Conaway: Reason for optimism as DoD begins its first-ever full financial audit

For the first time in history, the entirety of the Defense Department’s financial statement is being examined by professional auditors. While no one predicts the Pentagon will earn a clean opinion the first time around — or is willing to make a prediction on how long it will take — there is good reason for optimism, according to one of the few members of Congress who is both an advocate for financial improvement and an expert in the field.

Rep. Mike Conaway (R-Texas), a member of the House Armed Services Committee, called the progress DoD has made over the past decade “immense,” even if there’s still a “monstrous” amount of work still ahead.

“Starting with [former Defense secretary] Leon Panetta’s leadership moving forward, the system really has made great strides,” Conaway, a certified public accountant, said in an interview for Federal News Radio’s On DoD. “The four or five years I was involved with this issue, it was more about getting ready to audit, and at the same time trying to go through a systems rework where they were putting in enterprise systems to try to come into the 21st century with respect to the backbone of various general ledgers and payrolls and all the accounts payable systems and everything. And then the Marine Corps, to its credit, said ‘we’re tired to get ready we’re just going to audit. That really broke the ice in terms of getting the system to understand how far it had to go.”

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Indeed, after the Defense Department proclaimed its first audit success following one of the Marines’ audits, the DoD Inspector General revoked its previous clean opinion after discovering that some of the service’s funds in Treasury suspense accounts had not been accounted for.

But Defense officials, including David Norquist, the DoD comptroller, have argued that the only way to detect and remedy those problems is to subject the entire system to audit, a project that DoD officials disclosed earlier this month will cost $918 million in its first year alone: $367 million to conduct the audit itself, and a projected $551 million more to remedy whatever weaknesses the independent accounting firms discover.

But Conaway predicted those costs will decrease over time.

“The easier things become to audit, the more efficient the internal control systems are, the smaller the  sample sizes as you’re able to use, you’ll get some natural reduction in the cost of the audit. But there will always be a base cost,” he said. “The remediation number — the $500 million number — that ought to go away as things get fixed. As you go through each iteration, the number of things that need to get fixed should get smaller and smaller and the attendant costs of remediating those things ought to come down as well.”

Conaway, who chaired a special panel the House Armed Services Committee assembled in 2011 and 2012 to scrutinize DoD’s audit readiness plans, said it’s still unclear how DoD plans to spend the remediation funds.

But some of those costs should become more transparent to Congress via a new tracking system the department is introducing with the first year’s audit. As independent audit firms discover problems that must be remedied, they will enter them into the database. From there, DoD officials will assign a single official who is personally responsible for addressing each of the audit findings.

“When David [Norquist] came by and explained that to me, I got really excited. Because if everybody’s responsible for doing it, nobody’s responsible for doing it. And I know the men and women in uniform take those individual responsibilities real seriously, we just need to make sure the civilian folks have the same kind of sense of urgency to get this thing done,” Conaway said. “But the way it was laid out to us is that there are going to be these accountability meetings at the appropriate levels to say, ‘All right, you said you’d get that done in X number of days and it was going to cost Y.’ That level of granular detail on a huge deal like auditing the Department of Defense is exactly the way to go … each time that happens means it doesn’t have to be done again. It’s a one-and-done fix for most of this stuff, and when that happens thousands of times across the department, the systems get better, the internal controls get better, the audits get less difficult and less intense, and auditors are able to rely on smaller sample groups. Each one of those that gets fixed means you’re that much closer to a clean audit.”