Audit for 2019 Shows DOD’s Progress 

NOV. 18, 2019 | BY TERRI MOON CRONk department wide audit of the Defense Department did what DOD needed, the department’s comptroller said.

It tested all fixes that were made from the previous year and shows the department is making progress, Elaine McCusker said.

“Our first-ever consolidated financial statement audit in 2018 resulted in a disclaimer,” which means it failed, she said. The 2019 audit shows the same, though, the comptroller noted, that result was expected. We made progress in our priority areas while focusing on the importance of sustainable solutions.”Elaine McCusker, DOD comptroller

“To set the stage for 2019, DOD has 3 million employees in 160 countries, in more than 4,500 defense sites and close to 30 million acres of land,” McCusker said. “We manage a $292 billion inventory and 573,000 building structures. The 2019 consolidated audit covered the department’s more than $2.9 trillion in total assets, and $2.8 trillion in liabilities.”  

During this years’ audit, she said, 1,400 auditors visited 600 sites around the world and requested more than 100,000 samples. Auditors finished 24 stand-alone audits, in addition to the consolidated audit. They looked at buildings and property, military equipment, munitions and payment reports.  

“We made progress in our priority areas while focusing on the importance of sustainable solutions,” McCusker said.  

“But as expected, we will receive an overall disclaimer again this year,” she said. 

“We are measuring progress by development and implementation of corrective action plans that are successful, closure of [notices of findings and recommendations], increased fidelity on root causes and interdependencies behind our material weaknesses, movement of individual organizations up the chain of opinions, but ultimately better performance and responsiveness to war-fighter requirements in support of the [National Defense Strategy],” she said. 

DOD closed more than 23% of the more than 2,300 NFRs issued during its 2018 audit. “This is solid progress for our first year. We expect to increase the number of entities with unmodified opinions from six to seven. Two of the seven organizations with clean opinions maintained a sustainable history,” McCusker said. 

The military retirement fund will get its 24th consecutive unmodified opinion. And with close to $900 billion in assets, it represents about a third of DOD’s total assets, she added. “The Defense Finance and Accounting Service Working Capital Fund is expected to get its 20th consecutive clean audit opinion,” she said.

“DOD made progress in demonstrating our ability to support more in-depth auditing, supporting more extensive testing that will give us faster insights and allow us to identify more sustainable solutions,” McCusker said. We need continued focus on property accountability, inventory and property in the hands of contractors and our systems.”Elaine McCusker

“We have been driving positive cultural change for joint enterprise solutions. We have improved cybersecurity by tightening access controls and documentation. We have supported improved readiness through inventory visibility. And we have increased buying power through expanded use of accurate data and advanced analytics,” she said.  

DOD also sustained what it did well last year, McCusker said, adding there were no reported material weaknesses in civilian or military pay. “Auditors found no evidence of fraud.  And we have existence and completeness of major military equipment,” she said.

“But much work remains to be done as we continue to pursue an agencywide clean audit,” McCusker said. 

DOD will get a lot of new NFRs this year as auditors go deeper into systems and processes, she noted. “This is a good thing. We need continued focus on property accountability, inventory and property in the hands of contractors and our systems.”

She added it was essentially balancing the checkbook with the Treasury Department.  

“We will continue to strengthen our target system capability aggressively and work to retire old systems and support those organizations closest to positive opinions,” McCusker said. 

“This is an annual regimen where we expect continuous progress in terms of material weaknesses, emerging audit opinions and continuing to find and attack findings,” she said.

DOD Audit: Separating Myth From Fact

MAY 16, 2019 | BY DAVID VERGUN 

The first departmentwide audit of the Defense Department covered $2.7 trillion in assets and $2.6 trillion in liabilities for fiscal year 2018, making it most likely the largest known audit of an organization in history, according to David L. Norquist, DOD’s comptroller and chief financial officer.

Some myths and facts about the audit:

Myth

A disclaimer of opinion is a result of fraud or mismanagement of DOD assets, so financial statement audits uncover fraud.

FACT:  The auditors found no evidence of fraud. While independent audits serve an important purpose and may prevent or detect fraud, the primary purpose of a financial statement audit is not to detect fraud. Receiving a disclaimer for a first-year financial audit of a massive enterprise was expected. This is also consistent with other federal agencies undergoing initial financial statement audits. For example, it took the Department of Homeland Security 10 years to obtain a clean opinion and it is a much smaller, newer and less-complex organization than DOD.

In the initial years of these audits, an intent to disclaim does not represent a setback. The department will use the audit findings to establish a baseline and guide corrective actions. A disclaimer does not indicate, nor is it evidence or proof, that there is fraud or mismanagement.

Myth

Receiving a disclaimer must be a big surprise and represents a setback toward achieving the department’s goal of a clean audit opinion.

FACT:  Receiving a disclaimer for a first-year financial audit of a massive enterprise was expected. This is also consistent with other federal agencies undergoing initial financial statement audits. For example, it took the Department of Homeland Security 10 years to obtain a clean opinion and it is a much smaller, newer and less complex organization than DOD. In the initial years of these audits, an intent to disclaim does not represent a setback. The department will use the audit findings to establish a baseline and guide corrective actions.

Myth

DOD does not know where it is spending its dollars.

FACT:  The department knows where its money is spent. The audit did not identify instances where DOD does not know where obligated dollars are being spent. The audit findings highlight the fact that the department doesn’t always record the receipt of goods and services in a timely and accurate manner in the appropriate property management systems. To address these challenges, DOD has made it a priority to consolidate its financial systems to force discipline and integrity of data at the enterprise level.

