The Integrated Financial System Software Does Not Comply
With Some Accounting Standards or Contain Certain Functionality as Originally
Asserted by the Vendor
September 2004
Reference Number: 2004-10-187
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
September
23, 2004
MEMORANDUM FOR
CHIEF FINANCIAL OFFICER
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector
General for Audit
SUBJECT: Final Audit Report – The Integrated
Financial System Software Does Not Comply With Some Accounting Standards or
Contain Certain Functionality as Originally Asserted by the Vendor (Audit #
200410003)
This
report presents the results of our review of the Internal Revenue Service’s (IRS) planned Integrated Financial System (IFS).
The overall objective of this review was to determine whether the IFS, when implemented, would
function as intended to provide administrative financial management information
that is essential for financial statement preparation and useful to IRS
managers and others.
The
implementation of the proposed IFS will greatly affect the way the IRS records
and reports both administrative and custodial accounting transactions. Further, this system represents a key element
of the corrective actions being taken by the IRS to ensure its accounting
system is in compliance with the Joint Financial Management Improvement Program’s
(JFMIP) Federal Financial Management System Requirements, and provides
accurate and timely financial information for management decision making.
In
summary, we determined that the IFS may be at risk of being noncompliant with
Federal Financial Management Improvement Act of 1996 (FFMIA) requirements. The IFS either does not include functionality
required by various accounting standards or has had workarounds initiated by
the IRS to compensate for the nonfunctionality.
Further, the IRS needs to take a coordinated and united stance when
negotiating any costs with the contractor over asserted “Out of the Box”
requirements that are not met by the vendor’s software. We also
identified that contractor-performed data conversion efforts are progressing,
including evaluations being made by an independent IRS validation team to
ensure the converted data was accurately recorded. Finally, progress has been made on a
previously reported Treasury Inspector General for Tax Administration finding
to ensure that all JFMIP requirements are addressed in the system’s design.
We recommended the Chief
Financial Officer (CFO) ensure that all JFMIP and FFMIA requirements and
accounting standards are operating before the IFS deployment. If this is not feasible, the IRS should move
to the government version of the IFS as soon as possible, and the CFO should
ensure that these requirements are included in that version. We also recommended the CFO, in concert with
the Director of Procurement and the Associate Chief Information Officer, Business
Systems Modernization, ensure a coordinated and united stance is taken when
conducting negotiations with the IFS contractor concerning the costs associated
with the functionality of accounting requirements that were asserted to be
ready for deployment by the software subcontractor. These officials should also ensure all costs
are considered when any negotiations are held concerning system requirement
deferrals. Finally, we recommended that
the CFO ensure that all JFMIP requirements not originally included in the
IFS’ System
Requirements Report are added to
subsequent versions of the report and are included in future IFS releases.
Management’s
Response: IRS management agreed with our recommendations. The CFO will ensure those requirements not satisfied in the
IFS Release 1 are implemented in subsequent enhancements or upgrades. Upon successful implementation of the IFS
Release 1, the CFO will develop an action plan to address enhancements and future
releases of the IFS – especially the upgrade to the Federal Government version
of the software, which should close many of the existing JFMIP gaps. Additionally, the CFO has implemented the
recommendation to coordinate the IFS contract negotiations with the Director,
Procurement, and the Associate Chief Information Officer, Business Systems
Modernization, and has worked together to ensure all costs associated with the
requirements that were asserted to be ready for deployment by the software
subcontractor, but not delivered in Release 1, were included in the
negotiations. The IRS’ current contract
is a cost-sharing contract where the IRS is responsible for 24 percent of the
costs and the contractor is absorbing 76 percent of the costs incurred from May
1, 2004, through January 31, 2005. Management’s
complete response to the draft report is included as Appendix IV.
Office of Audit Comment: The IRS, when acquiring
subsequent releases of the IFS containing the requirements that were asserted
by the subcontractor to be functional in Release 1, should take into
consideration any significant deviations from the concessions received during
the recent negotiations when estimating or accepting a price for those future
releases.
