As key deadline approaches, DoD remains biggest obstacle to governmentwide audit

While the federal government as a whole has made major progress toward getting its books in audit-ready condition over the past two decades, the Defense Department remains the single biggest impediment, the Government Accountability Office said last week in its annual report on the federal government’s financial statements.

GAO has been sending the same message for years, but this year’s assessment comes at an inauspicious time, just eight months before a key legal deadline. By law, the department must attest that its financial statements are ready to undergo the scrutiny of independent auditors by the end of this fiscal year.

The watchdog did not paint a particularly optimistic picture, saying the department continues to have “serious financial management problems” and that “previously reported DoD material weaknesses continue to exist.” GAO said DoD financial managers appear to be acting on the recommendations independent auditors have turned in during the course of a series of partial, interim audits, but the list is long: several hundred material weaknesses were identified in just the last two years.

“These material weaknesses included the inability to reasonably assure that the [statements] reflected all of the relevant financial transactions that occurred and that documentation was available to support such transactions,” wrote Gene Dodaro, the comptroller general.

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And while the Pentagon will comply with the September 2017 deadline inasmuch as it will declare itself to be “audit ready,” it fully expects to fail its first audit and to continue to do so for several more years.

“Because some remediation actions and major system and process changes will not be fully completed, these audits are expected to result in significant audit findings and disclaimers of opinion,” the department reported in a November update to its financial improvement and audit readiness (FIAR) plan. “Disclaimers can be issued for a variety of situations, such as incomplete information and testing limitations due to the sensitive nature of the data.”

Nonetheless, the department’s financial management leaders believe the mere process of undergoing audits — even ones that are destined to fail in the near-term — is a more-than-worthwhile exercise. The FIAR plan began with DoD’s statements of budgetary resources (SBR), reasoning that budget data is the information that’s most valuable to the department’s management, and about 90 percent of those funds are already under audit.

“Although the department has not fixed everything that it must in order to achieve a clean opinion, institutionalizing annual audits while continuing to address issues is imperative,” officials wrote. “Audit findings and recommendations help the components focus on areas that need the most attention, prioritize remediation activities, and strengthen controls. Opportunities for process improvement and resource savings may also be revealed. For example, the Navy’s first audit resulted in 220 deficiencies, 82 percent related to IT systems. To address these challenges, the Navy is downsizing the number of systems and eliminating redundant capabilities.”

DoD already missed an earlier congressional mandate to get its financial statements in order. By the end of 2014, it was supposed to submit audit-ready statements of budgetary resources; lawmakers and an earlier defense secretary, Leon Panetta, saw that deadline as one way to ensure the department stayed on track for a full audit.

Under the current schedule, the Marine Corps will be the first military service to put its full financial statement under audit later this year. Its sister services will conduct their first in fiscal 2018, as will U.S. Transportation Command. U.S. Special Operations Command and the Defense Health Agency also “should be ready” in FY 2018, but “are at the highest risk,” according to DoD.

Several other Defense agencies, including the Defense Logistics Agency, the Defense Finance Accounting Service and the Defense Information Systems Agency have already passed audits to one degree or another, and the rest of DoD’s agencies will be examined by an independent firm in one consolidated audit that the department plans to award under a best-value competition.

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