DoD prepared to find lessons learned in audit it expects to fail

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The Defense Department is working hard this year on an audit it will almost certainly fail. But, DoD leaders said Tuesday the review offers valuable insight not only into the way the Pentagon spends, but how it operates.

DoD remains the only federal agency that hasn’t passed a full-scale financial audit. Congress approved measures in recent years that would require the agency to overhaul its financial systems in order to prepare for its first-ever audit by September 2018.

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Half a year away from that deadline, Tom Harker, the assistant secretary of the Navy’s financial management and comptroller office, said the Navy won’t receive a clean opinion from auditors reviewing its 2017 financial statements, but he said the feedback will give the military service a chance at a clean audit next year.

In managing expectations of the upcoming audit results, Harker said Navy Secretary Richard Spencer understands that this year’s outcome should serve as a roadmap to eventually earning a clean audit opinion in the next few years.

“Our secretary gets it,” Harker said Tuesday at the Association of Government Accountants’ National Leadership Training event in Washington. “He comes from the private sector. He knows what he’s used to, and he knows what he’s getting, and he sees how the audit’s going to go. We’re going to get a disclaimer this year. The goal for us this year is to get every possible deficiency and weakness out there so that it’s as visible and transparent to everybody, so we only have to take one beating as opposed to taking annual beatings.”

Despite the near-certainty of failing this year’s audit, Harker said the Navy has been working with auditors to try and give them as much information as possible, in order to get as much feedback on the depth and breadth of the problems they need to address.

Harker said he’s made that path forward clear to lawmakers on Capitol Hill and within Navy’s ranks.

“We know we’re going to get scrutiny around, ‘OK, look at all these problems.’ And the response is not focused on, ‘Do those problems exist,’ or any of that. It’s ‘OK, these are longstanding problems that have been here for decades. We are now acknowledging them and we are moving forward with correcting them.’ So don’t necessarily judge us for the problems that the auditors are finding in our first-ever audit. Judge us on how quick we are to develop and execute corrective actions,” Harker said.

The Pentagon expects to spend $367 million this year just to conduct the audit, and an additional $551 million to fix the problems its auditors find.

Mark Easton, the deputy chief financial officer of the Office of the Under Secretary of Defense, said DoD has spent the last few years getting its systems audit-ready and bringing more people — both within the defense community and the private sector — onto the project.

Easton said getting DoD’s systems to a state where they can be audited marks a significant achievement, even if the auditors hand down a failing grade this year.

“Because at the time we added resources, we developed a framework, many people would say, ‘Well, why didn’t you just go straight to audit?’ Because we entered a period of time that we characterize as focusing on audit readiness, and we needed to go through that phase. Albeit, we spent money, but we established an infrastructure, we expanded the number of people both inside the financial management community and outside. Most importantly, we established an infrastructure so that we could really get value out of that audit,” Easton said.

This fiscal year, Easton said eight defense components — including the Defense Finance and Accounting Service and the Defense Information Systems Agency — have sustained clean audit opinions. However, none of the military services have reached that level.

In 2015, the Marine Corps passed a partial audit, but DoD’s inspector general revoked that opinion after finding problems with the audit.

Despite the IG’s ruling, Harker said the Marine Corps, now in its second under a full-scope audit, remains in better shape for an audit than the Navy, which has had to beef up its financial management.

“Over the last decade, there was a significant gap between where our resources were and what our needs were. And so the Navy chose to take actions to fill that gap by cutting billets and contracting officers, cutting financial management positions, cutting people who execute the budget,” Harker said.

After Congress passed a two-year budget deal that raises budget caps for defense and non-defense spending, Harker said the sudden budget windfall has the Navy wondering how to put those funds to best use.

“That’s created a significant challenge for us, as we have this incredible influx of funding the Congress has given us to invest,” Harker said.

Wesley Miller, the assistant secretary for the Army for financial operations, described similar challenges. Getting to audit readiness, Miller said, requires buy-in from leadership, which can pose some challenges due to what he described as opposing interests within the Army’s upper echelons.

“There’s a military readiness side and then there’s the political, civilian, business side that sometimes work against each other. On the military side, it’s always readiness and readiness first. And to tell the story as far as where audit fits into readiness, it is sometimes a tough sell,” Miller said.

However, Miller added that there’s plenty of examples that illustrate how audit readiness impacts military readiness.

“When you go down to Fort Hood and you find 39 helicopters that had not been properly reported on the inventory there, it makes you wonder just how good are my controls over inventory and what am I, in fact, doing. If I go to Fort Rucker and I find that they’re running two maintenance systems that have the same helicopters in both maintenance systems, it makes it appear as if you have two sets of helicopters. Well, you don’t, you only have one. Bridging that and making sure that people can explain the business and why they have those [helicopters], it’s very important,” Miller said.

For Harker, getting the Navy ready for the upcoming audit deadline means more than crunching numbers. He said the audit should also help drive behavioral changes within the service.

“The audit is not about whether your numbers are right, it’s about are your business processes effective,” Harker said. “Are you delivering operations to the Navy for all of their back-office pieces that will increase their lethality and readiness and the ability to go wage war?”

Much like the Army, Harker said he’s been most effective at pitching audit readiness to the Navy’s top brass by describing some of the military readiness issues an audit raises.

“During the first initial phase of our audit on the Navy, they started asking questions about how many inventory locations do you have. We didn’t have an answer. ‘Well, where do you hold inventory? Is it in the hands of contractors, in the hands of Navy repair facilities, Navy warehouses, where is it?’ Couldn’t get an answer. They went through several months of that. Kickoff comes for our full audit, still didn’t have an answer. Now we’re starting to dig into it and it’s raising the question, how do we do logistics? How do we do maintenance cycle planning? How do we deal with the questions of readiness? And these are things that spawn from different auditor questions around our business processes,” he said.