DOD Outlines Results of Third Annual Department-Wide Audit

Nov. 16, 2020
Thomas W. Harker, Assistant Secretary Of The Navy, Financial Management And Comptroller (Performing The Duties Of The Undersecretary Of Defense Comptroller And Chief Financial Officer)

CHRISTOPHER SHERWOOD: Okay, good morning. I'm Christopher Sherwood. I'll be moderating the press briefing today and follow-on discussion.

The topic of today's briefing is the department's results of the F.Y. '20 full statement audit -- full financial statement audit. Our speaker is performing the duties of the Undersecretary of Defense Comptroller and Chief Financial Officer Thomas W. Harker. Our discussion is on the record, embargoed until you receive an e-mail from me later this evening once the Office of the Inspector General sends out agency-wide results to the comptroller. I will send an e-mail to you releasing the embargo.

We have 30 minutes for this -- for questions from those attending here in person and attending by phone. I will provide a five-minute warning. Please introduce yourselves and your organization, and limit your question -- questions to one initial question and one follow-up.

With that, I would -- I will turn it over to Undersecretary Harker. Sir?


Good morning, everybody. My name's Tom Harker, for those who don't know me. I'm the assistant secretary of the Navy for financial management and comptroller, performing the duties of undersecretary of defense comptroller. I've been performing those duties since June, and anticipate continuing for a while.

I'm pleased to report this year that DOD has completed its third annual comprehensive financial statement audit, covering the entire enterprise. We also have a couple of organizations who are still under audit because they need a little more time to show positive results this year.

There's two key themes that I want you to take away from this session today, and that's continued progress and value to the warfighting.

We continue to conduct one large audit of the Department of Defense, which consists of 24 standalone audits of the military services and the larger defense agencies. Our goal is to get a clean financial statement audit opinion for the Department of Defense as a whole, and we believe that the best path to accomplish that is to conduct standalone audits on each of our services and defense agencies. 

We've been clear that this is a journey that will require a sustained effort over several years, and we remain committed to this goal and continue to make significant progress.

Each year, we work to sustain the current clean opinions, increase the number of agencies or military services with clean opinions, and eliminate material weaknesses at both the department level as well as the component agency level.

For sustainment this year, every agency that had a clean opinion last year sustained a clean opinion this year, in spite of significant challenges due to COVID. They're all listed on the fact sheet that I believe Chris is going to provide you, but suffice it to say that it still takes a lot of work to maintain an opinion, and these agencies have done that in spite of the size and complexity of their agency and the challenges we faced this year with COVID which prevented us from doing a lot of testing, travel and that sort of thing, as you'd imagine.

The audit for the OIG has not been completed yet, but we anticipate completing that by the second quarter of fiscal year '21, and they anticipate getting another clean opinion, as well.

For continued progress, this year we're very pleased to report that we anticipate getting a new clean opinion for the DISA working capital fund. DISA's worked real hard this year to improve their business processes and controls. That's resulted in several operational improvements such as decreasing the time required to deliver property to their customers, improving the accuracy of their property records, and improve the accuracy of their financial statements. It also generates a clean opinion on the working capital fund, but I spoke about the three operational things first because those are really more important to warfighting than just the financial statement audit opinion. They had a 80 percent decrease in the time from award to delivery for a lot of their equipment that they have done, based on the improvements they've made to the business processes and controls over the last several years. They also were able to increase their data reliability through the use of robotic process automation and other tools, which has improved the -- or, the -- decreased the cost and improved the accuracy of their financial data.

In addition to the clean opinion on their working capital fund this year, we also anticipate them getting a clean opinion on their general funds next year, so this is an area where they've made a lot of investment in time and effort to improve their business processes, and we'll see the audit results this year, as well as next year.

In addition to the new opinion for DISA's working capital fund, we also have had several material weaknesses be eliminated from last year, two of them at the department level. The Navy also eliminated three material weaknesses, two on their general fund, one on their working capital fund, and the Marine Corps eliminated one material weakness.

