Fixing the DOD’s Audit Problem

Photo: Senior Airman Perry Aston/DVIDS
During last week’s Senate Armed Services Committee confirmation hearing for the secretary of defense nominee Pete Hegseth, several senators grilled him directly about his preparedness to address the Department of Defense’s longstanding audit issues. This issue is important because the Department of Defense (DOD) is the only federal agency that has never passed a financial statement audit. What both the senators and nominee failed to discuss is why this is so, and what this new administration can do to support the DOD passing an audit.
As a finance professional with several decades of experience serving across three military departments, other federal agencies, “Big 4” consulting firms, and Fortune 500 companies, culminating in my role as the chief financial officer and acting chief operations officer (undersecretary) of the Air Force and Space Force, I offer the following.
First, to understand why the DOD has been unable to pass an audit, one must understand the scale and complexity of the DOD. The only agencies that have larger budgets tend to focus on making millions of similar types of payments such as medical, tax, or social security. The combined 2024 budgets of the Department of Homeland Security, the Department of Transportation, the Department of Energy, NASA, and the Department of Veterans Affairs’ medical expenses, were less than half of the DOD budget of $824.3 billion. But it is the myriad missions and locations that make getting a clean audit for the DOD a daunting task. Since the Chief Financial Officers (CFO) Act of 1990 (Public Law 101–576), defense mission requirements of the last few decades have resulted in a consistently high warfighting tempo with hundreds of thousands of personnel and military equipment deployed worldwide. In addition to these warfighting operations, the DOD operates schools, hospitals, labs, and prisons. It runs both floating and stationary “cities,” such as Fort Liberty, which encompasses 250 miles, contains 60,000 personnel, and provides services to thousands more. The DOD is responsible for 3 million employees and pays millions more for military and civilian retirees. Its assets are spread around the world and from undersea domains to geospatial orbits. Many assets are in motion, prepositioned in foreign countries, continuously getting upgraded or modified, and can often be destroyed during the conduct of operations. None of this is an excuse. The American taxpayer deserves effective stewardship of the vast resources entrusted to the DOD. I offer this context only to illustrate why the task has thus far been elusive.
Second, learn what it takes to reach the objective. Due to the focus of the last several administrations on preparing for and conducting financial statement audits, progress has been made. As an example, by the time I left the Department of the Air Force, we had closed or downgraded the material weaknesses related to our fund balance with the Department of Treasury and our military equipment, comprising approximately 70 percent of our balance sheet. This meant that we had “balanced our checkbook” with the Department of Treasury and could account for the amount, location, and valuation of billions of dollars of our equipment around the world. It took extraordinary work to do so but it will take an even more herculean effort to close the remaining 30 percent unless changes are made. These changes require the attention not just of financial managers, but everyone: top leadership, policymakers, program managers, operational commanders, logisticians, and maintenance personnel, as well as the contractors that hold billions of dollars of DOD equipment and supplies.
Listed below are a few areas I’d recommend the next secretary of defense and senior DOD leaders focus on:
Relook at policies and standards that add no value to the DOD but add complexity to processes and systems.
My colleague and former special assistant Al Baharmast wrote an article on this topic in 2021, “How Government Policies Inhibit Accurate Financial Reporting and Incur Vast Costs.” During my career almost nothing has changed in this regard, and yet these are still some of the biggest unresolved impediments to an audit opinion for the DOD. To pass an audit, the DOD must have defensible figures for everything, including the property valuation of the Pentagon installation, even though there are no plans to sell it. It took a heroic effort to determine the book value of every piece of equipment in the Air Force, including the depreciated value of our 60-plus-year-old B-52s—when none of this information is relevant to daily military operations or the decision to invest in a new radar for the bomber fleet. We use the convoluted “consumption method” to value our operating materials and supplies when the costs for doing so far outweigh any perceived benefit. The list goes on and on. Congress, future DOD leaders, and the Department of Government Efficiency (DOGE): Here is a place you can help.
Continue to fund and demand accountability on the development and deployment of auditable business systems.
