DoD makes auditability a priority, but will likely miss 2014 deadline

Friday - 4/12/2013, 5:28am EDT

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Former DoD Dep. CFO Al Tucker and GAO's Asif Khan discuss the challenges DoD has in reaching a clean audit on In Depth with Francis Rose

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Christopher Hanks, former defense analyst for RAND, tells In Depth's Francis Rose why he thinks DoD's auditability march is on the road to nowhere.

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(This article is part of Federal News Radio's special report, Rise of the Money People).

The Department of Defense is an outlier among federal entities, almost all of which have complied by now with the 1990 Chief Financial Officer Act's requirement to develop financial statements that can withstand the scrutiny of independent auditors.

The department's progress toward obtaining a clean audit opinion has dragged on for more than two decades, and it now has a new set of legal deadlines in place: an interim deadline of 2014 for a partial audit and 2017 for a full audit. Experts who are watching the process closely are almost universally skeptical that the Pentagon will meet those deadlines.

However, if the department misses them, those same experts agree, it won't be for lack of trying.

"I don't want people to think this is all doom and gloom," said Dan Blair, the deputy DoD inspector general who serves as the top outside auditor of the Pentagon. "The department works very, very hard. With a lot of work, I think they're going to be able to get there."

Eventually. But he's doubtful about the department meeting its 2014 deadline for an audit of its statement of budgetary resources.

Tracy Porter, a partner at the CPA firm Grant Thornton, who is currently working with the Marine Corps on that component's SBR audit, said that the prospect of DoD as a whole earning a clean opinion on its 2014 statement is unrealistic, but she praised the department for taking auditability seriously.

That hasn't always been true, she said.

"When the CFO Act was passed, I really think DoD thought the sunset date would come and go, so they could just slow-roll this and do the minimum amount to get by," Porter said. "But over time, I think they now really do see the benefit of what this gets them."

The business value of maintaining reliable financial information

According to financial management experts inside and outside of government, DoD has transitioned from treating auditability as yet another unwelcome paperwork requirement to realizing that there's enormous business value generated by the process of preparing for an audit and maintaining reliable, detailed, up-to-date financial information.

That's what Congress had in mind in the first place 23 years ago, Blair said.

"The goal of the CFO Act wasn't just to get clean opinions on your financial statements," he said. "The goal was to provide reliable data to managers and decision makers on a daily basis. If you're doing things just to get a clean opinion, you're really falling short of some of the benefits you can obtain through improved financial management processes."

After years of what appeared to be half-hearted attempts to carry DoD through to auditability, things took on a noticeable change in 2011, when then-Defense secretary Leon Panetta said publicly and repeatedly that auditability was a top priority for the Pentagon.

"We may have crossed the Rubicon at that point in terms of momentum," said Rep. Mike Conaway (R-Texas), a CPA who chaired a series of House Armed Services Committee hearings about DoD auditability before releasing a report last year. "I can't brag on Leon Panetta enough, because especially with that leadership, folks get it. The commitment is there. Down in the depths of the system, you have people now who are positively looking at getting things done that will help them long-term and get them toward auditability."

The House panel's January 2012 report found DoD's audit readiness plan was achievable, assuming a sustained effort. But Conaway is more nervous about the deadline now. In addition to longstanding challenges the department already faced with issues such as data quality, internal controls and underperforming IT systems, Congress created new ones over the past year by keeping the government in constant budget turmoil and by imposing sequestration, which has sliced back funding for everything, including financial management.

"We're aggravating the problem over there. I don't envy (DoD Comptroller) Bob Hale and his team at all," Conaway said. "We're not going to let them off the hook, but I acknowledge we're not making it easier on them to get to sustainably auditable systems that can perform year-in-and-year-out."

DoD fed skepticism about its ability to meet the 2014 audit deadline in November when its Financial Improvement and Audit Readiness directorate published its latest progress update.

"That laid it out pretty clearly that for the SBR, only about 15 percent of the budgetary activity is under audit," said Asif Khan, the director for financial management and assurance at the Government Accountability Office. "That really shows that the lion's share has to be done between now and 2014. It's going to be a really tough push to get that done."