We've also had a number of the Defense agencies eliminate material weaknesses because we made an accounting change that moved all of our real property onto the balance sheets of the military departments or the Washington Headquarters Service, so that was a change in accounting procedure that resulted in elimination of material weaknesses. Putting it all on the military departments improves our ability to account for property, and it puts it all in the hands of the services and WHS.

Lastly, we continue to progress in the elimination of auditor-identified discrepancies. We had 3,248 discrepancies identified by all of the different auditors over the 24 component audits during F.Y. '19. We've cleared 530 of those to date, and we anticipate clearing a couple hundred more between now and the end of December, when the auditors finish all of their work. This is a significant accomplishment in spite of COVID, which has prevented a lot of the auditors from getting out and doing testing, and we'll be able to close more than 20 percent of the findings, which is similar to the progress we made last year.

So the bottom line in simple terms is the auditors found certain areas have gotten much better this year, in spite of the challenges faced it by COVID, and that we understand this audit is a massive undertaking. We have a fact sheet that we'll be providing that gives you a lot of these things I mentioned in more detail. But the audit, the bottom line is, it's part of our key component of our reform effort. It's how we go in and we make our business processes more effective so that we have better data and better outcomes.

So some of the value that comes from audit, I want to talk about that real quick.

First off, one of the things the auditors do is they look at our I.T. systems, and they go in and they test the controls around our I.T. system so we have good access controls, we have good segregation of duties -- that kind of thing. All of the steps we take to fix the things that they find helps decrease our cyber vulnerabilities. So it's not just the audit; it's also improving our cybersecurity.

The next thing that is key is the audit has taken a deep dive into our property, plant, and equipment, and our inventory and operating materials and supplies. During the first couple years of audit they found significant deficiencies in these areas, but we've made a lot of progress identifying areas where we had errors, going in and doing a lot of the cleanup work. And so you see now, as they go forward, they've cleaned up our accuracy of our property records. That helps us significantly because it lets us know what to order, what we already have.

In a lot of cases, auditors found things that weren't on the books anymore, things where we bought it out of the working capital fund and taking it to the end user, and the end user didn't need it right then, so they put it on a shelf, and then people forgot that it was on the shelf. Navy did a lot of work in this area. They were able to find, I think, $3.4 billion over the last several years, and they've put more than $50 million-worth of items onto aircrafts and ships as immediate, "Hey, we found this. We need it. Let's put it out there." And they've put another $2.7 billion back onto the books, as these items are available for people to order. So it's a significant improvement in how they manage their property.

We've also had another improvement from the audit in that it's helped us identify that we have too many systems. We're spending a lot of effort to go in and consolidate those systems and eliminate the legacy ones. That improves both our cybersecurity by eliminating old legacy COBOL-based software systems, and also saves us a lot of money. When you run nine systems and you can get that down to two, that saves you a significant amount of money. And so you're seeing that across all the defense agencies, as well as the military services not just on their financial systems, but on a lot of the other business systems that feed into the financial like H.R. or logistics.

So the last thing is as we get better, more accurate financial data, that gives us better ability to use that data to make decisions and it gives senior leaders the ability to ask better questions. We've been able to go through and build a data analytics tool called AVNA. It's for advancing analytics -- that we pull all of the general ledger data from the various I.T. systems, and that gives information available in real-time to senior leaders. They can combine that information with H.R. information, logistics information, and it gives them more ability to ask better questions. It also gives people at lower levels ability to ask better questions too, because they can see things at a more granular level that help them make better decisions, as well.

So we remain committed to sustaining this effort and demonstrating greater progress each year until the department receives and sustains a clean audit opinions. We've prepared the press release -- Chris will provide that -- and I'm ready to answer any questions. One thing I want to let you all know is that I'm hard of hearing. I have hearing aids, and so I would ask that we're all socially-distanced here. If you could please remove your mask, it enables me to read your lips, and also speak loudly so that I can hear you. I'd appreciate it. Thank you much.

