The Pentagon’s push for a clean audit is reshaping how it manages money and systems

Guest:	Rich Brady
Title:	CEO of the Society of Defense Financial Management
Summary:	Passing an audit remains one of the Defense Department's top financial priorities, but getting there may require more than better bookkeeping. Department leaders are looking at financial-system consolidation, common data standards and major process changes across the enterprise.

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Interview transcript

Terry Gerton When we think about defense financial management, there is a lot going on in the community today. I thought maybe we’d start at the highest level. When you think about the changes, what’s the biggest one that’s underway in this space?

Rich Brady I think we have to talk about audit, that’s probably where it starts, and the reason I say that is about 18 months ago now when the administration first came in, I met with senior officials and the acting OSD comptroller and I asked about the priorities going forward. And a lot of that was from the SDFM perspective. I wanted to make sure that, you know, our priorities, our objectives were aligned with that of the department from an educational standpoint, training standpoint and certification. And so when I laid out a number of things, you now, from PPBE reform to financial systems transformation, modernization, auditability, and said, okay, these are what we see as kind of on the plate, what’s the highest priority? Without question that they said auditability. And it’s far above everything else. And that message has stayed consistent over the last 18 months.

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Terry Gerton Many administrations have come and gone and many of them have talked about audit readiness. What gives you the sense that this group is really serious about it? When did you think the change was real?

Rich Brady Yeah, so I think there’s a couple things. Number one, if you look at a lot of the senior officials who are coming in, at least the Department of Defense, Department of War, the political appointees who are coming from the private sector, they come from an area and environment where audits are non-negotiable. If you’re working in the private sector, you’re looking for a private company or a publicly traded company, a hedge fund, you live or die by your audit. You’re not going to get any funding. Your creditors are not going talk to you if you don’t have a clean audit. So, many of them are coming in with a perspective of, well, what do you mean you don’t have a clean audit? How is this even possible? So it starts out kind of as a non-negotiable. That’s number one. And number two is, again, with this administration, there’s an opportunity for some bold changes. And I think that a lot of what it’s gonna take to get to a clean opinion is gonna be some bold moves, some bold change, particularly around systems and priorities as well.

Terry Gerton It’s interesting that you talk about the perspective from the outside, coming in and expecting that an audit is just table stakes. But there is no financial management environment like the Department of Defense’s financial management environment. What do you think were the biggest assumption challenges for this group of folks as they came in?

Rich Brady Yeah, I think that, again, they maybe have made an assumption that it was less complex than it is, or there was greater alignment amongst the financial systems. I mean, if you think about it, the department is, you’ve got a Department of Defense, but then you’ve the service, the military services as well, that act very independently. And they’ve grown up that way. And so it’s trying to take 200-plus years, 250 years of systems and processes that have grown up independently and force them together in a single, clean audit opinion. And that’s very difficult. And so one is I think there’s always this underestimation of the complexity of the Department of Defense, but at the same time, it’s maybe not as complex as some people think. Sometimes it’s just adhering to certain standards. And as I like to say, having a benevolent dictator at the top who’s gonna say, though this is the way it’s gonna be, we’re all gonna fall in line. Here’s the standard financial structure, we’re all going to do it this way, and that may mean some people have to change their processes and do it another way, instead of just deferring to each of the services, deferring the each of defense agencies to do with their own way.

Terry Gerton Is that something you think has been missing for a while? That central leadership?

Rich Brady No, I think the leadership has always been there. I just think that there’s always been, again, this deference to the services of the defense agencies to act more independent and operate more. And that’s a strength, quite frankly. But at the same time, when you’re trying to achieve a consolidated, clean audit opinion, it can sometimes be a challenge to that objective or goal.

Terry Gerton Well, one of the places where they have typically deferred is in the financial management systems. Every service has its own, and then somehow, some way at the top, magic happens and they get all brought together in a single, simple report. But you said this is an opportunity for real change in the system space. What are you seeing there?

