appropriations Act, 2010, Pub. L. No. 111-
                         212,124 Stat. 2302, 2305 (July 29, 2010).




                         Page 5                                    GAO-12-406 Army Military Pay Audit Readiness
                           resources, availability of budgetary resources, and how budgetary
                           resources have been used. 15

                           For fiscal year 2010, the Army reported $331.8 billion in total budgetary
                           resources and over $233.8 billion in net outlays (spending, net of
                           offsetting collections 16). The Army’s reported $46.1 billion in fiscal year
                           2010 active duty military payroll accounts for 20 percent of its net outlays.


Army Personnel Role in     The Under Secretary of Defense for Personnel and Readiness (USD
the Military Pay Process   (P&R)) advises the Secretary of Defense on a number of personnel areas
                           such as recruitment, pay and benefits, and oversight of military readiness,
                           and serves as DOD’s Chief Human Capital Officer. The Office of the
                           Assistant Secretary of the Army for Manpower and Reserve Affairs (ASA
                           (M&RA)) is responsible for setting the strategic direction and providing
                           overall supervision for manpower, personnel, and Reserve component
                           affairs of the Department of the Army, and serves as the Army’s lead for
                           manpower policy and human resources, among other things. In order to
                           fulfill these responsibilities, ASA (M&RA) relies on the Deputy Chief of
                           Staff, G-1, for advice and assistance. 17 In addition to being the principal
                           military advisor to ASA (M&RA), G-1’s other responsibilities include
                           developing policy that provides guidance for responsive and flexible
                           human resources support of the Army and overseeing the officer
                           accession and enlisted recruiting policy. The Human Resources
                           Command supports the Deputy Chief of Staff, G-1, in the management of
                           all military personnel by serving as the functional proponent for military
                           personnel management and personnel systems. Army Human Resources
                           Command, unit commanders, and training certification officials, among
                           others, are responsible for providing DFAS-IN with accurate and timely
                           information regarding changes in individual military member status
                           necessary to maintain accurate and timely payroll accounts.


                           15
                              Budgetary resources include the amount available to enter into new obligations and to
                           liquidate them. Budgetary resources consist 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.
                           16
                             Offsetting collections are collections from intragovernmental transfers, business-like
                           transactions with the public, and collections from the public that are governmental in
                           nature but required by law to be classified as offsetting. These collections are all
                           authorized by law to be credited to appropriation or fund expenditure accounts.
                           17
                                The Deputy Chief of Staff, G-1 function also is referred to as Army Personnel.




                           Page 6                                          GAO-12-406 Army Military Pay Audit Readiness
Creation of a Military Pay   As illustrated in figure 1, military pay accounts are established as part of
Account                      the enlistment process for new recruits and are based on personnel
                             records. The recruiting office establishes the basics of the recruit’s
                             personnel file in the Army Recruiting Information Support System
                             (ARISS). This file contains the recruit’s full name, contact information,
                             country of origin, social security number (SSN), and recruiting status.
                             After applying, the recruit reports to a Military Entrance Processing
                             Station (MEPS), 18 which works with the recruiting office to qualify
                             applicants for military service and serves as the quality control unit
                             between the recruiter and the military service. The applicant concludes
                             the MEPS visit by signing either an enlistment contract or a delayed entry
                             contract. The contract notes the terms of enlistment, such as pay grade,
                             which relate to basic pay information. This completes the entrance
                             documents that the MEPS collects. MEPS personnel then administer the
                             Oath of Enlistment. All of the documents created are electronically
                             transmitted to the respective service recruiting system, that is, ARISS for
                             the Army, and a paper copy, referred to as a “Packet,” is created that
                             accompanies the recruit to the training installation where the Packet is
                             delivered to the personnel office at the Reception Battalion. 19

                             Recruits generally report to their assigned installation Reception Battalion
                             for training within 2 weeks to 14 months after signing their enlistment
                             contract. The service liaison counselor keeps the documentation Packet
                             until the enlistee reports to the Reception Battalion, at which time the
                             Packet is sent to the respective training installation. The Reception
                             Battalion uses information contained in the Packet to create a personnel
                             file in the Reception Battalion Automated Support System (RECBASS).
                             The enlistee provides additional information on dependents, such as a
                             marriage certificate, birth certificates for dependent children, and W-4
                             dependent information. Reception Battalion personnel staff assist the
                             enlistee in filling out any additional forms if they were not included in the
                             Packet, such as direct deposit, pay allotments for base housing, savings
                             account deposits, child support, and emergency contact information.


                             18
                               MEPS are under the U.S. Military Entrance Processing Command (USMEPCOM), which
                             is the military entrance processing command for all Department of Defense military
                             services and the U.S. Coast Guard. There are 65 MEPS within the United States and
                             Puerto Rico.
                             19
                               Some MEPS have moved to electronic records in lieu of hard copy Packets. Other
                             MEPS may use Adobe Portable Document Format (PDF) file records that are e-mailed to
                             the training installation.




                             Page 7                                   GAO-12-406 Army Military Pay Audit Readiness
                                         Personnel staff enter this information into the personnel system and send
                                         the information to the installation’s Defense Military Pay Office where the
                                         enlistee’s payroll account, referred to as a master military pay account, is
                                         created in DJMS-AC. 20

Figure 1: Army Process for Creating a Military Pay Record for an Enlisted Service Member




                                         Military pay starts once the payroll account is established in DJMS-AC.
                                         Army active duty military personnel receive pay and allowances based on
                                         their grade and time in service; location; and whether they are married,
                                         have dependents, or are performing special duties. The Army’s active
                                         duty service members may elect to be paid once a month at the end of
                                         the month or twice a month at mid-month and at the end of month. The
                                         service member’s pay information is consolidated into one monthly Leave
                                         and Earnings Statement. In addition to basic pay, military members may
                                         also be eligible for cash recruitment or retention incentives (i.e., bonuses).
                                         Any necessary pay change after the pay account is set up is initiated by



                                         20
                                           Within the United States, DFAS-IN oversees 38 Defense Military Pay Offices and 14
                                         satellite offices. Outside the United States, the Army Finance Command oversees 20
                                         Finance Offices, which manage and update military pay accounts.




                                         Page 8                                     GAO-12-406 Army Military Pay Audit Readiness
                         the appropriate officials throughout the Army. These changes generally
                         relate to promotions, special duty pay, incentive pay, Permanent Change
                         of Station assignments, Temporary Change of Station assignments, and
                         changes in dependents.

