Good audits are critical for defense

Good audits are critical for defense
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In recent years, the Defense Department has embarked on a mission to improve the auditability and reliability of its financial management. This became even more critical amidst the pandemic and federal government financial developments over the last year. Pentagon audit efforts deserve support and oversight to maximize their contribution to improving more efficiency and resource allocation decisions in the years ahead.

The financial condition of the federal government deteriorated greatly from 2015 to 2020. Public debt is rising rapidly while the potential crowd out effects of future debt service rules have led some people to call this a national security issue. So we should do our best to understand this as a national security issue. But how certain can we be of the dollar amounts and related calculations offered by the federal government in its annual financial statements? Unfortunately, that remains another pressing object of concern, notably and ironically for the Defense Department. 

There are not enough people aware or fully appreciative of the fact that the federal government of the United States has earned a disclaimer of opinion on the audit of its financial statements every year for decades. Last year, it looked like more of the same, at least on the surface. The Government Accountability Office issued another disclaimer opinion, citing the Pentagon as a prominent source for that opinion. Under the surface, however, there are some important signs of progress.

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As background, Congress passed the Chief Financial Officers Act in 1990. Among other provisions, the law called for executive branch agencies to present audited financial statements, unless agencies refused to certify they were ready for this. It explains how the Defense Department figures went unaudited at least externally for many years through 2018.

That was the year the Defense Department finally took the plunge and underwent an extensive and costly audit effort, involving many private sector accounting firms and hundreds of individuals both within and outside of the Pentagon. Agency leaders like the comptroller and chief financial officer were vital to the success of that effort, even while the Pentagon received a disclaimer of opinion in the last few years.

Why call it a success? The Pentagon, the auditors, and Congress are still in the early stages on what will hopefully prove to be a solid learning curve. Progress is being made while those shortfalls in accounting and financial management are being identified and addressed. The audit faced special challenges in 2020 as the pandemic prevented critical onsite visits and related auditing processes. Greater numbers and better running of onsite audit examinations will be critical to audit success in the future.

Some Pentagon entities have achieved limited but key erasures of poor marks for what the auditors call “material weaknesses” and “instances of noncompliance” with federal laws and regulations. But the overall amount of audit findings remained stubbornly high in the most recent year. That can still be seen as a glass half full rather than half empty story, however, as the auditing process broadened its scrutiny in its third year, finding even more new problems than the problems identified and solved.

The drivers and leaders responsible for the early audit success at the Pentagon deserve praise. Entities like the Army Corps of Engineers can provide lessons for the Defense Department as a whole. Looking ahead, the Pentagon audit process deserves respect and encouragement. It is too early to surrender to cynicism. But it is not too late for more success in a mission that is critical for the Pentagon and for all of us.

Bill Bergman is research director at Truth in Accounting based in Chicago.