DoD’s First Full Audit’s Just the Opening Shot

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They say that the first casualty of any conflict is the truth.

The Pentagon, which is getting within range of being a $2 billion-a-day operation and has more than $2 trillion dollars in assets and liabilities, is notably undergoing its first full financial audit. Decades of financial management problems have left the Department of Defense (DoD) as the only Federal department not to be fully audited since agencies were told to do so in the 1990s. Those problems have landed DoD financial management on the Government Accountability Office’s (GAO) High-Risk List every year since 1995.

To complete the long overdue assessment, which will be comprised of 24 individual audits, DoD has enlisted 1,200 auditors and said it will spend more than $900 million, counting the $367 million cost of the audit itself and an estimated $551 million in the costs of subsequent fixes.

But that will just be the beginning, because DoD admits that cleaning up its financial practices is far from a done deal. Last Stepember, Sec. James Mattis and Comptroller David Norquist told the DoD Inspector General’s Office that the department was ready for an audit, “it was not a certification that the DoD financial statements or components’ financial statements are reliable,” the inspector general (IG) notes in its report on DoD’s Top Management Challenges for fiscal 2018. Rather, they expected the audit to find problems and produce actionable feedback. Mattis has told Congress “it will take time for the DoD to go from being audited to passing an audit,” the IG’s report states.

Nevertheless, after more than 20 years of confounding attempts at audits, DoD now pledges it will be a yearly ritual, even with a target release date. “Beginning in 2018, our audits will occur annually, with reports issued Nov. 15,” Norquist said in announcing the start of the audit in December.

DoD has a lot of elements to clean up, because it has a lot to keep track of with its huge budget, workforce, and its daily transactions occurring around the world. The 2018 National Defense Authorization Act allocated nearly $700 billion for the department’s base budget and operations. DoD expenditures account for almost half of the Federal government’s discretionary spending and it holds more than 70 percent of the government’s physical assets, the IG notes.

The financial management shortcomings, which include a lack of internal controls and some slapdash record keeping, have produced unreliable financial information that not only has prevented audits, but undercuts the ability to develop and execute budgets. This hinders the “ability to see potential waste, mismanagement, and cost overruns when certain data is either untimely, unavailable, or inaccurate,” the report states, echoing the findings in an earlier assessment by GAO.

As part of the process, the IG recommends among other steps of doing away with a number of legacy systems and making sure that remaining systems interface with each other automatically, without requiring manual intervention. Essentially, DoD needs to modernize its financial management with steps including greater automation and most likely making use of recent advancements in artificial intelligence and machine learning for financial services.

For now, the audit begins the process of what figures to be a massive undertaking. “With consistent feedback from auditors, we can focus on improving the processes of our day-to-day work,” Norquist said. “Annual audits also ensure visibility over the quantity and quality of the equipment and supplies our troops use.”

Perhaps DoD going financially AWOL is soon to be a thing of the past?

  1. Anonymous | - Reply
    "The financial management shortcomings, which include a lack of internal controls and some slapdash record keeping, have produced unreliable financial information that not only has prevented audits, but undercuts the ability to develop and execute budgets." Really? The DOD is actually very good at developing and "executing" budgets. It develops and submits a very detailed budget every year -- one that goes down to the program level and often below. The Congress, after making its own adjustments to the DOD 's budget request (which also undergoes review by the White House and OMB before going to Congress) then awards the DOD "Obligation Authority" (OA) in the national defense authorization and appropriation bills that it passes (eventually) every year. Once it has an approved budget from the Congress, the DOD then "executes" that budget by using the OA it has received from the Congress to "obligate" the Treasury Department to pay the bills DOD accumulates as it operates. Under the Anti-Deficiency Act, passed originally in 1884, with major amendments in 1950 and 1982, no executive-branch agency may obligate the Treasury in that way without having approved OA from the Congress. An "Anti-Deficiency Act (ADA) violation" occurs when an obligation is made (on the Treasury) without having approved OA to back it up. As an indicator of how effectively and efficiently the DOD "executes" its annual budget consider the following fact: In recent years, the DOD has less than $0.03 of ADA violations for every $100 of obligations. The quoted line at the top of this comment is standard "GAO speak" -- and wrong. For more than 20 years, the GAO has been accusing the DOD of producing "unreliable financial information." But, as explained above, the DOD develops and executes its budget each year with commendable accuracy. So what is the GAO talking about? The DOD is not a business, so private-sector-style financial statements (balance sheets and income statements), which are designed to show whether a business is building equity and making money, don't make any sense for the DOD. Nevertheless, thanks to the GAO (which convinced the Congress to pass the CFO Act of 1990), the DOD is expected to do that kind of private-sector-style financial accounting -- in addition to the OA-oriented budgetary accounting it has always done. Because the DOD is not a business, no one should be surprised that the DOD has had great difficulty trying to do produce private-sector-style financial statements. So, when the GAO says the DOD has "unreliable financial information,", what that means is that private-sector-style financial-statement auditors have never rendered an "unqualified opinion" that the private-sector-style financial statements the DOD is required to produce every year "fairly present" the financial position (balance sheet) and results of operations (income statement) of the DOD as if it were a business -- which it isn't. DOD isn't "financially AWOL" here. The GAO, with its pointless insistence that the DOD do private-sector-style financial accounting, and the Congress,which has failed to pass national-defense authorization and appropriation bills on time for years, are the ones who are "financially AWOL."
  2. Anonymous | - Reply
    I did not intend my nearby extended comment to be Anonymous: My name is Christopher Hanks. I'm a retired defense analyst and have published refereed papers on the subject of my comment. Interested readers can find me on the 'interweb" without much difficulty.
  3. Anonymous | - Reply
    Thank you for that explanation. I too have watched the Department work very hard to "do accounting right." The people in the department and the contractors are under intense scrutiny all the time. The folks at DCAA and DCMA also do a great job ensuring that we all keep on-track. Many of the hits the Department have taken have been unfair and often "fake news." When something is deserved, people go to jail. I don't see that at other Ds&As.

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