                         The Defense Manpower Data Center (DMDC) is the central DOD source
                         to identify, authenticate, authorize, and provide information on DOD-
                         affiliated personnel. As such, it is the one, central access point for
                         information and assistance on DOD entitlements, benefits, and medical
                         readiness for uniformed service members, veterans, and their families.
                         Major DMDC databases include information on pay; accessions and
                         examinations (USMEPCOM); authorizations and requirements; military
                         units and addresses, special purposes, for example, contingency
                         operations; Joint Command duty assignments; retirement point
                         repository; and mobilization/activations. DMDC has five major operating
                         locations, including the DOD Center, in Monterey Bay, California; the
                         Washington, D.C. area; and overseas locations in South Korea, Europe,
                         and Southwest Asia. In addition, DMDC has 2,145 issuing stations
                         (badge offices, etc.) at 1,400 worldwide locations. Computer support for
                         the DOD Center in Monterey Bay is provided by the DOD Center in
                         Monterey Bay and the Naval Postgraduate School in Monterey,
                         California. Other computer support offices are located in Arlington,
                         Virginia, and Auburn Hills, Michigan.


Processing of Military   Payments of basic pay and allowances to service members are made via
Payroll                  electronic funds transfer (EFT) through DJMS-AC. 21 At the local level,
                         DMPOs are required to review any substantial changes (defined as +/-
                         150 percent) in payroll data daily. The intent of this review is to identify
                         data input errors. In addition, a day before payroll is processed, DFAS-IN
                         conducts a pre-payroll review. This is a manual process, where the
                         DFAS-IN Military Pay Operations (Mil Pay Ops) staff obtain a sample 22 of
                         Leave and Earnings Statements from DJMS-AC and trace the information
                         in the statements to the relevant table outside of DJMS-AC. The purpose


                         21
                          Although most payments are EFTs to the service member, some payments may be
                         made manually. For example, casual pay (an advance payment) may be made using a
                         U.S. Treasury Check, cash, or stored value card (i.e., debit card).
                         22
                           The number of Leave and Earnings Statements reviewed is dependent on the number of
                         service members within DJMS-AC at that time. A program is run to select every 900th
                         statement.




                         Page 9                                   GAO-12-406 Army Military Pay Audit Readiness
of this review is to identify potential system problems with the pay
information used to calculate the pay amount. After completing this
review, DFAS-IN then sends the DJMS-AC totals to the certifying official
for certification. The certification process checks the DJMS-AC totals
against the disbursing file totals. The certifying official sends an
authorization and voucher to the Disbursing Office requesting release of
payment. The DFAS-IN Disbursing Office uses the Army’s disbursing
system 23 to send electronic payments to the Federal Reserve Banks,
which in turn distribute payments to each service member’s bank
account.

DFAS-IN’s Accounting Division performs a number of steps to transfer
payroll transactions from DJMS-AC to the Army’s general ledger
accounting system. 24 The Accounting Division receives DJMS reports
from Mil Pay Ops that contain the computed total pay costs and
disbursements for the payroll transactions, which are recorded as
summary records by budget activity (e.g., officer, enlisted, and cadet
pay). An individual soldier’s payroll information is not recorded in the
accounting system. Military pay accounting data is uploaded from the
Army’s general ledger accounting system into the Defense Departmental
Reporting System-Budgetary (DDRS-B) for budgetary reporting and then
to DDRS-Audited Financial Statement (DDRS-AFS) for financial
statement reporting. Figure 2 provides a high-level illustration of the
Army’s complex environment for establishing military personnel and
payroll records and processing military pay.




23
  The Army’s disbursing system, Standard Financial System (STANFINS) Redesign
Subsystem-1 (SRD-1), is an online, interactive accounting and finance system that
incorporates Military Pay, Accounts Payable, Civilian Pay, Accounting and Disbursing into
the online finance and accounting system.
24
  The Standard Financial System (STANFINS) is the Army standard general ledger
system currently used for recording military payroll.




Page 10                                     GAO-12-406 Army Military Pay Audit Readiness
Figure 2: Overview of Major Systems Involved in Processing Active Army Military Payroll




                                         a
                                         iPERMS does not feed DJMS-AC.




                                         Page 11                                 GAO-12-406 Army Military Pay Audit Readiness
                         Army Regulation No. 600-8-104, Military Personnel Information
                         Management/Records, establishes requirements for the Army’s Official
                         Military Personnel File. 25 The Army deployed iPERMS in 2007, and
                         certain MilPer (Military Personnel) Messages and a Department of the
                         Army memorandum indicate that iPERMS is intended to serve as the
                         system of record for the Official Military Personnel File. 26 In addition, the
                         Army is in the process of developing the Integrated Personnel and Pay
                         System-Army (IPPS-A), which is targeted for completion in 2017.


                         The Army could not readily identify a complete population of Army payroll
Process and System       accounts for fiscal year 2010, given existing procedures and systems.
Weaknesses Hindered      The Army and the Defense Finance and Accounting Service in
                         Indianapolis (DFAS-IN) did not have an effective, repeatable process for
Army’s Ability to        identifying the population of active duty payroll accounts. In addition, the
Identify a Valid         Defense Manpower Data Center (DMDC) did not have an effective
Population of Military   process for comparing military pay account files to military personnel files
                         to identify a valid population of military payroll transactions. 27 For
Payroll Transactions     example, it took 3 months and repeated attempts before DFAS-IN could
                         provide a population of service members who received active duty Army
                         military pay in fiscal year 2010. Similarly, it took DMDC over 2 months to
                         compare the total number of fiscal year 2010 active duty payroll accounts
                         to its database of personnel files. Standards for Internal Control in the
                         Federal Government requires all transactions and other significant events
                         to be clearly documented and the documentation readily available for
                         examination. 28 In addition, these ineffective processes are not in accord
                         with DOD’s own guidance or financial audit guidance. DOD’s Financial


                         25
                           Department of the Army, Army Regulation No. 600-8-104, Military Personnel Information
                         Management/Records (Washington, D.C.: June 22, 2004).
                         26
                           MilPer Message Number 10-322, “Submitting OMPF Documents into the Interactive
                         Personnel Electronic Records System (iPERMS),” § 3, Dec. 9, 2010; MilPer Message
                         Number 08-072, “Changes to Information Management Maintenance for the Official
                         Military Personnel File (OMPF) and DA Form 201, Military Personnel Records Jacket
                         (MPRJ),” §§ 2–5, March 18, 2008; and Department of the Army (DA) Memo 600-8-104,
                         “Military Personnel Information Management/Records: Official Military Personnel File
                         Access,” §§ 1–6, June 26, 2006.
                         27
                          DFAS-IN processes military payroll for the Army, and DMDC supports audits by
                         performing analyses of Army military personnel files and data.
                         28
                           GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
                         (Washington, D.C.: November 1999).




                         Page 12                                    GAO-12-406 Army Military Pay Audit Readiness
                             Improvement and Audit Readiness (FIAR) Guidance sets out key tasks
                             essential to achieving audit readiness, including defining and identifying
                             the population of transactions for audit purposes. 29 The GAO/PCIE
                             Financial Audit Manual (FAM) provides guidance concerning typical
                             control activities, such as independent checks on the validity, accuracy,
                             and completeness of computer-processed data. 30 One example of a
                             control in this area includes comparing data from different sources for
                             accuracy and completeness. Without effective processes for identifying a
                             complete population of Army military pay records and comparing military
                             pay accounts to personnel records, the Army will have difficulty meeting
                             DOD’s 2014 audit readiness goal and its 2017 goal for a complete set of
                             auditable financial statements.


