2015 a ‘pivotal year’ on path to clean DoD audit, which is also quite expensive

For the first time, nearly all of the Defense Department’s budget is under professional audit, the Pentagon told Congress in a report last week, making 2015 a “pivotal year” in getting the entire department’s books in audit-ready condition by the end of fiscal 2017.

As part of the department’s incremental approach to auditability, the Army, Navy and Air Force subjected their schedules of budgetary activity (SBA) to outside auditors for the first time. That one-year view of assets is only a piece of the statement of budgetary resources (SBR) needed to support the full financial audit every other federal department has passed, but combined with the work already underway in the Marine Corps and Defense agencies, it accounts for about 90 percent of dollars the DoD gets from Congress.

The outside accounting firms are expected to finish their work on fiscal 2015’s finances by the end of this calendar year, and Defense officials are pretty sure they know how things will go. The Army, Navy and Air Force will probably fail on their first go-round, just like the Marine Corps did. But they said the only way to ferret out the department’s weaknesses is to undergo a no-kidding audit with real auditors.

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“Just the fact of being under audit is not a trivial thing,” John Conger, the nominee to be DoD’s deputy comptroller, said at his Senate confirmation hearing last week. “Auditors expect a certain responsiveness. When they ask for documentation for a particular transaction, you’re supposed to be able to provide that in a reasonable amount of time. We just haven’t had the systems in place to be responsive at all.”

And because the department still lacks many of the internal controls and IT systems expected by modern accounting standards, auditors are having to rely on a huge amount of manual testing to determine how accurate and complete DoD’s transaction records actually are.

The new report gives a sense of the scale of the effort. In the Army alone, the auditors made 17,500 requests for extra documentation this year, leading  the service to hunt down and produce more than 26,000 records.

The level of internal government resources needed to support all of the manual labor in what’s sure to be the largest audit in the history of the world is fairly staggering. In 2015, the department spent $634 million to get itself in shape for a clean audit, and plans to spend $746 million in 2016. For some perspective, that’s about half of the annual budget of the entire Defense Finance and Accounting Service, the agency that handles most of the department’s day-to-day accounting, including payments to all of its contractors and almost 3 million employees.

The reported audit-readiness figures account for the costs the department is incurring for things like responding to auditor requests for paperwork and retrofitting legacy accounting systems to support an audit, but they don’t include the additional billions of dollars DoD is spending to replace its legacy financial systems with modern enterprise resource planning (ERP) systems, nor do they include the more than $37 million paid to KPMG, Earnst & Young and Cotton & Company to actually conduct this year’s SBA audits.

DoD has already shown that making itself auditable is going to be a trial-and-error process. After two years of attempts, the Marine Corps earned its first-ever clean opinion on its 2012 SBA, but DoD’s inspector general revoked that decision earlier this year after discovering previously-unaccounted-for funds in Treasury Department suspense accounts. The IG is now combing through the phantom transactions each of the military services have in those Treasury accounts in order to determine the degree to which they’d have an impact on DoD’s overall financial statements.

The revised audit plan the department submitted to Congress last week leaves no room for any more big surprises. In order to meet the legal deadline, DoD is counting on the Army, Navy and Air Force to get clean opinions on their SBR audits — a multi-year version of an SBA audit that’s needed to get to full-auditability — within the next two fiscal years. The Marine Corps will go first, undertaking an SBR audit in 2016.

Among other forthcoming milestones in the plan, each service will also need to have an auditor-approved inventory of the “existence and completeness” and value of all of their physical assets in sometime in 2017 — from real estate to aircraft carriers and spare parts — something no military service has achieved so far.