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Third Defense Audit Shows Some Progress, Watchdog Says

Some components are performing better, but overall, the department’s books still don’t add up.

The Defense Department failed its 2020 financial audit, but in the calculation of experts who monitor such things, that in itself counts as progress. It was only the Pentagon’s third-ever departmentwide financial audit—30 years after such reviews of federal departments and agencies were required by law. While the department also failed its two previous audits, in 2018 and 2019, if the key to solving problems is to first identify them, then the Pentagon is making progress, according to the watchdog group Truth in Accounting.

“They are making progress in the sense that they’re finding more problems than they resolve,” said Bill Bergman, Truth in Accounting’s director of research

Truth in Accounting used eight criteria along with an inspector general’s analysis, to evaluate how the department did on its fiscal 2020 audit that came out in November. While the timing and planning of the audit had to be adjusted due to the pandemic, the Pentagon nonetheless managed to produce the departmentwide financial review for only the third time since the 1990 Chief Financial Officers Act required such audits. 

“Upon reviewing the massive set of documents relating to the audits for DoD and its component entities, we found significant continuing concerns regarding spending in one of the largest agencies in our federal government,” said the report published on Tuesday. “The number of disclaimer opinions and identified material weaknesses remain high, but hopefully the component entities and their auditors are on a learning curve that will lead to better results in years to come.”

The watchdog issued weighted scores of the department’s components on eight criteria: auditor’s opinion (30%); ability to access the entities’ annual financial report and auditor opinion (10%); notices of findings and recommendations auditors issued to identify weaknesses (10%); change in the notices of findings and recommendations from the previous year (10%); material weaknesses (10%); non-compliance with laws and regulations (10%); change in the numbers of material weaknesses and noncompliances from the previous year (10%); and how long after the fiscal year ending the auditor’s opinion letter was sent (10%).

The best performing Defense entities were: the Defense Health Agency (Contract Resource Management); Defense Contract Audit Agency; Defense Finance and Accounting Service; U.S. Army Corps of Engineers and the Military Retirement Fund.

Among the worst performing were each of the services—the Army, Navy, Marine Corps and Air Force—and the Defense Logistics Agency. .

“[The services] are also among the largest entities, which poses significant financial management challenges,” said the report. “But we believe good accounting systems are even more important for the large military branches and we challenge them to rise in the rankings in the years ahead.”

The Defense Department said in November that it doesn’t expect to have a clean audit until 2027. That will have been 37 years after audits became mandatory and nine years after completing its first audit. 

“Although the audits of the DoD and its components resulted in more [notices of findings and recommendations] and material weaknesses and most disclaimer of opinions did not change from FY 2019 to FY 2020, the auditors saw progress by the DoD and its components,” the IG noted in its report. “This progress included the reduction or downgrading of material weaknesses, better understanding and development of business processes, and improved supporting documentation for transactions selected for testing.” 

Defense financial management has been on the Government Accountability Office’s “high-risk” list of programs vulnerable to waste, fraud, abuse and mismanagement since 1995. 

In another report on governmentwide finances, also published on Thursday, the watchdog said in fiscal 2020, 22 of the 24 agencies covered under the 1990 Chief Financial Officers Act “obtained an unmodified opinion from the independent auditors on their financial statements.” Also, “48 auditor-identified material weaknesses were reported at the end of FY 2020,” of which 26 were associated with the Defense Department.