Transcript

DOD Outlines Results of Fourth Annual Department-Wide Audit

Nov. 15, 2021
Michael J. McCord, Undersecretary of Defense (Comptroller); Moderator: Christopher Sherwood, Public Affairs Specialist in the Office of the Under Secretary of Defense for Public Affairs

CHRISTOPHER SHERWOOD:  Good afternoon, everybody.  Thank you for being here.  I appreciate it, and -- and for those that are on the phone as well.  So we'll go ahead and get started.  I'm Christopher Sherwood.  I'll be moderating the press briefing and follow on discussion.  The topic of today's briefing is the department's results of the 2021 Full Financial Statement Audit.  Our speaker is the Under Secretary of Defense Comptroller and Chief Financial Officer Michael J. McCord.  Our discussion is on the record, embargoed until you receive an e-mail from me later this evening.

That's once the Office of Inspector General sends an agency wide results to the comptroller, I will send an e-mail to you releasing the embargo.  For this discussion we have 30 minutes, and for those here in person and on the phone, I will provide a five minute warning before the end of the briefing and I just ask that you please introduce yourselves and your organization, and please limit your questions to one and one follow up.  All right, with that I'll -- I'll turn it over to Under Secretary McCord.

UNDERSECRETARY OF DEFENSE MICHAEL J. MCCORD:  Good afternoon everyone.  My name is Mike McCord.  I'm the Under Secretary of Defense Comptroller and CFO at the department.  We're here today because the department has completed its fourth consecutive financial statement audit.  This effort covered the department's $3.2 trillion in assets and included 26 stand-alone audits and one overarching consolidated audit which included all of the stand alone audits, plus about 30 other smaller funds or entities within the department that the -- that the IG wrapped into the overall audit.

I'm going to share some comments and highlights about this year’s audit, as well as the department's path going forward.  Before I do that, I want to start by thanking our Deputy Chief Financial Officer Doug Glenn for his service to the department, in particular for our -- on our audit efforts over the past two years.  Doug brought a much needed outside perspective when he joined our team from the Interior Department, and he's contributed greatly to our progress.  He will soon be moving over to the Office of Personnel Management to be Chief Financial Officer there, and he does so with our congratulations and -- and best wishes.

To frame my comments about this year's audit, let me just take a step back first.  As some of you know, I held this position previously serving as the department's Deputy Comptroller and then Comptroller from 2009 through 2016, and I've been back in this role since the first of June.  Now that I'm here, I'm struck by both what has changed and by what has not.  When I left in January 2017, we had not yet completed a consolidated audit of the entire department.  In fact, we were just in the process of awarding the contracts to the independent audit firms to get started on the effort that this -- that you are now talking about today.

What has not changed though, is that we're still following a long-term plan to tackle our financial audit challenge.  We started this plan under my predecessor Bob Hale in -- in the 2010 to '12 timeframe, and we've continued refining but following a consistent overall approach through Bob's tenure and then myself and then my successor and later Deputy Secretary Dave Norquist, and now back to me.  And I think that consistency has helped us make the progress that we have.  We began by doing just one of the four statements that comprise an audit, what -- that's called the Statement of Budgetary Resources, focusing on the three military departments.

Today we're doing a full audit of all four statements for each of the departments and then for the entire department.  So we -- we have expanded greatly since -- since I -- since we started on this path about 10 years ago.  Although we do not yet have a clean opinion and we have a long way to go, I will note that over this past decade we have done what we have told the Congress we would do when we said we would do it.  So when we said we would -- we would start something, we started it, when we said we would go into audit in 2017, we did go into audit in 2017.  So this afternoon, -- I'm here to talk about the audit, and as you know I'm not here to speak for the auditors.

I'm here on behalf of the management team who are the clients or the subjects of the audit.  The audit was carried out by multiple independent audit firms, under the supervision and coordination of the Inspector General's office.  I understand it has not been their practice to make a press statement about their results and of course I respect their independence, and they will decide what to say and when to say it about the results that we expect them to release today.  A point of clarification before I get into the details also -- I'll be referring to the audit in my remarks and I think that's probably how we all talk about it.  Again, it's a shorthand to describe the consolidated audit, which as I noted is a compilation of over two dozen separate audits of different DOD entities.

