Clean Audit Opinions: The Bar Has Been Raised for the DoD

In last month’s (June 2022) edition of?Service Contractor Magazine?(a Professional Services Council publication), Significance had the opportunity to publish an article to that emphasizes importance of clean audits for the DoD.?This article expanded upon a blog written by Rick Pauley earlier this year, which shed light on the background and challenges associated with achieving a clean audit.?The PSC magazine article (below) provides additional perspective from Significance’s new Director of Financial Systems Integration, Adriana “Obi” Obogeanu, on WHY clean audits are so critical not just to the DoD but to the federal government as a whole and ultimately to American taxpayers.?

Clean Audit Opinions:?The Bar Has Been Raised for the DoD

The Department of Defense (DoD) has the largest annual budget of all the federal departments and agencies, receiving hundreds of billions of dollars annually and having more than $2.2 trillion in assets.?Due to the size and complexity, it’s not surprising that the DoD is the only federal agency that has not yet received a clean audit opinion by an Independent Public Accounting (IPA) firm.??

The Marine Corps is Leading the Way

In fiscal year 2010, the United States Marine Corps (USMC) was the first service to undergo an audit by an IPA.?Since then, the remaining military branches have followed suit.?However, a clean audit opinion has continued to elude all branches of service to-date.?Currently, the USMC is engaged in a massive?Force Design?effort to reorient itself in its focus, organization, equipping, posture, and employment concept for the type of challenge presented by near-peer adversaries.?Part of this effort is its recent transition to a new financial management system, called Defense Agencies Initiative (DAI).?Transferring all end-to-end business processes into DAI will improve financial, property, asset, and personnel accountability and increase efficiencies and the timeliness of support to the warfighter down range.?Concurrently, the transition to DAI will support the Marine Corps’ efforts and enable it to achieve a clean audit opinion.???This will serve as a precedent for the other branches who have the same objectives.

Benefits of a Clean Audit Opinion:?

• Reassurance for the public.?Taxpayers will gain confidence that the dollars entrusted to the Department of Defense are being used responsibly, effectively, and efficiently.?This would provide credibility that they are committed to getting the most bang for their buck but doing it in a way that can be accounted for and reported accurately on their annual Agency Financial Report.?
• Credibility with Congress.?Similarly, a clean audit provides credibility with Congress.?As the DoD‘s “Board of Directors”, Congress is growing weary of its inability to pass an audit.?In fact, Senators Chuck Grassley and Bernie Sanders co-sponsored a?bill to reduce the Pentagon’s budget?every year the Department fails an audit.?A clean audit leads to credibility that funds are spent appropriately and within Congressional intent.?
• Compliance with statutory mandates.?Achieving a clean audit opinion would prove that DoD is in compliance with all applicable laws, rules, regulations, and Generally Accepted Accounting Principles (GAAP). This also indicates that all key stakeholders involved in the lifecycle of financial transactions are properly trained and educated on all requirements regarding appropriated funds, fiscal law and policy.??
• Business process and system improvements.?Clean audits drive standardization, simplification, and agility.?Approximately 14 years ago, the Department of Defense 4th Estate agencies (26 agencies and field activities) set out to create a new accounting system to help address a long-standing issue of not receiving clean audit opinions. The time and money associated with revising financial reports to obtain a clean audit were creating enough problems to warrant a complete overhaul and consolidation of all the agencies’ different accounting systems. This new system and its rollout to other agencies was named the Defense Agencies Initiative (DAI). During the last 14 years, as DAI rolled out across these agencies, all of them made strides towards standardized system and business processes and financial reporting, which brought them closer to receiving clean audit opinions. This caught the eye of other agencies, including the Marine Corps. In 2021, the USMC made the bold decision to sunset their legacy accounting system, the Standard Accounting, Budgeting and Reporting System (SABRS), and transition to DAI to accelerate their goal of achieving their first clean audit opinion.??
• Internal controls.?Establishing strong internal controls, across all systems and business processes will prevent fraud, waste, abuse, and mismanagement.?Effective internal controls also increase the material readiness of Commanders, allowing them to apply resources to emergent requirements.?In 2004, an Office of Management and Budget Circular (OMB Circular A-123 – Management’s Responsibility for Internal Control) was published to mandate government Chief Financial Officers, Chief Operations Officers, Chief Information Officers, and Program Managers to implement internal controls across all organizations to prevent inappropriate financial transactions and activities.?
• Accountability.?Audits drive better accountability. Maximum operational readiness is best achieved when strong accountability measures are being utilized.?A clean audit opinion would demonstrate that the Defense Department has accountability of all assets, including warships, aircraft, tanks, real property, missiles, weapons, equipment, etc.?Accurate inventory is an operational concern. As an example, an October 2019 article on military.com reported that Navy leadership acknowledged that the Navy audit uncovered $126M in aircraft parts they didn’t know existed.?Not only did they not know the parts existed, but they didn’t know the warehouse where the parts were stored existed.?As the military branches identify these issues and correct them, asset accountability coupled with financial accountability, will allow for better planning, programming, and budgeting for Future Year Defense Program (FYDP) dollars.?Moreover, accuracy leads to operational agility that best positions the military to defend America’s position as a global power.???

A Five-Year Strategy

Michael McCord, the Chief Financial Officer for the Office of the Secretary of Defense (OSD), articulated his goals for financial management when he released his Financial Management 22-26 strategy.?His five objectives were:

1. Cultivate a skilled and inspired FM workforce?
2. Optimize taxpayer dollars for the highest value outcomes?
3. Increase integrity of financial results?
4. Simplify and optimize our end-to-end business environment?
5. Empower data-driven, fiscally informed decision making?

It could be argued that OSD should work to transition all the military branches to one accounting system to get after these stated goals, especially goals 3-5.?DAI may be that solution since it has helped other Defense agencies achieve a clean audit opinion.?Over 25 Defense organizations operate on DAI, with the USMC joining this past November, and Navy Special Warfare Command (NSWC) is ready to ‘go-live’ in DAI in October of this year.?One accounting system across the DoD would definitely ‘simplify and optimize our end-to-end business environment.’????

To learn more about Significance’s government financial management expertise and services, contact Rick Pauley, Director of Business Growth, at [email protected].