Copies
of this report are also being sent to the managers affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector
General for Audit (Headquarters Operations and Exempt Organization Programs),
at (202) 622-8500
Risk of Noncompliance With the Federal
Financial Management Improvement Act of 1996
Asserted Out of the Box Requirements Were Not Met by Vendor Software
Data Conversion Efforts Are Progressing
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix IV
– Management’s Response to the Draft Report
The Internal Revenue Service (IRS) is in the midst of Business Systems Modernization (BSM), a major technological and business process transformation program. The BSM will radically change the IRS’ approach to satisfying its customers – the taxpayers.
To achieve legislative compliance and provide critical financial management information, the IRS acquired, through contractor assistance, a commercial-off-the-shelf software package, designated as the Integrated Financial System (IFS), as a cost-effective alternative to improve its financial systems. The implementation of the proposed IFS will greatly affect the way the IRS records and reports both administrative and custodial accounting transactions. In addition, the development of the IFS supports one of the President’s Management Agenda initiatives to improve financial performance, which involves ensuring Federal Government financial systems produce accurate and timely financial information for management decision making.
One basic, yet significant, requirement of the IFS is that the system is to be compliant with the Joint Financial Management Improvement Program’s (JFMIP) Federal Financial Management System Requirements. The IRS also expects the IFS to resolve several longstanding financial management issues, including the compliance with JFMIP requirements, identified by the Government Accountability Office (GAO) during the annual financial statement audits.
The IRS plans to implement
the IFS in a series of releases over a period of several years. Release 1 will include the JFMIP core
accounting functions of Accounts Payable, Accounts Receivable, General Ledger
Management, Budget Execution, Cost Management (also referred to as Cost
Accounting), and Financial Reporting, as
well as Budget Formulation. Release 1 will also include the mandated
Health Coverage Tax Credit functionality.
Subsequent releases will provide for additional financial management functions,
including Property and Procurement Management, and enhancements to the cost
accounting and finance modules. However,
these future releases and enhancements are on hold and are currently unfunded.
To increase the probability that the IFS will function as intended and meet defined requirements, the IRS is working with a contractor to conduct system testing prior to deploying the IFS. System testing is an essential component of the Enterprise Life Cycle, which governs system development activities and is required by IRS procedures.
This
online audit is a follow-on review to our two prior audits.
In the first audit report, issued in August 2003, we reported on IFS
requirements definition. In the second
audit report, issued in March 2004, we reported on IRS’ IFS phase I
system-testing efforts. In
addition, the Treasury Inspector General for Tax Administration (TIGTA)
Information Systems Programs audit staff, who are responsible for evaluating
systems modernization from an information technology perspective, have
previously issued a report containing concerns about IFS testing.
This
review was performed at the IRS National Headquarters in the office of the
Chief Financial Officer (CFO) located in
This audit was conducted while changes were being made to both IFS system design and business process procedures. Any system design or business process changes that have occurred since we concluded our analyses are not reflected in this report.
The Federal Financial Management Improvement Act of 1996 (FFMIA) establishes in statute certain financial management systems requirements that were already established by Executive Branch policies. The FFMIA was intended to advance Federal Government financial management by ensuring that Federal management systems can and do provide reliable, consistent disclosure of financial data. Further, this disclosure should be done on a basis that is uniform across the Federal Government from year to year by consistently using professionally accepted accounting standards. Specifically, FFMIA § 803 (a) requires each agency to implement and maintain systems that comply substantially with:
· Federal Government financial management system requirements.
· Applicable Federal Government accounting standards.
· The Government Standard General Ledger at the transaction level.
The Federal Financial Management System Requirements are a series of publications prepared by the JFMIP as the key requirements that agency systems must meet to be substantially compliant with generally accepted accounting principles for the Federal Government.
