Pentagon’s longstanding audit failures also pose a recruiting challenge

As part of its efforts to get itself on a firmer financial management footing, the Pentagon wants to infuse its accounting workforce with new blood. But imagine trying to run a recruiting campaign when most of the candidates you’re targeting suspect your organization is a hopeless cause.

That’s about the size of the challenge the Defense Department faces as it works to replace the growing cadre of retirement-eligible senior civil servants in its financial management workforce with new personnel who might be able to help the Pentagon finally earn a clean opinion on its financial statement audit.

Thirty years after the passage of the CFO Act, DoD’s longstanding failure to get a clean audit opinion hasn’t just earned it unending flak from Congress — it’s also created a perception problem in the rest of the federal financial management community that department leaders are now, fairly openly, trying to overcome.

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For members of the civilian agency financial workforce who’ve had casual encounters with DoD, some of the skepticism is well-founded, said Douglas Glenn, DoD’s assistant deputy chief financial officer.

“We’ve created this perception about not having our financial act together over years,” he said, adding an example: “When other agencies have reached out to DoD to say, ‘Hey, what are your intergovernmental balances? We need to reconcile with you, here’s all our transactions, what are yours?’ DoD comes back with, ‘We don’t know. Tell us what our numbers should be, and we’ll just book that.’”

Glenn, who previously served as a senior financial official at NASA and GSA, tried to recruit some of his former colleagues to work at DoD after he moved to the Pentagon. Those discussions didn’t always go well.

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“I’ve reached out to a number of folks and said, ‘Hey, DoD could use you, and I’d love to have you on my team.’ And I have heard, ‘Hey, I’d love to work for you again, Doug. But not at DoD.”

As part of the effort to overcome that stigma, Defense financial management leaders made their case to a virtual audience hosted by the Association of Government Accountants last week. One key message they tried to convey is the same one the department has been trying to deliver for years: The fact that DoD hasn’t yet passed an audit should not be interpreted as evidence that it does not know where its money is going.

“In the Army, we know in excruciating detail exactly where our resources are and how we spend them,” said Jonathan Moak, the Army’s acting comptroller. “We have more codes that we attach to a line of accounting than we really need.”

Moak suggested the spending data that could eventually enable DoD to pass an audit exists today – and in much more detail than what most other federal agencies maintain on their books. Aggregating those details and presenting them in a form that auditors can reliably understand and double-check is another matter.

“A good example is ammunition. The Army is the executive agent for the Marine Corps, the Air Force, the Navy, and we have to account for and maintain ammunition stockpiles in our retail and wholesale sites,” he said. “System-wise, we’re having a tough time with the reconciliations in the aggregation of all of that ammo. But if you go to any one of those ammunition sites, there is an absolute sheet that says exactly what’s in there, and we know with 100% certainty what’s there. It’s when you start to aggregate all of that data that erodes [auditors’] confidence level.”

And when it comes to things like poor internal controls and material weaknesses, officials insist things are, in fact, getting better.

In 2018, when DoD underwent its first-ever financial audit, independent accounting firms made 2,410 separate findings and recommendations. DoD closed about a quarter of those by the following year (though another 1,300 new ones were added in the 2019 audit).

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Thomas Harker, the Navy comptroller who also is currently serving as the acting DoD comptroller and CFO, said the department is closing in on material weaknesses too.

Officials said that’s part of a recent refocusing that’s pointed financial leaders toward the big-picture issues that prevent the department from earning a clean opinion, rather than focusing obsessively on dealing with each one of the thousands of audit findings.

“In the Navy, we really dove deep on material weaknesses in the past couple years,” Harker said. “Going into this current audit in 2020, we’re on track to close four material weaknesses even in spite of COVID. We’re going to clear [the ones involving] contingent legal liabilities, environmental disposal liabilities, contract authority, and our utilities.”

Nonetheless, the department has an enormous amount of ground to cover before it can hope to earn a clean opinion. None of the military services has done so yet, though some Defense agencies have. Out of the 24 individual audits that make up DoD’s consolidated financial statement, only seven resulted in clean opinions last year.

The latest audit showed 25 department-wide material weaknesses, five more than the year before. One of the new additions was DoD’s F-35 program, which is responsible for $50 billion in spending each year, but isn’t properly reflected on any of the military services’ balance sheets — at least not to the satisfaction of auditors.

But Glenn said that’s exactly why DoD needs to recruit new expertise: people who can help bridge the divide between what auditors expect and how the military currently does business.

“We need outside talent who have seen clean opinions, who know how to converse with auditors about the five assertions,” he said. “When auditors come in and ask for a report, we need folks who are smart enough to say, ‘No, you don’t want that report, you want this report, because this tells you how we can make our assertion and whether our controls are working.’”

Considering DoD’s size — larger than any Fortune 500 company — Glenn said the department will always need to rely on a blended financial management workforce, some of it made up of people who grew up in DoD, and some of it recruited from the outside.

But if the current balance is tilted too far in one direction, that’s partly a cultural problem that DoD itself needs to grapple with, Moak said.

“The Department of Defense is a little insular, because of the mission. Generally speaking, we tend to think you don’t understand us unless you’re already ‘us’. The Army is very guilty of that. We hire folks that served overseas with people that we know, and we tend to look inward,” he said. “We have to fight the urge to just hire the person who’s right there next to you. Every so often, you need to look outside and find that outside talent in the private sector or another department.”