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DOD’s uncertain progress on “audit readiness”

February 13, 2017

Late last week, the Government Accountability Office (GAO) issued yet another depressing evaluation of the internal controls and financial reporting weaknesses in the Defense Department (DOD). 

The DOD has been a central point of failure in federal government financial reporting for decades.  The GAO has cited the department as a principal reason for issuing a ‘disclaimer of opinion’ on the federal government’s financial statements every year since 1997.

Back in 2010, Congress passed legislation directing DOD to have its financial reporting ready for auditing by September 30, 2017 – a generous time frame.  But 2017 is now upon us, and it doesn’t look so good.  As part of the certification process, DOD enlisted independent public accountants to review the budgetary schedules for the Army, Navy and Air Force – and simply for audit review preparedness. All three of these firms issued disclaimers of opinion, however, citing widespread material control weaknesses.

The failure of Army, Navy and Air Force to meet this simple step means that GAO cannot reliably assess progress toward audit readiness, let alone progress toward a successful (clean) audit opinion.

How big of an issue are we talking about? 

In last year’s Financial Report of the U.S. Government, the “Statement of Net Cost” reported (unreliably) gross costs for the Department of Defense of $722 billion, roughly one-sixth of total “gross cost” for the federal government ($4.5 trillion).  However, as Robert Higgs and others have stressed, total defense department spending understates a true measure of “defense spending” (and debt) considerably.  Some of those other areas reported elsewhere in the federal government include Department of Energy nuclear weapons programs, the Department of Veterans Affairs, the Department of Homeland Security, NASA, and a portion of the interest on the overall national debt related to defense spending.

Speaking of Veterans Affairs, an amazing thing happened in the report for 2016.  The Department of Veterans Affairs reported a massive $378 billion loss from changes in assumptions, raising net cost from $272 billion to $649 billion – for a single year.  That change in assumption loss alone runs over one-half as much as total Defense Department net cost for 2016.

While the GAO has been emphasizing and focusing on the Defense Department, it is worth noting that these related programs become audit-relevant in light of other concerns emphasized by the GAO – weaknesses in the government’s controls and reporting of “intragovernmental activity,” as well as its methods for preparing the consolidated (overall) financial statements.

Some other recent stories (see here and here) shed light on audit issues for an entity within the Department of Defense – the National Security Agency (NSA).  The NSA goes unmentioned in the 274-page Financial Report of the U.S. government, including the GAO audit opinion.  In a 2014 article for the Federation of American Scientists, Steven Aftergood called GAO oversight of the NSA “a neglected option.”  Aftergood cited 2008 testimony from then-Comptroller General David Walker, who stated that “We still actually do have space at the NSA,” ...  “We just don’t use it. And the reason we don’t use it is we are not getting any requests [from Congress]. So I do not want to have people sitting out there twiddling their thumbs.”

Have any new Congressional requests arisen lately?

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