In the last several years, the GAO has reported numerous financial management weaknesses in its audits of the IRS annual financial statements and related assessments of internal control. The IRS has proposed the IFS as the remedy for administrative financial management weaknesses.
As a result of our analysis and observations performed with responsible CFO staff, numerous concerns were identified during system testing. We believe these concerns may put the IRS at risk of being noncompliant with FFMIA requirements. Specifically:
· The IFS Status of Funds Report that shows the budget, commitments, obligations, expenditures, and available budget balance at each level and sublevel of the IRS does not roll up to reflect an accurate status of funds needed for executive management’s day-to-day decision making. The IRS identified this condition during system testing and is working with the vendor to correct the situation. The JFMIP requires that the core financial system provide complete, reliable, consistent, timely, and useful financial management information on operations to enable individual operating components, divisions, bureaus, and other subunits to carry out their fiduciary responsibilities; deter fraud, waste, and abuse of resources; and facilitate efficient and effective delivery of programs by relating financial consequences to program performance.
· The IFS cannot produce the Statement of Net Cost in accordance with Office of Management and Budget (OMB) Bulletin No. 97-01, Form and Content of Agency Financial Statements, because the system is currently unable to split costs between Federal and non-Federal entities. The IRS is working with the vendor and hopes to correct the situation by January 2005. If they are unable to do so, the IRS will need to initiate a workaround to deal with the situation. The JFMIP requires that the financial system facilitate the preparation of financial statements and other financial reports in accordance with Federal accounting and reporting standards.
·
The IFS does not have the capability to
display an overrideable error message when attempting to post previously
unrecorded obligations relative to expired funds during the current year as
required by JFMIP core requirements. The
system as initially configured prevented the posting of new requisitions and
obligations using expired funds.
Additionally, the system was configured to prevent the posting of an
obligation without a requisition for current and expired funds. The IRS chose as a workaround to reconfigure
the system to allow new obligations against expired funds and to control this
functionality through system user authorization levels. Five employees will be authorized to obligate
funds without a requisition posted in the system. Although this workaround may solve the
situation, it increases the risk that unauthorized obligations can be recorded
in the system without a previously posted requisition.
In addition to the conditions identified during our detailed audit tests, the IRS informed us that as of May 21, 2004, 142 JFMIP requirements are being moved to future IFS releases due primarily to the fact that the IFS version the IRS acquired was geared to commercial use and would have been too expensive to re-fit for government use. Further, a majority of the moved requirements should be met by the currently existing government version of the IFS. Examples of requirements not fully functional in the commercial version of the IFS include the ability of the system to record full or partial receipt and acceptance of goods and services by line item and the ability to indicate if a payment is partial or final. Also, the commercial version is not able to meet the requirement to maintain accounts for reimbursable orders and identify government and nongovernment accounts that are designated as advance funding.
Further, the IRS has identified five JFMIP requirements needing implementation as soon as possible. Three of these five pertain to the preparation of the Statement of Net Cost. The IRS is working with the contractor to obtain the needed functionality of these requirements in future module releases and system upgrades.
1. The CFO should ensure all JFMIP and FFMIA requirements and accounting standards are operating before the IFS deployment. If this is not feasible, the IRS should move to the government version of the IFS as soon as possible, and the CFO should ensure these requirements are included in that version.
Management’s
Response: Given the time scheduled for implementation and the complexity of the
project, the CFO did everything possible to ensure relevant JFMIP and FFMIA
requirements and accounting standards were delivered in Release 1 of the IFS. The CFO will ensure those requirements not
satisfied in Release 1 are implemented in subsequent enhancements or upgrades. However, as indicated in the report,
subsequent planned releases of the IFS have been put on hold due to the current
IRS funding situation. Upon successful
implementation of the IFS Release 1, the CFO will develop an action plan to
address enhancements and future releases of the IFS – especially the upgrade to
the Federal Government version of the software which should close many of the
existing JFMIP gaps.