Again, this work was done by the IPA Silcott Independent Accountant Firms, some of which audited multiple different parts of the department or -- or different parts of different funds.  I had a chance to meet with these audit firms over the past few weeks to get a preview of what they're final results were expected to be.  So that's a primary source of my -- of my remarks today is the discussions we had as these process was near their conclusion.  The annual financial report of the department as a whole and the reports of our components, including the final version that -- approved by the Inspector General Office represents an enormous amount of work and material being released today.

The IG's Office did share their final results with our deputy CFO's team, some of which I have with me today over the weekend, but I certainly have not been able to personally review all this material from all these sources, that's just being finalized now in the last day or two.  So I do want to express my appreciation for the hard work of the inspector general's team does on the audit.  Both the IG and the Government Accountability Office are independent from us, and independent from each other, and so although partnership is not the right word for our relationship with either of them.  I think we're open with both of them and vice versa, and we certainly take seriously their views and value their insights.

So, again, the IG's independent.  They don't pass me an advanced copy of what they're releasing today, but we do understand from conversations that we have with them and with the firms where -- where this is going -- going to come out today.  So now, let me talk about some of the summaries -- some of the key points from this audit findings.  We believe we've made steady progress in unmodified opinion to achieve or expected to be achieved from several of our standing loan audits cover approximately 37 percent of our total assets.  This equates to about the size of 15 of the other CFO agencies combined when compared to our Fiscal Year 2020 results.  We expect a total of eight reporting entities to achieve unmodified audit opinions of F.Y. '21 and I'm going to just list them in -- in descending order of -- of size.

The biggest being the Military Retirement Fund, next the Army Corps of Engineers Civil Works Program, the Defense Health Agencies Contract Resource Management, the Defense Information System Agency's Working Capital Fund, Defense Commissary Agency, the Defense Finance and Accounting Service, Working Capital Fund, the Defense Contract Audit Agency and the Defense DOD IG themselves.  This was the 27th consecutive unmodified opinion for the Military Retirement Fund, 22nd consecutive for the Defense Finance and Accounting Service and the 14th consecutive for the Army Corps of Engineers and the 12th for the Defense Health Agency's Contract Resource Management.

We also got a qualified opinion on the Medicare Eligible Retiree Healthcare Fund.  As expected the overall department got a disclaimer opinion on our consolidated financial statement, the same as last year.  As of last week, the auditors had validated the closure of more than 450 notices of finance and recommendations, known as NFRs, from the more than 3,400 that were issued during our F.Y. 2020 audits.  We expect this total to increase over the next few weeks as auditors wrap up their fieldwork and new closures are updated in the data base.  So that is not a final number.  As the 10th of November, which is again, just a few days ago, auditors had issued 371 new NFRs for '21 and 2,032 recurring NFRs for a total of 2,403 for F.Y. '21.

Our investments and information technology remediation efforts continue to pay dividends.  Auditors have already validated the closure of 49 of 108 of our IT related findings from a year ago.  In F.Y. '21, auditors completed 27 engagements that are called our Statements of Standards of Attestation.  These are called SSAE Number 18 examinations and they cover 44 systems owned by eight service providers.  A number of the unmodified SSAE -- SSAE Number 18 opinions increased by three in F.Y. '21 to 15 unmodified opinions, and just to describe again in -- in more standard English what these are.  These are reviews of business processes that are used across the department that allow us not to validate the same identical process over and over, over again from Army, Navy, Air Force, all the different people that use the same process.

