Secretary Robert Gates has challenged the Defense Department to cut overhead costs and produce 2 percent to 3 percent growth in the Pentagon's budget. In this fiscal environment, some question the return on investment in money, time and effort to produce financial statements and subject them to audit. But these financial checks are more critical than ever.
Audits serve three purposes: They support accountability and stewardship, drive improvements in financial management systems and operations, and perhaps most important, they reduce risk by providing assurances about the quality of the financial information leaders, managers and decision-makers rely on. Without the incentive that audits provide, Defense cannot get the quality information it needs to manage its resources.
The department's audit history is inconsistent. Defense agencies have been producing financial statements for 20 years, since the enactment of the Chief Financial Officers Act in 1990, yet the department as a whole and the military branches still are not auditable. Nevertheless, some segments of Defense have achieved unqualified audit opinions and others are making progress.
The department is focusing its financial improvement plan on priority information that will better serve warfighters and decision-makers. This includes:
- Budgetary information -- status of funds received, obligated and spent -- that would make the statement of budgetary resources auditable.
- Mission-critical asset information - including military materiel, real property and general equipment -- that would inform managers about what they have in their inventories.
Some of the Marine Corps' financial statements now are being audited, the first step toward achieving an audit opinion for any of the military services, and other Defense agencies are approaching audit readiness. With so much progress, the department should continue its commitment to achieving audit readiness and unqualified audit opinions.
But an imminent challenge for financial managers is to harness the high potential for putting audited information to better use, which would maximize investments in audits. They should concentrate on extracting useful data and making it available to nonfinancial managers to inform operational and policy decisions. Consulting firm Grant Thornton LLP interviewed financial and business transformation managers at Defense and some civilian agencies to get their perspective.
One Defense manager said, "I am more encouraged than ever that we can take the balance sheet and make it highly informative to leadership as long as we interpret the data and not make them read the statements themselves." Another said, "We must provide more value added for our organizations. We can provide long-term cost projections for alternative courses of action. We could improve our cost-benefit analysis and risk management assessments and ensure that such valuable information is used at the highest levels of decision-making."
Pentagon leaders and managers must have timely and accurate financial information on which to base their decisions. In these tight budget times, financial audits have become even more important. As one manager survey noted, "If you can't trust the data, how can you rely on the analysis?"
Douglas A. Brook, an independent consultant to Grant Thornton LLP, has held top financial management positions at the Defense Department, Army and Navy.