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Pentagon fails 5th annual audit in a row – what you should know

The Pentagon in Arlington County, Virginia. (Dreamstime/TNS)
November 18, 2022

The U.S. Department of Defense has, once again, failed a comprehensive financial audit. The audit is the fifth comprehensive review the department has completed, and the fifth where auditors were unable to find sufficient record keeping for the DoD to pass off on a clean audit.

This year’s DoD-wide audit report involved 27 smaller component audits, of which seven component audits received “unmodified opinions,” which mean that auditors determined the underlying military financial information was recorded fairly and in line with U.S. accounting standards. One component audit received a “qualified opinion,” meaning auditors found material accounting misstatements that were not pervasive.

The remaining 16 component audits were listed with “disclaimers of opinion,” meaning the auditors were unable to find complete enough financial records to provide an audit opinion. The disclaimers of opinion accounted for 47 percent of the DoD’s total assets and at least 71 percent of the DoD’s total budgetary resources.

The DoD, as a whole, also received a “disclaimer of opinion.” With auditors saying “DoD management did not report materially complete balances in the Agency-Wide Financial Statements as required by the Statement of Federal Financial Accounting Standards.”

The overall DoD audit assessment was also hurt by accounting problems with the F-35 joint strike fighter program, which provides the stealth fighters for the U.S. Air Force, U.S. Navy and U.S. Marine Corps. The audit said “the DoD is unable to provide or obtain accurate and reliable data to verify the existence, completeness, or value of its Joint Strike Fighter Program Government property.”

The report stated that military leaders “fully expected” to see much of their audit come back with broad as receiving a disclaimer of opinion, as it has with previous audits.

On its balance sheet, auditors determined the DoD had about $3.5 trillion in financial assets and $3.7 trillion in liabilities.

During a Pentagon press briefing on Tuesday, DoD Comptroller Michael McCord said one of the challenges for military records keeping is in assigning values to the equipment the military has in its vast stores. He also said another problem arises with how the military is supposed to evaluate weapons and equipment it has paid for but that could take years for civilian manufacturers to deliver.

“We are still challenged with evaluation and existence of inventory equipment, real property assets. This is probably going to be the long pole in the tent for us,” McCord said. “My offices continue to partner with the Office of the Under Secretary of Defense for Acquisition and Sustainment to address government property in the hands, in the possession of contractors.”

When asked by a reporter how he would grade the DoD based on the audit’s findings, McCord said “we failed to get an A” but did not give a more precise grade.

“I would not say that we’ve flunked,” he added. “The process is important for us to do and it is making us get better. It is not making us get better as fast as we want.”

Despite the failed audit, McCord said the DoD is making some gradual improvements, as it has in previous years.

“The Navy, for example, downgraded their environmental liabilities which is a very major part of their overall liabilities,” McCord said. “Two other components each downgraded, one material weakness.”

While the military has improved with each successive annual audit, McCord said its getting harder to make big improvements.

“As we get sort of to the harder things, the progress is getting harder as well,” McCord said. “I would say each year the auditor findings and recommendations to us increase in complexity and in terms of degree of difficulty, with much of the lower hanging fruit having been picked. So as we move forward, we have to continue to focus on leadership and collaboration across DOD to solve these more difficult challenges.”

McCord said the DoD drawdowns of weapons and other military supplies to send to Ukraine “is actually a very teachable moment for us on the audit” because it demonstrates the need to have accurate records of what weapons and supplies the military has on hand.

“I’ve asked our people to imagine that was our folks, our men and women in uniform who are up against it in a way that we’re not used to, being — having only a couple days of [weapons and supplies],” McCord said. “This is why it matters. I’m not saying that insight is going to flip everything to a clean audit overnight, but I think it is an important thing for us to message across DoD and I’ve tried to do that in my — in my talks with people who work here.”

On Thursday, Republicans in the House of Representatives introduced legislation to more thoroughly audit U.S. aid flowing to Ukraine.