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Rich Brady Yeah, without question further consolidation, they have stated, you know, both publicly and privately that their intent is to reduce the number of financial systems out there. I think the number is around 130 financial systems throughout the Department of Defense, including the services and defense agencies. And that number probably needs to be halved, is what I’m hearing by the end of this administration. So that’s an aggressive goal, but again, one that’s certainly achievable. I think, again, there’s been a lot of deference to the services and the different communities that have these financial systems, and it takes somebody that’s gonna force them, really, to get onto a new system, and that may mean changing their, again, their processes, but at the end of the day, not changing the actual outcome. And there’s some hesitancy to give up on legacy systems. Obviously, there are careers that are built around legacy systems, there are incentive structures for offices and organizations that are build around legacy systems, and some of that has to be let go. And I think again, if there was ever an opportunity for some bold change, this is it. And some of the people that have gone into the department on the civil service side over the last 12 to 18 months saw that opportunity.

Terry Gerton There’s a couple of different ways you could go at a whole new financial system for the Department of Defense. One, you could buy it out of the box, right? And tell all of your defense financial managers that we’re just gonna comply with GAAP and we’re gonna take the system that comes out of box. But there are a lot of specific information requirements that DOD has to comply with. As you’re thinking about that system change, which way do you see it going?

Rich Brady Yeah, so let’s start, I think in a perfect world, if you were creating this from ground zero, you would start with a single financial system. But it’s not feasible today. And I think that when we talk about that and talk to people in the department, yes, that would be in an ideal world. It would be great to have a single financial system, but it’s really not feasible because you are dealing with some different processes, some different operating environments. You know, the services don’t operate in the same operating environment. They do have some autonomy as well. So, you are going to have some different processes and therefore you’re going to need some different systems. What’s most important is you have common data elements and so that the information can all be aggregated up at the highest level. And then you’re working off of a true common operating picture and a lot of people talk about dashboards. Dashboards are incredibly popular today. Everybody’s got one. But they don’t have a lot meaning if everybody’s looking at different data. We all have to be looking kind of at the same data and judging from the same And that’s standard data structure will get you there, regardless of the system you’re using. So I’m kind of system agnostic, it doesn’t really matter what system you use as long as we’ve got the standard financial structure underneath that we’re all using.

Terry Gerton So let’s put a pin in that because we’re going to come back to it, but another piece of how you would need to design that system relies on what you expect the financial managers to do. And the history of defense financial management, certainly my history in defense financial management was compliance, right? Reporting how much you got appropriated and did you obligate all of it? And did you have your internal controls in place all the way along? Do you see a changing role for defense financial managers? Are they becoming more like advisors?

Rich Brady Without question, and this is interesting, Terry, because I have the same conversation with private sector finance and accounting professionals. They have a similar challenge where the role, the nature of what we do as finance and accounting professionals is changing. When I started in the profession in the early 90s, you’re absolutely right. Our role was capturing, recording, and reporting of financial information. That’s what we did. It’s very compliant. It was backward-looking. It was hindsight. It was you know descriptive whatever you want to call it. Well guess what, we have systems that do pretty much all of that for us today and they do a pretty good job and so we don’t need finance and accounting professionals doing that today. We need them focused on higher value added activities in the area of analysis, scenario planning, forecasting, those type of activities and less on the compliance because again we can rely on the system. That’s difficult though, I mean a lot of people were brought up in that world and It’s hard to let it go. And it also takes an understanding from leadership of what financial management professionals can bring to the table now because they’re not just focused on that compliance role or mission. They can focus enterprise-wide, they can focus on enterprise risk, they can focused on value creation, all of these things that really probably were not feasible 20 or 30 years ago, but absolutely are today. And again, same conversations we’re having in the private sector that we’re have in the public sector.

Terry Gerton So to move someone from the old model of financial management to this new advisor, senior consultant, strategic partner, what information do they need out of the systems to be able to provide that kind of input?

