Reform

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.

A multi-colored pie chart
DOD FY 2018 Notices of Findings and Recommendations by Component
Pie chart showing DOD FY 2018 Notices of Findings and Recommendations by Component.
Photo By: OSDPA
VIRIN: 190515-D-ZZ999-012
A multi-colored pie chart.
DOD Audit Notices of Findings and Recommendations by Functional Area
A pie chart showing DOD Audit Notices of Findings and Recommendations by Functional Area.
Photo By: OSDPA
VIRIN: 190515-D-ZZ999-011

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.