No clean audit yet, but results show ‘momentum,’ DOD comptroller says

The Defense Department, in its seventh year conducting a full audit, has made progress toward a clean audit but has yet to pass across the board.

“This result was not a surprise and I know on the surface it doesn’t sound like we’re making progress, however that is not the case,” DOD Comptroller and Chief Financial Officer Michael McCord said in a late afternoon press briefing at the Pentagon on Nov. 15. “I believe the department has turned a corner in its understanding of the challenges and, more importantly, in addressing those challenges. Momentum is on our side.”

The Pentagon has until fiscal 2028 to obtain a clean opinion from the Inspector General as mandated by Congress.

A year ago, McCord noted, the DOD was already at the halfway mark in achieving clean opinions on sub-audits of assets. This year, the Defense Threat Reduction Agency (DTRA) received an unmodified audit opinion in only its second year of a standalone audit, he said.

DTRA brings the total to nine clean opinions. Last year, the U.S. Marine Corps achieved the same and, while the report was one of three yet to be submitted, McCord said he believed the service would pass again.

The Pentagon also saw major progress in resolving material weaknesses, a key metric used to track auditability. The DOD resolved all contingent legal liabilities considered material weaknesses, for instance.

Additionally, across 28 different sub-audits, the military departments and defense agencies closed seven material weaknesses and received downgrades for 12 more. A downgrade is audit jargon representing progress toward resolution of weaknesses.

“That’s a 46% increase over the 13 weaknesses that we addressed, that were closed last year,” McCord added.

The Pentagon also saw momentum pick up over the last year resolving material weaknesses related to its fund balance with the Treasury – closing or downgrading 12. This roughly equates to ensuring the department’s checkbooks match the Treasury’s records.

In FY24, McCord said, eight DOD reporting entities closed or downgraded a material weakness on fund balance with Treasury to include the Army’s General Fund, the Navy’s Working Capital Fund and the Air Force’s Working Capital Fund.

The Defense Information Systems Agency (DISA) resolved both its general fund and working capital fund balance weaknesses. DTRA, the Defense Research Projects Agency and the National Geospatial-Intelligence Agency accomplished the same.

“These are big rocks for our defense agencies,” McCord stressed. “In addition to reporting entities that already had favorable audit opinions, $703 billion, or 82% of our DOD-wide, $856 billion balance is now free of material weaknesses.”

For context, the Pentagon has “improved from less than 7% to over 82% of its funding being free of material weaknesses” since FY21, McCord said. “And we’re talking about a universe here of approximately 1,500 different active DOD accounts in the Treasury with a value of over $856 billion that must be reconciled.”

Scores went up in systems control testing as well with 93% of the system tests completed receiving favorable opinions. The Pentagon completed 27 system tests and achieved 17 unmodified and eight qualified opinions. Two tests failed. In FY21, 81% received favorable test results.

While there is no single method or tool that would solve all of the challenges of auditing a government department as large as the DOD, the use of data analytics platforms and artificial intelligence is “helping us pick up the pace of progress,” McCord noted.

“The Department continues to need the sustained investment, senior leadership commitment, and the support of our partners in Congress, federal regulators, the audit community, and our military and civilian personnel to accomplish its audit goals,” McCord said. “An unmodified audit opinion has always been the Department’s primary financial management goal, and with their help, I know it is achievable.”