What’s the real value of the US Defense Department audit?

As Congress examines the details of the president’s fiscal 2024 defense budget, members are also rightly focused on making the most of every dollar for military capability, and reimagining a defense budget structure that is more responsive, agile and transparent.

As we overlay these priorities with news last fall that the Pentagon has yet to achieve a clean opinion on its financial statements, it is useful to assess the real value of the audit, which comes from lasting improvements being made to business systems, cybersecurity, inventory and personnel management, and data analytics.

While a full financial statement audit is required by law, and obtaining a clean opinion would be useful and good, that eventual passing grade is actually secondary to the kind of progress driven by the audit.

To understand the audit, it is useful to consider the two types of accounting in play:

• Managerial, which has an internal focus for management and decision-making.
• Financial, which is compliance-oriented and intended for an external audience.

From a personal perspective, the managerial part is similar to your home budget. Paying your rent or mortgage, making decisions on what shopping you need to do and how much you should pay for each item to get the most out of your budget, and what entertainment you can afford — that’s management.

Balancing your checkbook, doing your tax return based on a specific set of rules, and keeping all your receipts to match what you bought or what you did — that’s financial.

Both are important to help you master your finances, but you don’t need to balance your checkbook to the penny or pass an IRS audit with all your detailed documentation in order to effectively run your life or your household, or to have a clear picture of where your money is going and what you are getting for it.

At a much larger level — in size, scope and complexity — the Defense Department is good, and getting better, at managerial accounting. It is also pretty good at financial accounting and reporting within small components where 46% of defense assets already have a favorable audit opinion. What the Pentagon needs, as the audit findings reflect, is to become better at enterprise-level financial accounting.

In a new report, we delve into the details of the audit value and the five key progress measures to consider in understanding why the audit journey matters, regardless of when an overall passing grade is achieved.

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The first is culture. The audit drives the entire department — not just the financial management community — to assimilate accuracy, accountability and recordkeeping into their daily missions, jobs and performance measures. Integrity of financial reporting is the business of every uniformed and civilian leader and employee. The growing amount of data, which is historically closely held, collected into a single system shows that responsibility is being taken seriously.

The second is progress in harnessing the power of data. If the digital battlefield is the center of capability and advantage in future warfare, then accurate, timely, reliable data from all defense systems is critical to our defense.

The need for a financial, single source of truth drove the department to create the advancing analytics, or ADVANA, capability, which now includes cyber, readiness, logistics, contracting, personnel and budget execution data, and provides user-friendly tools to answer management and oversight questions on performance across all systems.

Readiness of the force and cybersecurity are the third and fourth measures. Audit findings in the areas of inventory and information technology have prompted situational awareness efforts in relation to cybersecurity, parts and supplies in order to improve readiness and save money. Annual audits provide reassurance from both of these critical operational areas.

For example, the ADVANA Munitions Readiness Initiative collects data on current worldwide inventories. This reveals how readiness is impacted by proposed project deliveries. The initiative displays the health of stockpiles to determine if there are opportunities to either repair or test suspended lots for potential missile shelf-life extensions. It connects current inventory with procurements, expenditures and the industrial base to forecast future inventory and compare it to requirements. This enables the projection of potential impacts on readiness in the future and allows stakeholders to assess procurement increases against “what-if” scenarios.

With 36% of audit findings related to IT and cybersecurity, the cyber and business operations and management capability — created to address audit findings — routinely reviews and reconciles permissions and access agreements across procurement, acquisition and contract-sensitive data while making sure only appropriate and cleared personnel have access.

While this won’t stop criminal disclosure of classified information by those who have been trusted with access, it will help catch vulnerabilities in the system related to controlling that access.

Finally, the audit provides general support for stewardship and cost effectiveness. The efforts above contribute to better stewardship. They produce cost savings as the department reduces orders of parts it already has and better protects its systems, data and programs from cyber vulnerabilities. For example, using new tools developed for the audit, the department was able to identify $15 billion in potential improper payments, and stop those payments before they were made.

There are numerous other examples like those noted above. While passing a full financial audit is the ultimate goal, the real value is happening now. Rather than focusing exclusively on doing whatever is necessary — including fast, temporary fixes — to get that passing grade from auditors, the department’s pursuit of meaningful and lasting improvements make it a smarter customer and a better steward with a more lethal force.