Myth

Obtaining a clean audit opinion does not directly impact the mission.FACT:  The audit results will provide valuable insight for where the department must improve its financial management practices. It will also ensure that DOD has visibility over the counts, locations and conditions of property, inventory and operating supplies. The department fully expects these improvements to ultimately lead to cost savings and those resources can be reinvested into mission areas with critical needs. The audit will drive enterprisewide business improvements and allow DOD to leverage technology in the most efficient manner, which will benefit the warfighter and civilian workforce, increase readiness and provide quality data to drive better decision-making.

Myth

Achieving a clean audit opinion should take a year or two.

FACT:  Achieving a clean audit opinion in the first year or two is atypical, even for smaller, less complex agencies. The first few years of an audit are normally geared toward helping the auditor fully understand the department environment and assess key business processes. This is especially challenging considering DOD’s size and complexity. Achieving a clean audit opinion requires not only a cultural change within the department, but also some major business process and system changes that require time to make. As the auditors complete their assessment, they will provide their findings, which DOD will begin remediating the following year. The department will focus on receiving and prioritizing the auditor’s findings, developing and implementing corrective actions to remediate the findings. The timing of attaining a clean opinion will depend on the complexity and difficulty of the corrective actions.

Myth

DOD had not been audited before 2018.

FACT:  There are literally hundreds of program or compliance audits conducted across the department every year. DOD has undergone successful financial statement audits of several entities. The departmentwide audit is one that focuses on a set of financial statements, evaluated through an independent auditor’s lens using government auditing standards. Independent certified public accounting firms will do the stand-alone audits, and the DOD Office of the Inspector General will serve in the role of the group auditor.

Myth

After the department receives an intent to disclaim during audit, the audit is halted and DOD does not receive any additional value in the audit.

FACT:  While this is true for a private-sector audit, receiving a disclaimer on the DOD financial statements does not mean the financial statement audit will stop. In fact, the department has specific contract provisions that require the audit to continue even in the event of a disclaimer. The auditors will use the remaining time to identify additional areas for improvement and provide recommendations. DOD will use these findings to target and track corrections and hold the right individuals accountable for corrective actions. The department will measure and report progress toward achieving a clean audit opinion over the next several years using an objective measure, which is the closure of audit findings. As DOD remediates audit findings and improves the overall financial management processes and information, decision-makers will have better access to reliable and timely information.

Myth

Organizations do not receive audit feedback until the conclusion of the audit.

FACT:  Organizations receive feedback throughout the audit. In the early stages of the audit, feedback is based on inquiries and walkthroughs. Auditors are required to provide informal feedback and observations resulting from early audit issues, allowing the organization to begin implementing remediation efforts to address audit issues as they are identified.

Myth

Auditing DOD will be impossible because the current numbers are unreliable and unsupported.

FACT:  Auditing the entire department was a very difficult task the first time, but not impossible. The department has long been focused on executing its mission which did not always prioritize sound accounting practices or consider today’s financial audit scrutiny. Over the last several years, DOD has focused on a range of improvements across the organization that will better align the mission focus and business processes with requirements to be auditable, and ultimately, generate reliable, accurate, and transparent financial reports that will enable better informed decision-making by its workforce and leaders and by Congress.

Myth

“Audit ready” means DOD is able to receive a clean audit opinion.

FACT:  The term “audit ready” means DOD has the capabilities — meaning processes and systems — in place that allow an auditor to scope and perform an audit over the department’s full financial statements and provide actionable feedback. “Audit ready” does not mean that DOD’s financial statements are perfect and it can expect a clean audit opinion.

Myth

DOD should wait until the financial systems are fixed and ready for an audit before going through an audit.

FACT:  While the systems are an integral part of the audit, there are additional data quality and underlying challenges that the audit will highlight. The department’s approach is not to wait to begin addressing all of the findings identified. Receiving the auditors’ observations and findings will help target what needs to be fixed or deployed going forward.

Myth

With all of the issues DOD still has, the taxpayers’ dollars are being wasted by entering into an audit now. The department should not receive additional funding if it cannot pass an audit.

FACT:  At some point, preparation reaches the point of diminishing returns. The department believes it has reached that point. DOD has done as much as is reasonably prudent to prepare for the audit and so it is time to get underway, which is exactly what has occurred. There is an upfront investment cost in compliance, but over time, the department will realize benefits as a result of the audit. For example, as DOD’s internal controls improve through implementation of auditor recommendations, it expects to see improvements in the accuracy, completeness and validity of its data used for decision making.

Myth

One can reduce the national deficit if one uses the trillions of dollars of journal vouchers.

FACT:  Journal vouchers are accounting entries used to record various types of financial transactions in an entity’s accounting system or records. A journal voucher is made to record an agency’s receipt of funding, but the journal voucher in and of itself does not represent actual funding. Thus, a journal voucher recording funding that is not actually received would only result in a financial statement misstatement and not an actual reduction in the national deficit.

David L. Norquist, the Defense Department’s comptroller, talks about why the DOD audit is important. This audit is the largest in the department’s history.

Five things to know:

1Just like a personal or business audit, the Defense Department audit accounted for every piece of property — real estate, military equipment, etc. — as well as all of the DOD’s financial commitments.2The yearlong audit of the Defense Department is the largest audit ever, covering $2.7 trillion in assets and $2.6 trillion in liabilities.3This year’s defense budget is $716 billion — a significant investment by taxpayers. When the president promised to rebuild the U.S. military, he made a commitment to audit DOD to help stretch and maximize every dollar spent.4To be efficient on the battlefield, we have to be efficient with our money. Transparency, accountability and business process reform are some of the benefits military leaders and taxpayers will see from the results of this audit.5Taxpayers deserve the same level of confidence as a shareholder in a publicly traded company. Up until now, a clear and accurate accounting of DOD’s finances didn’t exist.FOR A DEEPER DIVE