DFAS-IN Did Not Have an      DFAS-IN made three attempts from November 2010 through early
Effective Process for        January 2011 to provide us a Defense Joint Military Pay System-Active
Identifying the Population   Component (DJMS-AC) file extract of Army service members who
                             received active duty pay in fiscal year 2010. The first attempt included
of Army Military Payroll     11,940 duplicate pay accounts, and the total number of pay accounts
Records                      included in the second attempt increased by 28,035 records over the first
                             attempt, necessitating a third attempt to establish the population of fiscal
                             year 2010 active duty pay records. We requested that DMDC compare
                             the results of DFAS-IN’s third attempt to identify the population of Army
                             fiscal year 2010 payroll accounts against DMDC’s compilation of monthly
                             active duty payroll data that it received from DFAS-IN. Of the 677,024
                             Army active duty pay accounts, per DJMS-AC, we were able to reconcile
                             all but 1,025 pay accounts (less than 1 percent of the total active duty pay
                             accounts, which is not considered material) to pay account data that
                             DFAS-IN had previously provided to DMDC. Standards for Internal
                             Control in the Federal Government requires all transactions and other
                             significant events to be clearly documented and the documentation




                             29
                               DOD, Office of the Under Secretary of Defense (Comptroller/CFO), Financial
                             Improvement and Audit Readiness (FIAR) Guidance, December 2011.
                             30
                               GAO/PCIE, Financial Audit Manual, Volume 1, GAO-08-585G (Washington, D.C.: July
                             2008). The President’s Council on Integrity and Efficiency (PCIE) was replaced by the
                             Council of the Inspectors General on Integrity and Efficiency (CIGIE). CIGIE was
                             statutorily established as an independent entity within the executive branch by the
                             Inspector General Reform Act of 2008, Pub. L. No. 110-409, § 7, 122 Stat. 4302, 4305-
                             4313 (Oct. 14, 2008) (codified at 5 U.S.C. App., § 11).




                             Page 13                                    GAO-12-406 Army Military Pay Audit Readiness
                           readily available for examination. 31 As discussed later in this report, we
                           were unable to verify the validity of the records. Further, we did not
                           attempt to reconcile military payroll amounts to the related disbursements
                           because an Office of the Secretary of Defense (Comptroller) and Chief
                           Financial Officer (OUSD(C)) contractor was in the process of performing
                           a pilot reconciliation of payroll to disbursement data.

                           DOD’s Financial Improvement and Audit Readiness (FIAR) Guidance
                           states that being able to provide transaction-level detail for an account
                           balance is a key task essential to achieving audit readiness. At the time
                           we initiated our audit, Army officials told us that they had not yet focused
                           on this area in their audit readiness efforts because the target date for
                           Army military pay was not until the first quarter of fiscal year 2015. 32 The
                           inability to readily provide a population of military pay accounts impeded
                           our efforts to accomplish our audit objectives and, if not effectively
                           addressed, will impede the Army’s ability to meet DOD’s new Statement
                           of Budgetary Resources audit readiness goal of September 30, 2014.


System Weaknesses          DMDC did not have an effective process for comparing military pay
Hindered the Matching of   account files with military personnel files. The Army’s pay and personnel
Army Pay Accounts to       systems are not integrated, which can lead to differences between the
                           systems and potential errors. Therefore, an audit of military pay would
Personnel Files            include comparisons of military payroll accounts to personnel records to
                           identify discrepancies. While DMDC was ultimately able to confirm that all
                           677,024 service members who received fiscal year 2010 active duty Army
                           military pay from the DJMS-AC had an active duty personnel file in one of
                           the multiple personnel systems, the reconciliation process was labor
                           intensive and took over 2 months to complete. For example, DMDC’s
                           initial comparison of active duty Army military pay accounts to personnel
                           records identified 67,243 pay accounts that did not have a corresponding
                           active army personnel record on September 30, 2010. 33 Labor-intensive
                           research was necessary to reconcile the differences between DJMS-AC
                           pay records and Army personnel files compiled by DMDC. According to


                           31
                                GAO/AIMD-00-21.3.1.
                           32
                             Subsequent to this discussion, the Secretary of Defense issued a memo accelerating
                           the Statement of Budgetary Resources audit readiness goal from 2017 to 2014.
                           33
                            The personnel file used for comparison included service members who were still on
                           active duty in the Army on September 30, 2010, and did not cover the entire fiscal year.




                           Page 14                                      GAO-12-406 Army Military Pay Audit Readiness
DMDC, these differences related primarily to personnel who had either
left or were scheduled to leave the service, were reserve component
soldiers released from active duty, or were soldiers who had died during
fiscal year 2010. For these reasons, the service members were not
included in the personnel file on September 30, 2010, that DMDC used
for our initial comparison. We confirmed six duplicate SSNs in personnel
records with the Social Security Administration and referred these records
to DMDC and the Army for further research and appropriate action. 34

DMDC attempted to complete our requested comparison of active duty
Army pay accounts to military personnel records in January 2011, but
was unable to complete the reconciliation until early March 2011. DMDC
officials told us that the reasons for the delays included mainframe
computer issues, 35 staff illness and turnover, and management data
quality reviews of the file comparison results, including additional file
comparisons to resolve differences. Without an effective process for
confirming that the Army’s active duty payroll population reconciles to
military personnel records, the Army’s efforts to meet DOD’s Statement of
Budgetary Resources auditability goal of September 30, 2014, will be
impeded.




34
  The six duplicate personnel records related to SSNs that were assigned to two different
service member names.
35
  DMDC and other DOD agencies use the Navy Postgraduate School mainframe
computer to support their activities and share data processing priorities.




Page 15                                     GAO-12-406 Army Military Pay Audit Readiness
                       The Army does not have an efficient or effective process or system for
The Army Was Unable    providing documentation that supports payments for Army military payroll.
to Provide             For example, DFAS-IN had difficulty retrieving and providing usable
                       Leave and Earnings Statements files for our sample items, and the Army
Documentation to       and DFAS were unable to provide personnel and finance documents to
Support the Validity   support our statistical tests of all 250 service members’ pay accounts for
and Accuracy of a      fiscal year 2010. Standards for Internal Control in the Federal
                       Government 36 and DOD’s FIAR Guidance 37 require audited entities to
Sample of Payroll      document transactions and events and assure that supporting
Transactions           documentation can be identified, located, and provided for examination.
                       In addition, DOD Regulation 7000.14-R, Financial Management
                       Regulation (FMR), requires the military components to maintain
                       documentation supporting all data generated and input into finance and
                       accounting systems or submitted to DFAS. 38 Further, DOD’s Financial
                       Improvement and Audit Readiness (FIAR) Guidance states that
                       identifying and evaluating supporting documentation for individual
                       transactions and balances, as well as identifying the location and sources
                       of supporting documentation and confirming that appropriate supporting
                       documentation exists, is a key audit readiness step. However, because
                       the Army was unable to provide documents to support reported payroll
                       amounts, we were unable to determine whether the Army’s payroll
                       accounts were valid, and we were unable to verify the accuracy of
                       payments and reported active duty military payroll. Further, because
                       military payroll is significant to the financial statements, the Army will not
                       be able to pass an audit of its Statement of Budgetary Resources without
                       resolving these control weaknesses. The following discussion
                       summarizes the problems with the Army’s processes related to military
                       pay audit readiness.




