Defense Primer: FY2023 Department of Defense Audit Results
April 5, 2024
Defense Primer: FY2023 Department of Defense Audit Results
The Chief Financial Officers Act of 1990 (CFO Act, P.L.
How Are Audits Done?
101-576) requires annual audits of financial statements for
For each line item on a financial statement and notes to the
federal agencies. Under the CFO Act, audits of federal
financial statement, an auditor examines a sample of
agencies are the responsibility of the agency’s inspector
underlying economic events to determine the accuracy of
general (IG), but the IG may contract with one or more
the information reported. The auditor is expected to give an
external auditors to perform the audit.
unbiased opinion on whether the financial statements and
related disclosures are fairly stated in all material respects
The Department of Defense (DOD) released the results of
for a given period of time in accordance with Generally
its sixth annual audit, FY2023, on November 15, 2023.
Accepted Accounting Principles (GAAP). While the
DOD received a disclaimer of opinion, meaning auditors
Federal Accounting Standards Advisory Board (FASAB)
could not express an opinion on the financial statements
sets the financial reporting and accounting standards for the
because the financial information was not sufficiently
federal government, GAO is responsible for establishing
reliable. The DOD’s IG coordinated the agency-wide
auditing standards for federal agencies, including for
financial audit of DOD, covering $3.8 trillion in assets and
federal grant recipients in state and local governments.
$4.0 trillion in liabilities. The agency-wide audit was
conducted by Independent Public Accounting (IPA) firms
Material misstatement in financial reporting can be
contracted by DOD IG. The IPAs conducted 29 separate
defined as information on a financial statement that
audits within DOD.
could potentially affect the reader’s decision or the
conclusions drawn by a reader about the financial
Generally, the process and standards used to audit DOD are
status of an agency
the same as those used to audit other federal agencies.
Understanding why and how the DOD audit was conducted
can help Congress evaluate the audit results and usefulness
Auditing Standards
of the audit.
GAO issues the Generally Accepted Government Auditing
Why an Audit?
Standards (GAGAS), also commonly known as the “Yellow
Book,” which provides a framework for conducting federal
Government entities, including the United States
government audits. Similar to the requirements in the
government as a unitary entity, issue annual reports that
private sector, GAGAS requires federal financial reporting
present their current financial position and condition, and
to disclose compliance with laws, regulations, contracts,
discuss key financial topics and trends. An audit of the
and grant agreements that have a material effect on the
government’s financial information provides accountability
entities’ financial statements. The GAGAS requires
over government agencies’ use of public resources to
auditors to consider the visibility and sensitivity of
Congress, oversight bodies, and the public.
government programs in determining the materiality
threshold.
Financial audits aim to provide reasonable assurance that
the audited entity’s financial statements are free of material
Some organizations within the federal government use a
misstatements whether caused by error or fraud. DOD
hybrid of external and internal auditors. Whether external
audits can provide critical insight into (1) the reliability of
or internal auditors perform the function, they are required
its financial data; (2) the efficiency and effectiveness of
to adhere to the standards established under GAGAS.
internal operations; and (3) its compliance with statutes and
financial regulations. With such information, DOD and
In addition to examining financial information, an audit
Congress could take steps to improve DOD’s performance
evaluates management’s assertion of internal control over
in these areas.
financial reporting. Audit of internal control includes audit
of computer systems at the entity-wide, system, and
DOD’s financial management has been on the Government
application levels. GAGAS recommends using specific
Accountability Office’s (GAO’s) High-Risk list (HRL)
frameworks for internal control policies and procedures,
since 1995. The HRL identifies areas that might be subject
including certain evaluation tools created specifically for
to fraud, waste, abuse, and mismanagement. In addition to
federal government entities.
the financial management, other aspects of DOD’s
operations that could affect the financial management are
Types of Audit Opinions
on the GAO’s April 2023 HRL.
