What We Found
The Department of Defense needs to continue to improve its information systems controls, action plans, and monitoring efforts to produce reliable, useful, and timely financial information for decision makers.
Since our 2019 High-Risk List, the Department of Defense (DOD) has made progress to partially meet the criterion of demonstrated progress. The other four criteria remain unchanged.
The Coronavirus Disease 2019 (COVID-19) pandemic altered the timing and scope of the fiscal year 2020 financial statement audits, and affected DOD components’ ability to complete audit remediation activities. DOD continues to assess the overall effect COVID-19 is having on its efforts to improve financial management at the department.
Leadership commitment: met. Since our 2019 High-Risk Report, DOD leadership continued its commitment to financial management improvements by (1) implementing a database that tracks thousands of financial statement audit findings; (2) including financial statement audit issues in the Secretary of Defense’s broader reform agenda; and (3) providing information about DOD’s strategic financial management transformation efforts, audit remediation progress, and audit metrics at meetings with (or in reports to) Congress, senior leaders, and the Under Secretary of Defense (Comptroller).
DOD also continued to include mandatory performance requirements, such as effectively closing audit findings issued by DOD’s auditors, for relevant members of its Senior Executive Service to support these annual financial statement audits.
Capacity: partially met. DOD has efforts under way to address capacity. For example, in fiscal year 2019, 23 of 26 Other Defense Organizations, such as the Defense Information Systems Agency, migrated to a standardized enterprise resource planning system, which should reduce the number of financial management systems used. In addition, the Defense Finance Accounting Service collaborated with the Secretary of Defense to use a central financial management data repository to help components verify that transactions are accurate and complete and demonstrate how they flow to its financial statements.
DOD also led an initiative to reduce the number of legacy financial management systems by investing in current enterprise resource planning systems and certain financial management systems. However, in September 2020, we reported that the department’s financial management systems strategy did not include measures for tracking progress in achieving the strategy’s goals. We also reported that DOD does not know how much it spends on the systems that support its financial statements because it does not have a way to reliably identify them. Since beginning a department-wide financial statements audit in fiscal year 2018, auditors have reported material weaknesses across numerous areas, including systems controls that affect the accuracy of financial reporting and pose a significant risk to DOD’s operations.
DOD continues to use a financial management certification program to provide targeted financial management and leadership training and education to address its financial management workforce skills gaps. Nevertheless, DOD continues to face financial management personnel capacity challenges in its efforts to mitigate competency gaps by adding personnel with the requisite financial management skills. For example, DOD acknowledges that succession planning across the department is inconsistent, it has to compete with industry for financial management talent, and that it has difficulty retaining millennials.
Action plan: partially met. DOD and its components have taken some steps to prioritize audit remediation efforts, develop corrective action plans (CAP) to address findings reported by its external auditors, and improve their ability to monitor and report on such efforts. For example, as of May 2020, DOD had identified eight financial statement audit remediation priority areas and is working to further prioritize its remediation efforts to focus on critical findings that contribute to material weaknesses in these areas.
DOD also developed and implemented a centralized database to track, summarize, and report information about the audit findings, recommendations, and related CAPs to address them. However, there are opportunities for DOD to continue strengthening its action plans. For example, in October 2020 we reported that DOD’s CAPs to address audit findings do not always (1) include required information, (2) indicate that a root-cause analysis was conducted, and (3) document the rationale for accepting the risk associated with not taking action on certain deficiencies and appropriately identify such instances in the database.
Monitoring: partially met. DOD identified financial statement audit remediation priority areas and metrics to monitor progress for addressing certain material weaknesses. DOD also reviewed CAPs to determine if they included information specified by the Office of Management and Budget, such as the year the deficiency was first identified and the targeted corrective action date.
To monitor progress, DOD uses a reporting tool to produce reports for high-level decision-making and reporting based on real-time data contained in its centralized database. This tool enables DOD to produce reports on the status of audit findings and its efforts to address audit priority areas and material weaknesses.
However, the database information may be inaccurate, unreliable, and incomplete for management decision-making. For example, in October 2020 we reported that financial statement audit findings were not always linked to the correct CAPs in the centralized database. Additionally, although DOD reviews the database information monthly, it does not follow up on instances of outdated information or other exceptions identified to ensure components resolve them timely. Without complete and reliable information on DOD’s audit remediation efforts, internal and external stakeholders may not have quality information to effectively monitor and measure DOD’s progress.
