DOD Financial Management
DOD’s financial management continues to face long-standing issues—including its decentralized environment; cultural resistance to change; lack of skilled financial management staff; ineffective processes, systems, and controls; incomplete corrective action plans; and the need for more effective monitoring and reporting.
DOD financial management was first added to our High-Risk List in 1995. DOD remains one of the few federal entities that cannot accurately account for and report on its spending or assets. DOD’s discretionary spending makes up about half of the federal government’s discretionary spending, and its assets represent more than 70 percent of the federal government’s physical assets.
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.
Since our previous High-Risk Report, progress has been made to meet the criterion of leadership commitment and partially meet the criterion for monitoring. The other three criteria remain unchanged.
Leadership commitment: met. In 2018, DOD leadership met the goal of undergoing the first agency-wide financial statement audit and established a process to remediate any audit findings—ultimately to improve the quality of financial information that is most valuable in managing the department’s day-to-day operations. The audit effort aligns with the department’s new national defense strategy which includes a priority to reform the department’s business practices. DOD’s fiscal year 2018 financial statement audit resulted in a disclaimer of opinion—the auditors were unable to express an opinion due to insufficient evidence. That said, according to a DOD official, audit remediation efforts have produced benefits in certain inventory processes that have led to operational improvements. We support DOD’s efforts to improve its financial management and will continue to oversee and monitor the financial statement audit results and provide constructive input through recommendations related to remediation efforts.
DOD leadership also demonstrated its commitment to make needed improvements by developing a database that tracks hundreds of findings and recommendations that came out of the audit. In addition, senior leadership has been meeting bimonthly with military services’ leadership for updates on the status of corrective action plans to address audit findings and recommendations, and the Under Secretary of Defense (Comptroller) has been meeting frequently with the Secretary of Defense to review the plans. As a result of these actions, this criterion has moved from partially met in 2017 to met in 2019.
Capacity: partially met. According to DOD Office of Inspector General (OIG) ineffective information technology systems’ controls hinder DOD’s ability to produce accurate, timely, and reliable financial information. DOD’s auditors issued more than 1,100 systems-related findings and recommendations during the fiscal year 2018 financial statement audit and the DOD OIG has reported multiple material financial systems that do not comply with federal systems requirements. These weaknesses pose a significant risk to DOD operations and could, for example, result in payments and collections being lost, stolen, or duplicated. They may also open the department up to other cyber threats across different networks and systems.
To conduct audits and support remediation of findings, DOD allocated the resources to complete its fiscal year 2018 financial statement audit, undergo a 2019 audit, and initiate related remediation efforts. These audits are expected to help guide DOD’s overall efforts to improve its financial information which is needed to support operational readiness. For example, the Navy expanded its use of automatic data feeds to prepare for the audit and improve its efficiency and operations. As a result, the Navy has avoided $65 million of charges for service provider support that manual data entry would have required.
Action plan: partially met. In the past several years, the Army, Navy, and Air Force have all undergone numerous audits, and have developed corrective action plans in varying detail to address some of their audit findings. DOD developed a centralized database to summarize information about the audit findings, recommendations, and related corrective action plans. The Financial Improvement and Audit Remediation (FIAR) directorate plans to use this information to describe specific actions that DOD plans to take to address audit findings.
Audit remediation efforts have already provided some operational benefits. For example, according to a DOD official, during an initial audit, the Army found 39 Blackhawk helicopters that had not been recorded in the property system. Similarly, the Air Force identified 478 buildings and structures at 12 installations that were not in the real property systems. These benefits demonstrate how the department is leveraging audit findings to support the National Defense Strategy effort to reform business practices for greater performance and affordability.
That said, hundreds of the same problems were identified again in the fiscal year 2018 audits, and hundreds of the same recommendations were re-issued. In addition, the military services have been addressing deficiencies in how they remediate audit findings and recommendations. However, the Army and Air Force continued to have deficiencies in how they identify, track, and prioritize financial management-related findings and recommendations, and develop and monitor the status of corrective action plans.