Auditors form opinions by examining the types of risks an
organization might face and the types of controls that exist
to mitigate those risks. Once the risks and controls to
mitigate those risks have been determined, the auditors will
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Defense Primer: FY2023 Department of Defense Audit Results
examine supporting evidence to determine if management
is presenting the financial statements fairly in all material
DOD Financial Management Systems and Business
respects. Although many entities in the federal government
Systems Modernization. DOD’s FY2023 audit assessed
usually receive unmodified opinions, auditors may express
compliance across 160 distinct financial management (FM)
other types of opinions based on the circumstances. There
systems. GAO has assessed DOD FM systems as posing a
are four types of audit opinions:
high risk of fraud, waste, abuse, and mismanagement,
Unmodified Opinion. An unmodified opinion (clean
alongside high-risk areas of business systems
opinion) states that the financial statements present fairly,
modernization, contract management and weapons system
in all material respects, the consolidated balance sheets,
acquisition. GAO’s April 2023 High Risk Series report
downgraded DOD’s Business Systems Modernization
related consolidated statements of net cost and changes in
net position, combined statements of budgetary resources,
efforts due to stalled progress on agency action plans since
and related notes to the consolidated financial statements in
2021. DOD reports it is “revisiting its approach to business
enterprise architecture.”
accordance with GAAP. This opinion is expressed in a
Congress might consider clarifying
standard report. In certain circumstances, explanatory
the underlying causes of DOD’s stalled progress and the
language might be added to the auditor’s standard report,
desired timeline and expected costs and benefits of
which does not affect the unmodified opinion.
achieving unmodified audit opinions.
Modified Opinion. A modified opinion states that, except
Logistics Information Systems. DOD personnel providing
for the effects of the matter(s) identified in the opinion, the
information to auditors needed to consult over 400 distinct
financial statements present fairly in all material respects in
logistics information technology (IT) systems for the
conformity with GAAP.
FY2023 audit. These systems contain essential information
Adverse Opinion. An adverse opinion states that the
for building audit trails of DOD property, plant, and
financial statement(s) do not present fairly in accordance
equipment assets, including cargo shipments. Congress
with GAAP.
might assess ongoing DOD efforts to consolidate logistics
IT systems, standardize data structures, and automate the
Disclaimer of Opinion. A disclaimer of opinion states that
extraction of management information so assets are visible
the auditor does not express an opinion on the financial
statements. The auditor’s report s
to DOD personnel and financial transactions affecting these
hould give all of the
assets are transparent and accessible to auditors in a timely
substantive reasons for the disclaimer. Some of the reasons
manner.
for a disclaimer of opinion include financial statements not
conforming to GAAP and financial management systems
Assessing the Audit Workforce. Congress might consider
that are unable to provide sufficient evidence for the auditor
assessing institutional learning among IPAs and DOD IGs
to express an opinion.
performing DOD audits. Comprehensive audits are labor
and knowledge intensive, with approximately 1,600
Of the 29 standalone audits included in the FY2023 DOD
auditors requiring DOD-specific knowledge in addition to
audit, 18 received disclaimers of opinion; seven received
security clearances and extensive international travel. It is
unmodified opinions; one received a modified opinion; and
not clear from publicly available documents how IPAs and
three opinions were still pending as of November 2023,
IG leadership are mitigating common risks, such as
when the FY2023 audit was released.
workforce turnover, that might limit institutional learning
Limitation of Audits
specific to the conduct of DOD audits.
Independent audit opinions provide reasonable assurance,
but for the following reasons do not fully guarantee, that
CRS Resources
financial statements present fairly in all material respects:
CRS Report R44894, Accounting and Auditing Regulatory
• Auditors use statistical methods for random sampling
Structure: U.S. and International, by Raj Gnanarajah
and look at only a fraction of economic events or
CRS In Focus IF10701, Introduction to Financial Services:
documents during an audit. It is cost and time
Accounting and Auditing Regulatory Structure, U.S. and
prohibitive to recreate or sample them all.
International, by Raj Gnanarajah
• Audit procedures cannot eliminate potential fraud,
though it is possible that an auditor may find fraud
during the audit process.
Other Resources
Office of the Under Secretary of Defense (Comptrol er)/
Considerations for Congress
Chief Financial Officer, Department of Defense Agency Financial
Assessing Root Causes. DOD’s November 2023 audit
Report FY 2023, November 2023
oversight report identified five root causes that DOD
Office of the Under Secretary of Defense (Comptrol er)/
considers focus areas for corrective action and process
Chief Financial Officer, Defense Budget Overview, Fiscal Year
improvements: workforce modernization; business
2024 Budget Request, March 2023
operations; quality decision-making; reliable networks; and
U.S. Government Accountability Office, High-Risk Series, GAO-
enhanced public confidence. Congress may consider
23-106203, April 2023
reviewing the results of the FY2023 DOD audit and using
the findings to enhance oversight of DOD’s remediation of
issues in these or other focus areas.
Raj Gnanarajah, Analyst in Financial Economics
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Defense Primer: FY2023 Department of Defense Audit Results
IF12627
Cameron M. Keys, Analyst in Defense Logistics and
Resource Management Policy
Disclaimer
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