Secretary of Defense Lloyd J. Austin III and Deputy Secretary of Defense Dr. Kathleen H. Hicks meet with CEOs

Secretary of Defense Lloyd J. Austin III and Deputy Secretary of Defense Dr. Kathleen H. Hicks conduct a black chief executive officer roundtable talk, virtually, from the Pentagon, Washington, D.C., June 25, 2021. (DoD photo by Brittany A. Chase)

Pentagon Grapples With Trillions In Liabilities Amid Rising Chinese Military Power

Bloomberg
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November 19, 2023

By Roxana Tiron (BGOV) and Tony Capaccio (Bloomberg) The US Defense Department failed for the sixth consecutive year to score a clean financial audit, a goal routinely achieved annually by businesses that have a fraction of its $3.8 trillion in assets and $4 trillion in liabilities. 

Pentagon officials nonetheless claimed significant progress in tracking its assets and correcting hundreds of deficiencies in its accounts.

The failure “is not a surprise,” Pentagon Comptroller Michael McCord told reporters at the Pentagon. “It certainly is not something that we say, ‘it doesn’t matter.’”

About 1,600 auditors and 700 site visits were needed to review the Defense Department’s business processes and activities. The Defense Department spent $187 million on the audit, a small slice of its $853 billion budget.

The Pentagon’s inspector general’s office has been overseeing the audit work. It said in a statement Thursday that working toward a clean audit will make the department’s operations more efficient and increase public trust. “While we acknowledged enhancements in the DoD’s financial management procedures, significant challenges persist in generating thorough and precise financial statements,” Inspector General Robert Storch said.

‘Improvements, Changes’

“Auditing the Department’s $3.8 trillion in assets and $4.0 trillion in liabilities is a massive undertaking,” McCord said in a news release. But he said “the improvements and changes we are making every day as a result of these audits positively affect” every military member and civilian employee.

One indication of progress is that no new Pentagon-wide material weaknesses were reported this time, the department said.

“When it comes to the Pentagon audits, steady progress is the name of the game versus clean audits quickly,” said Mackenzie Eaglen, a senior fellow at the American Enterprise Institute. “Almost every year the Defense Department adds new sub-organizations to the list of clean audits, and this is the trend the Pentagon must stay on going forward.

Lawmakers have been pressing the Pentagon to produce a “clean” audit by 2027. But the Pentagon sought to put part of the blame on unreliable budgeting by lawmakers, saying that “Congress can further help by stabilizing the budget process and avoiding continuing resolutions and government shutdowns.” McCord said this would be the 14th year with the Pentagon funded by continuing resolutions. The most current stopgap proposal would provide funding for the Pentagon until Feb. 2. 

Of the 29 Defense Department components undergoing standalone financial statement audits, seven received a clean audit opinion, and one received a qualified opinion. The results of the financial statement audits of the Marine Corps, the Defense Information Systems Agency Working Capital Fund, and the Pentagon’s Office of Inspector General are still pending, while the rest of the agencies all received disclaimers — financial audits that weren’t clean. 

“Failure” in audit lexicon means the review of the 29 defense units resulted in a “disclaimer of opinion.” Disclaimers are issued when auditors can’t form an opinion about the adequacy of the financial records based on a paucity of reliable data, not necessarily that there was a misuse or poor use of fund. 

The agencies that received a clean audit are: the Military Retirement Fund, the Defense Commissary Agency, the Defense Contract Audit Agency, the DFAS Working Capital Fund, the US Army Corp of Engineers– Civil Works, the National Reconnaissance Office and the Defense Health Agency – Contract Resource Management.

The Defense Department identified and reviewed $621 million in payments subject to improper payment testing, which resulted in an estimated proper payment rate of 99.76% and $1.4 million in improper and unknown payments.

The department measures audit progress across five areas: workforce modernization, business operations, quality decision-making, reliable networks, and enhanced public confidence. For example, the Air Force has deployed 65 bots saving approximately 429,000 labor hours and improving the ability to audit its business processes. Auditors for the Army tested its construction-in-progress monitoring control and found no unresolved transactions in the clearing account. 

The Navy reviewed $17 billion of unliquidated obligations, validating that 97% of the balances met audit requirements and uncovering an available $330 million, according to a news release.

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