Defense Primer: FY2018 Department of Defense Audit Results

Defense Primer: FY2018 Department of Defense Audit Results

Updated January 9, 2019
Defense Primer: FY2018 Department of Defense Audit Results
The Chief Financial Officers Act of 1990 (CFO Act, P.L.
Congress could take steps to improve DOD’s performance
101-576) requires annual audits of financial statements for
in these areas.
federal agencies. Under the CFO Act, audits of federal
agencies are the responsibility of the agency’s inspector
DOD’s financial management has been on the Government
general (IG), but the IG may contract with one or more
Accountability Office’s (GAO’s) High-Risk list since 1995.
external auditors to perform the audit.
Those on the High-Risk list are considered more vulnerable
to fraud, waste, abuse, and mismanagement.
The Department of Defense’s (DOD) IG conducted the
first-ever agency-wide financial audit of DOD in FY2018.
How Are Audits Done?
A number of DOD components have previously undergone
For each line item on a financial statement and notes to the
annual audits (e.g., the U.S. Army Corps of Engineers,
financial statement, an auditor is to examine a sample of
Defense Contract Audit Agency, and National
underlying economic events to determine the accuracy of
Reconnaissance Office). The agency-wide audit was
the information reported. The auditor is expected to give an
conducted by nine Independent Public Accounting (IPA)
unbiased opinion on whether the financial statements and
firms contracted by DOD IG. The IPAs conducted 24
related disclosures are fairly stated in all material respects
separate audits within DOD.
for a given period of time in accordance with Generally
Accepted Accounting Principles (GAAP). While the
The DOD released the results of the FY2018 audit on
Federal Accounting Standards Advisory Board (FASAB)
November 15, 2018. DOD received a disclaimer of
sets the financial reporting and accounting standards for the
opinion—meaning auditors could not express an opinion on
federal government, GAO is responsible for establishing
the financial statements because the financial information
auditing standards for federal agencies, including for
was not sufficiently reliable. DOD is expected to submit a
federal grant recipients in state and local governments.
full report to Congress on this effort by March 31, 2019.
Going forward, DOD has stated that it will be audited
Material misstatement in financial reporting can be
annually, with audit results expected to be issued in
defined as information on a financial statement that
November for the prior fiscal year.
could potentially affect the reader’s decision or the
conclusions drawn by a reader about the financial
DOD spent $413 million to conduct the FY2018 audit:
status of an agency
$192 million on audit fees for the IPAs and $221 million on
government costs to support the audit. DOD spent an
additional $406 million on audit remediation and $153
Auditing Standards
million on financial system fixes.
GAO issues the Generally Accepted Government Auditing
Standards (GAGAS), also commonly known as the “Yellow
Generally, the process and standards used to audit DOD are
Book,” which provides a framework for conducting federal
the same as those used to audit other federal agencies.
government audits. The Yellow Book requires auditors to
Understanding why and how the DOD audit was conducted
consider the visibility and sensitivity of government
can help Congress evaluate the first agency-wide audit
programs in determining the materiality threshold. Similar
results and usefulness of the audit.
to the requirements in the private sector, GAGAS requires
Why an Audit?
federal financial reporting to disclose compliance with
laws, regulations, contracts, and grant agreements that have
Government entities, including the United States
a material effect on the entities’ financial statements.
government as a unitary entity, issue annual reports that
present their current financial position and condition, and
Some organizations within the federal government use a
discuss key financial topics and trends. An audit of the
hybrid of external and internal auditors. Whether external
government’s financial information provides accountability
or internal auditors perform the function, they are required
over government agencies’ use of public resources to
to adhere to the standards established under GAGAS.
Congress, oversight bodies, and the public.
In addition to examining financial information, an audit
Financial audits aim to provide reasonable assurance that
evaluates management’s assertion of internal control over
the audited firm’s financial statements are free of material
financial reporting. Audit of internal control includes audit
misstatements whether caused by error or fraud. DOD
of computer systems at the entity-wide, system, and
audits can provide critical insight into (1) the reliability of
application levels. GAGAS recommends using specific
its financial data; (2) the efficiency and effectiveness of
frameworks for internal control policies and procedures,
internal operations; and (3) its compliance with statutes and
including certain evaluation tools created specifically for
financial regulations. With such information, DOD and
federal government entities.
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Defense Primer: FY2018 Department of Defense Audit Results
Types of Audit Opinions
DOD receiving a disclaimer of opinion on its first-ever,
Auditors form opinions by examining the types of risks an
agency-wide audit in FY2018 was not unexpected; many
organization might face and the types of controls that exist
organizations do not receive an unmodified audit opinion
to mitigate those risks. Once the risks and controls to
during the initial audit. It is estimated that it could take
mitigate those risks have been determined, the auditors will
DOD up to 10 years to receive an unmodified audit opinion.
examine supporting evidence to determine if management
The November 2018 audit report identified areas for
is presenting the financial statements fairly in all material
corrective action and revealed needed process
respects. Although many entities in the federal government
improvements.
usually receive unmodified opinions, auditors may express
other types of opinions based on the circumstances. There
“The Department's assets total more than $2 trillion,
are four types of audit opinions:
making this likely the largest financial audit ever
Unmodified Opinion. An unmodified opinion (clean
undertaken. Along with sheer size, there exists
opinion) states that the financial statements present fairly,
significant complexity. However, these are not reasons
in all material respects, the consolidated balance sheets,
to delay the audit; they are reasons to begin. Where
related consolidated statements of net cost and changes in
we find problems, we will also find opportunities.
net position, combined statements of budgetary resources,
Remediating audit findings is at the center of our
and related notes to the consolidated financial statements in
financial improvement strategy.”
accordance with GAAP. This opinion is expressed in a
David L. Norquist, Under Secretary of Defense
standard report. In certain circumstances, explanatory
Comptroller/CFO
language might be added to the auditor's standard report,
which does not affect the unmodified opinion.