                       36
                        GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
                       (Washington, D.C.: November 1999).
                       37
                         DOD, Office of the Secretary of Under Secretary of Defense (Comptroller/CFO)
                       Financial Improvement and Audit Readiness (FIAR) Guidance, December 2011.
                       38
                         DOD, FMR, Volume 6A, Chapter 2, “Financial Reports Roles and Responsibilities,”
                       ¶ 020201.B. (rev. August 2011).




                       Page 16                                    GAO-12-406 Army Military Pay Audit Readiness
DFAS-IN Could Not            DFAS-IN staff experienced difficulty and delays in providing usable Leave
Readily Provide Usable       and Earnings Statement files to support our testing of Army military
Leave and Earnings           payroll. We selected a sample of 250 service members and requested the
                             relevant Leave and Earnings Statement files for fiscal year 2010. After
Statement Files for Sample   multiple discussions and requests, we ultimately obtained usable Leave
Items                        and Earnings Statement files for our sample items—5 weeks after our
                             initial request. DFAS-IN took over 2 weeks to obtain the initial set of
                             Leave and Earnings Statement files because it retrieves the files from two
                             areas of the Defense Joint Military Pay System-Active Component
                             (DJMS-AC). The active DJMS-AC database holds the current month plus
                             the previous 12 months’ data; older data are archived. When we
                             requested Leave and Earnings Statement files for fiscal year 2010 in April
                             2011, a portion of these files had been archived and had to be retrieved
                             from the archived database. In addition, the first set of Leave and
                             Earnings Statement files that DFAS-IN provided included statements
                             outside the requested fiscal year 2010 timeframe of our audit, thus we
                             had to request a new set of files. It took over 1 week, including our data
                             quality review, to obtain the second set of Leave and Earnings Statement
                             files consisting of 445 separate files containing monthly statements for the
                             250 service member pay accounts in our sample. We determined that the
                             Leave and Earnings Statements for an individual service member
                             generally were in two or more of the files provided. Consequently, we had
                             to combine these files into a format with each service member’s Leave
                             and Earnings Statement files grouped together to include all of the pay
                             and allowance information for the service members in our sample. This
                             combining and formatting required 2 additional weeks.


The Army Was Unable to       Although the Army deployed the Interactive Personnel Management
Locate Supporting            System (iPERMS) as the Army’s Official Military Personnel File in 2007
Documentation for            and the requirements for assuring that adequate supporting
                             documentation is available for audit and examination are clearly defined,
Military Pay Account         the Army did not have procedures in place to assure that its military pay
Sample Items                 transactions were adequately supported and that the supporting
                             documentation could be readily retrieved and provided for financial audit
                             purposes. Standards for Internal Control in the Federal Government
                             requires internal control and all transactions and other significant events
                             to be clearly documented and the documentation readily available for
                             examination. 39 DOD Regulation 7000.14-R, Financial Management


                             39
                              GAO/AIMD-00-21.3.1.




                             Page 17                              GAO-12-406 Army Military Pay Audit Readiness
Regulation (FMR), requires the military components to maintain
documentation supporting all data generated and input into finance and
accounting systems or submitted to DFAS. 40 This regulation also requires
the components to ensure that audit trails are maintained in sufficient
detail to permit tracing of transactions from their sources to their
transmission to DFAS. Audit trails are necessary to demonstrate the
accuracy, completeness, and timeliness of transactions as well as to
provide documentary support for all data generated by the component
and submitted to DFAS for recording in the accounting systems and use
in financial reports. 41 Further, DOD’s FIAR Guidance states that
identifying and evaluating supporting documentation for individual
transactions and balances, as well as the location and sources of
supporting documentation and confirming that appropriate supporting
documentation exists, is a key audit readiness step. 42 Without the
capability to readily locate and provide supporting documentation for
military payroll transactions within a short timeframe, the Army’s ability to
pass a financial statement audit will be impeded.

After selecting our sample of 250 Army military payroll accounts in March
2011, we worked with Army Human Resources Command, Army Finance
Command, and DFAS-IN officials to obtain source documents that
supported basic pay, allowances, and entitlements. After being directed to
make our document requests to various offices, none of which provided
supporting documentation but instead referred us to other offices, we
suggested that the Army focus on the first 20 pay account sample items
to assess the feasibility of obtaining supporting documentation. 43 When
the Army continued to have difficulty locating supporting documentation,
we suggested that the Army focus on the first 5 sample items. As of the
end of September 2011, 6 months after receiving our initial request, the
Army and DFAS-IN were able to provide complete documentation for 2 of


40
 DOD, FMR, Volume 6A, Chapter 2, “Financial Reports Roles and Responsibilities,”
020201.B. (rev. August 2011).
41
 DOD, FMR, Volume 6A, Chapter 2, “Financial Reports Roles and Responsibilities,”
020203.A. (rev. August 2011); GAO/AIMD-00-21.3.1.
42
  DOD, Fiscal Year 2010 Financial Improvement and Audit Readiness (FIAR) Guidance,
Office of the Under Secretary of Defense (Comptroller/CFO) (Arlington, VA: May 15,
2010).
43
 A sample item constitutes a soldier’s pay account for fiscal year 2010, including reported
Leave and Earnings Statements for all 12 months of the fiscal year.




Page 18                                      GAO-12-406 Army Military Pay Audit Readiness
our 250 sample items, partial support for 3 sample items, and no support
for the remaining 245 sample items. 44 Our review of the partial
documentation provided for 3 sample items showed that the Army was
unable to provide supporting documentation for common elements of its
military pay, including basic allowance for housing, cost of living
allowance, hardship duty pay-location, and hostile fire/imminent danger
pay. Specifically,

•    The Army was unable to provide supporting documentation for basic
     allowance for housing for one service member. In general, a service
     member on active duty is authorized a housing allowance based on
     the member’s grade, dependency status, and location. Basic
     allowance for housing is based on the median housing costs and is
     paid independently of the service member’s actual housing costs. At
     the conclusion of our fieldwork, a DFAS-IN official told us they had
     requested this documentation from the National Archives and Records
     Administration (NARA); however, they had not yet received it. 45

•    For two sample items, the Army did not provide adequate
     documentation that the two service members were appropriately paid
     for clothing allowance. A clothing allowance is paid to enlisted service
     members annually in the anniversary month each year after they
     received their first clothing allowance. At the end of our field work,
     DFAS-IN had not provided an explanation as to why these service
     members received their clothing allowance in a month other than their
     anniversary date.

