Pentagon looking for 2019 improvements after first audit failure

With the Pentagon’s first-ever full-scope financial audit now in its rearview mirror, the one thing independent auditors can say for certain is that financial management weaknesses are still pervasive throughout the defense agencies and military services. It has been more than a decade after the department set about an effort it refers to as Financial Improvement and Audit Readiness.

At least for 2018 though, passing an audit wasn’t really the point; neither the Pentagon’s management nor its auditors expected anything resembling a “clean” opinion in the first year.

But putting the entire department under outside financial scrutiny for the first time at least sets a measurable baseline to help figure out whether the Defense Department is or isn’t making genuine, measurable progress toward getting its books in order.

“The most important thing to come out of the audit this year is the identification of the notices of findings and recommendations (NFRs) and the department’s efforts to track those and act upon those,” Brett Mansfield, a senior advisor in the DoD inspector general’s office said. He gave an interview to Federal News Network’s about the IG’s annual list of management challenges.

“This year, it’s really about learning what needs to be addressed and putting together plans to address them both individually — within components — and overall across the department,” he said. “It lets them understand where they need to focus their efforts … and then hopefully when the auditors just look at them next year, they’ll see improvement, if not a complete fixing of the issues.”

20 department-wide material weaknesses

The scale of the first audit was immense, both in terms of its cost and in terms of the problems the independent accounting firms DoD hired ended up finding.

Defense officials have previously estimated a price tag of nearly $1 billion for the initial audit, including the cost of auditor-suggested remedies to the weaknesses they found.

And the findings were plentiful: Across the military services and agencies, examiners issued more than 1,000 notices of finding and recommendation in 2018. In its report summarizing their conclusions, the IG said the deficiencies, taken together, represented 20 department-wide material weaknesses.

Donald Trump
Acting Secretary of Defense Patrick Shanahan

For example, the department still does not have a single system that either it or its auditors can look to for the full “universe” of financial transactions in a given year. Instead, they’re spread across 19 different, often incongruent databases.

DoD’s comptroller is working on a tool that would consolidate those millions of financial data points in a single place. But until it pulls that off, the IG said the Pentagon is missing out on major opportunities to save money and improve military readiness.

“For example, the DoD plans to use the universe of transactions to perform cost management analysis of its programs, to improve budgeting, and forecasting of programs such as the Joint Strike Fighter Program,” according to the report on management challenges. “[It could] link cost performance data to related priority missions, such as Operation Inherent Resolve and provide assurance that internal controls are in place and effective at managing risk, such as the risk for duplicate payments.”

Spending without ‘accurate balance of funds’

In another major example of a material weakness, the department still doesn’t have a way to accurately reconcile its “funds balance with Treasury,” the equivalent of balancing a personal checkbook with one’s bank statement.

That’s partly due to the sheer volume of day-to-day transactions involved in running the world’s largest military and the complexity of the department’s IT systems. And the IG said it’s a particular problem for the more than 100 other defense organizations who share a single “checkbook” at the Treasury Department. Individually, those agencies often don’t have an accurate picture of how many of the dollars in that Treasury account actually belong to them.

“DoD leadership continues to make spending decisions without knowing the accurate balance of funds available with the Treasury. Without a proper checkbook balance, the DoD’s spending decisions could result in an over-or underutilization of its appropriation,” officials wrote. “For example, if a DoD component believes it will overspend its appropriation, it might not hire sufficient staff, make needed repairs, or maintain critical equipment.”

And the IG says the department is making improvements to how the military services account for their property, but the picture is complicated by how interdependent DoD components are on each other for their day-to-day operations.

For instance, 46 percent of spare parts, clothing and other supplies the Army owns are actually in the custody of the Defense Logistics Agency; similar figures apply to the Navy and Air Force. And the military services tend not to have accurate, reconciled accounts of what DLA is storing and distributing on their behalf.

In one case, the IG found the Army had ordered millions of extra, unnecessary spare parts for its Gray Eagle drone because it wasn’t tracking the ones already stored in DLA facilities.

“If a military service believes that it has a low quantity of a spare part based on a service provider’s inaccurate report, or the military service does not review the inventory held by others, it may decide to order additional parts that it does not need,” auditors wrote. “Alternatively, if a military service believes that it has a sufficient quantity of a spare part based on a service provider’s inaccurate report and does not review the inventory held by others, it may decide to not order additional parts and ultimately impact the readiness of the warfighter.”

Single database for NFRs

Defense officials have said little about the specific actions they plan to take in 2019 to address the first audit’s findings.

But in what auditors consider to be a promising sign, the Pentagon has established a single database to keep track of the status of all 1,000 NFRs auditors issued in the first go-round.

The same system assigns one individual with accountability for resolving that particular issue, David Norquist, DoD’s comptroller and CFO wrote in a message accompanying DoD’s 2018 financial statement.

“The wide visibility and use of this tool across the department will reduce duplication of efforts, facilitate the sharing of lessons learned and best practices, and help maintain accountability,” wrote Norquist, who is also serving as the acting Deputy Secretary of Defense as of Wednesday. “The tool will also help us to track the number of auditor findings closed, which will be the benchmark used to measure our progress towards achieving a clean audit opinion.”

Although it’s one of the most significant challenges the Defense Department faces, responding to the audit findings is only one of the top 10 the IG identified in its latest management report, which will also guide the inspector general’s own oversight projects in the coming year.

The others are:

  • Implementing DoD Reform Initiatives
  • Countering China, Russia, Iran, and North Korea
  • Countering Global Terrorism
  • Improving Cyber Security and Cyber Capabilities
  • Ensuring Ethical Conduct
  • Enhancing Space-Based Operations, Missile Detection and Response, and Nuclear Deterrence
  • Improving Readiness Throughout the DoD
  • Acquisition and Contract Management
  • Providing Comprehensive and Cost-Effective Health Care

The list largely echoes the other iterations the IG has issued in previous years, but does include some changes in focus, Mansfield said.

For instance, the office largely agrees with the problems former Defense Secretary James Mattis decided to focus on in his business reform initiative prior to his resignation. So instead of continuing to point out business processes that need to be improved, the IG will shift its focus more toward ensuring the Pentagon is addressing the issues it’s already acknowledged need fixing.

“So this year we’ve shifted away from identifying to actually acting upon those initiatives the department has put in place,” Mansfield said. “That’s everything from implementing a new Defense Travel System to changing the way healthcare is done and placing it under the Defense Health Agency.”