Four years into DoD financial audits, IG says progress has stalled

The Defense Department and its components are now into their fifth consecutive year of having their financial statements scrutinized by independent auditors. In the first few years, there were some very promising signs that DoD was on the path to eventually earning a clean opinion, as every other federal agency has already done.

But in the assessment of the department’s inspector general — the office with overall responsibility for auditing the financial statements — it’s getting more difficult to find clear signs of widespread financial improvement. To be sure, Defense components are still finding and fixing a lot of individual problems. But as of 2021, there was little to suggest the department was making significant headway against the systemic problems that are holding it back from a clean audit.

That’s at least one of the biggest takeaways from the latest edition of a plain-language summary the OIG publishes each year to summarize the billion dollar-per-year audit effort.

Marcus Gullett, the deputy assistant inspector general for audit, financial management and reporting, said the scale of the DoD audit effort is massive, and in the OIG’s view, still a completely worthwhile endeavor, but that DoD leadership needs to do more to ensure those efforts bear fruit.

“We’re talking about over $900 billion in appropriations. Fifty-four percent of total government assets are in the DoD, and this involves over 1,200 auditors across 26 standalone audits. So it’s worth commending the efforts that the audit teams and the components put in year in and year out,” he said in a wide-ranging interview discussing the results on Federal News Network’s On DoD. “But 17 of those 26 standalone audits have disclaimers of opinion, which basically just means that there’s not enough audit evidence available to conclude that the financial statements are fairly presented. So the theme for FY 2021, frankly, is that the progress has stalled.”

While the audit is a vast enterprise and DoD has had some successes, the overall statistics do tend to suggest the department is treading water.

This year’s financial statements showed the military departments and Defense agencies managed to solve 808 distinct problems — called notices of findings and recommendations (NFRs), in audit parlance. But auditors reissued another 2,678 NFRs that had already been identified in past years’ audits, and added another 690 to the pile this year.

Another way of looking at the problem is to measure DoD’s number material weaknesses: broad categories of problems that are so serious that they could lead to meaningful misstatements about, for example, the department’s spending in a particular area, the valuation of its assets, or the inventory it has on hand.

In 2021, there were 28 of them, two more than the previous year, and 25 were repeats from the 2020 audit. In 2020, there were 17 DoD components that hadn’t yet earned an individual clean opinion. The number was still the same as of 2021.

“One way to think about this is that when we issue NFRs, management agrees with us. We have over 90% concurrence rates, and they’re developing corrective action plans,” Gullett said. “There’s a cadence there of being willing to address a specific issue.”

The harder part seems to be getting DoD financial management leaders to see the forest for the trees — and take serious steps to resolve the much harder underlying challenges that many of those NFRs point toward.

“We’ve been pretty consistent in messaging over the last few years that this effort needs to lead to developing sustainable business processes,” he said. “What we might see, for example, is in the IT realm. One particular system may have an access control issue, so the auditor issues an NFR. And next year, the component addresses the issue in System A. But then, the auditor comes back and says, ‘Okay, the issue is fixed in System A, but System B has the same exact access control issue this year.’ So that’s the type of enterprisewide thinking we need to see before the components are able to move toward addressing the material weaknesses that flow from all of those NFRs.”

But the OIG thinks there’s reason for optimism on that front. During the first few years of audits, many of the politically-appointed leadership positions critical to that enterprisewide view were vacant or led by acting officials. That’s no longer the case. DoD’s top two financial management positions are now held by Senate-confirmed officials. The Army and Air Force also have Senate-confirmed leaders in their respective comptroller/CFO seats.

In the early days of the audit effort, DoD ordered each of its components to draw up credible “roadmaps” for how that component could achieve a clean opinion. Now that those positions are filled, there’s a good opportunity for the Pentagon to not just hold the components to their plans, but for DoD as a whole to draw up one of its own.

“The roadmaps are oftentimes inconsistent across components. They also have sort of vague measures of success,” Gullett said. “So one of the things we’re focused on in developing measurable goals is taking a top down approach from the DoD comptroller level: sort of pushing down their expectations for these roadmaps.”

And asked whether DoD’s “stalled” progress means it’s time to reassess the overall audit effort, Gullett said the answer is clearly no.

After all, most of the 800 NFRs the department managed to close over the past year really were financial management weaknesses that should have been solved anyway, even if the audit weren’t the driving factor behind them. And the more DoD can do to communicate the operational impact of fixing its finances, the better.

“Each year the auditors identify something tangible, it kind of highlights [that’s] important,” Gullett said. “This past year, the Navy highlighted that its inventory records showed [less than what it had]. At another Defense Logistics Agency site, DLA wasn’t measuring certain metals accurately. We have example after example, and the risk here is that if you don’t know what you have and where you have it, your ability to accomplish your mission can be hampered. I’d also point to contingencies. Ukraine, or COVID-19, or Afghanistan. Those things happen, if DoD doesn’t have the controls in place to pivot to support these contingencies, that’s going to have a bigger impact on the overall operating budget. So this is an opportunity to really hone in developing those sustainable solutions with clear goals, holding the components accountable, and kickstarting the audit progress again.”

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