Rich Brady Well, without one, reliable information. And so, again, this gets back to the data quality. Not only just consistent data standards and data elements, but the data and quality has to be there as well. And then two, a common picture that we’re all operating off the same common dashboard. So we’re making decisions based on the same information that’s aggregated up through the organization. And then three, again a recognition from leadership That They’re not there just to provide reports, but they’re to provide the analysis. When I was in uniform in the Marine Corps, I said, if you want to leverage the capabilities of the community today, the leadership has to ask questions in a little bit different way. If you want us to just focus narrowly on our stovepipe, we can do that, but if you want us take a broader look, we can do that as well. And so I think there’s not only recognition from the community of the capabilities they have. But the leadership, and in this case, we’re talking mostly the political leadership with the kind of questions that need to be asked. And I think, again, with this administration coming from the private sector, coming with that perspective of, hey, there’s a bottom line here, we need to talking about return on investment, we need be talking about capabilities and not just budget execution and obligation rates, that there is a higher expectation or a different expectation than there was in the past.

Terry Gerton So you’ve used the word analysis in there several times that you want the new financial managers to be able to analyze and bring depth to the understanding of the information. A lot of folks are investing in AI to help with that. Are you seeing an AI investment in the financial management space here in DoD?

Rich Brady Yes, without question, and yeah, so there’s kind of two parts to this as well I want to tell. One, a lot of people want the training and education on the technology side, like everything needs to be focused on technology. But in our community, as you know, you have to know the basic blocking and tackling of defense financial management as well. You have to understand the basics of appropriations law and accounting, the DOD financial management regulations. That’s, again, kind of the table stakes. But then from there, you need to upskill into the technology areas and without question AI is one of those areas. But there’s still a lot of space today for robotic process automation, machine learning, even blockchain technologies today. And basic dashboards, process mapping, all of these things are important and support ultimately what you’re trying to get to is better decision making. So AI is a tool for better decision-making. And what we’re hearing from the community is they want to use it. They would like to use. They want some guardrails. They want to understand what’s the best way to use it and what’s an ethical and proper way to us it. But without question, it’s an area we’re going into. And we’re seeing this in the private sector as well. It’s probably not being leveraged as much as it is in other areas of defense right now, particularly on the operational side. But it is coming into the back office functions, the overhead functions increasingly.

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Terry Gerton Are you seeing it change the approach to financial accountability and stewardship and internal control?

Rich Brady I don’t know that I would say that we’re seeing that change just yet. I do think that that is coming. Let’s just look at it from the audit perspective, from the auditor’s perspective. For the first, you know, 12, 18 months of when I would that AI went commercial about two years ago, three years ago. A lot of the auditors were pushing back saying there’s not a place for AI for use in audit. They’ve kind of come around now and said, no, we can rely on this. So a lot of it’s a question of reliability. And obviously the AI technology is improving rapidly. It is becoming more reliable. But if you have garbage data to begin with, AI is not necessarily going to fix that. The analysis it provides, the results it provides it’s going to be garbage as well. So. You’ve got to work the basic underlying data first to then put leverage, layer AI on top of it to get the decision support you need.

Terry Gerton I think the financial management space, maybe unlike many others, has a great deal of human personal responsibility, right? Your financial manager is ultimately personally liable for things being right or wrong. So as you’re thinking about auditability and as you are thinking about accountability, are there places in here where you would say this just cannot be delegated to technology?

Rich Brady Well, you’re absolutely right, you know, there is a liability, pecuniary liability in areas of financial management in the public sector. What that results in is a very risk-averse community, one that is, I won’t say resistant to change, but change is difficult because there is this compliance mindset. There is this sense that I’m personally liable. There is a sense that these are taxpayer dollars. And we have to be prudent in their use and expenditure. So we’re kind of dealing with some of that when it comes to leveraging of technology, particularly new technology that’s evolving very quickly and that frankly does still have some risk. But I think given the size of the department, we’re talking about again, going from roughly a $900 billion budget somewhere. Close to 1.5 trillion, maybe 1.2 to 1,5 trillion. You are gonna have to leverage technology. You don’t have enough people. You can’t, you could never have enough people to do all the manual processes, the manual checks to account for all of that spend. You have to rely on technology. And so it’s gonna take an estimate of what your risk tolerance level is, but it’s improving, again, the technology, and we absolutely have to leverag it.

