The Defense Department is making progress toward the goal of a clean audit, said Michael J. McCord, the undersecretary of defense comptroller and DOD's chief financial officer.
McCord briefed the press yesterday on the results of the massive audit of the department — the sixth since 2018.
Getting a clean audit is crucial so leaders can manage and lead the department. DOD is one of the largest organizations in the world with $3.8 trillion in assets and $4 trillion in liabilities, McCord said.
"The audit comprises 29 standalone audits of the military services and other components, such as the Defense Logistics Agency and several other accounts as well as the department's consolidated audit," he said in the briefing. In addition, there is an overall department-wide audit on its own.
The audit is a massive effort conducted by a mix of independent public accounting firms and the DOD Office of the Inspector General.
The bottom line is of the 29 components undergoing stand-alone financial statement audits, seven received an unmodified audit opinion, and one received a qualified opinion. This means the audits found these organizations under compliance. The audits of the U.S. Marine Corps, the Defense Information Systems Agency Working Capital Fund and the DOD Office of Inspector General are still pending. All other DOD components undergoing a stand-alone audit received disclaimers of opinion, which means there were faults, and more work must happen before they come under compliance.
"I want to highlight that while we still have much work to do, our work on the audit over the last few years has yielded significant benefits to the department," McCord said. "Our efforts to track coordinate and quickly deliver security systems to our allies and partners in Ukraine and now Israel is closely related to the work across the DOD enterprise on readiness."
The overall results of the sixth annual department-wide audit will again be a disclaimer of opinion, McCord said. "This is not unexpected," he said.
McCord spoke about the Marine Corps audit, which has been extended. "We are very focused on it as a test case for the department and the larger services," he said. "The Marines have [an] extension to March 1 because this is a first-time audit. Whatever results of that may be when we get the auditor's final opinion, I want to commend the USMC and in particular, (Marine Commandant Gen.) Eric Smith for their leadership and effort."
Putting the audit results in perspective, McCord said favorable opinions cover 50% of DOD's assets. "This does not mean that the other 50% is unaccounted for," he said. "The department has tight control of its assets — but too many of our financial management systems, such as some of our property systems of record, still cannot meet auditing standards. We are working hard to accelerate the retirement of these older systems and bring more of our asset records up to accounting standards."
This is key to the future. The components have eliminated many older systems and put in more modern procedures and technologies. McCord hopes these changes will help to accelerate the process.
McCord also discussed the notices of finding recommendations, known in shorthand as NFRs. "As of Nov. 13, the auditors had validated that we had closed 490 of last year's 3,008 findings, and we expect that total will continue to increase as the numbers get finalized," he said.
To date, auditors issued 2,509 new NFRs, of which about 365 were completely new and the other 2,144 were reissued or recurring.
Another deficiency is known as a material weakness. Auditors did find material weaknesses that indicate "a pattern or a whole subject area that needs work," he said.
The department and its components closed one material weakness and downgraded six material weaknesses, an increase from three in fiscal 2022.
"The department took a major step toward resolving its Fund Balance with Treasury material weakness, one of Secretary of Defense (Lloyd J.) Austin III's three audit priority areas," he said.
The Air Force General Fund closed its Fund Balance with Treasury material weakness. It is the first service to fix this foundational issue on one of its financial statements, McCord said.
The Army Working Capital Fund and Navy General Fund both downgraded their Fund Balance with Treasury material weakness.
"The substantial progress made by the services shows that by naming DOD-wide priority areas, concentrating efforts and setting and monitoring metrics, we are collectively having a meaningful effect," he said.
McCord stressed that the audits are not just nameless, bureaucratic exercises that signify nothing.
"We measure progress across five areas: Workforce Modernization, Business Operations, Quality Decision-Making, Reliable Networks and Enhanced Public Confidence," he said.
Workforce modernization, for example, is robotics automating manual processes and freeing up labor hours "and allowing our workforce to focus on analytics and more value-added tasks," he said. All the services and many defense agencies are putting bots to good use.
Business operations are improving, and he pointed to the Marine Corps reducing unsupported, undistributed transactions from $2.2 billion in October 2022 to less than $500,000 in March 2023. This supports more effective leadership decisions, he said.
Data quality efforts give leaders more information. "The Navy reviewed $17 billion [in] unliquidated obligations; validating 97% of the balances met audit requirements, while also uncovering $330 million available for de-obligation," McCord said. "This provided Navy with greater insight into funds management and optimized use of budgetary resources for mission critical objectives."
Retiring legacy systems results in more reliable networks, he said. This past year DOD retired 10 audit-relevant systems, three of which were accounting systems used by multiple components over several years.
The process is moving forward, but McCord would like to see it speed up considerably. He called on Congress and defense industry partners to do more to help in the effort.
"Our congressional defense committees can help by doing their part in stabilizing the budget process and avoiding continuing resolutions and repeated threats of government shutdowns, such as the one we are living through yet again this week; by ensuring timely continuity and confirmation of our military and civilian leadership; by providing adequate and consistent resources for replacing DOD legacy systems; and through continued support of the department's financial transformation efforts," he said.
Industry partners can help by bringing property in the possession of contractors into audit compliance, providing transparency into the location and condition of DOD assets, and supporting audit progress by complying timely with all audit requirements and requests.
"I commit to accelerating our audit efforts to ensure every decision we make at the department is fiscally informed and empowers global force decision-making," he said. "Fiscal readiness accelerates mission readiness, and we are working hard to achieve greater financial integrity and increase transparency, in support of decision-making."