The best examples of these are, in my mind, are the processes that Defense Finance and Accounting Service uses to support all the DOD components such as the process used to validate military and civilian pay.  So those are separate -- separate processes that are validated.  The military pay process is separate from the civilian pay process.  Each got an unmodified opinion or passed its test, and I highlight this because when you combine the fact that our military and civilian pay processes pass muster, along with the clean opinion on the Military Retirement Fund.  You have a qualified opinion on the Medicare Eligible Retiree Healthcare Fund, I think it shows that we are strongest on the audit where it matters most and that is meeting Secretary Austin's imperative to taking care of our people.

As in the past, our greatest challenges on the audit lie on the property side, the -- the accounting for and evaluation of our equipment and our real property.  On the people side, we have a good record again this year.  Another metric of note is in that F.Y. '21 we will result in 28 DOD-wide material weaknesses which is a net gain of two from the previous year.  We expect to downgrade one, we just called the military housing privatization what we also had three additional new ones named, which is a result -- leads to a result of a net gain of two.  So contingently legal liabilities which have been non-graded in 2020, was back again as a material weakness this year and reconciliation of net costs of operations through outlays was also a downgrade that came back, and finally financial statement compilation is a new one.

That's all the consolidated statement.  Within the military departments, which again you'll hear from them, we expect that they'll be releasing their material today.  They downgraded to four material weaknesses this year.  The Navy downgraded their utilities.  Air Force general fund downgraded contingent lethal liability to oversight and monitoring eternal controls and the Air Force downgraded on their working capital coincide their property plant and equipment.  While I would, of course, prefer to see no problems resurface, we also see these -- these NFR closures and material weakness downgrades and -- and the overall picture on these to be indicators of progress, especially in light of the fact that each year our remaining open findings and recommendations and material weaknesses are more extensive and more complex, in terms of degree of difficulty, as much of the low-hanging fruit have been picked at this point.

So stepping back for some of the specifics and despite -- despite the ongoing COVID-19 pandemic, and its effect on the ability of all of our auditors to do their work, the audits continue to mature and were extensive in F.Y. '21.  The particular -- the -- the limitation in COVID is at all inside visits that auditors like to do to meet their normal standards, are going to look at things themselves and wonder around and -- and ask to be shown things is much harder for them to do during COVID.  So, that happened before I got here in F.Y. '20 but that -- that -- that issue recurred again this year, and with a bit of a challenge for the auditors and for the components.  I'd also want to say that our -- our audits continue to play a pivotal role in the support of the National Defense Strategy reform efforts and provide a positive return on investment.

For example, for the Navy material accountability campaign, the Department of the Navy identified nearly $960 million in F.Y. '21 in material that was not properly accounted for in their system and therefore not recognized as available.  Examples of material found over the past two years through this campaign include more than $33.5 million in material associated with the F-18EFMG System Design and Development Test Contract Inventory, was added to the supply system.  This material then filled more than 189 open requisitions and helped the Navy avoid more than $28 million in new costs by not buying things that it found that it had.  Ten million dollars were, a second example, $10 million worth of excess mine counter measures shipboard and patrol craft maintenance material such as couplings and connecting rods and gears were brought into the Navy ERP.

This material then filled more than 2,000 requisitions and helped the Navy avoid an estimated $4.8 million in new costs, again from not buying inventory that -- that the records, not that the records were reconciled and they showed that they had it.  Final example, more than 2,300 excess tieback protective suits were located and transferred to the USS Theodore Roosevelt and the Nimitz personal protective equipment for use in cleaning and disinfecting against COVID-19.  That's with the Navy.  On the Army side, the Army successfully implemented the Defense Travel System Accrual Methodology last year along with the recording the associated journal vouchers in 2021, 4th Quarter.  This estimated accrual accounted for the impact of approximately $11.4 million on the Army's financial statements.  This directly supports accurate financial reporting for DTS expenses and remediates both financial statement -- statements and audit findings.

The Air Force developed a robotic process automation or BOT to provide single click feature for monthly and quarterly reconciliations of accountable property systems of record to the general ledger.  What used to take days to complete, now takes less than five minutes freeing up resources and saving hundreds of hours per month that can be reinvested into supporting other mission critical tasks across the Air Force.  As a result of improved obligation monitoring processes, the National Geo-Space Intelligence Agency identified over $100 million for de-obligation of which 20 percent was unexpired funding that could be reused for other agency missions.  So we continue to value the audits as they're driving improved operational efficiency as well as data accuracy.

