The Defense Department Audit Was A Miserable Failure

The Defense Department makes up more than half of all the U.S. Government's discretionary spending -- spending using income and other taxes, and borrowing. (Social Security and much of Medicare are paid for through separate trust funds). How is the Defense Department doing with its massive budget?

Not too well! The department just finished its first ever audit, and the results were not good. Of the 21 agencies in the department, 14 of them failed that audit, 2 were still trying to finish the audit, and only 5 got what could be considered a passing grade.

It seems that the department is not only a huge money hole, but it's not even sure where all that money goes. Shouldn't the American taxpayers expect more from the Defense Department? Shouldn't it be able to pass the same kind of audit that other government departments must pass?

Here is what the Department of Defense had to say about the audit on November 16th (trying to put the best spin on the audit results that they could):

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.