•    The Army was unable to provide supporting documentation for one
     service member residing within the continental United States receiving
     a cost-of-living allowance. A cost-of-living allowance for soldiers
     stationed in the United States is a supplemental allowance designed
     to help offset higher prices in high-cost locations. At the end of our
     field work, a DFAS-IN official told us they had requested the
     documentation from NARA; however, they had not yet received it.



44
  We used the results of DMDC’s comparison of the population of Army fiscal year 2010
active duty military pay accounts to military personnel records to select a statistical sample
of pay accounts for testing the accuracy of basic pay and allowance transactions reported
on the related monthly fiscal year 2010 Leave and Earnings Statements.
45
  NARA is the nation’s record keeper of all documents and materials created in the course
of business conducted by the United States federal government.




Page 19                                       GAO-12-406 Army Military Pay Audit Readiness
•   Finally, for two service members, the Army was unable to provide
    supporting documentation for hardship duty pay and hostile
    fire/imminent danger pay. Service members are entitled to hardship
    duty pay for location assignments when there is a permanent change
    of station duty or temporary/deployed/attached duty of over 30 days in
    a specific location. Additionally, a service member is entitled to hostile
    fire/imminent danger pay when, as certified by the appropriate
    commander, the member is (1) subject to hostile fire or explosion of a
    hostile mine; (2) on duty in an area close to hostile fire incidents and
    the member is in danger of being exposed to the same dangers
    experienced by other service members; or (3) killed, injured, or
    wounded by hostile fire and the service member is on official duty in a
    designated imminent danger pay area. At the end of our field work,
    the Army was unable to provide adequate support for the dates that
    each of these service members reported for duty at the specified
    location which triggered the start of these two types of pay, and it was
    unable to provide documentation that one service member had been
    ordered to report to duty in the designated location.

As shown in figure 3, the Army provided complete documentation for
soldier pay accounts associated with sample items #2 and #4, but it was
unable to provide complete documentation for sample items #1, #3, and
#5. Further, after 6 months, the Army was still unable to provide any
documentation for the remaining 245 pay account sample items.




Page 20                               GAO-12-406 Army Military Pay Audit Readiness
Figure 3: Test Results for 5 of 250 Soldier Pay Account Sample Items




One of the reasons the Army was unable to provide supporting
documentation is that it does not have a centralized repository for pay-
affecting documents. Army personnel and finance documentation
supporting basic pay and allowances resides in numerous systems, and
original hard copy documents are scattered across the country—at
hundreds of Army units and NARA federal records centers. According to
Army and DFAS-IN officials, there are at least 45 separate systems that
the Army uses to perform personnel and pay functions with no single,
overarching personnel system. Although these systems contain personnel
data on military members and their dependents and feed these data to
DJMS-AC, the systems do not contain source documents.

Army Regulation No. 600-8-104, Military Personnel Information
Management/Records, establishes requirements for the Army’s Official
Military Personnel File. 46 Army policies indicate that iPERMS is intended




46
 Department of the Army, Army Regulation No. 600-8-104, Military Personnel Information
Management/Records (Washington, D.C.: June 22, 2004).




Page 21                                   GAO-12-406 Army Military Pay Audit Readiness
to serve as the system of record for the Official Military Personnel File. 47
The Army deployed iPERMS in 2007 and designated iPERMS as the
Army’s Official Military Personnel File. However, when we attempted to
find supporting documents in iPERMS, we found that this system had not
been consistently populated with the required service member
documents, resulting in incomplete personnel records. For example,
when attempting to test our sample, we discovered that documents, such
as orders to support a special duty assignment, permanent change of
station orders, and release or discharge from active duty, that should
have been in iPERMS were not. The Army has designated the Human
Resources Command as the owner of iPERMS; however, local
installation personnel offices across the country are responsible for
entering most documents into individual service member iPERMS
accounts, and the Army has not established a mechanism for periodic
monitoring, review, and accountability of iPERMS to ensure that
personnel files are complete. For example, we found that documents
needed to support pay transactions are not in iPERMS because (1) Army
Regulation 600-8-104 does not require the personnel form to be included
and (2) the documents are finance documents and not personnel
documents. 48

Efforts to achieve auditablity are further compounded by payroll system
limitations. DJMS–AC, used to process Army active duty military pay, is
an aging, Common Business Oriented Language (COBOL) 49 mainframe-
based system that has had minimum system maintenance because DOD
planned to transition to the Forward Capability Pay System and then to



47
  MilPer Message Number 10-322, “Submitting OMPF Documents into the Interactive
Personnel Electronic Records System (iPERMS),” § 3, Dec. 9, 2010; MilPer Message
Number 08-072, “Changes to Information Management Maintenance for the Official
Military Personnel File (OMPF) and DA Form 201, Military Personnel Records Jacket
(MPRJ),” §§ 2–5, March 18, 2008; and Department of the Army (DA) Memo 600-8-104,
“Military Personnel Information Management/Records: Official Military Personnel File
Access,” §§ 1–6, June 26, 2006.
48
  These documents include the Department of the Army (DA) Form 5960, Authorization to
Start, Stop or Change Basic Allowance for Quarters and/or Variable Housing Allowance;
the Department of Defense (DD) Form 1561, Statement to Substantiate Payment of
Family Separation Allowance (FSA); and the DD Form 2367, Individual Overseas Housing
Allowance.
49
 COBOL is one of the earliest high-level programming languages. It was developed in
1959, and the language continues to evolve.




Page 22                                    GAO-12-406 Army Military Pay Audit Readiness
                          the Defense Integrated Military Human Resources System (DIMHRS). 50
                          DJMS-AC lacks key payroll computation abilities to pay active duty Army
                          service members. To address these functionality limitations, DFAS has
                          developed approximately 70 workaround procedures that are currently
                          being used to compensate for the lack of functionality in DJMS-AC. An
                          audit of Army military pay would necessitate an evaluation of these
                          procedures and related controls.

                          Another factor in the Army’s inability to provide support for military payroll
                          is that the Army has not adequately documented its personnel processes
                          and controls related to military pay. During our audit, we spent
                          considerable time attempting to identify the range of personnel and
                          finance documents that would be needed to support basic military pay
                          and allowances reported on service members’ Leave and Earnings
                          Statements and the appropriate office responsible for providing the
                          documentation. According to Internal Control Standards, written
                          documentation should exist covering the agency’s internal control
                          structure and all significant transactions and events. 51 The documentation
                          for internal control includes identification of the agency’s activity-level
                          functions and related objectives and control activities and should appear
                          in management directives, administrative policies, accounting manuals,
                          and other such guidance.