MODERATOR: Okay. So we'll start with the room, and we'll start with Tony Capaccio.

Q: Hi, sir. Tony Capaccio with Bloomberg. We -- we've been covering this for the last couple years. Now, last year the general funds and the working capital funds of the Army, Navy, Marines, DLA, and SOCOM and TRANSCOM and D.H. -- the health programs all received disclaimers of opinion, which is not a good thing in your world.


Q: Have those improved, or do -- do -- have those disclaimers of opinion continued?

MR. HARKER: We continue to receive disclaimers of opinion for the ones listed on the sheet. We have an overall disclaimer, and there's also several significant large agencies that have disclaimers. The only improved opinion we had this year was the DISA working capital fund.

Q: Okay. Can I ask a follow-up, too? Last year DOD said this -- the effort about a billion dollars. Is that roughly the -- the amount? And how many trillions of dollars of assets, just for -- for the layperson, did you audit that were reviewed?

MR. HARKER: How many did we --

Q: Okay, last -- last year the -- the press release said that $2.9 trillion of DOD assets --

MR. HARKER: Oh, that's -- yes.

Q: -- were -- were reviewed. I just -- for size and scope.

MR. HARKER: Yes. So we reviewed similar total assets, about $2.9 trillion of -- roughly. The challenges we've had are ensuring the accuracy of that. So when we look at elements of our property plant and equipment and our other assets, about a trillion of it is in government bonds. That's money that we have invested in government bonds which we hold as an offset to our actuarial pension liability. So the military service members have a pension liability. We also have assets that support that.

Q: Yes.

MR. HARKER: So those are all clean. The good news is we have a trillion dollars-worth out of our $2.9 trillion where we have a clean opinion on the audit that looks at that. The $2. -- the liability, our biggest liability is that pension, and that also is clean. So when we're looking at these things, we have significant areas -- real property, there's been a lot of improvement there. I mentioned that we're moving real property from all of the defense agencies' balance sheets onto the military services and the Washington Headquarters Service. That gives us only four places where we have to hold real property data, which makes it easier for us to audit. It also gives us better visibility into what real property we have, where it is, what condition it's in so that we can make better operational decisions about the acquisition of property.

As you can imagine with COVID, we've had people increase telework significantly. And so now we look at all of our real property, we say "what do we own, what are we leasing, do we need to continue leasing or do we bring people back into -- behind the fence line?" So it's -- it's given us a lot more better data.

Q: Great, thanks.


MR. SHERWOOD: Okay, we'll -- we'll go to the phones here for a second, and Richard Sisk with Do you have a question please?

Q: Yes, can you hear me, sir?

MR. SHERWOOD: Yeah, we can hear you.

Q: Okay. Mr. Harker, did I hear you say, you know, it'll be several years before you could expect a clean audit? And as -- as a follow, did this audit -- did you look at Afghanistan and what you might have to counter, not count -- considering -- considering that the troops might be withdrawing? What -- what's the status of Afghanistan as far as an audit goes?

MR. HARKER: So -- so the -- sir, could you repeat the question please?

MR. SHERWOOD: I can -- I can repeat that absolutely. So Richard asked if -- basically in Afghanistan, if -- with regards to a count or in -- in the audit, was anything with regards to a troop drawdown that the audit had captured? And Richard, can you repeat your first question? It was before the --

Q: Yeah, I thought Mr. Harker said it'd be several years he expected before there -- there really would be a clean audit.

MR. SHERWOOD: Thank you.

MR. HARKER: Okay, so first, going through the process of being audited, each year the auditors dive deeper and they find more things. So you look at the process of getting to a clean opinion for federal agencies, it can take a long time.

