Signs of progress, and new sources of concern, in DoD’s Annual Financial Report

From Truth in Accounting, November 19, 2019

Late Friday afternoon of last week, the Defense Department (DoD) issued its Agency Financial Report. The report arrived on November 15, as expected and as of the same date last year. The DoD received a disclaimer of opinion on its financial statements, as it did last year, and the main service branches (Army, Navy, Air Force, and Marines) continued to get disclaimer opinions. Among the 20+ component entities, the same entities earning unmodified (clean) opinions earned them again this year, while there were no new entities earning clean opinions.

The more things stay the same, on the surface, the more they change. There is a lot going on under the surface. They include signs of progress, as well as new sources of uncertainty, if not future inquiry and/or investigations.

We now have a DoD agency-wide financial report with audited financial statements to compare with an audited report from a year ago -- for the first time ever since the 1990 Chief Financial Officers Act required executive branch departments to issue audited financial statements. Unfortunately, it is too soon to be comparing results from year to year, for a few reasons. For example,

• In the “Emphasis of Matter” section of the auditor opinion letter to the Secretary of Defense and the DoD Comptroller, the DoD Office of Inspector General (DoD-IG) newly emphasized that it received what it called a “preliminary final” Agency Financial Report, a characterization it did not make last year. This is one sign among others that we don’t yet have apples to compare to apples, as opposed to apples and oranges.
• The Management Discussion & Analysis section of the report noted that the FY 2019 audits resulted in the issuance of more than 1,300 “Notices of Findings and Recommendations” (NFRs) as of November 15. These can’t be compared to year-ago results, yet, however, because this section also stated that the DoD “anticipates receiving significantly more NFRs as the auditors finish compiling their findings and developing the related NFRs.” 

For the 2018 audit results, Truth in Accounting based our own “Audit Report Card” on a summary report that wasn’t delivered by the DoD Office of Inspector General until January 2019, a couple of months after the DoD Agency Financial Report. It appears we may have to wait for that report again, to develop our rankings and provide an overview of progress and/or deterioration in DoD auditability.

That doesn’t mean there aren’t notable and newsworthy results in what has been delivered to U.S. citizens and taxpayers so far this year. 

• The number of material weaknesses cited and summarized by the DoD Inspector General declined significantly from last year (20) to this year (14). 
• DoD apparently made significant progress as 10 identified and named material weaknesses last year were not separately identified in the DoD-IG letter this year. But that letter also identified four newly-named material weaknesses, including a curious “Suspense Accounts” item as well as the “Joint Strike Fighter Program.” (The F-35 fighter jet).
• The DoD IG letter newly identified a difference of opinion with the DoD on the reporting for “Security Assistance Account” balances administered by the DoD. The DoD-IG believes these balances should be on DoD’s books, and audited as such, while DoD believes they belong elsewhere in the U.S. Government-wide financial statements. 

At the date of the DoD Agency Financial Report, the Federal Accounting Standards Advisory Board had yet to make a decision on this last question, and those balances were not audited or considered by the DoD-IG in developing its audit opinion. The “Security Assistance Account” balances result from foreign arms sales and foreign military training and financing programs worthy of interest, inquiry, and good accounting.

So the DoD may have made progress, for example, in closing about 20 percent of the “Notices of Findings and Recommendations” delivered in last year’s first “full-scope” department audit. But we have much more to learn in the months, and years, ahead.

Truth in Accounting will continue to monitor developments, and we will deliver our own DoD Audit Report Card in the coming weeks. 

DN: Pentagon audit’s secret to success is failure