Title: Department of Defense Financial Management Challenges Description: The Department of Defense's budget makes up about half of all federal discretionary spending. But the DOD's financial statements have long been the source of scrutiny. For example, DOD is the only major federal agency that has never received a clean audit opinion. We'll find out more from GAO's Asif Khan. Related GAO Work: GAO-23-105784, DOD Financial Management: Additional Actions Needed to Achieve a Clean Audit Opinion on DOD's Financial Statements Released: May 2023 [Music] [Asif Khan:] DOD leadership is taking the right steps to address the long-standing weaknesses. However, in order for DOD to get a clean opinion, there are still many steps remaining. [Holly Hobbs:] Hi and welcome to GAO's Watchdog Report. Your source for fact-based, nonpartisan news and information from the U.S. Government Accountability Office. I'm your host, Holly Hobbs. The Department of Defense's budget makes up about half of all federal discretionary spending. But the DOD's financial statements have long been the source of scrutiny. For example, DOD is the only major federal agency that has never received a clean audit opinion. Some recent changes were meant to help address this issue and provide clarity on DOD's financial management. We'll find out more from GAO's Asif Khan, an expert on federal financial statement audits who has a new report out about the DOD's financial management. Thanks for joining us. [Asif Khan:] Thank you for having me here. [Holly Hobbs:] So Asif, GAO has audited the Department of Defense's financial statements for a long time, and we've even designated it as high risk because of pervasive issues. Why is this still a problem? [Asif Khan:] Many of the issues that led to GAO putting the DOD financial management on High Risk still persist today. These relate to its financial management systems, its business processes, internal controls and financial reporting. One of the key things to remember is that DOD's systems were not originally designed for financial reporting. Their purpose was to attract military equipment and supplies and material. Now, the systems are also required to track financial or transaction information. The system's environment has become overly complex, in part due to retrofitting new systems into an older business environment. Without proper planning, this can make it more error prone with little standardization and ineffective processes. [Holly Hobbs:] And in our report, we use the term 'clean audit opinion.' What does that mean and why does it matter? [Asif Khan:] A clean audit opinion is also referred to as an 'unmodified opinion.' This is given by an auditor when they conclude that management has presented the financial statements fairly in accordance with generally accepted accounting principles. It matters in the DOD context because the financial statements audits enables Congress and the public to obtain a more accurate assessment of how DOD spends its money. The audit process identifies vulnerabilities in information technology systems, helps identify and prevent wasteful practices, and assists DOD in improving its operations. [Holly Hobbs:] Could you give us an example of a discrepancy we found in DOD's financial statements? [Asif Khan:] One example of a long-standing problem that still persists today is DOD's inability to reconcile its fund balance with Treasury. Fund balance with Treasury reconciliation is the same as you reconciling your checkbook to your bank statement. So DOD in this case is the individual and the Treasury is their bank. DOD components do not always have adequate processes in place to research and resolve differences between their records and the Treasury records. So there's always a difference between their checkbook and the bank statement. [Holly Hobbs:] DOD recently underwent some changes that were meant to help address some of its financial management weaknesses. Can you tell us a little bit about that? [Asif Khan:] The recent significant change required DOD to undergo a full financial statement audit on its fiscal year 2018 financial statements, and submit the results to Congress. DOD has been doing audits every year since then. However, during the course of these audits, the auditors reported numerous material weaknesses and issued thousands of notices of findings and recommendations. These reported weaknesses and findings provide DOD with a roadmap for financial management reform. [Holly Hobbs:] So what is DOD doing now to address the deficiencies we found? [Asif Khan:] DOD has defined the why, the what, and the where. By undergoing the audits and findings being reported, DOD has developed and implemented corrective action plans, which include modernizing systems. These changes are a step in the right direction. Now it needs to further define their action plans to show how they will implement their financial management goals and objectives, and how they will achieve auditability by implementing the corrective actions. {MUSIC} [Holly Hobbs:] Asif just told us that while the Department of Defense's financial statements have long been a concern, recent changes have provided the department with new insights on how to address these challenges. So Asif, Congress wants the DOD to work towards having a clean audit opinion by 2027. What do we think needs to happen to make that deadline? [Asif Khan:] DOD leadership is taking the right steps to address the long-standing weaknesses. However, in order for DOD to get a clean opinion, there are still many steps remaining. The first step is that each military department has to get a clean audit opinion. This would put them on a path towards getting a DOD-wide clean audit opinion. DOD would greatly benefit from addressing the Secretary of Defense's audit priorities, such as those relating to their systems, modernizing their legacy systems, and reconciling their fund balance with Treasury. These are just to mention a few. DOD would also benefit from developing plans by putting more detail to achieve a clean opinion and set realistic timelines to avoid missing deadlines. [Holly Hobbs:] And last question, what's the bottom line of this report? [Asif Khan:] Holly, the bottom line of this report is that DOD needs to maintain its focus by identifying the impediments to effective corrective actions and setting realistic deadlines to avoid time slippages that have occurred in the past. This will lead DOD to auditability and will demonstrate to the taxpayer that they are a good steward of the resources entrusted to them. This is achievable. [Holly Hobbs:] That was Asif Kahn talking about GAO's new report on DOD's financial management. Thanks for your time Asif. [Asif Khan:] Thank you very much. [Holly Hobbs:] And thank you for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts, Spotify or wherever you listen and make sure to leave a rating and review to let others know about the work we're doing. For more from the congressional watchdog, the U.S. Government Accountability Office. Visit us at GAO.gov.