As the Pentagon struggles to meet its latest Congressional mandates to get its financial statements in audit-ready condition, leaders say 2015 will be a major stepping stone. For the first time, the entire department will undergo a financial audit, even if it’s a partial one.

DoD, the only department that has yet to pass a full audit, is facing two deadlines that began as internal policy goals and that Congress later enshrined in federal law.

The department must have its entire consolidated financial statement ready to run the gauntlet of independent auditors by fiscal 2017. A smaller-scale review, covering only the department’s statement of budgetary resources for 2014, is supposed to be ready in the meantime.

DoD has experienced some setbacks since Congress established those goals, including new strains on the department’s financial management workforce as a result of the past few years of federal budget upheaval and civilian employee furloughs. DoD says its current position remains that its 2017 statements will be ready to go.

To test progress toward that goal though, the department is telling all of its components to get ready for a “limited scope” financial audit in 2015, said Margo Sheridan, the new director of DoD’s financial improvement and audit readiness directorate.

“We’re going to learn a great deal from this. I’m not sure we’re going to pass it, but we’re going to learn a lot,” she said. “We’re going to broaden our scope after that, with the goal of undergoing a full-scale financial audit of the Department of Defense in early 2018.”

DoD saw a small glimmer of hope toward its audit goals last month when officials announced that the Marine Corps had become the first military service ever to receive an unqualified opinion on its schedule of budgetary activity (SBA).

That endorsement essentially demonstrated that the Marines could provide sufficient documentary evidence of the money they received from Congress and what they spent in fiscal 2012. But the SBA is a slimmed-down version of the statement of budgetary resources DoD must produce for 2014.

All started at different points

Still, as Defense Secretary Chuck Hagel noted in a Pentagon ceremony to celebrate the accomplishment last week, progress is progress.

“I know it’s unusual for us to be in the Hall of Heroes to mark a bookkeeping achievement,” Hagel said in a venue usually reserved for recognitions of military valor. “But damn, this is an achievement.”

During a panel discussion organized by the Association of Government Accountants Tuesday, the military services’ financial management leaders did not offer timelines as to when they might be able duplicate the Marine Corps’ limited success.

But James Watkins, the Army’s deputy assistant secretary for financial operations, said each service began the effort from a different starting point, particularly with regard to transitioning their decades-old IT systems for financial accounting into modern enterprise resource planning systems that adhere to government accounting standards.

In the Army’s case, service leaders decided they needed to hold off on letting auditors scrutinize their statements until their main ERP, the General Fund Enterprise Business System (GFEBS), was up and running.

“That’s because our legacy systems are not auditable. It would take a lot of money and time and effort to get them auditable, and all of that money would all be wasted since we were going to throw those legacy systems away before 2018,” Watkins said. “We had to wait until GFEBS was fully deployed to execute our strategy.”

The Army first implemented GFEBS in 2012, and since then, has undergone four localized outside audits, dealing with its budgetary resources and inventories of assets, in order to begin to understand where the Army’s main financial weaknesses lie. Watkins said that iterative process gave his service valuable lessons, and it’s now expanding the process across the Army.

“What I’ve learned over the last few years is that deploying an ERP is very difficult in and of itself, but that’s only the tip of the iceberg in terms of the work that has to be done,” he said. “We fielded a system that changes processes, procedures, the organization, roles and responsibilities across the entire Army. In industry, you can trade out one ERP for another, and it’s not so bad. When you’re trading out an ERP for a legacy system that’s 40 years old, there’s a lot of other changes. What we’re expecting the staff to do and the changes we’re expecting from the staff are different.”

Combination of new, old systems

The Air Force freely admits its further behind than the Army in terms of deploying new IT systems to support audit readiness. That service is resigned to the fact that its main ERP, the Defense Enterprise Accounting and Management System (DEAMS), won’t be ready in time to handle the audit of DoD’s 2017 statements.

Stephen Herrera, the Air Force’s associate deputy assistant secretary for financial operations, said DEAMS now is deployed to six bases, an advance when compared to a deployment of two last year.

But if it has a hope of producing audit-ready statements four years from now, the Air Force is going to have to retrofit its legacy systems to perform the task.

“We’re not going to make unaffordable and unwise investments in order to get them there, but quite frankly, we realize this would be unachievable if we didn’t rely on our legacy systems and put stronger controls in,” he said. “We’re doing our due diligence. Our sleeves are rolled up, and there are highs and lows every day.”

The Navy hopes to capitalize on the lessons its Marine Corps brethren just learned after three successive attempts to earn a clean opinion on their budget numbers. The Navy says it’s ready to assert audit readiness in eight out of 10 elements of its schedule of budgetary activity.

Like the other services, it is also making progress on tracking the “existence and completeness” of its inventory of equipment, which it’s broken down into 13 areas, said Dennis Taitano, the Navy’s deputy assistant secretary for financial operations.

“We’ve asserted seven of those as audit ready, including four in our military equipment area, things like ships, planes, subs,” he said. “We’ve got those audit- ready, and we’re proud of that. But as the folks on Capitol Hill tell us, ‘We expect you to know where the big stuff is. You should not tell us there’s an aircraft carrier out there you can’t find.'”

Indeed, the small stuff will most likely prove DoD’s biggest challenge as the 2017 deadline grows nearer.

Matching account balances

Sheridan, who took her current job at the Defense Department after successfully navigating the Coast Guard through its first successful audit, said DoD has been, and still is, focused on getting clean opinions on relatively rudimentary tasks, like proving it received and spent the amount of money it asserted to Congress, and that DoD’s account balances match up with what’s reflected in the Treasury Department’s records.

After that, it will have to move on to the much more complicated task of accurately documenting every single day-to-day transaction to the satisfaction of auditors.

“We’ve barely started the balance sheet,” she said. “What my office is going to start doing is mapping out the path of all of those balance sheet items that we gave up on years ago. But we’re going to have to deal with it,” she said. “I’m hoping we can score a pretty quick win with these budgetary accounts and then move into this proprietary business. It’s up to my office to lay out that path for the military services, and we’re going to be doing that over the next few months.”

But Sheridan said ending DoD’s outlier status as the only federal department to have failed to pass a financial audit is not an impossible task.

“Auditability can be achieved in a military organization. A lot of folks thought that couldn’t be done, and the Coast Guard proved it can be done,” she said. “There’s a ‘however’ to that, though. You have to have the right leadership emphasis, and you have to make an appropriate investment in people and other resources to close the gaps. We’re not kidding ourselves. We know we’re going to need to make a huge investment of time and people. We’re just going to have to make that investment in order to get it done.”

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