Demonstrated progress: partially met. Since DOD has made some progress to address its financial management challenges the rating for this criterion improved from not met in 2019 to partially met in 2021. For example, in 2020, DOD completed its third entity-wide financial statement audit. Although DOD did not receive an opinion on its financial statements, it successfully implemented corrective actions that enabled auditors to close 623 (26 percent) of the audit findings issued in fiscal year 2018. DOD anticipates successfully implementing corrective actions that will enable auditors to close over 20 percent of the audit findings issued in fiscal year 2019.
Ensuring DOD financial statement audits are conducted annually is important for a variety of reasons. Over the last few years these audits have led to operational improvements that have saved millions of dollars and better positioned DOD for readiness and deployment. Financial statement audits also help DOD improve its operations by evaluating information technology and cyber systems for compliance with specified requirements, testing the department’s financial information for accuracy, and identifying specific control weaknesses during the audit that need to be addressed by DOD’s management.
Financial statement audits not only determine the accuracy of financial records, but also provide actionable feedback on weaknesses and inefficiencies in DOD’s financial management processes that, if corrected, can result in more efficient operations, better decision-making, and better use of the significant resources provided to DOD.
DOD also developed performance metrics to assess its progress on audit remediation priority areas. In addition, the military services developed methodologies to prioritize their audit findings concluding that more than half of their fiscal year 2018 audit findings are high priority and significant to their financial statement audits.
In fiscal year 2018, DOD established a centralized database to track and monitor audit findings issued from financial statement audits and the related CAPs developed to remediate them. However, DOD does not have effective processes to regularly monitor the quality of the CAP information included in the database. As a result, the database information may be inaccurate or incomplete, affecting the quality of information provided to management and Congress on the status of DOD audit remediation efforts.
While this progress is encouraging, additional actions will be needed to continue to address DOD’s ability to provide reliable, useful, and timely financial and managerial information related to areas such as financial management systems and information technology, inventory, property plant and equipment, and fund balance with the Department of the Treasury.
DOD’s financial management continues to face long-standing issues—including its ineffective processes, systems, and controls; incomplete corrective action plans; and the need for more effective monitoring and reporting.
DOD financial management has been on our High-Risk List since 1995. Although DOD’s spending makes up about half of the federal government’s discretionary spending, and its physical assets represent more than 70 percent of the federal government’s physical assets, it remains the only major agency that has never been able to accurately account for and report on its spending or physical assets.
DOD’s financial management issues extend beyond financial reporting as long-standing control deficiencies adversely affect the economy, efficiency, and effectiveness of its operations.
Sound financial management practices and reliable, useful, and timely financial and performance information would help ensure DOD’s accountability over its extensive resources and more efficient management of its assets and budgets.
DOD’s approach to addressing these management challenges is to correct the issues identified by its auditors, and downgrade or eliminate material weaknesses.
It is critical that DOD and its components continue their efforts to address long-standing financial management deficiencies. Over the years, since we added this area to our High-Risk List, we have made numerous recommendations related to this issue, 33 of which we made since the last update in March 2019. As of December 2020, 49 recommendations are open. To address its complex array of financial management challenges, DOD needs to take actions, such as the following that we recommended in September and October 2020:
- updating its guidance to instruct components to document root-cause analysis when needed to address deficiencies auditors identified;
- improving its CAP review process to ensure data elements not included in CAPs are appropriately identified and communicated to components and resolved, audit findings are linked to the correct CAPs, and components document their rationale for accepting the risk associated with certain deficiencies and appropriately identify such instances in its database;
- developing and implementing a DOD-wide strategy to remediate real property asset control issues;
- establishing performance goals that include performance indicators, targets, and time frames to monitor the status of efforts to address information technology-related audit findings;
- implementing a mechanism to identify financial management systems that support the preparation of its financial statements in the department's systems inventory and budget data, and identify a complete list of financial management systems; and
- establishing time frames for developing an enterprise road map to implement its financial management systems strategy that documents the current and future state; includes a transition plan for moving from the current to the future; discusses performance gaps, resource requirements, and planned solutions; and maps DOD's financial management systems strategy to projects and budget. The plan should also document the tasks, time frames, and milestones for implementing new solutions, and include an inventory of systems.