Fifth year of DoD financial audits shows little progress toward clean opinion

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The Defense Department closed out its fifth year of full-scale financial audits with a failing grade — a result that’s not surprising in and of itself, considering that officials have previously predicted that getting a clean opinion would take a decade or more from the time the audits started.

Perhaps more surprising was how little measurable progress DoD made in fiscal year 2022. By one important metric, it actually took a significant step backward.

In 2022, independent auditors found three new “material weaknesses” — deficiencies in the department’s financial management that are serious enough to cause material misstatements in its finances. Ordinarily, those new findings would have brought the number of departmentwide material weaknesses to 31, but the department’s management and the DoD Inspector General agreed to consolidate three weaknesses from past years into other existing categories, leaving the total number at 28, the same as in 2021.

“I was hoping for more progress than I saw,” Mike McCord, DoD’s comptroller and chief financial officer told reporters. “We are peeling off the layers, and as we get to the harder things, the progress is getting harder as well. I would say each year the auditor findings and recommendations to us increase in complexity and in terms of degree of difficulty, with much of the lower hanging fruit having been picked. So as we move forward, we have to continue to focus on leadership and collaboration across DoD to solve these more difficult challenges.”

The three new weaknesses the IG reported this year were titled “interface controls,” “reporting entity,” and “DoD component level accounts.”

The new interface controls finding reflects the IG’s assessment that despite years of trying to modernize and improve the connections between DoD’s myriad financial IT systems, the department hasn’t done enough to ensure the integrity of the data moving between those systems.

“DoD components did not have comprehensive or documented interface strategies and did not design or implement effective interface controls for multiple significant financial management systems,” auditors wrote. “For example, DoD components were unable to identify complete and accurate populations of interface edits and validations that affect financially relevant transactions.”

Meanwhile, the reporting entity weakness means auditors don’t believe the department is completely capturing financial data for the more than 60 DoD components it’s legally required to consolidate into its financial statement.

“Improper implementation and application of [federal financial accounting standards] affected the reliability of information published by DoD management and led DoD management to report materially incomplete balances in the agency-wide financial statements,” according to the disclaimer of opinion the IG published this week.

Similarly, the new “component level accounts” weakness shows auditors don’t have confidence that DoD is reporting all of its components’ finances accurately — even those that are included in the consolidated financial statement.

“Without proper internal controls, the DoD was unable to ensure that balances were reported completely and accurately in the DoD Component Level Accounts entity,” auditors wrote. “As a result, there is an increased risk that balances reported … are materially incomplete and inaccurate.”

The now-annual audit of the Pentagon’s finances — likely the largest financial audit operation in the world — is actually a combination of 27 separate audits involving funds managed by the military services and other DoD components.

Those sub-audits represent another way to measure progress. None of those individual components received newly-earned clean opinions this year, but on the plus side, each of the nine components that had earned them in previous years maintained them in 2022.

The largest of those funds with clean opinions, the military retirement fund, has been passing its own separate audit since long before the DoD-wide audit started. And as a general matter, the audits have shown the department is on solid footing when it comes to reporting its finances in the areas of pay and benefits, McCord said.

“Our military pay and civilian pay processes received unmodified opinions again this year, and I highlight these because although we have a lot of work to do, the one thing that we have to make sure we do first is taking care of people,” he said. “We are still challenged with evaluation and existence of equipment and real property assets, which is probably going to be the long pole in the tent for us … and we need to continue to address government property in the possession of contractors. The Joint Strike Fighter is probably the biggest issue there.”

Still, McCord maintained that the audit process has helped force positive business changes across the department, even if some of those changes are not as “easily countable” as the department’s total number of material weaknesses and its notices of findings and recommendations (NFRs).

For example, DoD has begun to deploy robotic process automation on a fairly large scale to help collect and process financial information, both for its own use, and to deliver it to the auditors who need to assess DoD’s finances. As of this summer, 559 of those “bots” were in use across the department, he said, 54% of which were contributing directly to the audit.

“In the Army, on the first attempt, one of their bots successfully pulled 96% of samples in one day for something that would normally take five or 10 days,” he said. “This kind of speed hasn’t yet moved the needle in terms of moving an opinion, but its one of the things that we believe is going to help us. The Air Force has also made some progress in terms of doing their validation. With this same sort of automatic process, they have sped up a validation from three months to seven days.”

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