Maturing our systems to contain all the necessary activity and only valid activity, provides us the better information to guide our decision making.  That's why the audit's part of a long-term effort to modernize the department.  So, let me just wrap up here.  In -- in -- while we did not increase the count of our modified -- of our unmodified opinions, we have a sound plan in place and we're -- we're continuing to follow it.  The department continues to make steady progress toward achieving a favorable audit opinion and creating a sustainable audit environment.  Each component with the disclaimer of opinion, currently ongoing a stand alone audit developed a roadmap that includes forecast of material weakness downgrades by fiscal year.  Our leadership, myself and the deputy secretary have informed the components that -- that deviating from these forecasts going forward will require sign-offs from both the deputy secretary and myself.

So we're trying to enforce greater accountability on sticking to schedules of things we say that we're going to do to fix the problems that we have.  We're also in the process of developing dashboards in our department wide database that will enable senior leaders to monitor progress in fixing audit findings in real time, to help address challenges as -- as they arise.  Okay.  Let me just say, since I got here, I -- I can -- there are -- there are a lot of processes I'm familiar with from when I was here before.  One that is new is in addition to the -- to the defense -- the deputy secretary have had meetings that everyone's familiar with that involve resource decisions, in helping to build the next year's budget, and in this case the F.Y. '23 budget.

We have a whole new set of, what are called, business help DMAGs, business health led meetings by the deputy but drill down on particular metrics they might be financial -- there might be financial ones to include the audit.  They might be inventory ones.  They might be personnel ones.  So, we're using some of the new automated data tools that we have, the IVANA platform in particular, to have greater senior leader visibility and greater ability to drill down on business health metrics that -- that's only going to help us going forward, to have this, kind of a, visibility that is easier for everyone to use and be on the same page.

So in closing, we remain committed to sustaining progress made to date in increasing our unmodified opinion counts in the coming years.  I want to thank you for your time today.  We have a press release and a fact sheet that are going to be available along with materials from the military departments and the other components once we get the green light from -- from the IG to release them.  But I'm happy to answer any questions that I'm able to at this time.

MR. SHERWOOD:  And we'll -- we'll start in the room, if anyone here has a quick question they want to -- Okay.  We'll go to the phones.  Mike Stone, I think Reuters.  Are you on the line?

Q:  Yes.  Thanks a lot.  Thanks for doing this.  In previous years, one of your predecessors said that 20 -- said by 2027 was when a clean audit would occur for the overall agency.  Is that still the goal?  And also, in previous years there's been a line in the press release -- not the press release, the fact sheet about no fraud was found.  Was there fraud -- that was absent this year.  Was there fraud found by the auditors this year?

MR. MCCORD:  Let me -- let me answer those in reverse order because that's easier.  My understanding is that no, there was no fraud detected in the financial audit, and again, there's so much material that's being released so quickly.  I don't know if there's a sentence in some place in the IG's report that's going to say that exact phrase or not, but my understanding is no.  The answer is the same as last year, no there was not.  I would also just point out that that is not the primary purpose of a financial audit and conversely, it's not -- financial audits are not the only way or even the primary way that you do detect fraud.  But I think that they're important because getting the controls right which is integral to the audit, allows you to shrink the environment where fraud could exist.

So, it's -- it's cleaning up.  It's like disinfecting the financial environment, but there are all the other kinds of audits you're familiar with that -- that detect fraud or ways including those done by contract auditors that work for us at the DCAA, investigations that are done by the IGs, the service audit agencies.  So there are a number of other forums to detect fraud but -- but the financial audit, to my -- to my knowledge, did not uncover anything.  So that is consistent with last year despite any -- any difference in what the -- what the wording of the fact sheet might be.  On the first point, on 2027, yes, that was -- that's a date that I believe that the department and including the Army, Navy, Air Force, were talking about in the spring.

