Pentagon Audit Shows Progress, But Also Deep Challenges in Financial Management

The Defense Department’s second-ever audit once again shows wide variation in performance across the military services and Defense agencies, according to a report released on Tuesday by a watchdog group. 

Truth in Accounting used 10 criteria, along with an inspector general’s analysis, to evaluate how the department did on its fiscal 2019 audit that came out in November. The Pentagon failed the audit, which covered over $2.9 trillion in assets and $2.8 trillion in liabilities, but demonstrated progress and sustained achievements over its 2018 audit. It was the second time the agency was audit-ready since Congress made government department and agency audits a requirement in 1990.

“We issue this ranking to identify relative strengths and weaknesses in financial reporting, to track progress over time and to identify agency leaders who serve as good examples for the department as a whole,” according to the group, a non-profit, non-partisan organization that aims to “provide citizens with understandable, reliable and transparent government financial information.”

The criteria included: auditor’s opinion (40%), ability to access the entities’ annual financial report and auditor opinion (5%), notices of findings and recommendations auditors issued to identify weaknesses (5%), number of re-issued notice of findings and recommendations (5%), weaknesses in internal control of financial reporting (5%), non-compliance with laws and regulations (5%) and how long after the fiscal year ending the auditor’s opinion letter was sent (5%). Since this is the Pentagon’s second department wide audit, the group also weighed: notices of findings and recommendations from the previous year closed (10 %), change in the number of material weaknesses (10%) and change in the number of instances of noncompliance (10%). 

The best performing Defense entities were: the U.S. Army Corps of Engineers (Civil Works Program); the Military Retirement Fund; the Defense Health Agency (Contract Resource Management). 

Among the worst-performing entities were: the U.S. Transportation Command; the Navy; the Defense Logistics Agency; and the Defense Health Program. Truth in Accounting noted that, as was shown in the Pentagon’s 2018 audit, the military services all were all in the lower half of the rankings: “We believe good accounting systems are even more important for the large military branches, and we challenge them to improve and rise in the rankings.” 

Bill Bergman, Truth in Accounting director of research, told Government Executive “there’s both progress and lack thereof” at the department. While the fact that the audits are being conducted at all shows progress, they are exposing problems previously unknown in Defense’s financial reporting. For example, the number of material weaknesses TIA tracked that Defense auditors identified rose from 20 in fiscal 2018 to 25 in fiscal 2019. Also, while Defense entities closed about one-third of the notices of findings and recommendations from fiscal 2018, defense auditors found more than double as many new findings in fiscal 2019.

Despite the shortcomings of the department wide audit, there are role models within the department for struggling organizations, Bergman said. He cited Thomas Steffens, chief financial officer at the Army Corps of Engineers, among the top performers in both audits.

Bergman noted that the fiscal 2020 National Defense Authorization Act included a directive that mirrors what Truth in Accounting does: No later than January 30 of each year, the Defense secretary must submit a report to the congressional defense committees that ranks the sub-agencies in how they performed on their financial statements. Then no later than June 30 of each year, the head of each poorly performing sub-component must submit a report to the committees on their weaknesses and plans for corrective action. 

Bergman was not sure if it was the result of his group’s efforts or a coincidence, but nevertheless he was pleased.