DHS is the most recent agency to get a first clean opinion and it took them 10 years. We had a meeting last week where each of the military services presented their timelines to get to a clean opinion for us and that's roughly similar to what the DHS timeline was. If you look at when we first started being audited in 2017, we're on track or we have plans that are resourced to get us to a clean opinion around that same timeframe.

Second question was dealing with assets and expenditures in Afghanistan. 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 bans 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.

In some cases, they were able to do virtual testing, where they -- where they weren't on a classified location and they could use cell phones to do FaceTime or Zoom meetings and actually see the serial numbers on assets but it was limited because of COVID. I don't know specifically whether any of our auditors went to Afghanistan but we can get back with you that information.

MR. SHERWOOD: Okay. And we'll go back to the room. I think Ryan, you had your hand up first. Go ahead.

Q: Excuse me. Thank you, sir, for doing this. I -- I just wanted -- Tony had asked how much the audit had cost, and I don't know if I -- I had heard that, but I actually just -- you said something at the beginning, where you said you expected to be doing this for some time to come.

I guess -- so has there been any impact by the shakeup here at the Pentagon leadership on the audit or the proof -- getting sign off from Secretary's office? Did that delay anything? And then do you expect to be carrying out this audit next year?

MR. HARKER: So the department is required to be under audit for several different laws. It's written into the NDAA that we start -- and we did start, and 2017 was the first year -- that continues to be a priority for the committees. It's also a requirement of the CFO Act of 1990. So the audit will continue.

The cost of the audit, you asked, that was around $203 million this year for all of the different audits that were conducted at the 24 sub-component level, as well as some of the -- and if I get too technical, I apologize -- but we do statement of standards of attestation agreements, number 18 service organization control reports, which is a mini audit of a process at places like DFAS or other areas, where they perform a process of the service provider for large elements of DOD.

So we do a small audit of one of those processes, we call it a SOC Report, Service Organization Control Report, and then other auditors rely on that work. So -- but the total cost was $203 million for all of that. So second question?

Q: So any of the, I mean, leadership -- obviously you said you've been here and -- and obviously there's been a lot of change. Has that -- did that impact getting sign off on the audit, did that impact any of the processes at all?

MR. HARKER: It did not. We have a process in place where our DCFO Office inside the OSD comptroller shop goes and routes materials up for explanation and signature. The -- in various years, the Deputy Secretary or the Secretary has signed the reports. This year, the Deputy Secretary signed it. As you know, Secretary Norquist is very familiar with everything we're doing because of his role as Comptroller. I mean, he's meeting with the Secretary today to walk him through everything that he needs to know about the audit but, you know, the -- the Deputy Secretary is an expert on this.

Q: Great, thanks.


MR. SHERWOOD: We're going to stay in the room. Lara?

Q: Hi, sir, thanks for doing this.

MR. HARKER: Thank you.

Q: Can I just clarify -- you -- you told Tony that you reviewed roughly 2.9 trillion assets this year. Is this -- and you said that was similar to last year. Is that on top of what you did last year or is it the same number?

MR. HARKER: 2.9 trillion is the total assets on our balance sheet. And so all of those assets are under audit. So it's the same 2.9 trillion, it's just when the auditors do their samples, they look at different things.

Q: Okay. And then also, can you just say a little it more about the -- can you quantify the impact that COVID had, what didn't get done, did things get done less efficiently? Can you just say more about that?

MR. HARKER: Certainly. So when -- when auditors do test work, their best way to do test work was to go out and see and touch an asset and say "yes, this asset exists," and to walk around an area and look and say "are there other assets that exist in this area that might not be in your books?"

So the best thing for them is to be able to go out and come in and, you know, assuming these chairs are assets, it's like "Okay, look at that one, look at that one, look at all of them, check the serial numbers, make sure that verifies everything that's on the books," then also look and say "are there some here that aren't on your books?" So they call that existence testing and completeness. Existence is "does everything that's on your books exist?" Completeness is "is everything that does exist on your books?"

