GAO pokes more holes in Marine Corps’ 2012 financial audit

The federal government’s top auditor has concluded that an audit of the Marine Corps’ 2012 financial statements – previously issued by the Defense Department’s inspector general – was riddled with problems, including missteps by the DoD IG itself.

The Government Accountability Office’s findings seemed to point to further setbacks for the Defense Department’s statutory mandate to have all of its financial statements ready for audit by the end of fiscal 2017.

The DoD IG had already rescinded its clean opinion of the Marine Corps audit in late March, saying its report was “no longer to be relied upon” because of newly-uncovered financial information that it said was previously undisclosed to its auditors.

But GAO’s report pointed to problems with the IG’s own work and suggested the audit team should have insisted upon further evidence from the Marines before expressing confidence in the accuracy of their financial statements.

“We noted several areas where there is a high risk of material misstatement related to the completeness of outlays and obligations reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule, for which the auditor either did not perform any testing procedures or did not perform sufficient procedures to determine whether there were material misstatements,” GAO officials wrote in a now-public report first reported by Bloomberg News.

The military services’ financial statements are so routinely out of compliance with generally-accepted accounting principles (GAAP) that observers have come to expect DoD’s auditors to issue what is sometimes called a “same-day disclaimer,” because none of the armed services – with the exception of the Coast Guard – even attempt to claim that their financial statements are fully-auditable.

But the 2012 Marine Corps audit was supposed to be different, serving as a “beachhead” for the rest of the department, partially because the Marines are the smallest of the DoD services and also because its financial management systems are comparatively straightforward: it is the only service, for example, which had managed to collapse all of its personnel IT systems into one by the time of the audit.

But GAO opined that there were several problems with the methodologies the IG used to render the clean opinion for the Marine Corps.

That service, like its three sister services, is heavily reliant on the Defense Finance and Accounting Service and other DoD “feeder systems”. Even though the Marines have conducted extensive work over the past five years to ensure the systems under their direct control are compliant with auditing standards, many systems which provide much of their underlying information still are not.

There are 25 such feeder systems, according to GAO, and 90 percent of the transactions that wind up in the Marine Corps’ general fund start in those feeders.

GAO expressed particular concern, for instance, with nonpayroll systems, saying they weren’t sufficiently accounted for in the 2012 audit opinion:

“The risk of material misstatement in the Fiscal Year 2012 General Fund Schedule related to the transfer of transactions from nonpayroll feeder systems is high, we believe.”

This particular opinion has no effect on the audit in question, because the DoD IG’s office has already called back its earlier clean opinion, albeit for different reasons: a contracted auditor discovered funds in Treasury Department suspense accounts that were not accurately reflected in the audit opinion the IG had previously issued.

In a 15-page written response to GAO’s findings, Daniel Blair, DoD’s deputy inspector general for auditing said his office was examining four separate reviews of the issues surrounding those suspense accounts and is reexamining quality assurance procedures within the IG’s office.

And he strongly suggested that many of GAO’s concerns were merely the result of subjective differences of opinion between two different government auditing offices.

“Throughout the report, GAO references several auditing standards, but does not mention the need to use professional judgement when applying each of these standards,” Blair wrote. “In our professional judgement, the 2012 Marine Corps SBA audit was performed in accordance with applicable audit standards.”

Several members of Congress – some of whom have been vocally supportive of DoD’s apparent progress toward auditability in the past – did not hesitate to voice disappointment in GAO’s findings.

“This is more than just a disagreement among accountants,” said Sen. Tom Carper (D-Del.). “It raises questions about the department’s basic financial practices and whether DoD is being held to the high standards that taxpayers deserve.”

Sen. John McCain (R-Ariz), the chairman of the Senate Armed Services Committee, called the GAO report “troubling.”

“The Defense Department’s response to the GAO findings shows that the Pentagon is not making the progress achieving auditable financial statements it claims, let alone the progress it said it would have accomplished by now,” he said. “The rest of the government can pass an audit. It’s long past time for the Defense Department to demonstrate it can do the same and restore taxpayers’ confidence in its stewardship of precious defense dollars.”

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