Key Issues > DOD Financial Management - High Risk Issue
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DOD Financial Management - High Risk Issue

DOD financial management has been on GAO’s High-Risk List since 1995 because of long-standing deficiencies with its financial management systems, reporting practices, and management of its finances. These deficiencies not only impact DOD’s ability to have auditable financial statements, they also impact its ability to make sound decisions on missions and operations. Having sound financial management practices and reliable, useful, and timely financial information is important to ensure accountability over DOD’s extensive resources to efficiently and economically manage the department’s assets and budgets.

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The effects of DOD’s financial management problems extend beyond financial reporting. Long-standing internal control deficiencies adversely affect the economy, efficiency, and effectiveness of its operations. For example, DOD’s financial management problems have contributed to (1) inconsistent and sometimes unreliable reports to Congress on weapon system operating and support costs, limiting the visibility that Congress needs for effective oversight of weapon system programs, and (2) an impaired ability to make cost-effective choices, such as deciding whether to outsource specific activities or how to improve efficiency through technology.

Given the federal government’s continuing fiscal challenges, reliable, useful, and timely financial and performance information is important to help federal managers ensure fiscal responsibility and demonstrate accountability. This is particularly true for DOD, whose reported discretionary spending makes up about half of the federal government’s and whose physical assets represent more than 70 percent of the federal government’s. However, DOD remains one of the few federal entities that cannot demonstrate its ability to accurately account for and reliably report its spending or assets. DOD’s financial management problems remain one of three major impediments preventing GAO from expressing an opinion on the consolidated financial statements of the federal government.

Here are some examples of the ramifications of DOD’s financial management issues:

  • DOD’s reported inventory, buildings, and other property and equipment represent 73 percent of the federal government’s reported physical assets as of September 30, 2015. However, DOD cannot demonstrate that it has accurately and completely accounted for all of these assets, including their location and condition.
  • DOD’s reported fiscal year 2015 procurement obligations represent over 60 percent of the federal government’s. However, DOD lacks effective systems, processes, and controls related to its procurement activity, including contract pay.
  • DOD is unable to reconcile its fund balances with Treasury’s records. As a result, DOD cannot demonstrate that its reported amount of funds available is reliable, and is therefore in danger of obligating and disbursing more funds than it has.

DOD has not fully implemented its own plans for improving financial management and achieving financial audit readiness. In recent years, the Army, Navy, and Air Force have not fully identified and remediated their systems, processes, and internal control deficiencies. However, in an effort to meet congressional requirements, the military services asserted that they were ready to undergo an audit of 1 year’s budget activity, although the statutory target called for audit readiness of multi-year budget activity. In the initial audits covering fiscal year 2015 budget activity, all three services received disclaimers of opinion from their auditors, which means that the auditors were not able to complete their work or issue an opinion within a reasonable time. In this case, the disclaimers were a result of fundamental deficiencies in controls over financial record keeping that have resulted from problems with the financial systems and the related business processes and controls. The three services are undergoing audits of their fiscal year 2016 budget activity for certain funds appropriated by Congress.

DOD’s financial management improvement efforts have been hindered by its

  • decentralized environment;
  • cultural resistance to change;
  • lack of skilled financial management staff;
  • lack of effective processes, systems, and controls;
  • incomplete corrective action plans; and
  • ineffective monitoring and reporting.

DOD and component leadership’s recent commitment to improving its financial management has been encouraging. The statements, testimony, and actions of senior leaders have emphasized the importance of effective financial management and audit readiness to DOD’s stewardship over the substantial funding and other resources entrusted to the department. Consistent with statutory requirements, DOD leadership directives have set out a strategy and methodology for improving financial management through Financial Improvement and Audit Readiness (FIAR) Plan Status Reports and FIAR Guidance. In addition, DOD’s budgetary audits are providing insights through auditor recommendations on actions needed to correct financial systems, business practices, and financial reporting deficiencies.

However, DOD has not yet demonstrated that its leadership has the ability to achieve effective financial management reform, and DOD lacks a sufficient cadre of financial managers with the qualifications and level of expertise needed to lead reform throughout the department. Further, given the need to reduce or consolidate DOD’s hundreds of nonstandard financial systems and business processes, implementation of effective corrective actions will take some time. DOD and its component management will need to overcome the significant financial management challenges the department faces in reaching the ultimate goal of implementing lasting reform to ensure that it can routinely generate reliable, timely, and useful financial and other information critical to sound decision making and effective operations.

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More Reports

GAO's 2015 High-Risk Series: An Update
http://gao.gov/products/GAO-15-373T

GAO-15-373T: Published: Feb 11, 2015. Publicly Released: Feb 11, 2015.
GAO'S 2015 High-Risk Series: An Update
http://gao.gov/products/GAO-15-371T

GAO-15-371T: Published: Feb 11, 2015. Publicly Released: Feb 11, 2015.
High-Risk Series: An Update
http://gao.gov/products/GAO-15-290

GAO-15-290: Published: Feb 11, 2015. Publicly Released: Feb 11, 2015.
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Podcasts

DOD Financial ManagementMonday, September 28, 2015
DOD Improper PaymentsThursday, June 6, 2013
  • portrait of Asif Khan
    • Asif Khan
    • Director, Financial Management and Assurance
    • khana@gao.gov
    • 202-512-9869