For the past two years, the Army has committed to improving its business processes in order to make progress towards achieving what would be its first “clean” audit. Under the Chief Financial Officers Act of 1990, all federal agencies are required to pass a financial audit, but the Department of Defense is the only agency that has never achieved a clean audit—that is, one without any misstatements— since it began conducting audits in 2018.
Between 2011 and 2022, the Army—the largest arm of the DoD—increased its financial audit budget by about 500 percent, to $281 million. This substantial investment underscores the urgency and necessity of achieving audit results. Still, on November 15, the DoD once again announced that it had received a “disclaimer of opinion” on its annual audit. Such a result means that not only did the DoD fail to pass its audit, but also that independent auditors could not compile the data necessary to issue an opinion on the accuracy and completeness of the DoD's financial statements.
Understandably, recent news coverage views this failure—which is the latest in a series of such outcomes for the DoD—as fodder for questioning the DoD's ability to be good stewards of American taxpayer dollars. In response to these failures, the “Audit the Pentagon Act,” proposing cuts in the DoD's budget as punishment for audit failures, has received bipartisan sponsorship.
A disclaimer of opinion on the DoD's financial statements implies a failure to account for equipment, property, and funding in ways that comply with standard practice.
A disclaimer of opinion on the DoD's financial statements implies a failure to account for equipment, property, and funding in ways that comply with standard practice. Such a failure could of course be caused by poor stewardship of underlying assets, but other plausible causes could be much less incendiary. Pushing for good stewardship and pushing for auditability are related, but they are not the same.
When the DoD initiated its Financial Improvement and Audit Readiness efforts in 2005, it initially focused on facilitating the audit process, more than it did implementing systemic improvements necessary for sustained audit success. Throughout the DoD, organizations failed to allocate adequate resources toward implementation, consistently underestimating costs and overestimating their capacity to execute necessary improvements for audit success. Compounding the challenge, the DoD's size and scope far exceed other parts of the government. It is the nation's single largest employer, accounting for nearly one-sixth of all federal spending.
In March, 2024, the Marine Corps—following a pilot effort that lasted over two years—became the first military service to receive a clean audit opinion. Despite the Army's significantly greater challenges—with about five times the military personnel, eight times the assets, and six times the funding of the Marines—this breakthrough has shifted perceptions of the DoD audit problem from “unsolvable” to “difficult, but doable,” likely raising expectations for the Army's future success.
To this end, the Army and its Financial Management and Comptroller (FM&C) have created cross-Army governance bodies and growing capabilities in the United States Army Financial Management Command (USAFMCOM), which aims to remediate audit problems and improve business processes. These efforts engage Army-wide staff, drawing on their knowledge to remediate audit issues, improve business processes, and generating buy-in across the Army. Four cross-functional Audit Acceleration Teams are now tackling priority business areas that significantly impact the Army's financial statements: inventorying and accounting for the value of the Army's buildings and equipment, for example, and accurately tracking the status of the Army's funding. The Army has also created a variety of governance bodies that focus on business-oriented Army organizations, guiding improvement activities and enforcing accountability, some of which include participation by the Under Secretary and Vice Chief of Staff of the Army—all of which indicates a top-down commitment from the highest levels to work toward the goal of completing a clean audit.
The Army is also transitioning away from its past engagement with audits, which took an approach of “checking the box” and participating in a required external process. With USAFMCOM as a facilitator, Army audit efforts have historically provided auditors with requested materials, triaging issues as they arise, then distributed these materials along with requests for improvements to relevant Army organizations.
Historically, the Army has underestimated required audit resources. But now, using Congressional and public scrutiny as leverage, FM&C has achieved broader buy-in from Army senior leaders for sustained funds to improve its audit process.
In 2023, the Army expanded USAFMCOM's role in remediation efforts—allowing it to lead an audit acceleration team, for example—and in audit sustainment efforts, by having USAFMCOM manage a Continuous Monitoring Program that will test internal controls of Army business processes. Such efforts are already bearing fruit (the audit acceleration team helped the Army downgrade a material weakness) and give a sense of the Army's commitment to a “transformational change” approach, expanding its audit response from an issue-focused, organization-level approach to one that is mission-focused and enterprise-level—which is likely to result in broader success.
Historically, the Army has underestimated required audit resources. But now, using Congressional and public scrutiny as leverage, FM&C has achieved broader buy-in from Army senior leaders for sustained funds to improve its audit process. Army Materiel Command, for example, is leading a key initiative to remedy material weaknesses—major flaws in financial controls potentially leading to financial statement errors—identified in Army Working Capital Fund audits, which have a size and complexity akin to the recently successful Marines audit.
The Army could continue conducting smaller scale remediation activities like the above, using a coordinated, phased approach, which should in turn provide insights for the much larger General Fund audit. By working its way up in size and complexity, the Army can continue building upon its path toward overall audit success.
