Despite pervasive weaknesses in DoD’s first audit, IG encouraged by ‘tone at the top’

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It will likely be several more years before the Defense Department is able to earn a clean opinion on its consolidated financial statement.

But the Pentagon’s chief auditor thinks there’s reason for optimism. In the view of the inspector general, even though the first audit found pervasive weaknesses, it also showed that leaders throughout the department are committed to finally pulling off a successful audit — and have set the right “tone” to communicate that message throughout the workforce.

“The biggest thing we’ve seen this year was tone at the top, from the Secretary of Defense all the way down to the commanders at the bases. They understood the impact of this audit, and that has not been there in the past,” Carmen Malone, deputy assistant inspector general for audit and financial management readiness, told Federal News Network during a wide-ranging interview about audit results. “Without that tone, we’re not going to get the support we need to get the information and to get the audit accomplished. So that has been huge.”

After more than 1,000 auditors from five separate accounting firms and the IG’s own staff fanned out across the military services and Defense agencies in 2018, they returned with more than 2,400 separate findings and recommendations. About half related to financial issues; the other half had to do with weaknesses in DoD’s IT systems.

From there, the IG consolidated the problems, grouping them into 20 separate departmentwide “material weaknesses” — various factors that point toward the DoD’s inability to provide accurate, high-confidence financial statements.

And at least for the first year, as part of a layman’s-language explanation of the audit, the IG also decided to identify six weaknesses that it considers the most significant ones:

• Financial Management Systems and Information Technology
• Universe of Transactions
• Inventory and Related Property
• General Property, Plant, and Equipment
• Fund Balance with Treasury
• Financial Statement Compilation

(To hear a detailed discussion of each material weakness, click on the audio link at the top of this page)

“These six stood out as either having the biggest impact to being audit ready or having the biggest impact to the financial statements,” Malone said. “For example, the financial management systems and information technology material weakness hits all across DoD. DoD has over 200 systems that talk to one another and impact the financial statement, so if you have a material weakness there, obviously that could be a huge impact to your financial statements. Inventory and property, plant and equipment, along with fund balance with Treasury, are some of the largest assets for the Department of Defense. So without getting those correct and making sure that you have a complete listing and that all the assets exist, those are huge weaknesses that would have an impact. Because until you do that, you can’t actually value the property in the report correctly.”

The fact that the department has now undergone a full-scope audit also gives its financial overseers one of its first reliable benchmarks to measure progress going forward.

From the IG’s perspective, the biggest indicator of forward momentum will be whether the military services and agencies are able to resolve a substantial number of the findings and recommendations auditors called out in the first year.

Each is being tracked in a centralized database the Pentagon set up specifically to maintain accountability over all of the deficiencies.

“[The Defense components] have requirements to have corrective action plans and certain timelines, and they’re reporting at the highest levels within the department,” Malone said. “Seeing that process that we’ve never seen before is huge. If you’re making people focus on the corrective actions and ensuring that those corrective actions address the problem, you will make progress both in readiness towards the audit, in operations, in saving money. It’s not going to happen overnight, but it is happening.”

But Malone cautioned that even as DoD begins to resolve some of the 2,400 specific findings from the 2018 audit, it’s certain to uncover many more brand new ones in 2019 and future years.

“As we close certain deficiencies, that means we’re going to be able to get a little further along in the audit, which is going to identify additional deficiencies,” she said. “I don’t think anyone should expect that this first year audit went out and identified all the deficiencies within the department, and don’t want the mistake out there that they received all their deficiencies and there will be no more. There will be more. We need to make sure that not just the department understands that, but Congress and public as well.”

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