I think at this point it's a little premature to say that -- that I know that date to be correct or incorrect.  I haven't found anything since I've been here that would -- that would make me say -- that would make me back away from that date, but I think if -- if you think about the -- the 26 as I eluded to.  The 26 different building blocks that are -- that are each the major parts of the audit.  The Army's general fund, the Army working capital, from the Navy general fund, the Navy working capital fund and so on.  Right now we're at -- we're at as -- as we said about a third of that is green if you want to think in terms of stop light, green, yellow, red, in terms of an unmodified opinion, a qualified opinion or -- or a disclaimer or adverse opinion.

So, when we're at this stage, where none of the three military departments have a clean opinion for example.  We're not just close enough in my opinion to say that I know, for sure, it's going to be 2027 or its not.  When we get to the point where we have more of these major building blocks that -- that are in this stage where, let's say, two of them are unmodified and one of them is qualified, now we're getting really close to where making a prediction of a timeline is -- is probably a little more productive.  So again, I -- I'm not distancing myself from -- from or -- or questioning the timeline that people put out there the spring before I arrived, but I haven't seen anything that would change my opinion of -- of that.  But again, I think we're also -- we need more information to get more precise on that point.

MR. SHERWOOD:  All right.  We'll go ahead and go to Tony Bertuca, Inside the Pentagon.

Q:  Yes.  This is Tony.  Thank you Mr. McCord for being with us.  So when do you think a military department could receive a clean opinion?  My guess is the Marine Corps is pretty small but the Space Force is -- is the smallest service.  Now is there a chance they would get one in the next couple of years or, are we far enough along to make a prediction about that, a military department or service?

MR. MCCORD:  Tony, I don't think I would predict that yet.  The -- the Marine Corps, as -- as you may remember from some years ago, was very close, had one for awhile, had their heart broken as it were by -- by having that reverse.  So I would hate to put them out there and say I know that they’re going to do it at this time.  In fact, that's the -- that's a challenge with all of this, right, is you can only commit to doing the work, but you can't -- what you can't promise is what the independent evaluator is going to think of your work in saying that I know I'm going to get a clean opinion because I've done -- I've done all the preparation.  Just like saying, you know, I've done all the hard work.  I'm sure I'm going to win this game.  It doesn't -- it doesn't turn out that way.

I would say specifically on the Space Force, at this point, still part of the Air Force. So we'd have to make up a -- a prior decision to split them out and when to split them out before I could say, you know, I know the Space Force will be ready to have one in -- in a certain year.  We're still in the process of, I mean, it's far along but we're still in the process of moving things, moving budget accounts, moving activities, moving assets from the Air Force to the Space Force.  So, we're first going to have to decide when -- when to, sort of, launch that out separately from the -- from the Air Force.  I mean, I take your point that it's something that is newer and probably smaller than some of the other entities the department would have would stand a good chance of being a leader in that, but right now they don't -- they're not -- we're not in a position where the Space Force is a separate auditable entity.

Q:  And a very quick follow up then. So we're at the fourth year, this has been performed, it costs about -- around $1 billion a year.  Right?  I know going into this a few years ago, there -- there was debate among some lawmakers, you know, is -- is this worth it, and some analysts, sort of, is the juice worth the squeeze here.  So after $4 billion, four years, can -- can you say -- can you attest that the value of doing this?  Because obviously it's not just about, you know, finding $4 billion worth of discrepancies you can plug back in, its, you know, its about, you know, more than that, but how is it -- what is the value of this to the Defense Department's strategy?