During system integration and configuration, the IRS identified 531 functional requirements, as of May 21, 2004, that were not met by the IFS. These requirements are being either deferred to future IFS releases or designated as needing immediate attention. Of these 531 requirements not met, 473 were asserted by the IFS software subcontractor as being met “Out of the Box.”
Section C of Task Order (TO) number 0091 of the IRS’ implementation contract related to the preliminary development of the IFS states in general, under the Performance Based Work Statement Matrix heading of Performance Standard, that the system design meets 100 percent of selected requirements as asserted by the software subcontractor as “Out of the Box.” Section C, Performance Standard Number four defines “Out of the Box” requirements as those that would be met by means of configuration only and the requirement would be met without modifying code or making database changes that would add time, effort, or complexity to upgrades.
Section G, item H.7, goes on to state that any differential costs associated with approved deviations
from the performance standard to meet 100 percent of selected requirements “Out
of the Box” would be borne by the software subcontractor and are unallowable
costs under the TO. Differential costs
are defined as any costs over and above the costs to meet the requirements
through configuration.
Because of system requirement deferrals, the IRS is forced to develop workarounds to ensure accounting standards are met when the system is deployed. For example, the IFS does not meet the system requirement to provide the capability to automatically offset payments to vendors based on current outstanding receivables. In another example, the IFS does not have the capability to split an invoice into multiple payments on the appropriate due dates when items on the invoice have different due dates or discount terms.
Per the IRS, as of June 30, 2004, approximately $137.8 million has been obligated for IFS implementation TOs and other obligations, with the IRS recording expenditures of approximately $121.1 million against those obligations. Of those amounts, approximately $113.8 million and $98.3 million represent obligations and expenditures, respectively, to the IFS vendor. These amounts only include external costs and do not include costs incurred for IRS personnel or resources.
We understand negotiations were recently completed to deal with the issue of deferred requirements that were asserted by the software subcontractor as “Out of the Box” and an amendment to the relevant TO was signed on July 15, 2004. Notwithstanding these recent negotiations, we believe IRS resources are at risk if it does not take a coordinated and firm stance when dealing with the vendor when it pertains to the delivery of system requirements (i.e., the participation of the CFO, Chief Information Officer (CIO), and Procurement staffs, as needed, to ensure that system implementation, accounting functionality, and acquisition regulation concerns are jointly represented and presented). Also, if further negotiations are required, the IRS needs to consider not only the cost to implement any further deferred requirements, which would represent unallowable costs under the contract, but to also consider the financial impact of IRS resources needed to identify and ensure the ultimate implementation of the requirements into the IFS. These costs should also include the cost of workarounds needed to ensure IRS systems meet accounting standards.
The CFO, in concert with the Director of Procurement and the Associate CIO, Business Systems Modernization, should:
2. Ensure a coordinated and united stance is taken when conducting any negotiations with the IFS contractor concerning the cost associated with the functionality of accounting requirements that were asserted to be ready for deployment by the software subcontractor.
Management’s Response: The CFO has implemented the recommendation to
coordinate the IFS contract negotiations with the Director, Procurement, and
the Associate CIO, Business Systems Modernization.
3. Ensure all costs are considered when any negotiations are held concerning system requirement deferrals.
Management’s Response: As recommended, the IRS has worked together to ensure all costs associated with requirements that were asserted to be ready for deployment by the software subcontractor, but not delivered in Release 1, were included in the negotiations. The IRS’ current contract is a cost-sharing contract where the IRS is responsible for 24 percent of the costs and the contractor is absorbing 76 percent of the costs incurred from May 1, 2004, through January 31, 2005.
Office of Audit Comment: The IRS, when
acquiring subsequent releases of the IFS containing the requirements that were
asserted by the subcontractor to be functional in Release 1, should take into
consideration any significant deviations from the concessions received during
the recent negotiations when estimating or accepting a price for those future
releases.
