The Defense Department has spent the last seven years getting itself ready for its first-ever financial audit. But the congressionally-mandated timeline for DoD to become “audit ready” means a new administration will have taken office before the final test.
In light of that fact, DoD’s current financial management leaders have already begun drawing up plans to brief the staffs of Hillary Clinton and Donald J. Trump in the coming months, hoping to maintain the momentum they believe they’ve built on audit readiness so that it’s not lost in the chaotic shuffle of a presidential transition.
“Under the law, it’s too early for us to actually communicate with the two candidates, but starting probably in August we’ll be providing information on an equal basis to either side that wants it, and then obviously at a higher level in November once there is a president-elect,” Mike McCord, DoD’s comptroller and chief financial officer, told the House Armed Services Committee Wednesday. “We need to be ready to do a solid transition. I will tell you that when I came in with the previous team, the transition was pretty much all about the budget — there was very little about audit. We’re going to do a much better job of making sure that the new team is aware of this issue, which has moved a good bit in the eight years since then.”
The military services and agencies have been working under the same basic Financial Improvement and Audit Readiness plan developed by former DoD comptroller and CFO Bob Hale since 2009 — and DoD’s current financial management leadership believes that consistency is largely responsible for the progress the department has made so far toward getting its books in order. Under current law, DoD must declare itself audit ready by Sept. 30, 2017, after a new administration takes office. The independent audit to determine whether the department passed or failed that test will happen the year after.
The department says more than 90 percent of its current budget is now being audited by independent public accountants. The audit work now underway includes audits of the 2016 budgets of all four military services within DoD. The department isn’t holding its breath that any of those audits will result in an unqualified or “clean” opinion, with the exception of the Marine Corps, which was the first to undergo several trial audits and expects to be fully auditable by this September — one year ahead of the statutory deadline.
McCord said DoD will make the case to both campaigns that they should continue with the strategy the department’s already been working with.
“Obviously, we can’t speak to what priority the next administration might place on this issue or whether they might come in and decide that our strategy doesn’t make sense to them, but we have followed the same strategy for years and we’ve benefited from congressional support to do that,” McCord said. It’s not a given that the new team will decide that what we’re doing makes sense, but we’ll certainly try and present them all the facts and make our case as to why they should continue to implement the strategy that we’ve laid out.”
But the separate comptrollers of each of the military services said they were fairly confident that their workforces would continue to do what needs to be done to push toward audit readiness after having spent several years overhauling their financial IT systems and business practices.
Ricardo A. Aguilera, the Air Force’s comptroller, said there’s also been a concerted effort to convince senior leaders that becoming auditable would let them run their organizations more effectively, and that audit readiness isn’t merely an exercise in compliance.
“As a former auditor, I would say the progress we’ve made is almost irreversible,” he said. “I’m really pleased when I go into senior-level decision making meetings on the audit and I’m sitting side-by-side with my counterparts in the personnel arena, in the civil engineering community and the logistics community and I see their commitment in getting all of their portfolios ready for audit as well. So in terms of momentum, I feel as though in the Air Force, it’s almost irreversible and backed into the DNA.”
Dr. Susan Rabern, the assistant secretary of the Navy for financial management agreed — but noted that the process has included sticks as well as carrots. Financial auditability is now part of the performance plans for all of DoD’s senior executives. She said the Navy has dismissed at least two senior officials so far primarily because they were not taking the department’s audit goals seriously enough.
“It’s all about sending the message that this is serious business and we mean it, and those who aren’t performing, we’ll find someone who can,” she said. Time is of the essence, we have to have people who can do this job. It’s not fair to anyone to have someone in the job who can’t do it and it’s not fair to those around them.”
Even though none of the military services have passed an audit thus far, the fact that they’ve undergone the audit process for the first time in their history has told them exactly what they’ll need to fix between now and the end of fiscal 2017.
The story is roughly the same in all three military departments: IT system weaknesses are responsible for a majority of their auditability problems.
“The first year audit identified 220 major deficiencies, 82 percent of them related to IT systems,” Rabern said. “Simply stated, we have too many systems and most of them were not originally configured to conform to auditability standards. To overcome these challenges, we will continue to downsize our current suite of systems, eliminating redundant capabilities. During the implementation of Navy ERP, almost 100 business systems were eliminated. We now plan to reduce the number of general fund Department of Navy accounting systems from three to two, while eliminating all other non-auditable legacy systems, avoiding maintenance costs and streamlining IT controls.”
The transition timeline means the next administration — mostly likely including a new DoD comptroller, will be in charge by the time DoD’s ready to assert audit readiness. But McCord said getting the books audited will require the department to start the contracting process for independent auditors within the next several months.
That, in and of itself will be a challenge. McCord said the “big four” auditing firms — Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG — are the only ones in the world that likely have the capacity to tackle an auditing problem as large as DoD.
“We have to learn from what the independent auditors say, and one of the concerns that we have is that the scope of what we do may make it hard to get audit firms on contract with us for the scale of work that we have to do,” he said. “Two of those firms really aren’t doing audits right now. They are doing the consulting side, which makes it hard for them to then be independent auditors. And so having sort of two of them in and two of them out constrains us already. It would be attractive work I think, given the size of it. But there’s a limited number of people that can handle the size of the work that we do.”
For contract simplicity reasons, the department would prefer to hire one firm to conduct the audits of all of the “fourth estate” — the Defense agencies, the Office of the Secretary of Defense and the combatant commands. But each of the big four firms has already performed audit consulting work for some or all of those DoD components, leading to possible conflict of interest problems.
“One possibility is to have the Government Accountability Office do the audit,” McCord said. That’s something we’ve discussed a little bit if we can’t get a public firm to do it. I don’t think the inspector general of the Department would likely have the capacity to do the entire thing themselves – certainly not with any less contract support than there is now.”