Audit challenges continue to haunt Defense Department as legal requirement looms

For an agency that receives roughly $600 billion a year, the Defense Department is not exactly showing fiscal responsibility, according to a new report by the DoD Inspector General Office.

Financial management ranks in the top five of the IG’s list of management and performance challenges facing the Pentagon in 2018.

That comes as no surprise to those who are familiar with DoD’s history of audit, in the fact that the department has never been audited and remains the only federal agency that has yet to complete one.

“Long-standing financial management challenges continue to impair the DoD’s ability to provide reliable, timely and useful financial and managerial information to support reported financial statement balances. Additionally, the lack of reliable financial information prevents its full use in operating, budgeting and policy decisions,” the IG report stated.

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DoD was required by law to be audit-ready by Sept. 30. Defense Secretary Jim Mattis told the IG office DoD will begin a full audit in FY2018. Congress is holding the department’s feet to the fire on it.

“Unless we get this audit, this committee will start acting in ways that will force it. We will withhold acquisition and we will withhold authorization,” Senate Armed Services Chairman John McCain (R-Ariz.) said this month. “You cannot run an organization efficiently if you don’t know how much it costs. And frankly, you all have been getting away with it for years. So you’re warned. We want an audit. We want an audit.”

DoD comptrollers and officials waiting for confirmation have paid lip-service to the audit for years, but the actual audit still has yet to take place.

“I can tell you unequivocally, having not seen a single financial statement in the Navy in great detail, that they’re not going to pass this audit,” said President Donald Trump’s nominee to be undersecretary of the Navy, Thomas Modley, during his confirmation hearing on Nov. 7. “However, there are lots of very important things that they can learn from this audit. And they just need to get on with it. And if confirmed, I will be watching this very, very carefully to understand that we’re learning the right lessons and that we’re focusing on the right things to fix.”

The IG office says auditability still has some major barriers.

“The major impediments to auditability require the DoD to improve, and in some cases change, its way of doing business. Long-standing business processes that have supported DoD missions are not always sufficient for an audit,” the report stated.

It goes on to say DoD IG and independent auditors have consistently found DoD needs to develop sustainable and repeatable processes to better respond to audit requirements and provide timely and sufficient supporting documentation for transactions.

“DoD leaders have acknowledged that there are still corrective actions to be implemented and remediation efforts to be completed before unmodified audit opinions can be achieved. Without these corrections, the DoD financial statements will continue to remain unreliable and affect the DoD’s ability to make important financial, management and resource decisions,” the report stated.

Some in Congress feel at this point it is complete folly for DoD to attempt an audit.

“These audits, which are touted as the largest ever undertaken, could top $200 million,” Sen. Chuck Grassley (R-Iowa) said in September. “Spending so much money on audits that are doomed to failure would be a gross waste of tax dollars.”

That doesn’t mean the department should fold its tents and give up on auditability, Grassley said, only that it should focus its resources on fixing the financial management weaknesses that make a clean audit so difficult — namely, the “feeder systems” that DoD’s more modern enterprise resource planning systems rely on for their data about financial transactions, some of which have been in operation since the 1960s.

“Fix them, and then the rest should be just a piece of cake,” Grassley said

The Defense Department doesn’t disagree with Grassley’s contention that feeder systems are a massive and persistent obstacle to clean audit opinions.

In the most recent update to its financial improvement and audit readiness plan, issued in May, the DoD comptroller’s office said it was “nearly impossible to ensure data are completely and accurately feeding” between those systems, which still lack the basic capabilities needed to undergo a successful audit and, in many cases, require manual workarounds to satisfy audit demands.

But it’s been DoD’s longstanding opinion that the best way to uncover and fix those weaknesses is to put the department’s entire financial management infrastructure through its paces under the eye of independent auditors.

That view was reaffirmed by the current administration in May, when David Norquist, now the DoD comptroller, testified at his Senate confirmation hearing that the department had spent enough time doing limited-scope audits in preparation for the full audit that’s yet to come.

“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 complexity of the department is true, and this legitimately makes any endeavor, like an audit, harder. But that is not a reason to delay the audit. It is the reason to begin.”