Army Military Pay Audit   DOD’s November 2011 FIAR Status Report includes DOD’s goal of
Readiness Efforts         achieving audit readiness for its Statement of Budgetary Resources by
Currently Under Way       the end of fiscal year 2014. DOD and the Army have established interim
                          goals for meeting the fiscal year 2014 Statement of Budgetary Resources
                          audit readiness goal. For example, the Army plans to assert audit
                          readiness for its General Fund Statement of Budgetary Resources,
                          including military pay, by March 31, 2013, and have its assertion tested
                          and fully validated by June 30, 2014. Army officials stated that military
                          pay audit readiness poses a significant challenge and acknowledged that




                          50
                           The Defense Integrated Military Human Resources System (DIMHRS) was terminated
                          due to the differences in the business processes, operations, and information required by
                          each Service.
                          51
                            GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
                          (Washington, D.C.: November 1999).




                          Page 23                                     GAO-12-406 Army Military Pay Audit Readiness
the success of the Army’s efforts will be key to meeting DOD’s 2014
Statement of Budgetary Resources audit readiness goal.

To meet this goal, the Army has several military pay audit readiness
efforts planned or under way—most of which were begun after we
initiated our audit. However, many of these efforts are in the early
planning stages and will need to be carefully documented and managed
to ensure effective and timely implementation.

•    In November 2010, as part of the Office of the Under Secretary of
     Defense (Comptroller) (OUSD(C)) effort to provide management
     consulting assistance where needed on financial audit readiness,
     DOD provided contractor support to the Army for documenting and
     testing DJMS-AC application system controls. 52 In November 2011,
     OUSD(C) and contractor officials provided us a status briefing that
     indicated DOD’s contractor expects to complete documentation and
     testing of DJMS-AC controls in March 2012.

•    The November 2011 OUSD(C) status briefing also noted that the
     Army’s Financial Improvement Plan (FIP) team began executing
     discovery, documentation, and controls testing of front-end military
     pay business processes, including accessions; field service activities;
     and Military Personnel, Army appropriation budget activities. This
     effort includes processes executed by the Army financial management
     and personnel communities, including the Army Budget Office, Office
     of the Deputy Chief of Staff for Personnel, Army and DFAS installation
     finance and military pay offices, and Army installation military
     personnel offices. The Army FIP effort encompasses the active Army,
     Army National Guard, and U.S. Army Reserve. The Army plans to
     complete these efforts by December 31, 2012, and implement any
     required corrective actions by December 31, 2013.

     Further, as part of the Army FIP discovery effort, Army officials told us
     they plan to develop a repository of military pay entitlement
     information by entitlement type, which includes governing laws and
     regulations; the necessary key supporting documentation, responsible
     parties, and location for retrieval; as well as the automated information


52
  Application system control is a category of control designed to help ensure
completeness, accuracy, validity, confidentiality, and availability of transactions and data
during application processing.




Page 24                                       GAO-12-406 Army Military Pay Audit Readiness
     systems involved and their owners. The Army plans to complete these
     efforts by December 31, 2013. However, it is not yet clear who will be
     responsible for entering pay-supporting documents in the repository
     and what process will be used for ensuring completeness of the files.
     As previously discussed, Army Regulation No. 600-8-104, Military
     Personnel Information Management/Records, established
     requirements for the Official Military Personnel File, but the regulation
     did not include requirements for ensuring that personnel documents
     are centrally located, retained in the service members’ Official Military
     Personnel File, or otherwise readily accessible. The regulation also
     did not require that these files be monitored to ensure their
     completeness.

•    Army officials told us that in conjunction with DFAS, it has identified
     other systems for SSAE No. 16 53 and DFAS self-reviews. Further, the
     Army plans to identify by March 31, 2012, all systems that have a
     material impact on the military pay processes and require Federal
     Information System Controls Audit Manual (FISCAM) assessments. 54
     The Army intends that all required reviews will be completed by
     December 31, 2013.

     Additionally, the Army is working with DFAS-IN to document
     processes and perform control testing of payroll accounting, referred
     to by the Army as back-end processes. The Army expects to
     implement all corrective actions on these controls by December 31,
     2012.

•    As a result of our work, Army and DFAS-IN officials told us they plan
     to develop a matrix of personnel documents that support military pay
     and allowances and identify officials responsible for providing this
     documentation. Army Deputy Chief of Staff, G-1, officials plan to work
     with IPPS-A team members to determine how IPPS-A will incorporate
     or link to this information. Effective development of such a matrix will
     be critical to ensuring that payroll transactions are supported and,


53
  Statement on Standards for Attestation Engagements (SSAE) No. 16,”Reporting on
Controls for a Service Organization,” effective July 15, 2011, supersedes Statements on
Auditing Standards (SAS) No. 70, and provides professional guidance on performing the
service provider’s (e.g., DFAS) examination.
54
 GAO, Federal Information System Controls Audit Manual (FISCAM), GAO-09-232G
(Washington, D.C.: Feb. 2, 2009). See §1.1 for purpose and use of the FISCAM.




Page 25                                     GAO-12-406 Army Military Pay Audit Readiness
                  therefore, audit ready. The need for such a matrix became apparent
                  nearly 1 year ago, but the Army has not yet completed such a matrix
                  or identified personnel responsible for providing needed documents.
                  Further, it has not established a central repository for these
                  documents, or designated iPERMS as the official repository, and it
                  has not established a mechanism for periodic monitoring, review, and
                  accountability to ensure that the central repository will be effectively
                  maintained.

              •   In addition, the Army is in the process of developing the Integrated
                  Personnel and Pay System-Army (IPPS-A). However, the current
                  targeted IPPS-A implementation date of 2017 will require the Army to
                  rely on its current systems for purposes of meeting DOD’s Statement
                  of Budgetary Resources audit readiness date of September 30, 2014.
                  IPPS–A is planned to be developed and implemented in two
                  increments, with multiple releases. The Army plans to employ 14- to
                  18-month development cycles for each release, with the goal of
                  fielding capabilities every 12 months. The Army intends for Increment
                  I to consist of a trusted data source of soldier personnel and human
                  resource data and to provide the foundation for Increment II, which is
                  expected to provide integrated personnel and pay services, to be
                  developed and implemented across multiple releases. In response to
                  our findings in this report, Army IPPS-A officials told us that they have
                  recently begun efforts to determine how IPPS-A will link to personnel
                  records that will be needed to support Army military payroll amounts.
                  The Army’s strategy is for each release of IPPS-A to incrementally
                  build upon the prior release’s design and capability, to ultimately
                  contribute toward the Army’s goal of reaching financial auditability by
                  fiscal year 2017. Because implementation of the IPPS-A is not
                  targeted for completion until 2017, a slippage in the implementation
                  date could impede the Army’s efforts to support DOD’s financial
                  statement audit readiness goal of September 30, 2017. Without timely
                  and effective efforts to establish an electronic repository of pay-
                  supporting documents and ensure that the documentation is
                  complete, IPPS-A will not be able to fully support the Army’s audit
                  readiness efforts.