MR. MCCORD:  Yes.  You're exactly right with -- with the way you stated that, is you can't directly connect the dot.  In -- in fact, of course, first of all to do the audit is the law.  So it’s not a discretionary activity on my part where I would say, you know, I -- I -- I think I'm not going to -- I'm going to pass because I don't -- I don't see the cost/benefit ratio in there for me.  It's the law.  We're required to do it, and we -- and we agree that we should be doing it.  So, that's first point.  Second point, the $1 billion figure as -- as I'm sure you're familiar, includes the cost of the audit per say and the remediation that is ongoing to address issues that are uncovered in the audit or uncovered in our own internal control.  So that work, the 75 percent plus of that is things that I would argue we should be doing anyway and would be doing anyway.

Only around 20 to 25 percent is the cost of conducting the audit, paying the independent audit firms.  So, yes, I -- I think, I do get that question and I know others probably do about can you directly connect dollars saved, and there will -- there will be cases where you can.  But the value, I think, is -- is -- goes beyond that and I would give one example or one -- one thing that's on my radar screen is one of the chief areas where we get, so-called, notices of finding recommendations is on internal controls.  And I think that's very important because you see, you know, repeatedly the -- the amount of cyber intrusions that our adversaries, as well as others, may try against the department, against all kind of government entities.

Protecting the information, I don't know that I would need to put a dollar figure on how much return I got in protecting a piece of information, because it might be disclose -- it might be a leak -- a personal proprietary information, it might be a leak of -- or a breach of, what's called PPI, personal information about the millions of people that we have in our system.  So there's good reasons to protect the information we have and there's a whole effort, as I'm sure you also are very well aware of, under -- under the leadership of A&S to have a cyber -- a cyber maturity model that goes into the contract world.  So cleaning up our own house on controls, protection of information, cleaning up those of the contractors that we rely on is an important effort anyway.

And I think this is an area where the audit dovetails very nicely with something that we all recognize we need to be doing, regardless of whether I could say that I saved exactly X dollars by cleaning up the environments that something wasn't breached, something wasn't leaked, something wasn't, you know, important information wasn't disclosed.  So I -- I would, again, I would understand -- I always understand that people have that question.  They have that in their mind of, is it an investigation for waste that you find the exact dollar amount that you spent or two times the dollar amount that you spent, and there are areas of the department, again I would point to defense contract audit agency work as an example, where they're actually able to quantify that better.  Because that's the nature of what they do, they look -- they're looking at -- at the pricing the contract did and comparing it to standards in coming up with -- with things where they could go back to the contractor and reclaim some money.

But our effort doesn't work quite that way, to the extent that we're able to identify issues like that, I think it's useful to do so, but it is also important to remember that it goes -- it has a much more fundamental purpose of having us be aware of our business, cleaning up our processes, reducing the number of systems that are vulnerable, reducing the number of systems that require updating.  So it can save us money in ways that -- that may or may not tie directly to the audit, but it's -- I think there's broad buy in across the department that it’s worth doing.

Q:  Thank you.

MR. SHERWOOD:  All right. Thanks Tony.  We're running a little short on time.  We have time for a few more questions. We'll go to Lauren Williams, Fed Computer Week.

Q:  Hi and thank you so much for doing this. I want to follow up on Tony's question and just, kind of, ask if there were any material insights on the -- the audit of the IT assets with this -- this round of the audit?

MR. MCCORD:  Well, certainly at the big picture level there -- it remains a primary challenge for us.  I mean, that's where a lot of our -- of the NFRs have been over the last couple of years.  A lot of the notices of finding of recommendations and -- and there are still going to be, I -- I think I said earlier that we -- the number of -- of findings for this year's cycle is still being completed, and will probably grow.  So I don't know the exact number yet of IT related NFRs but -- but there's certain to be a pretty substantial number and again, I think that that's an area that we really need to focus on because, again, of all the, sort of, cyberthreats out there that -- that having -- having either an antiquated system or poor controls even in a newer system.

