DoD's quest for a clean audit opinion.

The Department of Defense (DoD) is committed to achieving a clean audit opinion for all of its Components (that is, military services and Defense agencies). The goal is to accomplish this by fiscal year (FY) 2007, but senior leaders admit that the goal may be too ambitious. Much work needs to be done before all DoD Components will be ready to be audited.

The standard for audit readiness is being able to provide credible and auditable financial records and to show that previously identified deficiencies have been corrected. To meet this standard, many preparations need to be made at the Component activities subject to audit. Components must educate and train their personnel on the standards that need to be met and on the proper format for their records and supporting documentation. During the audit, auditors will need to have "quick and easy access" to this supporting documentation, and it is important that it be in the proper format.

Many preparations also will need to be made at the Office of the Inspector General, DoD (OIG,DoD) for its personnel to be able to perform these financial audits to the proper standards. Financial audits should provide reasonable assurance that the financial statements being audited are correct and fair and conform to Generally Accepted Accounting Principles. The audits also must conform to Generally Accepted Government Auditing Standards. The auditors must use professional judgment when analyzing the statements and arriving at their findings.

For the DoD to achieve a clean audit opinion, a total of 65 to 67 financial statements must be audited. To be able to perform all the required audits to the proper standards, the OIG,DoD staff end strength must be increased to approximately 400 personnel by FY 2007. The current staff for this function is only five personnel. This staff of 400 will be responsible for overseeing an "army" of approximately 2,000 auditors and accountants who will need to be contracted from the private sector to perform these audits.

An additional major challenge to achieving the goal of audited financial statements is the need to procure the funding for all these preparations, including the huge plus-up to the OIG,DoD staff.

There are four phases to an audit. The first phase is the validation of financial plans--the plans for what needs to be done in the DoD Components in order to get ready for an audit. This phase generally includes a review of the internal controls in place and an internal mini-audit to confirm the existence of enough credible information present in the records to audit. The Components will need to fund this phase internally.

The second phase is the management assertion--a statement from the DoD Component head that his or her financial statement line items are ready for audit. This phase includes the engagement letter being issued to OIG,DoD that contains an explanation of the actions that have been taken to identify existing problems, a confirmation that sufficient audit-ready evidence exists and is readily available for review, and a confirmation that the agency possesses a knowledgeable staff that will be available to support the audit.

The third phase is the assessment--a validation of the reliability of the financial statement line items and the assurance of their readiness for audit. During this phase, if the OIG,DoD deems that a Component is not "audit ready," then the audit will be postponed until the weaknesses are corrected. (This is because Section 1008 of Public Law 107107 has mandated that funding not be spent on financial statement audits so long as management asserts that they are unreliable.)

DoD is trying to build fail-safes into this phase of the process to ensure that funding is not wasted. The Congress cut some funding from the OIG,DoD in FY 2004 because the DoD Components were not deemed sufficiently prepared to obtain clean opinions.

The final phase is the actual audit. The OIG,DoD will oversee or conduct the audits and (hopefully) issue clean opinions.

There are many Components to be audited DoD-wide. They have been prioritized into four tiers. Tier I includes the military services. Some are already in the process of being audited. The Military Retirement Fund has received a qualified opinion, and the Medicare Eligible Retirees Health Care Fund has received an unqualified opinion. All of the other Services currently have disclaimed audits. They plan to have clean opinions in FY 2007; some will have line items clean in FY 2005.

Tier II includes the intelligence agencies--the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, and the National Security Agency.

Tier III includes the Defense Commissary Agency and the Defense Logistics Agency. These agencies must prepare stand-alone financial statements. Tier IV includes all other Defense agencies.

In summary, the quest for a clean audit opinion is a daunting task. The Department is committed to achieving this goal by FY 2007. To do this will require drastically increased funding for the O1G,DoD, as well as a concerted effort from all DoD Components. Much progress has been made, but much more will be needed to achieve this very ambitious goal.

Francis (Gene) Reardon, Deputy Inspector General, Auditing

Department of Defense

Elaine Shipman serves as the management analysis officer for the United States Army Corps of Engineers, New York District. She previously served as a program analyst at the Directorate for Housing and Public Works at the United States Military Academy, West Point. She earned her CDFM in July 2001. She has a B.S. degree in organizational management from Nyack College and is currently working toward her MPA from Baruch College, City University of New York. She is a member of the West Point Chapter of ASMC.