              Active Army military payroll, reported at $46.1 billion for fiscal year 2010,
Conclusions   is material to all of the Army’s financial statements, and as such, will be
              significant to the Army’s audit readiness goals for the Statement of
              Budgetary Resources. The Army has several military pay audit readiness
              efforts that are planned or under way. Timely and effective
              implementation of these efforts could help reduce the risk related to



              Page 26                               GAO-12-406 Army Military Pay Audit Readiness
                      DOD’s 2014 Statement of Budgetary Resources audit readiness goal.
                      However, most of these actions are in the early planning stages.
                      Moreover, these initiatives, while important, do not address (1)
                      establishing effective processes and systems for identifying a valid
                      population of military payroll records, (2) ensuring Leave and Earnings
                      Statement files and supporting personnel documents are readily available
                      for verifying the accuracy of payroll records, (3) ensuring key personnel
                      and other pay-related documents that support military payroll transactions
                      are centrally located, retained in service member Official Military
                      Personnel Files, or otherwise readily accessible, and (4) requiring the
                      Army’s Human Resources Command to periodically review and confirm
                      that service member Official Military Personnel File records in iPERMS or
                      other master personnel record systems are consistent and complete to
                      support annual financial audit requirements. These same issues, if not
                      effectively resolved, could also jeopardize the 2017 goal for audit
                      readiness on the complete set of DOD financial statements. In addition,
                      the Army’s military pay auditability weaknesses have departmentwide
                      implications as the other military components, such as the Air Force and
                      the Navy, share some of the same military pay process and systems risks
                      as the Army. Going forward, focused and committed leadership and
                      knowledgeable staff in key functional areas, including personnel,
                      systems, military payroll, and accounting will be essential to effective
                      implementation of military pay audit readiness efforts.


                      To help the Army develop the processes and controls necessary to
Recommendations for   achieve financial statement audit readiness for military pay, we are
Executive Action      making the following four recommendations.

                      We recommend that the Secretary of the Army direct the Assistant
                      Secretary of the Army for Financial Management and Comptroller to work
                      with Army Personnel (G-1), DFAS-IN, and audit readiness officials to

                      •   document and implement a process for identifying and validating the
                          population of payroll transactions for fiscal year periods at a minimum.

                      •   identify key finance (i.e., pay-affecting) documents that support
                          military payroll transactions and develop and implement procedures
                          for maintaining them, including responsibility for coordination with
                          Army Personnel (G-1) and audit readiness officials.




                      Page 27                              GAO-12-406 Army Military Pay Audit Readiness
                     In addition, we recommend that the Secretary of the Army direct the
                     Assistant Secretary of the Army for Manpower and Reserve Affairs to
                     revise AR No. 600-8-104, Military Personnel Information
                     Management/Records, to require that

                     •   key personnel and other pay-related documents that support military
                         payroll transactions are centrally located, retained in the service
                         members’ Official Military Personnel File, or otherwise readily
                         accessible. Consider first using the Interactive Personnel
                         Management System (iPERMS) for this purpose.

                     •   the Army’s Human Resources Command periodically review and
                         confirm that service member Official Military Personnel File records in
                         iPERMS or other master personnel record systems are consistent and
                         complete to support annual financial audit requirements.

                     We received written comments from the Secretary of the Army on March
Agency Comments      12, 2012, stating that the Army agreed with our four recommendations.
and Our Evaluation   The Army’s letter also states that our work has been extremely helpful in
                     identifying the need to have consistent agreed-upon rules for
                     documenting files required to support audits of military pay and cited
                     several efforts under way to improve the auditability of its military pay.
                     The Army’s comments are reprinted in appendix II.

                     The Army’s letter states that it believes we found no significant issues in
                     our review of the military pay accounts, but our report is very clear in
                     highlighting the significance of the issues with the Army’s military payroll.
                     For instance, our report states that without effective processes for
                     identifying a complete population of Army military pay records and
                     comparing military pay accounts to personnel records, the Army will have
                     difficulty meeting DOD’s 2014 Statement of Budgetary Resources audit
                     readiness goal and its 2017 goal for a complete set of auditable financial
                     statements. In addition, because the Army was unable to provide
                     documents to support reported payroll amounts, we were unable to
                     determine whether the Army’s payroll accounts were valid, and we were
                     unable to verify the accuracy of the payments and reported active duty
                     military payroll.

                     Further, in responding to our first recommendation that the Army
                     document and implement a process for identifying and validating the
                     population of payroll transactions for fiscal year periods, the Army stated
                     that it validates personnel and payroll records monthly in real time, and



                     Page 28                               GAO-12-406 Army Military Pay Audit Readiness
will evaluate the value of retaining personnel files for prior years. If the
monthly pay to personnel comparison is a control procedure that the
Army performs regularly and intends for the auditors to rely on, the
process and results must be documented and retained for the auditor to
assess and test beyond the end of the fiscal year, as we recommended.


We are sending copies of this report to the Secretary of Defense; the
Under Secretary of Defense (Comptroller/Chief Financial Officer); the
Deputy Chief Financial Officer; the Director, Financial Improvement and
Audit Readiness; the Secretary of the Army; the Assistant Secretary of
the Army for Financial Management and Comptroller; the Assistant
Secretary of the Army for Manpower and Reserve Affairs; the Director of
Army Finance Command; the Directors of DFAS and the DFAS-
Indianapolis Center; the Director of the Defense Manpower Data Center;
the Director of the Office of Management and Budget; and appropriate
congressional committees. In addition, the report is available at no charge
on the GAO website at 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.




Asif A. Khan
Director, Financial Management and Assurance




Page 29                               GAO-12-406 Army Military Pay Audit Readiness
List of Committees

The Honorable Thomas R. Carper
Chairman
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
Chairman
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 Todd Platts
Chairman
The Honorable Edolphus Towns
Ranking Member
Subcommittee on Government Organization,
Efficiency and Financial Management
Committee on Oversight and Government Reform
United States House of Representatives




Page 30                          GAO-12-406 Army Military Pay Audit Readiness
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              This audit was initiated under our mandate to audit the consolidated
              financial statements of the United States government. 1 Our objectives
              were to perform basic audit procedures necessary to conclude about the
              validity and accuracy of Army’s active duty military payroll. Those basic
              audit procedures included (1) identifying a valid population of military
              payroll transactions, and (2) testing a sample of payroll transactions for
              validity and accuracy.