Just make you vulnerable, in ways that -- that go beyond the impact on the audit, to the -- to the operation of the department and -- and to us not wasting resources.  So I don't -- in all of the voluminous amount of material that's just coming out in the last day or two, I don't have a -- a -- anything in front of me or anything that has passed in front of me that I read over the last day or so that is a -- that is a IT specific wrap-up.  Again, the IG, you know, has been just now compiling this and getting it done and sharing it with our team.  So we -- let us get back to you if there's a more specific IT takeaway and I -- I look forward to seeing what the IG has to say themselves.  But, yes, I don't have a -- I don't have a -- a paper or a -- or a subset of the IGs work that is specific to that, every -- every auditor, of course, looked at that separately but beyond what I've said I'm not sure that there's a -- a common theme across the different firms that I talked to on this issue.

Q:  Well, that's helpful.

MR. SHERWOOD:  And we'll go to the room.  Tara.

Q:  Thank you.  Tara Copp, Defense One.  Two quick ones.  When do you see these audits becoming just part of normal operating business on a predictable schedule, what do you need to ramp up staff to make it, you know, that -- to be able to keep that regular pace?  And then second, unrelated question, you know, inflation's is hitting everything from car prices to grocery items, are you starting to track and predict what impact it's going to have on weapon system buying in acquisition?

MR. MCCORD:  Okay.  On the ramp-up, I think -- I think we're pretty -- pretty close to being there now in terms of, although -- although as I said, there's one or two entities that we could see maybe Space Force will split out and do a separate one and we actually have plans to take a couple -- a couple smaller agencies that were in the -- in the -- I spoke about there being 26 major building blocks that are stand alone audits today and about another 30 that are in a group that are the smallest three to five percent.  We are planning to take one or two of those from the consolidated pool that the IG does and move them to a stand-alone -- so we're actually planning to increase the number of stand alone audits by a few.  And this is separate from whether the Space Force splits off and becomes a separate auditable entity as well.

But that aside, I think for the, you know, most of the actors in this process are already undergoing audit.  I think we're probably fairly close to a normal battle rhythm of what has to happen year after year.  The interesting question will be if we move to where we have, if and when we move to having more unmodified opinions, how much can the level of effort go down in terms of, on our side.  We know that the auditors will take less time once they have -- find the process of a more repeatable and fewer -- fewer samples, fewer tests need be done.  They will save time.  Will we be able to repurpose people that are working audit now, I'd be hopeful of that but I think we're a few years away from that.

But -- but in terms of the sheer workload, I think we're probably in the right neighborhood already of the amount of person hours and -- that it takes to do this.  On inflation, yes, certainly -- certainly the report last week was striking, and we saw in -- in OMB's mid-session review, their inflation numbers for the near term went up from what they were in the spring when the budget that's on the Hill now was developed with one set of assumptions.  As is typical every -- every summer, the OMB does -- the OMB does a mid-session review.  Those numbers don't officially find their way into -- into our materials, our budget because the budget is the budget.  It's been submitted.  We can't change it just because economic assumptions change.  There will be a new set that we expect to receive fairly soon that will go into F.Y. '23 budget that comes out next year.  So we're, kind of, at a midway point, hence the name mid-session review where we've seen projections that both -- for both '21.  The fiscal year we just ended and the calendar year we're about to end -- in '22 have already been projected up by close to a percentage point, of -- of -- on -- on the particular inflation metric that we use in the defense budget which is the GDP deflator, not the consumer price index.

So, what that -- what it -- what that is saying, assuming that that's accurate, right, is that something that is in the '22 budget that we're -- we -- we asked Congress for $1 billion for system X.  When you actually put it on contract and maybe if it's a ship, something that might take several years to, you know, over the course of that, prices are going to go up from what we said.  So, in terms of seeing it actually happen hasn't happened yet, you know, we're not -- we're not -- we don't have an F.Y. '22 budget approved yet.  So we're not putting F.Y. '22 funded things on contract yet other than -- other than fairly routine things that can be done during a CR.  But yes, that -- that worry is out there, certainly as that -- that costs are going to go up in ways that we can't assign line item by line item yet.  You could take a model, of course, and -- and take the same facts or apply it to every single line item, it's not going to work that way in practice because you're going to have contract by contract.