Because of COVID, they had a hard time doing completeness testing. It's hard for them to be able to go and validate that there's something that -- that everything's on your books, because they're not physically there.

They were able to do existence testing for a lot of the items by going and using digital media for things or pictures, take a picture of the serial number and a picture of the asset, you can kind of see the progression. So a lot of the agencies that had clean opinions were able to do things that way. Some of the ones that were progressing were able to do things that way, but it did create challenges.

The other challenge is just the lack of face-to-face ability to look over things and talk through it. Zoom meetings are useful, but it's not as good as being in the same room, looking at the same piece of paper and talking about it, the face-to-face communications has made a challenge.

Q: Were there any agencies, though, that maybe didn't get a clean audit because --

MR. HARKER: Sorry?

Q: Were there any agencies though that maybe didn't get a clean audit or didn't make as much progress because of the challenges due to COVID? Like what was the impact?

MR. HARKER: I would say there were a number of challenges that everyone dealt with for COVID. When you talk to private sector companies, a lot of them had challenges in their audits as well because of the same things I just talked about with regard to property testing.

The audit standards folks went around and they identified ways of providing assurance, so they worked with all the big audit firms on how can they do the testing, and then we incorporated a lot of those same standards.

Specific agencies, the focus for us was let's get -- for the ones that have clean opinions and do everything we need to do to support them in sustaining those clean opinions. And then for the agencies that didn't, let's figure out how we can help them in executing their corrective action plans.

You know, the Navy was able to clear three material weaknesses, that's a huge accomplishment in spite of COVID. They might have gotten a fourth if we hadn't had COVID. The one that they came close on was their environmental and disposal -- I'm sorry, no. Their utilities. They got environmental and disposal liabilities.

So they were looking at the utilities on the bases when in a lot of cases that's underground, sewage pipes, power transmission facilities, all that, stuff where having the auditors on-site would have made that easier.

MR. SHERWOOD: Okay, we'll go back over to the phone lines.

Aaron Mehta, Defense News, do you have a question, please?

Q: I do, thanks.

This follows up a little bit on a few things you said. With the understanding that this is a likely 10-year process -- you said that's how long it took DHS -- are you at all, I guess, disappointed or did you expect more progress this year versus last year?

MR. SHERWOOD: More progress this year over last year, did you expect more?

MR. HARKER: Do we expect more next year or did we make more this year than last year?

Q: Did you expect more this year compared to last year? I think, like, last year there was a lot of stuff that Ms. McCusker told us had gotten close and had just kind of crossed that threshold. But it sounds like, from what you've said, only one major working capital fund seemed to have improved this year.

MR. SHERWOOD: So, bottom line, yeah, we got it -- thank you, Aaron. So the bottom line is did you expect more this year?

MR. HARKER: We didn't expect more than we received. I mean, I think any time you have a new agency get a clean opinion, that's a huge accomplishment. So for us, last year, we did not have any agencies make -- get new clean opinions, this year we did. So DISA's working capital fund getting a clean opinion there was a significant improvement.

We also were able to eliminate material weaknesses this year, which is something that, last year, only Navy did it. And it was one material weakness. This year we had two material weaknesses at the department level, three at Navy, one at Marine Corps, and then we were also able to clean up a lot of the smaller ones for real property by consolidating real property.

So 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.

I may be a little biased because I came from Navy, but the Navy and Marine Corps have both made huge progress this year. The Marine Corps did make a push for an audit opinion this year. They were initially at the start of the year really focused on trying to get there, and they fell short.

A lot of that was due to COVID, but some of it was due to just lessons learned during the process of being audited and going for a full-scope audit opinion. That enabled them to clear a material weakness, and also increase the accuracy of a lot of their property planning and equipment balances, and their inventory and operating materials and supplies.

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.