Monitoring: partially met. DOD’s centralized database will be used to capture, prioritize, and assign responsibility for auditor findings and the related corrective action plans—used to measure progress towards achieving a clean audit opinion. A clean or unmodified opinion is the opinion expressed by the auditor when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. DOD expects the database to improve its oversight and monitoring of pervasive deficiencies as well as their related remediation efforts. However, because the database is still being populated with findings and recommendations, it is too early to assess whether DOD will be able to successfully prioritize the findings and related corrective action plans, and report information to stakeholders.
In addition, DOD leadership has held frequent meetings to discuss the status of corrective action plans. DOD also established councils in certain areas (e.g., financial reporting) to review the status of audit remediation activities and challenges. The DOD OIG reported that corrective action plans have not been developed for all long-standing material weaknesses. Without such plans to monitor and measure progress, these long-standing material weaknesses may continue to affect DOD’s ability to improve its financial management and get to a clean audit opinion.
Demonstrated progress: not met. The DOD OIG’s disclaimer of opinion on DOD’s fiscal year 2018 financial statement was partially based on the disclaimers of opinion for the Army, Navy, Air Force, U.S. Marine Corps, Defense Health Program, Defense Logistics Agency, U.S. Transportation Command, and U.S. Special Operations Command. The DOD OIG also reported 20 material weaknesses in internal control across the department, contributing to its disclaimer of opinion. Some of these—such as an inability to account for its property and equipment—are examples of long-standing weaknesses that DOD has been unable to address.
In addition, the DOD OIG reported on several findings and recommendations regarding inventory and related property that could have operational impacts for DOD. For example, the auditor found:
- 107 rotor blades for Blackhawk helicopters that could not be used but remained on the inventory records,
- 24 Gyro Electronics for military aircraft that should not be used but remained in the inventory records,
- 20 fuel injector assemblies for Blackhawk helicopters did not have supporting documentation to demonstrate which military service owned them.
The results of prior audits and examinations further show the extent and complexity of improvements needed to provide reliable information for financial reporting and operational readiness. For example, DOD has multiple material financial management systems that do not comply with federal systems requirements. Further complicating this issue, DOD lacks internal controls over many of its financial systems which hinders its ability to generate accurate, reliable, and timely financial and performance information.
However, DOD has seen some early signs of progress. For example, in preparing for and undergoing its first financial statement audit, Navy’s Commander, U.S. Pacific Fleet, strengthened internal controls to improve its operations. The initiative strengthened internal controls that resulted in freeing up purchasing power to fund $4.4 million in ship repair costs.
Further, DOD reports that Army successfully implemented a materiality-based physical inventory best practice to Army depot asset counts. This process improvement ensures a more accurate inventory count and Army avoids approximately $10 million of future cost annually.
Over the years, since we added this area to our High-Risk List, we have made numerous recommendations related to this issue, 9 of which were made since the last high-risk update in February 2017. As of December 2018, 53 recommendations are open. To address its complex array of financial management challenges, DOD needs to take action in all areas of concern, such as:
- DOD should continue to develop and deploy enterprise resource planning systems with appropriate functionality as a critical component of DOD’s financial improvement. In addition, DOD should make changes to the remaining legacy systems to satisfy audit requirements and improve data used for day-to-day decision making.
- DOD needs to continue building a workforce with the level of training and experience needed to support and sustain sound financial management.
- Army and Air Force should continue to follow the steps in OMB’s guidance for addressing financial management related findings and recommendations reported by external auditors, including steps to identify, prioritize, and track them; develop effective action plans to remediate them; and monitor the implementation status of the plans.
- DOD leadership needs to work on its centralized monitoring and reporting process by populating the database with all of the open financial management related findings and recommendations as well as their associated corrective action plans, and to prioritize them and track their completion.
- DOD will also need to continue to ensure that it has corrective action plans to address all of its material weaknesses.
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