Pentagon Fails Audit and Nobody in Washington is Surprised: DoD fails its first ever, much-anticipated audit
(Source: Tax Payers for Common Sense; issued Nov 16, 2018)
The much-anticipated first audit of the Department of Defense landed in public view this week. The first and biggest takeaway? They failed. And nobody is surprised.

The number two civilian official in the Pentagon is Deputy Secretary of Defense Patrick Shanahan. To quote him, “We failed the audit. But we…never expected to pass it.” And for that, Mr. Shanahan receives the dubious distinction of the Taxpayers for Common Sense “Quote of the Week”.

Formal audits are dense and data-filled tomes, so this piece constitutes our initial analysis of the full document. There will be much to read, ruminate, and write about in the coming weeks, so keep coming back to check out our latest. But here are some preliminary observations.

First, some organizations within DoD were given “clean” audit opinions, which means they passed. Those organizations are:
-- U.S. Army Corps of Engineers – Civil Works
-- Military Retirement Fund
-- Defense Health Agency – Contract Resource Management (which is a subset of DHA)
-- Defense Contract Audit Agency (would have been tres embarrassing had they failed!)
-- Defense Finance and Accounting Services Working Capital Fund (also an embarrassment if they had failed.)

Receiving “modified opinions”, meaning their financial statements were fairly presented but don’t comply with generally accepted accounting principles:
-- Medicare-Eligible Retiree Health Care Fund
-- Defense Commissary Agency

Not passing:
-- Everybody else

But we know taxpayers will be heartened to hear that the Army, Navy, and Air Force “properly accounted for major military equipment and military and civilian pay.” Well, there are about a zillion things that a military department does outside of equipping and paying people, so we don’t find that tremendously reassuring.

Other interesting takeaways:
-- The Pentagon has $2.8 trillion in total assets…and $2.6 trillion in liabilities.
-- Of those liabilities, more than 94% consist of military retirement and employment benefits. There is no easy solution to that challenge.
-- The Inspector General’s report on “Management Challenges” is included in the audit.

The top four challenges of ten are listed as:
-- #1: Implementing DoD Reform Initiatives
-- #2: Countering China, Russia, Iran and North Korea
-- #3: Countering Global Terrorism
-- #4: Implementing reforms recommended by the audit
To our minds, numbers two and three are strategic and tactical challenges while numbers one and four are management challenges. These are apples and oranges.

-- The audit points out that improper payments are a minuscule percentage of overall DoD payments. However, the audit also noted they have increased 25% from FY17 to FY18. What caused that increase and can the trend be reversed?

Finally, talk about your bad timing! Wednesday the National Defense Strategy Commission released its final report recommending the Pentagon get as much as $972 billion by Fiscal Year 2024. Twenty-four hours later the Pentagon announced it failed the audit.

Call us curmudgeons, but we think there ought to be a full accounting of what the Pentagon spends now before we jack up spending to almost a trillion dollars a year.


The Biggest Audit in Human History ... Really?
(Source: US Department of Defense; issued Nov 16, 2018)
WASHINGTON --- The first Defense Department-wide audit 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, the DOD comptroller said recently.

David L. Norquist, who is also the department’s chief financial officer, spoke about the audit Nov. 14 at a Pentagon media roundtable.

The audit covered every asset in the U.S. military, including buildings, fences, storage tanks, planes, ships, tanks, computers, spare parts, invoices, purchase orders and contracts.

Audit Results

Five organizations received an unmodified opinion, in other words a clean opinion, meaning no discrepancies, the highest possible rating. They are: the U.S. Army Corps of Engineers – Civil Works, the Military Retirement Fund, the Defense Health Agency – Contract Resource Management, the Defense Contract Audit Agency and the Defense Finance and Accounting Services – Working Capital Fund.

Two organizations, the Medicare-Eligible Retiree Health Care Fund and the Defense Commissary Agency, received a modified opinion, which means auditors have suggested some areas for remediation.

Audits for the DOD Office of Inspector General and Defense Information Systems Agency are still in progress and should be completed by the end of next month, Norquist said.

Other DOD agencies, which is most of the DOD, he said, received disclaimers, which means there were issues such as inventory discrepancies, information technology systems security issues and financial reporting errors.

The agencies with discrepancies had by and large never been audited before, Norquist said, and most of them have already started remediation efforts to correct them so that when they are audited again at the end of this fiscal year, they will have shown improvement.

By far, the most discrepancies involved IT security, he said. For example, not revoking certificates of personnel who have departed or using systems that could be hacked.

Auditors did not find any evidence of fraud, nor did they report any problems for civilian or military pay. And, all of the services were able to account for the existence and completeness of all major military equipment.

Norquist speculated that future audits will generate a healthy competition among the services to be first with a clean audit, meaning no discrepancies for every single organization.

How the Audit was Conducted

The DOD Office of the Inspector General and independent public accounting firms performed the department’s financial statement audits.

It was important that multiple auditing agencies were used to generate healthy competition, Norquist said.

About 1,200 auditors conducted more than 900 site visits at more than 600 locations, including military bases, depots and warehouses.

The auditors reviewed hundreds of thousands of items. Auditors confirmed counts and condition of assets, reviewed DOD systems, and validated accuracy of personnel, he said.

However, the auditors didn’t count every single bean, bullet and bandage, Norquist added. Instead, he said, they took statistically significant samples.

Why Auditing is Important

The audit is not just important to improving IT security and knowing where every piece of equipment is and what condition it is in, he said.

The audit also improves readiness. Norquist provided an example.

At Hill Air Force Base, Utah, $53 million worth of uninstalled missile motors were listed in “not working condition,” he said. However, the auditors found that they in fact were operational. Subsequently, the Air Force was able to put them into service.

In the past, the services were reluctant to conduct a departmentwide audit, Norquist said.

However, Defense Secretary James N. Mattis was adamant about having one, saying that ignorance is not a strategy.

Mattis directed the DOD to embrace the audit, review the problems and fix them, Norquist said.


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