Financial reviews and the financial statements

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1. Two kinds of review, and the statements behind them

The Defense Security Cooperation Agency (DSCA) checks the money in the Foreign Military Sales program from two directions. With a purchaser, it reviews the financial posture of that country’s program. With the implementing agencies, it reviews how they use the funds they receive. Both sit in section C9.14 of the Security Assistance Management Manual (SAMM C9.14). Behind them, chapter 14 sets rules for the financial statements of the Security Assistance Accounts (SAMM C14.8). The audit of those accounts is covered in auditing the security assistance accounts.

2. Financial Management Reviews with a purchaser

DSCA reviews the current and forecast financial posture of a purchaser’s program and holds a Financial Management Review with the purchaser if needed (SAMM C9.14.1). The manual lists six aims. The review reconciles financial records, reviews the financial status of cases and ensures the purchaser’s accounts stay solvent. It also seeks to improve cycle times, identify cases that need intensive financial management, and form financing strategies for current and future purchases.

DSCA plans and runs these reviews with the implementing agencies, the security cooperation organizations, the Defense Finance and Accounting Service and the purchaser (SAMM C9.14.1). The manual prescribes a mandatory format for case financial status reporting, Figure C9.F9. Minor changes to it need approval from the DSCA country finance director.

3. Business Process Reviews with the agencies

The manual traces Business Process Reviews to financial reforms made in 2006 (SAMM C9.14.2.1). The manual links them to an increase in the administrative surcharge rate from 2.5 percent to 3.8 percent, and to renewed enforcement of manpower requirements. DSCA must "monitor usage of FMS Trust Funds to include periodic reviews of funding levels and unused balances" (SAMM C9.14.2.1). DSCA began these reviews in fiscal year 2011.

Each review evaluates an organization’s business practices in its use of administrative and CAS surcharge funds, case funds and capacity building program support funds (SAMM C9.14.2.2). It also looks at compliance with security assistance policy. "The review is not an audit or an inspection, but is a joint effort, with the applicable IA, to assess existing processes to better understand them and assist with any issues" (SAMM C9.14.2.2). The aim is to find areas for improvement and best practices to share.

DSCA leads at least two reviews a year, with a goal of one with each military department implementing agency every year (SAMM C9.14.2.3). Its leadership may direct others at any time. In the first quarter of each fiscal year, DSCA tells the agencies selected, using a risk-based approach or a leadership request, and sends the questions and a suggested timeframe. Minutes, with action items, go to the participants no later than 20 business days after the review (SAMM C9.14.2.4). DSCA tracks the action items quarterly until all are closed.

4. Litigation and contingent liabilities

The financial statements must reflect legal exposure. DSCA’s general counsel, with its business operations office, runs data calls to find litigation, claims and assessments affecting the Security Assistance Accounts (SAMM C14.8.1). Any found are recorded or disclosed in the statements and footnotes. DSCA submits interim statements to the Treasury each August and final statements each November (SAMM C14.8.1.1). The legal data calls go out around July and October, asking agencies to report matters above the materiality threshold where a negative judgment would be paid from those accounts.

A second set of data calls, around April and October, looks for contingent liabilities that might be recognized or disclosed (SAMM C14.8.2). These can include treaties and other international agreements and warranties on sales. DSCA’s accounting office coordinates on two kinds of contingent liability, but others lead the assessments: the general counsel for legal matters, and the Defense Finance and Accounting Service for future contract financing payments (SAMM C14.8.2.1). DSCA also documents an assessment, with the implementing agencies, of the types and sources of contingent liabilities its programs may carry (SAMM C14.8.4). Twice a year DSCA reviews the security cooperation portfolio of international agreements with its general counsel (SAMM C14.8.4.1). Any agreement that materially affects the accounts has its liability recognized in the statements.

5. Contract authority in the statements

The manual repeats the rule on contract authority: it lets the program incur obligations whose payment depends on a future act (SAMM C14.8.3). Defense appropriations cannot liquidate those obligations unless an appropriation act specifically allows it. Purchaser national funds in the trust fund are used instead. DSCA and the agencies must recognize, measure, record and report contract authority under the Office of Management and Budget’s Circular A-11 and the federal accounting standards (SAMM C14.8.3.1). DSCA has published posting logic manuals with illustrative entries for sales transactions (SAMM C14.8.3.2).

6. Property bought with security assistance money

General property, plant and equipment are tangible assets with a useful life of two years or more, not intended for sale in the ordinary course of operations (SAMM C14.8.5). Real property, general equipment and internal use software are subsets of the category. Property bought with security assistance funds must be accounted for and reported on the financial statements under the Department’s guidance. Each implementing agency must set and document procedures for property accountability and financial reporting on these accounts (SAMM C14.8.5.1). Those procedures follow the Department’s instruction on accountable property and the relevant chapters of Volume 4 of the Financial Management Regulation, which cover real property, general equipment and internal use software (SAMM C14.8.5.1.1 and SAMM C14.8.5.1.3). Embedded or integrated software is part of the acquisition cost of general equipment (SAMM C14.8.5.1.2).

Key terms

Financial Management Review	A review with a purchaser of its program’s financial posture, held where needed.
Business Process Review	A joint review with an implementing agency of how it uses surcharge, case and program support funds.
Security Assistance Accounts	The accounts whose financial statements DSCA submits to the Treasury.
Contingent liability	A possible obligation, such as one from litigation or an international agreement, assessed for the statements.
General property, plant and equipment	Tangible assets with a useful life of two years or more, not held for sale.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Sound financial records support the programs that are delivered and sustained in the field. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.