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Pentagon's First Comprehensive Audit Says There Are Too Many Material Weaknesses to Provide Reliable Financial Info

Chris Gaetano
Published Date:
Nov 19, 2018

The first ever comprehensive audit of the Pentagon has resulted in the auditors saying they were unable to obtain sufficient and appropriate audit evidence to provide a basis for an audit opinion, due to issuing disclaimers of opinions on the general and capital funds for all major military branches. Auditors also issued disclaimers of opinions on the component financial statements for the Defense Health Program, Defense Logistics Agency, U.S. Transportation Command and U.S. Special Operations Command. 

"When combined, these reporting entities are material to the DoD financial statements. As a result, we were unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion," said page 91 of the report. It noted that material weaknesses, particularly those in the realm of internal control, "limit the DoD's ability to produce reliable financial statements," 

The auditors detected 20 material weaknesses: 

* Multiple material financial management systems that did not comply with federal requirements, and did not implement internal controls over their IT environment to sufficiently deter fraud, waste and abuse, which prevent the DoD from collecting and reporting accurate financial information. 

* Inability to validate the completeness of the "universe of transactions underlying their financial statements," which meant they could not perform reconciliations with financial statement line items, which in turn inhibited the auditors' ability to detect errors. 

* Lack of process for properly compiling statements into the Agency-Wide Basic Financial Statements. 

* Ineffective processes and controls for reconciling their fund balance with Treasury. 

* Lack of proper controls to record, report, test or reconcile transactions that should be labeled as accounts receivable.

* Lack of ability to report Operating Materials and Supplies in accordance with standards, as the systems did not maintain historical cost data and did not implement a process to accurately value all opening balances. 

* Lack of systems and controls to properly provide assurance over the existence, completeness and valuation of inventory and related property recorded in the financial statements, as well as lack of policies and procedures to manage to account for inventory held by other parts of the DoD as well as government contractors. 

* Inability to record general property, plant and equipment at acquisition or historical cost, substantiate the existence and completeness of its assets, and assign or determine the value for all real property and general equipment assets. 

* Lack of policies and procedures to confirm the existence of government property in possession of contractors. 

* Unsupported accounts payable balances as well as a lack of financial management system capabilities to properly record accounts payable transactions. 

* Lack of policies and procedures to substantiate and value the DoD's environmental and disposal liabilities. 

* Failure to justify why the DoD was "unable to determine" the change of a negative outcome for legal actions against it, as standards require for accounting for legal contingencies. 

* Lack of historical data in at least six agencies that support beginning balances on financial statements or give the ability to reconcile those beginning balances to closing balances at the end of the reporting period. 

* $175 billion worth of unsupported journal vouchers, as well as journal vouchers posted before management could perform adequate reviews. 

* Lack of ability to accurately identify, provide supporting documentation, or fully reconcile intragovernmental transactions among certain parts of the DoD. 

* Failure on the part of three reporting entities to accumulate cost information and record transactions in compliance with GAAP for Statement of Net Cost. 

* Because of the above item, three agencies that were unable to perform the required reconciliation with the budget. 

* Failure to accurately determine total budgetary resources available during the period, and status of those resources within three of the reporting entities. 

* Lack of sufficient entity-level controls to establish an internal control system that will produce reliable financial reporting. 

* Lack of effective oversight and monitoring for material weaknesses. 

The report also noted, in an emphasis of matter paragraph, that the auditors did not receive a completed Agency Financial Report until after close of business on Nov. 14, 2018, which limited their ability to complete a thorough review of the annual financial statements.

The Defense Department itself, in a recent article, pointed to the positives: the U.S. Army Corps of Engineers—Civil Works, the Military Retirement Fund, the Defense Health Agency—Contract Resource Management, the Defense Contract Audit Agency and the Defense Finance and Accounting Services—Working Capital Fund all received clean audit opinions. The article also noted that the agencies with discrepancies had by and large never been audited before, and most of them have already started remediation efforts to correct the discrepancies so that when they are audited again at the end of this fiscal year, they will have shown improvement. The DoD also said that auditors did not find any evidence of fraud, nor did they report any problems for civilian or military pay. And, said the DoD, all of the services were able to account for the existence and completeness of all major military equipment.

The DoD noted that, with $2.7 trillion in assets, this was the biggest audit of an organization in human history. 

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