Defense Department Fails its Audit

Last November, the Pentagon announced that it had failed its financial audit - the first audit that it ever had to undergo. The auditors hired to conduct the audit "disclaimed" an audit opinion meaning they were unable to render an opinion because the records were, in some cases unavailable, and in other cases, nonexistent.

The Defense Department has struggled for many years to comply with the law that mandates an audit. It is the largest of all Federal agencies with more than $2.7 trillion in assets and more than two million personnel working all over the world.

One of the problems is that the military was not built for accountability but was built incrementally over time to win wars. Today, it finds itself composed of a multitude of overlapping and diverse financial and inventory systems and processes.

We do not know what the final cost of the audit totaled. One estimate last year was $918 million - $367 million for the audit and $551 million to correct problems disclosed by the audit (that's enough to buy nine F-35 fighters).

The Heritage Foundation made the following recommendation concerning future audits of the Defense Department:

To make the audit more effective, Congress must take the lead. Lawmakers must engage with  the Pentagon and, together with the Federal Accounting Standards Advisory Board, implement commonsense changes to the audit. For example, Congress could remove non-value-added areas such as balance-sheet valuation and accounting for the existence and completeness of major military equipment - an area in which no problems were found in the 2018 audit.

It would probably be an unsuccessful defense for contractors to cite DoD's failure to pass an audit as justification for its own deficiencies. We don't think that contract auditors will buy the argument that we are no worse than you are.