The DOD still has hundreds of audit-relevant financial and financial feeder systems (e.g., business systems that support human resources, procurement, and logistics). Most do not meet the vast set of federal requirements to demonstrate a reliable internal control environment (defined by legislation such as the Federal Financial Management Improvement Act of 1996, Federal Managers’ Financial Integrity Act of 1982, and Federal Information System Controls Audit Manual). The DOD also struggles to prove it has a complete and accurate set of all the transactions that are within the scope of the audit, known as a “transaction universe.” Having auditable business systems and access to a complete universe of transactions are important because no service aside from the U.S. Marine Corps (and likely the U.S. Space Force) can pass an audit that is based on a substantive approach—this would require 100 percent of inventories, a review of millions of transactions, and access to hundreds of military bases. All of the other military services are simply too big for this to be feasible, especially in an annually recurring audit cycle. Instead, the auditors are looking to sample transactions from an auditable control environment; however, without retiring legacy systems, proving that the audit-relevant systems have the proper controls, and validating that they can provide a complete transaction universe, the DOD cannot get past this enormous obstacle. Each military department is making progress toward these objectives, but in my experience, the business systems environment is the single biggest impediment to the DOD achieving the NDAA-mandated 2028 audit milestone.
Demonstrate consistent and informed commitment, often referred to as “tone from the top.”
To the new cadre of DOD political appointees: You must make audit progress a priority or the dates for a clean audit will continue to push into the future. This requires becoming knowledgeable about the progress and challenges in executing the audit roadmaps within the organizations you will lead. The 2024 financial statements are a good start to gaining this understanding. This will require having difficult discussions when milestones are slipping, holding leaders accountable for failing to take required actions for the material weaknesses within their purview, and finding new suppliers if contractors fail to provide auditors with the required data on contractor-held materials and supplies. But success is not dependent solely on the leadership of appointees and career senior executives. In my prior role, I had the pleasure of seeing General Eric Smith, United States Marine Corps, brief on what he was personally doing to lead audit remediation within the Marine Corps. Without his personal attention, I don’t know if the Marines would have gotten a clean opinion. It is incumbent on all uniformed leaders to follow the example he set. Understand how your role contributes to or hinders the audit progress of your organization. Then lead from the front.
I will close with two thoughts related to comments I often heard, such as statements like “the DOD won’t know where it is spending its budget until it can pass on audit,” and, on the flip side, “Isn’t this a distraction?” The DOD knows to a great level of detail how it spends its resources on programs and organizations. It tracks the budget to thousands of line items (perhaps too many, but look for Programming, Planning, Budgeting, and Execution reform to address that subject). It is inaccurate to say that because of the DOD’s audit disclaimer folks at DOGE or anyone else will find hundreds of millions of dollars of fraud or improper payments that can be redirected to other efforts. That is not to say there aren’t tremendous opportunities for automation, innovation, cutting redundant or poor-performing programs, or restructuring ineffective and expensive contracts, but these issues are not closely tied to the reasons why the DOD has not passed an audit.
Finally, as to the argument the audit is a distraction during an era of great power competition, I will again disagree. Audit progress is the result of effective, secure processes. It reflects that data of all types, data that is used daily for decisionmaking, is complete and accurate. An organization that can pass an audit has more reliable information and, due to improved system controls, is less prone to cybersecurity or insider threat attacks. Aside from those policies I mentioned above that need to be relooked and ideally eliminated, the steps to get a clean audit will lead to better processes and ultimately, better decisions for managing people, installations, equipment, and supplies.
To those who will take on the mantle of leadership of the DOD and military departments: Thank you for your service and your willingness to tackle these challenges. Achieving the DOD’s audit milestones will not be an easy task, but there is significant momentum. With the right focus, willingness to think differently about outdated policies, and commitment to funding the improvements needed to systems and data, perhaps this time we’ll reach the objective. And just maybe you will be the last nominees to face this particular line of questioning in your hearings. For the sake of our taxpayers and for all who serve, I sincerely hope that is the case.
Kristyn Jones is a senior adviser (non-resident) with the Defense Budget Analysis Program and the Aerospace Security Project at the Center for Strategic and International Studies in Washington, D.C., and the former chief financial officer and acting chief operations officer (undersecretary) of the Air Force and Space Force.
