WASHINGTON — The U.S. Department of Defense has once again failed to achieve a clean audit, but officials are urging patience for what is expected to be a long-term effort.
The results of the Pentagon’s third-ever audit added another clean organization to its list, which represents a clear win, according to Thomas Harker, the acting DoD comptroller. But he also stressed that it would be years before the Pentagon can truly say it has passed its audit cleanly.
“We have been clear that this is a journey that will require a sustained effort over several years,” Harker said, pointing to the fact it took the Department of Homeland Security — the last government agency to complete a first-time audit — a decade to receive the all-clear.
Harker said that based on that timeline, a truly passed audit for the entire DoD may not come until around 2027.
Still, he sees reasons to be optimistic, particularly in the clean audit that is expected for the Defense Information Systems Agency’s working capital fund, which he called a “significant improvement.” (The DISA fund, as well as two Navy funds, will not be fully finished until December, but Harker expressed confidence in the preliminary conclusions; the Inspector General’s office will complete in early 2021.) The DISA fund failed to achieve a clean audit last year.
“I think anytime you have a new agency get a clean opinion, that’s a huge accomplishment. Last year, we did not have any agencies get new clean opinions. This year, we did,” Harker said. “What you’re seeing is a maturation of the process. Many of the individual agencies or services are developing more capability and better accounting skills so that they can resolve a lot of the problems, and you’re seeing significant process in certain areas.”
The six offices that previously received clean audits all were recertified as clean this time around: The U.S. Army Corps of Civil Engineers – Civil Works; the Military Retirement Fund; the Defense Health Agency – Contract Resource Management; the Defense Contract Audit Agency; the Defense Finance and Accounting Services (DFAS) working capital fund; and the Defense Commissary Agency.
The Pentagon remains the only government agency that has yet to pass an audit. For years the department avoided starting the process, claiming its various systems made an audit effectively impossible to perform — much to the aggravation of Congress. But in 2017, the DoD began the process, which is broken down into 24 individual audits of various departmental offices.
The audit cost $203 million in fees, with about $1 billion in remediation costs to fix identified problems. The effort covers roughly $2.7 trillion in department assets, including roughly 26.5 million acres of land. For the third straight year, auditors found no evidence of fraud, and have closed 16.3 percent of the issues identified in the previous year’s efforts.
While none of the military services have cleared an audit, Harker believes the Marine Corps made a “ton” of progress, saying the service made a serious push for a clean audit this year but fell short, in part due to delays caused by the COVID-19 pandemic. But the effort will benefit them as the Corps tries against next year, he said.
“That enabled them to clear a material weakness, and also increased the accuracy of a lot of their property, plant and equipment balances, and their inventory and operating materials and supplies,” Harker said. “They cleaned up military payroll, so that when the auditors tested military payroll and with our own internal testing, they got 100 percent accuracy, which is the first time any of our services have done that.”
Among other positive changes identified by the Inspector General’s office:
• “The Army was able to provide supporting documentation for differences in cash, as reported between the Army and the Department of the Treasury, which allowed the auditors to test Fund Balance with Treasury for the first time since the audits began in FY 2018.”
• “The Air Force made progress in reconciling military equipment transactions to the financial statements, which enabled the auditors to expand testing and analysis over the balance.”
• “The Marine Corps was able to provide supporting documentation that allowed auditors to test military pay, civilian pay, and recoveries throughout the year. Auditors tested more samples and these samples passed at a higher rate than in FY 2019.”
The IG’s office intends to issue a report in January that will lay out, specifically in layperson terms, what work has been accomplished and what more needs to be done.
“Despite challenges presented by the COVID-19 pandemic, the Department of Defense demonstrated improvement in its financial management processes in FY 2020," said Sean O’Donnell, the acting DoD Inspector General, in a statement. "The Department still has significant challenges to overcome before achieving a clean opinion. The DoD Office of Inspector General remains committed to fully and fairly auditing the financial statements, identifying deficiencies, and providing clear information to the DoD on what is necessary to fix these deficiencies.”
A unique wrinkle for this year’s audit came in the form of COVID-19, which shut down a number of planned trips for auditors to bases around the world.
“As the audit unfolds, the auditors pull items to test as part of their audit. When they do tests of property, one of the challenges we faced this year during COVID was the travel ban,” Harker explained. “And we were not able to send auditors out and do that much travel. So they weren’t able to do as much testing on the ground.”
There are two types of on-the-ground testing that auditors perform. The first, called “existence testing,” is checking that everything that’s recorded on paper exists — for instance, checking that 16 chairs expected to be in a building are all accounted for.
The second, called “completeness testing,” is essentially the flip — seeing what is on the ground and making sure it is tracked in the books. For instance, during the first audit in 2017, auditors discovered 71 uninstalled missile motors, worth about $53 million in total, that were not tracked on paper.
While FaceTime and Zoom served as adequate teleconference tools for existence testing, it was the completeness testing that suffered the most due to the coronavirus restrictions, Harker said.
The Inspector General’s office noted that auditors could only visit around 100 locations, as opposed to over 600 in the previous year.
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.