DoD targets 2028 for first clean financial statement audit

Pentagon financial leaders said they’re making meaningful progress toward finally earning a clean audit opinion. So much so, in fact, that they’re now willing to project a tentative timeframe for when it’ll happen: 2028.

Testifying before the House Armed Services Committee last week, Defense officials emphasized that the 2028 date is by no means a sure thing, but it’s not chosen out of thin air either. It coincides with the current schedule for DoD officials to finish implementing corrective action plans to address the material weaknesses the first few audits have identified.

And Douglas Glenn, DoD’s deputy chief financial office said the department is reasonably confident that after three years of full-scale financial audits, officials now know where the major problems lie.

“I’m thrilled to say that last year’s audit introduced no new [material weaknesses]. Unfortunately, it takes a little bit of an explanation,” he said. “Our total number of material weaknesses went up, but that was only because the DoD inspector general expanded one prior-year material weakness into four categories. So I’m hoping – very much hoping and believing that we have all the financial issues on the table.

Specifically, the IG pointed to 26 separate material weaknesses during the fiscal 2020 audit. The previous year’s audit included a catch-all material weakness dealing with financial IT systems, but auditors decided it made more sense to describe those problems in more granular detail. Those four “new” weaknesses are legacy systems, configuration management and security management, access controls, and segregation of duties.

And the new formulation illustrates the extent to which outdated information technology plays a role in DoD’s auditability problems. Out of the more than 3,500 separate findings auditors made in 2020, about half had to do with IT.

Glenn said there are about 400 IT systems that handle financial data across the department right now, and modernizing and consolidating them is a massive challenge.

“We very much get that less IT systems equals less cost, less cyber vulnerability. But it’s not like these 400 systems only capture financial information. They have financial information, plus other reasons and value propositions, so it’s not as easy as just putting them all into one financial system,” he said. “Plus, people hate new systems – they love the systems that we try to take away. You have to tell them exactly where they need to go and how to replace that functionality, and you have to hold them accountable for decommissioning. So we’re doing that quarterly meetings jointly with CIO, CFO and the services and saying, ‘All right, what systems are out there, where are you going to migrate to, and when are you going to do it?’”

Of course, not all of DoD’s remaining problems have to do with IT.

One recently-discovered example, added to the list of material weaknesses in 2019, relates to the department’s management of the F-35 program. More than three million pieces of government-owned property for the F-35 – worth more than $2 billion – are completely unaccounted for, at least as far as DoD’s financial statements are concerned.

“While the planes themselves are all on the service books and under audit, the parts and equipment unfortunately are not on the department statements, and therefore they’re not subject to audit,” Glenn said. “But we’re now counting all the stuff that’s out there. It’s about three quarters complete, last time I checked, and we’re moving it into an accountable property system that we’re going to subject to audit procedures. We’re going to get the findings, we’re going to put corrective action plans against those findings, and we’re going to hold ourselves accountable for progress.”

But DoD officials say they’re making progress in other areas too, and the findings from the first few years of audits have helped focus their efforts.

In the Navy, for example Navy, property accountability has been a major focus area. The audit helped the service realize it had millions of pieces of property sitting in its inventory that it simply didn’t know about from an enterprise point-of-view.

Alaleh Jenkins, the Navy’s acting comptroller, said the actions the service has had to take to help deal with the property issues the audit identified have led to the discovery of more than $3 billion in spare parts thus far.

“At the local level, we had visibility, but it was not in a property system,” she said. “So we made it available to fill open requisitions. We had examples where we had planes at [Naval Air Station] Lemoore waiting on parts and pieces, and by identifying warehouses of, say, F-18 landing gears, we were able to put that in place and get planes repaired and flying.”

Defense officials are also quick to point out that there are some areas of the department that already do have clean opinions. Eight separate DoD entities have earned unmodified opinions; altogether, Glenn said, those entities are responsible for more than a third of the department’s assets.

“The annual audit regimen has set the department on an irreversible course in support of business reform, reinforcing accountability to taxpayers and directly contributing to enhanced military readiness,” he said. “We continue to equip the workforce with the resources and tools to respond to audit requests and remediate our audit findings. I suspect we all look forward to the day when we hear on the evening news or the drive home that for the first time in history, the U.S. government has achieved a clean audit opinion.”

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