Terry Gerton Let’s take risk tolerance and $1.5 trillion and bang them together into a conversation about waste, fraud, and abuse. That’s another topic that’s really top of mind for this administration. Where do you see the role of the defense financial manager in making sure that inside that giant bucket of $1,5 trillion, funds are being properly distributed and accounted for?

Rich Brady Yeah, if I’m putting myself in the kind of the role of a defense financial manager, you know, your number one kind of priority is I’ve got to get the money out the door, right? I’ve gotta get this money spent because most of it’s either an annual appropriation or if it’s a multi-year, it’s two or three years. You do have some five-year appropriations, but most of its annual appropriations. So you’ve got 12 months or less if the appropriation comes late to spend it. And if you don’t spend it, you’ll lose it. And so you want to get it, get as much of that out the doors as you can. But you want to do it in accordance with the law and regulation, particularly the federal acquisition regulations, to make sure that it’s all under contract legally. And so that’s a challenge, particularly when you get to the end of the fiscal year. There’s a lot of pressure right now. There’s lot of money that needs to be spent very quickly before September 30th. And so, unfortunately, what tends to happen at this point in time is that the highest priorities don’t necessarily get funded. It’s those that you have a contract vehicle and you can get the money spent on as quickly as you can. And so I think that that’s going to be kind of the challenge that the community is going to be grappling with as the budget quickly expands is how do we continue to spend at this level. I mean it’s, I think the administration is looking to leverage other transaction authorities, some additional authorities under the Office of Strategic Capital to do. Actual equity investments in companies or for capabilities that will help them move some of that money quicker but into the day it’s still a very kind of manual process when you get into the acquisition regulations and you’d have to do the competition and you have to get the RFP out and source selection and all of that. It takes time.

Terry Gerton Well, let’s pull the thread on that, because many of those systems are there to be intentional breaks, right? This Defense Department leadership team has really been vocal about wanting to buy faster, move faster in the acquisition space, move faster and a lot of decision spaces, and yet the financial system and the financial regulations are, in some ways, designed to move that a little more slowly and carefully. How do you see reconciling that tension?

Rich Brady Well, I think the tension is always good, right? You don’t want it to be so stringent that you’re not able to spend anything. Likewise, you don’t it to so loose that there are no rules and regulations or accountability there. So, I just would start by saying a little tension is good. I think what you really want to ask yourself is what is the desired outcome or what’s the level of risk that’s acceptable? Obviously, if you’re trying to achieve certainty that not one dollar spent was spent without some fraud, waste, or abuse or anything or not appropriately, the price of certainty is infinite. You’re never going to get there. And so you have to determine what is that level of risk that you’re willing to accept. And I think you can move with technology to more of a continuous review. Every single document has to be reviewed. Look at it from an audit perspective where you sample. You don’t necessarily review every single document. You pull a sampling of documents, you look for anomalies, and then… If you notice something off track, you go in further. But otherwise, I think we’re beyond the point where every single transaction needs to be reviewed and it can be done from a sampling perspective and can be from an automated and continuously.

Terry Gerton So as the department moves to really implement this speedier process, are you seeing more seats at the decision table for the financial managers where they’re saying, boss, here’s the rule about that. Now we can maybe make it a little quicker or shorter, we can shorten that path a little, but you can’t get by this rule.

Rich Brady I would go back to some of my own training and what I tried to impart on my Marines when I was in the Marine Corps and working in financial management, and that is, there’s almost always a way to yes. I mean, our role in financial manager is not to just sit back behind a desk and say no, no, and pull out regulations and tell people why they can’t do things, particularly your general officer, your flag officers, your SESs, or your political appointees. You want to try to get to yes. So understanding what’s the desired outcome here? What are we trying to achieve? Let’s start with that and then let’s figure out a way of getting you that. More often than not, there is a way of getting there, you know, we talk a lot about, well, you can’t buy water with appropriated funds, kind of the general rule, okay, we all got that. But no, there a way to do that, depending on the circumstance, you now? And so, tell me a little bit more. Let’s have the conversation. This is where I think the defense financial manager or the federal, the Fed-Siv financial manager really can add value. It’s being at the decision table and being part of these decisions and not being just a in the back, I’m the scorekeeper to tell us, again, looking in the rear view mirror, hindsight, what’s happened. It’s really being part of those kind of discussions of like, what are we trying to achieve here? What’s the strategy? And how do we create a budget strategy, a financial strategy that supports that desired outcome.

