The Pentagon's first attempt to audit a military department's statement of budgetary resources will not be completed as planned, forcing defense officials to determine whether they want to issue a late audit opinion or turn their attention to next year's edition.
The audit of the Marine Corps' fiscal year 2010 statement of budgetary resources was supposed to be completed Nov. 15, but the auditors will have to issue a disclaimer, Defense Department Deputy Chief Financial Officer Mark Easton told Inside the Pentagon in a Oct. 19 interview.
"We don't have enough information using the rules and the audit standards that we have to be able to render an opinion," Easton said.
By the end of the calendar year, the department will decide whether to issue an out-of-cycle opinion or let the disclaimer stand and put energy toward the FY-11 audit, Easton said.
The decision is waiting for the evaluation of the Marine Corps' remediation plan, which should be completed in December. This evaluation is being completed by the DOD inspector general's office and an independent public accounting firm, Grant Thornton -- the two entities that are conducting the audit.
"Hopefully we would continue if we thought there was enough time to be able to issue an opinion on FY-10." Easton said. He said he doesn't know which way the department is leaning, but he noted that "either way, we want to get a positive FY-11 audit."
The audit of the FY-10 statement began last October. The Marine Corps is the first military department to be audit ready, but the planned evaluation of the service's finances comes nearly two decades after Congress mandated that all federal agencies produce auditable financial statements in the 1990 Chief Financial Officers Act.
The Pentagon initially said it would be compliant by 1997, but that deadline was pushed back to 2007 and then to 2016. In the FY-10 National Defense Authorization Act, Congress mandated that the Pentagon be audit ready by 2017.
The Marine Corps' audit would have put the Pentagon almost 14 percent of the way through financially auditing its departments and agencies.
"The Marines want to establish the beachhead, and so they would like to bring the troops home for Christmas, but we'll see," Easton said.
Easton said that even though DOD may not be where it had hoped on this particular audit, the process and the remediation will help build a foundation that could help with future audits of not only the Marine Corps, but also the Navy, Army and Air Force.
Easton said that the remediation effort has demonstrated that some of DOD's business practices are not being done to meet a financial audit standards. He said in some instances, this has popped up when DOD has to obligate a certain amount of money and make an estimate, such as for bulk obligations.
"We have found that in some cases, we have not had the processes to go back and reevaluate, reconcile, update that obligation," Easton said. "And so that is one of the things that the auditors have pointed out -- that you have to have a process to constantly be ensuring that you got the right amount of money obligated, and you have a process in place to go back and liquidate that particular estimate with actuals in a standard way."
Easton said that DOD has also learned that some of its financial systems fail to capture needed information. He said, for example, a contractor could get adequately paid in a timely manner, but the accounting transaction has not been posted to the proper account.
"We have not found anything that we think are showstoppers, but there have been issues that we know need to be fixed." Easton said.
During a Sept. 29 hearing before a Senate Homeland Security and Governmental Affairs financial management subcommittee, defense officials lamented that the audit process was much more difficult than imagined.
"It's much harder than we thought it was, so it's taking longer," said Navy Deputy Chief Management Officer Eric Fanning.
Defense Comptroller Robert Hale told lawmakers that the department has "struggled."
"Frankly, the problems have been a lot greater than we expected with our business processes, and so we're not going to make it by Nov. 15," Hale said.
Hale said that the audit taught the department that they have to work on balancing the checkbook with the Treasury because DOD doesn't "have the data in the systems that track it in the detail that auditors expect." He said that DOD also has to reconcile when there is a little bit of money left over after a contract is done.
"We have a lot of open contracts that have caused us problems in this audit," Hale said.
During the interview, Easton reiterated that DOD sees the FY-10 audit as a "success story" even though it might not ever produce a formal opinion.
"First-time audits in and of themselves are very, very difficult," Easton said. "If you're starting up your own business and you do a first-time audit, it would be just a new learning experience, but again, probably your business is small enough that you'd be able to work through some of those issues. But we're starting in a very large organization that's very, very complex."
In a May status report to Congress, Hale said that the lack of resources devoted to audit readiness was a significant hurdle in the department's financial improvement goals. Hale said that money for this purpose has increased.
In his statement submitted to the financial management subcommittee before last month's hearing, Hale noted that DOD's business environment does not always record financial results of business events, such as contract signing. He added that many of the systems are old "and handle or exchange information in ways that do not readily support current audit standards." To counter this, DOD is working to improve the "quality, accuracy and reliability of the financial and asset information" used daily, Hale wrote.
ITP previously reported that the Navy projected audit readiness in 2014 and the Army and Air Force were expected to hit that goal 2016. Easton declined to comment on whether this schedule is still current, noting that he does not want to "jump the gun" of a Financial Improvement and Audit Readiness Plan slated to be turned in to Congress next month.
When asked if DOD would meet the mandated 2017 audit readiness date, Easton replied, "It's got to be on track." -- Jordana Mishory