DOD fails third audit, but sees progress with cost-savings

The Defense Department boasts cost savings as it chases a clean audit. But using the $1 billion audit to find savings could be short-sighted.

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The Defense Department completed its third audit of its nearly $3 trillion enterprise, but it still has a ways to go before it passes one.

Deputy Secretary of Defense David Norquist said the audit covering fiscal year 2020 has yielded "returns that significantly outweigh its cost by improving business operations" as DOD looks to continue reforms "for greater affordability."

DOD is expecting seven clean or unmodified opinions. Results from four audits are expected to be completed by Dec. 15 and March 25, 2021, including one for the Defense Information Systems Agency, two Navy funds, and one for DOD's inspector general office.

Thomas Harker, DOD's acting comptroller and chief Navy budgeting official, told reporters DOD likely wouldn't pass an audit until 2027. But he argued that the pursuit to find money-saving opportunities was worth the journey.

"When we look at the return on investment for the process improvements that we're making, around accountability for property accountability, for inventory, that type of thing, we've identified more than $700 million in savings based on these process improvements," Harker said at the Nov. 16 press briefing.

The audit, which reviews dozens of DOD agencies, has often been touted as a path, or at least a map, toward cost-savings. But Mark Cancian, senior adviser for the Center for Strategic and International Studies' international security program, argues that perspective is somewhat misguided.

"Audits are not designed to find savings," Cancian said. "So the notion that when we complete the audit, we're going to discover all this money – no. It's a misunderstanding about what a financial audit is."

Cancian, who previously led the Office of Management and Budget's Force Structure and Investment Division, talked to FCW ahead of DOD's release of the audit results about what cost savings and reform efforts could be expected in a Biden administration.

He said financial audits are primarily about accounting for assets and increasing transparency into inventory: "it verifies that the numbers on the books are correct."

"There's no investigation about whether the F-35 is a good idea. Only that the money that was allocated to the F-35 was, in fact, spent properly in the right categories," Cancian said.

But with the Defense Department likely looking at flat or declining budgets in future years, the need to find savings through management reforms will likely persist.

Cancian said past financial audits have found improperly categorized inventory, which forced military departments to improve their information systems and yielded indirect cost savings benefits.

But overall, he's not sure it's worth it. "So many people have this notion that it will open up some insight into the department that you just can't get away with it. Because the pushback is it costs $1 billion a year to do the audit, so you know what you're getting needs to be worth $1 billion a year."