So the Marine Corps made a ton of progress, it just didn't quite result in that audit opinion. And I think that was primarily due to COVID.

MR. SHERWOOD: Aaron, did that answer your question? Do you have a follow-up?

Q: That's good, thank you.

MR. SHERWOOD: All right, I'll go over to Jeff Schogol with Task and Purpose. Do you have a question, please?

Q: Hi, thank you very much. If I understood you correctly, you said the Defense Department did not pass the audit this year. And since it first started getting audited in 2017, and it will take 10 years, it will be until 2027 until the Pentagon passes this audit. Is that right?

MR. HARKER: The -- yes, I would say that's right. We did not pass -- we had a disclaimer on the consolidated opinion, we had several other disclaimers on the individual audits. And this is similar in timeline to what the Department of Homeland Security experienced during their quest for an audit.

Q: If I could ask a follow-up question, if it's taking the Pentagon 10 years to pass an audit, what is it doing wrong? Can you elaborate on where it's overspending and money being wasted, which is the purpose of the audit?

MR. HARKER: So one of the things that -- if I could come at your question from a different point of view, we spent $200 million being audited this year. But when we look at the return on investment for the process improvements that we're making around accountability for property, accountability for inventory, that type of thing, we've identified more than $700 million in savings based on these process improvements.

So it's one of those things that it's not that anyone's doing anything wrong, it's that there's -- this is something that's never been done for an entity of the size and complexity as the Department of Defense. And so we have not built up a robust capability in financial accounting. Our focus has been many other things: executing the budget, acquiring weapons systems, and whatnot.

So as we're building that capability, we're executing corrective actions to the things that don't comply with accounting principles in order to get into compliance. But more importantly, we're improving the accuracy of our financial information so that decision-makers can make better decisions.

MR. SHERWOOD: Okay, we have time for one last question in the room. Tony, please?


Q: -- can you clarify the cost issue? The billion dollars, the cost issue. The $230 million you talked about was preparing the infrastructure for audit, but there are audit fees and then there's cost to remediate deficiencies. Those cumulative were over a billion dollars last year. I just want to -- if Chris could -- because there's going to be people saying, "Oh, it went from a billion to $200 million."

MR. HARKER: (inaudible) --

Q: You -- you had a subset. That's -- I -- (inaudible) --

MR. HARKER: The cost -- the cost of the audit this year was $203 million for when you add up all the audits. Somewhere last year, I think last year was around $195 million. The year before that was around $200 million. So the cost of the audits has stayed the same.

The investment that we've put into cleaning up deficiencies, that's always been a hard one to quantify. It was around a billion last year, but it's -- that's kind of a modeled number, and it's around the same this year. We're -- we're pulling that data together.

Q: Okay, and then the auditor fees for Ernst & Young and all the companies, that's a separate subset?

MR. HARKER: That's the $200 million.

Q: Oh, that's part of it?

MR. HARKER: That's the auditor fees. That's what we're paying the independent public accounting firms that come audit us.

Q: Okay.

MR. HARKER: That's -- and that's part of the -- the $1 billion that you cited for last year.

Q: Okay, I just want to be -- just see if Chris can get just the cumulative cost remediation auditor fees and preparations. So it's --

MR. HARKER: There's a report to Congress that we prepare, and we'll make sure that you get a copy of that.

Q: (inaudible) --

MR. HARKER: It goes over all of that.

Q: I'm trying to reconcile your figures from last year.

MR. SHERWOOD: All right. And sir, I'll offer any closing comments you have, and then we'll wrap it up.

MR. HARKER: Appreciate you-all's interest, and thank you for coming out and dialing in, if you're on the phone. This was something where we've invested a lot of time and effort in getting to the audit, and being audited these last several years has revealed a lot of information to us on the areas where we can improve our processes, become more efficient, more effective, and better stewards of taxpayer resources.

MR. SHERWOOD: Okay. Thank you for your time.