Terry Gerton Well, that really gets us back to SDFM itself because as you’re thinking about these new roles for the financial manager and all the new tools that they’re going to need to perform those roles, where do you see the biggest capability gap?

Rich Brady Yeah, that’s a great question. You know, I like to say if I surveyed our members, it would be all over the place, right? Some people want more discussion around auditability, because that’s the number one priority. Other people will tell you, oh my gosh, you’re cramming auditability down our throats. We’ve heard enough about auditability. We need some more of the basic blocking and tackling, some basic accounting and budgeting and program management. And so really it’s still, for us, it’s kind of across the board. We have to do the basic training in defense financial management, which includes appropriations law, budgeting, accounting program, all of that. But we have to the higher value added kind of technology training as well. Whether that’s AI, data analytics, decision support. And so we’re trying to have a healthy balance of both right now. Again, trying to keep as we see, you know, the department shifting. Right now, auditability’s on the front burner. Two years ago, three years ago it was all about PPBE reform, so we’ve kind of moved PPBE Reform to the back. But, you know here this spring, department’s talking more about PPB reform. It’s come up again. So we’re talking about, okay, do we need to move that one back forward? While we continue to focus on the basic skills that Defense Financial Managers need. Because our community is made up of early careerists, you know, in their early 20s right out of college, all the way up to seasoned professionals at the executive level. And we need to have training and education opportunities for everyone wherever they are in their career journey.

Terry Gerton So there’s classroom training, all of those kind of topics you just talked about, but there’s also on-the-job experience. Are there certain positions that you think are really critical in preparing financial managers for those senior advisory financial management positions in DoD?

Rich Brady Yeah, I would say that probably more than anything, senior financial managers have to have a better understanding of jointness. I know we’ve been talking about jointness now, right? Since the mid-80s. But it’s still very important. If you want to move up to senior levels, you’re gonna find that you’re dealing with strategic issues that cross boundaries and cross service lines or agency lines or department lines as well. And so… Having some joint experience, whether that’s, you know, working in different services, or working at the OSD level, or working in a defense agent, or even going out of the department, working for Homeland Security, Veterans Affairs, and then coming back, I think is important. Having those different perspectives, which really improves decision-making through the different experience perspectives, education background, that’s what results in better decision for the department. Instead of having somebody who just came up one single. Pipeline, let’s say, just through the Marine Corps and came into a senior position. I think that’s going to be critical in the future. And I would even add that maybe in 10, 15, 20 years, having a stint in the private sector is going to important. Having that perspective, because a lot of areas of financial transformation, financial modernization originate in the public sector and eventually come into the public sectors. So having some experience in the sector will likely be important as well.

Terry Gerton Unless you’ve found a time travel device, I’m not sure there’s enough hours in the day to punch all of those tickets. If you had to choose in the balance between really understanding the technical details of defense financial management and having a broader perspective across different organizations and perhaps the private sector, where would you land?

Rich Brady At what level? At the most senior level, at the senior level obviously you need less technical expertise. You probably can’t even keep up with it at that stage. You’ve got to have an enterprise perspective. Today it really demands, and this is not just in the public but in the private sector as well. CFOs have to be technologists. They don’t have to technophiles, they don’t need to know how to do coding, but they need to understand what’s on the horizon of technology and how it can be leveraged in the organization. Not only in the finance and accounting function, but in other areas of the organization to improve from a cost control perspective and outcomes perspective or a value perspective. So, you know, CFO’s of the future have to technologies.

Terry Gerton Let’s bring this back to where we started with all of the changes in the profession. You talk to comptrollers, you talk to leaders, you are all across the space. What gives you the most confidence in the profession today?

Rich Brady I would say without question it still comes down to their commitment to the mission. I mean, understanding that the work that they do has meaning from a national security perspective. That I think is what inspires me to continue to work in this field and when I talk to people within the department, that probably inspires them more than anything is again, just being part of that larger mission or that larger purpose.

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