The JFMIP has stated that of the many critical tasks necessary to successfully implement a new financial system, data conversion is one of the most frequently underestimated. From the outset, it should be understood that financial systems data conversion is a complex and difficult task that requires highly skilled staff to conduct successfully. If data conversion is done right, the new system has the opportunity for success. The JFMIP concludes by stating that converting data incorrectly has lengthy and long-term repercussions.
The IRS’ contractor has developed a Data Conversion Test Plan describing procedures to execute and document the unit testing of all data conversion components, followed by comprehensive end-to-end testing via mock data conversion cycles.
Unit testing includes validating that each conversion program for a given component performs according to the technical specifications and expected results are documented in the test scripts. The mock conversion tests test the full data conversion life cycle and are executed before the production cutover is performed to ensure that the timing of the conversion is as short as possible and that all data anomalies have been addressed.
Finally, test scripts were created to support the unit testing of each conversion component, as well as the mock conversions. The scripts include expected results for each test. During test execution, if a conversion is not successful because of a flaw in the functional design of the conversion or a flaw in the conversion program, a defect report is logged and tracked until the conversion of the component is successful.
The primary sources of legacy data are the Automated Financial System, the Budget Formulation System/Plan Development System, and the Requisition Tracking System/Integrated Procurement System. The primary targets include various financial components of the IFS software and the Strategic Enterprise Management/Business Warehouse component. The conversion teams will utilize both manual and automated conversion methods to accomplish their tasks.
The contractor, along with the IRS, has developed selection criteria and validation methods for all the components of data conversion. Additionally, the IRS has formed a team to independently validate all converted information using their own validation tools and acceptance criteria.
As of July 21, 2004, the IFS data conversion’s first two mock cycles failed because the system’s environment was constantly changing. The third cycle was completed and the year-end closing of accounts was demonstrated, but some problems were encountered that still need to be resolved. The IRS’ validation team is currently evaluating the results of the third mock conversion cycle to ensure all data were accurately recorded. A future data conversion cycle is planned after all changes to the process have been implemented. The IRS will use this cycle to determine if all system changes were successfully implemented and to approximate how long the conversion process will take when the system is implemented.
In a prior TIGTA audit report concerning IFS
requirements definition, we reported that the IRS established a framework to
identify material administrative accounting requirements for inclusion in the
IFS. However, we did identify 64 JFMIP
requirements that were not specifically or fully addressed in the IFS’ System
Requirements Report (SRR), which represents the detailed design of the
IFS. Of these 64 requirements, 36
represented mandatory JFMIP requirements and 28 represented value-added
requirements.
We recommended that the Acting CFO, along
with the IFS contractor, ensure that the identified JFMIP requirements were fully
addressed and incorporated into the IFS’ SRR.
In management’s response, CFO officials
stated they had assessed the missing or incomplete JFMIP requirements included
in the report and provided assurances that the requirements either are
addressed through a collection of requirements in the SRR or will be addressed
by ensuring that the requirements are included in future releases of the IFS.
Of the 36 JFMIP mandatory requirements, we
agree the IRS has addressed 30 of the requirements, and that 2 requirements are
not valid for IRS’ business processes.
The remaining four requirements, which pertain to the property and
travel modules, are to be addressed in future releases of the IFS. Since these modules are not yet formulated or
the IRS has not initiated related change requests on them, we were unable to
assess whether these requirements were added to the IFS’ SRR.
For the 28 value-added requirements, we agree
the IRS has addressed 7 of the requirements.
The remaining 21 requirements, which mostly pertain to the property,
travel, and seized assets management modules, are to be addressed in future
releases of the IFS. As with the
mandatory requirements being addressed in future releases, we were unable to
assess whether these requirements were added to the IFS’ SRR. Although the IRS is not mandated to implement
value-added requirements, we believe the IRS should continue to assess the
requirements when designing future releases.
4.
The CFO should ensure the remaining JFMIP
requirements are added to subsequent versions of the SRR and are included in
future IFS releases.