              To identify the population of Army active duty payroll transactions, we
              obtained Army active duty military payroll records from the Defense
              Finance and Accounting Service, Indianapolis (DFAS-IN). DFAS-IN
              processes military payroll for the Army. At our request, DFAS-IN made
              three attempts from November 2010 through January 2011 to provide us
              a complete file of service members who were paid in fiscal year 2010.
              The first attempt included 11,940 pay accounts that were duplicate, and
              the total number of pay accounts included in the second attempt
              increased by 28,035 records over the first attempt, necessitating a third
              request for the population of fiscal year 2010 active duty pay records. To
              obtain assurance that the overall population of Army fiscal year 2010
              payroll accounts matched the sum of monthly payroll accounts, we
              requested the Defense Manpower Data Center (DMDC) compare the
              results of our third request for the population of Army fiscal year 2010
              payroll accounts against its compilation of monthly active duty payroll
              data that it received from DFAS-IN. We were able to reconcile all but
              1,025 pay accounts (less than 1 percent of the total, which is not
              considered material). We did not reconcile military payroll amounts to the
              related disbursements because an Office of the Under Secretary of
              Defense (Comptroller) and Chief Financial Officer (OUSD(C)) contractor
              was in the process of performing a pilot reconciliation.

              In addition, because the Army does not have an integrated military
              personnel and payroll system, we worked with the DMDC to match payroll
              accounts to personnel records to determine whether the population of
              Army military payroll accounts was in agreement with the population in
              the DMDC database. 2 We relied on work performed by DMDC because



              1
               31 U.S.C. §§ 331(e), 717(b)(1).
              2
               DFAS-IN’s third population attempt identified 677,024 active duty Army Service members
              (excluding those who were assigned to classified duties). We excluded soldiers assigned
              to classified duties from our audit scope.




              Page 31                                    GAO-12-406 Army Military Pay Audit Readiness
Appendix I: Objectives, Scope, and
Methodology




we reviewed its quality control procedures and found them to be
adequate, for our purposes. We compared the total number of records in
DFAS-IN’s population and DMDC’s database for the service members
who received active duty Army military pay in fiscal year 2010. We did not
separately validate Army personnel file data. DMDC’s file comparison of
Army active duty pay accounts to military personnel records identified
67,243 pay accounts that were not matched to a file of military personnel
records on September 30, 2010. We asked DMDC to perform more
detailed comparisons of these differences. These differences related
primarily to personnel who were not active Army service members
because they had either left or were scheduled to leave the service, were
reserve component soldiers released from active duty, or were soldiers
that had died during fiscal year 2010. Finally, we confirmed six duplicate
SSNs in personnel records with different names with the Social Security
Administration and referred these records to DMDC and the Army for
further research and appropriate action.

To address our second objective, we documented key controls, laws, and
pay regulations and used the population of matched personnel and
payroll records to select a statistical sample of 250 soldiers for testing the
accuracy and validity of Army military payroll. 3 We obtained 12 months of
fiscal year 2010 Leave and Earnings Statement files for each soldier in
our sample, the most recent data available at the time, to compare with
supporting Army personnel documents indicating such information as
military orders, special duty and expertise entitlements, marital status,
and dependent information. We gained an understanding of Army
processes with a focus on key steps involved in establishing military
personnel records related to specific pay and allowance amounts. We
also performed process walkthroughs at DFAS-IN and assessed key
controls over the accuracy of payroll payments made to service members.
To document the process for capturing pay-related information and
setting up military personnel records, we interviewed Army personnel,
Human Resources Command, and Finance Command officials and
visited a Military Enlistment Program Station in Indianapolis and a military
reception battalion at Fort Jackson, South Carolina. We also interviewed
finance officials at Defense Military Pay Offices at Fort Jackson, South
Carolina, and Fort Carson, Colorado, to gain an understanding of how



3
 Our sampling plan was based on a 95-percent confidence interval and had an acceptable
error rate of 5 percent.




Page 32                                   GAO-12-406 Army Military Pay Audit Readiness
Appendix I: Objectives, Scope, and
Methodology




pay adjustments are initiated, input, and reviewed. We requested and
obtained fiscal year 2010 monthly Leave and Earnings Statement files for
the service members in our sample from DFAS-IN and requested Army
personnel documents to support basic pay and allowance amounts
reported on the Leave and Earnings Statements, including such
information as military orders, and the certifications of special duty
expertise, marital status, and dependent information. We did not plan to,
nor did we test deductions and allotments for items such as Service
Member’s Group Life Insurance, Thrift Savings Plan, and TRICARE. In
addition to basic pay, we planned to test base housing allowance;
hazardous duty pay; hostile fire/imminent danger pay; cost of living
allowance; military overseas housing allowance; family separation
housing; temporary lodging allowance; clothing allowance; and special
duty pay, such as foreign language proficiency pay and parachute (jump)
pay. We reviewed documentation provided by the Army for 5 sample
items and documentation contained in the Army’s Interactive Personnel
Management System (iPERMS), which serves as the Army’s Official
Military Personnel File. We were unable to complete our tests of active
duty military payroll accuracy because of a scope limitation related to the
Army’s inability to provide support for its active component military payroll
transactions.

In support of our objectives, we reviewed Army military personnel and
payroll policies and procedures and identified sources of pay-related
documentation. Throughout our work, we interviewed key Army officials in
Manpower and Reserve Affairs, Human Resources Command, and
Finance Command. We also interviewed DFAS-IN officials responsible for
payroll functions and Office of the Under Secretary of Defense
(Comptroller/Chief Financial Officer) audit readiness contractor officials.
Additionally, we interviewed agency officials regarding the status of
Army’s efforts to develop an Integrated Personnel and Payroll System-
Army (IPPS-A). We also performed walkthroughs of DFAS-IN Military Pay
Operations, accounting, disbursing, financial reporting, and related
processes.

We conducted this performance audit from June 2010 through March
2012 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
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives. Other matters identified in



Page 33                               GAO-12-406 Army Military Pay Audit Readiness
Appendix I: Objectives, Scope, and
Methodology




our work that merit management’s attention and correction will be
reported in a separate letter to Army management.




Page 34                              GAO-12-406 Army Military Pay Audit Readiness
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of the Army



of the Army




             Page 35                                     GAO-12-406 Army Military Pay Audit Readiness
Appendix II: Comments from the Department
of the Army




Page 36                                     GAO-12-406 Army Military Pay Audit Readiness
Appendix II: Comments from the Department
of the Army




Page 37                                     GAO-12-406 Army Military Pay Audit Readiness
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Asif A. Khan, (202) 512-9869 or khana@gao.gov
GAO Contact
                  In addition to the contact named above, Gayle L. Fischer, Assistant
Staff             Director; Carl S. Barden; Tulsi Bhojwani; Frederick T. Evans; Lauren S.
Acknowledgments   Fassler; Wilfred B. Holloway; Sabur O. Ibrahim; John J. Lopez; Julia C.
                  Matta, Assistant General Counsel; Sheila D. M. Miller, Auditor in Charge;
                  Margaret A. Mills; Heather L. Rasmussen; Ramon J. Rodriguez; James J.
                  Ungvarsky; and Matthew P. Zaun made key contributions to this report.




(198649)
                  Page 38                               GAO-12-406 Army Military Pay Audit Readiness
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