Specific requests for adjustment or other renegotiations for labor costs, material costs, so it, of course, and that's not what's the deflator is meant to do.  It's not meant to predict every single thing in the world will go up by exactly the same amount.  It's -- it's, you know, you understand how that -- how that works.  But we do -- we are looking at that in terms of our budget -- in terms of our budget going forward.  What's the impact?  How can we best try to mitigate it?  And as far as the things that are -- that are sitting in the budget that's before Congress right now, one of the committees, the most recent one to -- to do a mark-up if I can call it that, the Descendant Appropriations Committee, actually did at our request include an increase in funding as a placeholder to recognize that higher inflation.

Other committees acted earlier before that kind of information was available.  So one way to deal with it is to provide funding and let us allocate it where we see that it’s needed, as we execute the budget going over the years.  Otherwise our main alternative will be to try and reallocate money if we have savings in one place to address inflationary charges that will show up other places.  But again, primarily this is going to play out over, not only months but possibly years as -- as things that we -- that were funded in F.Y. '22 actually get put on contracts some months later and then go into all of the stages of actually delivering that contract to goods and services pricing going forward.  So it's certainly a concern that we have right now, but it’s -- there -- there's a bit of a speculative part to it as well.

Q:  What about your shorter-term objects or items you procure such as the DLA items that they buy, you know, equipment, paper goods for bases, even things like the Thanksgiving dinners that will go across the world for the troops?

MR. MCCORD:  Yes.  Good point.  Those -- those we could see earlier.  Right?  And -- and those would be cases where we could -- we could see what is -- what is the impact on the cash.  If -- if BLA has to buy 1,000 tires or 1,000 Thanksgiving dinners, either one, if the prices are higher and it starts to reduce the cash, then we -- then we can look at what are we going to do to address that.  Do we need to move money from someplace else to -- to keep the cash position adequate or other ways we can mitigate.  Yes, so -- so you're right.  In -- in some consumable items as I tend to call them, we might see that show up earlier.

MR. SHERWOOD:  Last question and in the room.  Go ahead.

Q:  Kristina Anderson, AWPS News.  Thank you for doing this.  Are you seeing opportunities, cost savings as well as accuracy in asset control across the department?  A potential in some of the new technologies that are coming on board for instance, there was a prototype program, I think a year ago or so, where one of the bases implemented 5G to try to do inventory control on a real time basis, so they would get more accurate as well as more timely information.  So are you seeing potential in that?

MR. MCCORD:  I would say, yes, we see potential in that and I think -- and I think further, yes we see some reality in that already.  Just the nature of the way this works though, it doesn't -- it doesn't show up in our report card if you will.  So if, and there are cases that I think that we can -- can document for you in this past year, where things are done more quickly.  Things that took X days to get the information just in terms of the -- the audit response, if you can get the information more quickly, more information more quickly than the auditors can spend their time digging deeper, fixing some of their problem or finding some other problem.  Because they're not spending so much time, and we have some examples like that, but if all -- if you still haven't gotten from where you fixed all the things that you need to do to make, for example, the Air Force get a -- get an unmodified opinion.

The time that you saved, the fact that you answered the questions more quickly is goodness but it’s not goodness that shows up in your report card and that's -- that's one of the reasons, thank you for the question, that's one of the reasons why we -- we look at this -- we look at what's happening and we -- and once we talk to the auditors and one of the things that they'll say is we do find a strong management commitment to the auditor of the department, and we do find progress in that sort of area.  But, again, it -- it's -- it's understandable that people might be skeptical because we can't point to saying, well we have five more modified opinions because we're able to do things more quickly, but we do see it happening on the ground.

MR. SHERWOOD:  All right.  And sir, do you have any closing comments?

MR. MCCORD:  Just want to thank you. I know this is a difficult subject to talk about with our jargon and things like that, and I try my best.  I don't know that I succeeded necessarily in keeping the jargon as low as I would like in this subject.  But I do appreciate everyone who came out to talk to us about this today.

MR. SHERWOOD:  All right.  And that concludes our briefing.  Thank you.