DoD says contracts in place for its first full-scale financial audit

The Congressionally-mandated deadline for the Defense Department to declare its financial statements to be in “audit-ready” condition is just a little over three months away, and last week, lawmakers got their first assurance from DoD’s newly-confirmed comptroller that the department will, in fact, comply.

David Norquist, who was confirmed by the Senate as undersecretary of Defense (comptroller and CFO) less than a month ago, told the House Armed Services Committee that full audits of Defense components and an overarching audit of each of DoD’s financial statements would take place in 2018. The department has already made arrangements with independent public accounting firms to conduct the work, he said.

“Most of those contracts are already awarded. There’s one or two that are awaiting to be finalized and awarded, but we have every expectation to be fully compliant and fully under audit,” Norquist said.

Of course, placing the department under audit and having it actually pass an audit are very different matters. No one in the Pentagon is willing to forecast that DoD will earn a clean opinion during its first couple of years of full-scale audits.

The shorter-term goal over the past seven years has been to get to the point where auditors are giving Defense financial managers “actionable feedback,” rather than simply issuing disclaimers of opinion because the department’s internal controls are too weak to inspire any confidence that its financial statements are accurate.

But in his confirmation hearing last month, Norquist suggested the best way to improve internal controls and eliminate material weaknesses is to let itself be audited and see what the experts turn up.

“For seven years or more, the department has engaged in audit readiness, preparing for a full-scope audit without starting it. This approach has diminishing returns,” he said. “I recognize it will take time for the department to go from being audited to passing an audit. Everything you have heard about the size and the complexity of the department is true, and this legitimately makes any endeavor, including an audit, harder. But that is not a reason to delay the audit, that is a reason to begin.”

Norquist said his views were influenced by the experience of the Department of Homeland Security, where he was the chief financial officer beginning in 2006, before DHS had passed its first audit.

“I implemented a process of remediation and accountability,” he said. “Today, DHS has achieved four consecutive clean opinions. It was a bipartisan effort that depended upon strong support from Congress, and I believe we can bring similar change to the Department of Defense.”

If he’s right, the Department may get its first clean opinion in time for the 30th anniversary of the CFO Act, the 1990 law that requires audited financial statements from 23 federal agencies.

However, in the latest update to its Financial Improvement and Audit Readiness plan, also published last month, the Pentagon said it believes there are several factors that are unique to DoD and that go some way toward explaining why it remains the lone audit holdout.

For instance, the department pointed to byzantine financial structures, in some cases created by Congress, that make it very difficult to explain to external auditors the ways in which money flows throughout the department’s hundreds of financial IT systems – some of which pre-date the CFO Act by 30 years. As an example, the report points to large facilities on military bases that host Defense agencies.

While one set of laws makes the military department that runs the installation accountable for all of the facilities within its fence line, another requires the agency itself to pay for its own building construction and maintenance.

Officials said they’ve also encountered difficulties around classified programs, because the current rules promulgated by the Federal Accounting Standards Advisory Board don’t account for the need to protect classified information in the context of financial audits. The department said it’s working with FASAB on a “special accounting pronouncement” that would cover classified programs.

Then there’s the matter of the department’s size: it will be, arguably, the largest and most complex organization in the world ever to undergo a financial audit, and doing so will require armies of private outside auditors to assist the DoD inspector general. Although DoD has secured contracts for most of the work that will need to be done in 2018, the department signaled some concern about how sustainable its current approach is.

“The potential for contractual protests and lack of sufficient and capable independent public accounting firms continue to be risk factors over which the department and the components have no control,” officials wrote. “Current resource reductions, especially for individuals with accounting and finance backgrounds, also constrain the Department’s ability to address deficiencies.”

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