Modified Opinion. A modified opinion states that, except
Congress may consider reviewing the results of the FY2018
for the effects of the matter(s) identified in the opinion, the
DOD audit and using the findings to enhance oversight of
DOD’s
financial statements present fairly in all material respects in
remediation of issues identified in it. Possible
policy responses could include implementation of process
conformity with GAAP.
improvements, investments in information technology
Adverse Opinion. An adverse opinion states that the
systems, and changes in accounting practices.
financial statement(s) do not present fairly in accordance

with GAAP.
CRS Resources
Disclaimer of Opinion. A disclaimer of opinion states that
the auditor does not express an opinion on the financial
CRS Seminar, Understanding the DOD Audit, by Moshe
statements. The auditor’s report should give all of the
Schwartz and Raj Gnanarajah, January 11, 2019
substantive reasons for the disclaimer. Some of the reasons
CRS Report R44894, Accounting and Auditing Regulatory
for a disclaimer of opinion include financial statements not
Structure: U.S. and International, by Raj Gnanarajah
conforming to GAAP and financial management systems
CRS In Focus IF10701, Introduction to Financial Services:
that are unable to provide sufficient evidence for the auditor
Accounting and Auditing Regulatory Structure, U.S. and
to express an opinion.
International, by Raj Gnanarajah
Limitation of Audits

Independent audit opinions provide reasonable assurance,
but for the following reasons do not fully guarantee, that
financial statements present fairly in all material respects:
Other Resources

Office of the Under Secretary of Defense (Comptrol er)/
Auditors use statistical methods for random sampling
Chief Financial Officer, Department of Defense Agency Financial
and look at only a fraction of economic events or
Report FY 2018, November 2018
documents during an audit. It is cost—and time—
prohibitive to recreate or sample all economic events;
Office of the Under Secretary of Defense (Comptrol er)/
Chief Financial Officer, Defense Budget Overview, Fiscal Year
 Some line items on the financial statements involve
2019 Budget Request, February 13, 2018
subjective decisions or a degree of uncertainty as a
U.S. Government Accountability Office, High-Risk Series, GAO-
result of using estimates; and
17-317, February 15, 2017, p. 282

Department of Defense Office of Inspector General,
Audit procedures cannot eliminate potential fraud,
Understanding the Results of the Audit of the DoD FY2018
though it is possible that an auditor may find fraud
Financial Statements, January 8, 2019
during the audit process.
Considerations for Congress

The federal government is unable to receive an unmodified
Moshe Schwartz, Specialist in Defense Acquisition
opinion on its Financial Report of the entire United States
Government because agencies with significant assets and
Raj Gnanarajah, Analyst in Financial Economics
budgetary costs such as DOD, Department of Housing and
IF10913
Urban Development, and Railroad Retirement Board have
each received a disclaimer of opinion in recent fiscal years.
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Defense Primer: FY2018 Department of Defense Audit Results

Disclaimer
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