Management’s Response: The
CFO will ensure any requirements not satisfied in Release 1 are identified and
implemented in subsequent enhancements or upgrades. However, as indicated in the report,
subsequent planned releases of the IFS have been put on hold due to the current
IRS funding situation. Upon successful
implementation of the IFS Release 1, the CFO will develop an action plan to
address enhancements and future releases of the IFS – especially the upgrade to
the Federal Government version of the software which should close many of the
existing JFMIP gaps.
Appendix I
Detailed
Objective, Scope, and Methodology
The overall objective of this review was to
determine whether the Integrated Financial System (IFS), when implemented,
would function as intended to provide administrative financial management
information that is essential for financial statement preparation and useful
to Internal Revenue Service managers and others. To accomplish this objective, we:
I. Verified that IFS financial system requirements and related internal controls were effectively identified and tested and would deliver an integrated financial system that meets established financial requirements when implemented.
A. Reviewed IFS general ledger posting guidance for consistency with established Office of Management and Budget guidance, legislative mandates, and Federal accounting standards.
B. Reviewed System Integration Testing – 2 (Release 1) procedures and plans to gain an understanding of the testing process.
C. Judgmentally selected 164 of approximately 2,900 system requirements based on 9 accounting functional areas that we believed, if validated, would provide a basis to reach conclusions about the overall functionality of the IFS. The 164 system requirements affected 58 test cases that we attempted to analyze. Our planned analysis involved review of the test case, observation of the actual test, review of post-test supporting documentation, and discussions with subject matter experts concerning the test results.
D. Of the selected 58 test cases, we were able to review 53 test cases for reasonableness and ability to exhibit the functionality of the affected system requirement. Four test cases were found to be deleted and one was a duplication of another test case. However, due to initial untimely notification of test scheduling, we were only able to observe 29 of the selected 58 test cases. Further, we were only provided 48 of the post-test documentation folders prior to completion of our fieldwork. Although affecting the scope of our originally planned audit work, we do not believe that these limitations affected the overall accomplishment of our audit objective. One area that did have some impact on the accomplishment of our audit objective was the way the testing process, as well as the test cases, changed as we attempted to perform our audit analyses. Consequently, we were unable to reach a final conclusion on the nine accounting functional areas and, therefore, the IFS as a whole. However, our audit work did identify areas where we believe a degree of risk exists that the IFS may not meet the Joint Financial Management Improvement Program’s (JFMIP) requirements or where requirements will only be met through workarounds.
E. Discussed with subject matter experts the extent of the security audit trail detail (such as employee login and activity while on the system) and how it will function after implementation of the IFS.
F. Discussed with subject matter experts if auditability functions are being contemplated for the IFS.
II. Verified data conversion plans from the legacy financial system to the IFS were developed and testing was progressing.
III. Followed-up on previously reported conditions contained in our requirements definition report concerning 64 JFMIP requirements that were either missing or that were not fully addressed in the Systems Requirements Report.
IV. Assessed the impact on compliance with laws and regulations of deleted or deferred requirements that were asserted to be functional by the software subcontractor, and the overall cost to the project.
Appendix II
Major Contributors to This
Report
Daniel R.
Devlin, Assistant Inspector General for Audit (Headquarters Operations and
Exempt Organizations Programs)
John R.
Wright, Director
Thomas J. Brunetto,
Audit Manager
Bobbie M. Draudt, Lead
Auditor
Gary D. Pressley,
Senior Auditor
Richard E. Louden,
Auditor
Peter
L. Stoughton, Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Operations Support OS
Chief, Agency-Wide Shared Services OS:A
Chief Information Officer OS:CIO
Associate Chief Financial Officer for Internal Financial Management OS:CFO:I
Associate Chief Information Officer, Business Systems Modernization OS:CIO:B
Director, Procurement OS:A:P
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of
Management Controls OS:CFO:AR:M
Audit
Liaisons: Chief, Agency-Wide Shared Services OS:A
Chief
Financial Officer OS:CFO
Chief
Information Officer OS:CIO
Appendix IV
The response was
removed due to its size. To see the
response, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.