https://crsreports.congress.gov
Updated January 9, 2019
Defense Primer: FY2018 Department of Defense Audit Results
The Chief Financial Officers Act of 1990 (CFO Act, P.L.
101-576) requires annual audits of financial statements for
federal agencies. Under the CFO Act, audits of federal
agencies are the responsibility of the agency’s inspector
general (IG), but the IG may contract with one or more
external auditors to perform the audit.
The Department of Defense’s (DOD) IG conducted the
first-ever agency-wide financial audit of DOD in FY2018.
A number of DOD components have previously undergone
annual audits (e.g., the U.S. Army Corps of Engineers,
Defense Contract Audit Agency, and National
Reconnaissance Office). The agency-wide audit was
conducted by nine Independent Public Accounting (IPA)
firms contracted by DOD IG. The IPAs conducted 24
separate audits within DOD.
The DOD released the results of the FY2018 audit on
November 15, 2018. DOD received a disclaimer of
opinion—meaning auditors could not express an opinion on
the financial statements because the financial information
was not sufficiently reliable. DOD is expected to submit a
full report to Congress on this effort by March 31, 2019.
Going forward, DOD has stated that it will be audited
annually, with audit results expected to be issued in
November for the prior fiscal year.
DOD spent $413 million to conduct the FY2018 audit:
$192 million on audit fees for the IPAs and $221 million on
government costs to support the audit. DOD spent an
additional $406 million on audit remediation and $153
million on financial system fixes.
Generally, the process and standards used to audit DOD are
the same as those used to audit other federal agencies.
Understanding why and how the DOD audit was conducted
can help Congress evaluate the first agency-wide audit
results and usefulness of the audit.
Why an Audit?
Government entities, including the United States
government as a unitary entity, issue annual reports that
present their current financial position and condition, and
discuss key financial topics and trends. An audit of the
government’s financial information provides accountability
over government agencies’ use of public resources to
Congress, oversight bodies, and the public.
Financial audits aim to provide reasonable assurance that
the audited firm’s financial statements are free of material
misstatements whether caused by error or fraud. DOD
audits can provide critical insight into (1) the reliability of
its financial data; (2) the efficiency and effectiveness of
internal operations; and (3) its compliance with statutes and
financial regulations. With such information, DOD and
Congress could take steps to improve DOD’s performance
in these areas.
DOD’s financial management has been on the Government
Accountability Office’s (GAO’s) High-Risk list since 1995.
Those on the High-Risk list are considered more vulnerable
to fraud, waste, abuse, and mismanagement.
How Are Audits Done?
For each line item on a financial statement and notes to the
financial statement, an auditor is to examine a sample of
underlying economic events to determine the accuracy of
the information reported. The auditor is expected to give an
unbiased opinion on whether the financial statements and
related disclosures are fairly stated in all material respects
for a given period of time in accordance with Generally
Accepted Accounting Principles (GAAP). While the
Federal Accounting Standards Advisory Board (FASAB)
sets the financial reporting and accounting standards for the
federal government, GAO is responsible for establishing
auditing standards for federal agencies, including for
federal grant recipients in state and local governments.
Auditing Standards
GAO issues the Generally Accepted Government Auditing
Standards (GAGAS), also commonly known as the “Yellow
Book,” which provides a framework for conducting federal
government audits. The Yellow Book requires auditors to
consider the visibility and sensitivity of government
programs in determining the materiality threshold. Similar
to the requirements in the private sector, GAGAS requires
federal financial reporting to disclose compliance with
laws, regulations, contracts, and grant agreements that have
a material effect on the entities’ financial statements.
Some organizations within the federal government use a
hybrid of external and internal auditors. Whether external
or internal auditors perform the function, they are required
to adhere to the standards established under GAGAS.
In addition to examining financial information, an audit
evaluates management’s assertion of internal control over
financial reporting. Audit of internal control includes audit
of computer systems at the entity-wide, system, and
application levels. GAGAS recommends using specific
frameworks for internal control policies and procedures,
including certain evaluation tools created specifically for
federal government entities.
