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DOD Financial Management

This information appears as published in the 2017 High Risk Report.

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Since 2015, the Department of Defense’s (DOD) progress in improving its financial management processes and operations has been mixed. Without reliable, useful, and timely financial information, DOD is severely hindered in making sound decisions affecting the department’s operations.

DOD financial management was first added to our High-Risk List in 1995. Long-standing, uncorrected deficiencies with DOD’s financial management systems, business processes, financial manager qualifications, and material internal control and financial reporting weaknesses continue to negatively affect DOD’s ability to manage the department and make sound decisions on mission and operations. Having sound financial management practices and reliable, useful, and timely financial and performance information is important to help ensure accountability over DOD’s extensive resources and efficiently and economically manage the department’s assets and budgets. This is particularly important because DOD’s reported discretionary spending makes up about half of the federal government’s reported discretionary spending, and its reported assets represent more than 70 percent of the federal government’s reported physical assets. 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 us from expressing an opinion on the consolidated financial statements of the federal government.

The effects of DOD’s financial management problems extend beyond financial reporting. Long-standing internal control deficiencies have adversely affected the economy, efficiency, and effectiveness of operations. For example, as we have reported, 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 to effectively oversee 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. DOD’s efforts to improve its financial management have been impaired 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 (CAP); and ineffective monitoring and reporting.

Effective financial management is also fundamental to achieving DOD’s broader business transformation goals. However, given DOD’s decentralized environment and hundreds of nonstandard financial management business processes and systems, DOD anticipates it will take several years of effort before it will reach these goals. Current budget constraints and fiscal pressures make the reliability of DOD’s financial information and its ability to maintain effective accountability for its resources increasingly important to the federal government’s ability to make sound decisions about allocating resources.

The Army, Navy, and Air Force underwent audits of their respective Schedules of Budgetary Activity (Budgetary Schedules) for fiscal years 2015 and 2016.1 However, all three of the independent public accountants (IPA) that performed these audits issued disclaimers, meaning that the IPAs were not able to complete their work or issue an opinion because they lacked sufficient evidence to support the amounts presented. These IPAs also identified material weaknesses in internal control at the three military services and collectively issued hundreds of findings and recommendations. As of the end of fiscal year 2016, 700 IPA findings and recommendations related to the three military services’ fiscal years 2015 and 2016 Budgetary Schedules remained open. These weaknesses included the military services’ inability to, among other things, reasonably assure that the Budgetary Schedules reflected all of the relevant financial transactions that occurred and that documentation was available to support such transactions.

The results of these audits illustrate the significant amount of work that remains for DOD to have reliable, useful, and timely financial management and performance information for decision making on its mission and operations. In addition, DOD officials reported in the November 2016 Financial Improvement and Audit Readiness (FIAR) Plan Status Report that the department anticipates receiving disclaimers of opinion on its full financial statements for several years but emphasized that being subject to audit will help the department make progress.2

[1] Unlike the Statement of Budgetary Resources (SBR), which reflects multiple-year budget activity, the military services’ Budgetary Schedules reflect the balances and associated activity related only to funding from fiscal year 2015 forward. As a result, the Budgetary Schedules exclude unobligated and unexpended amounts carried over from funding prior to fiscal year 2015, as well as information on the status and use of such funding (e.g., obligations incurred and outlays) in fiscal year 2015 and thereafter.

[2] Congress mandated in the National Defense Authorization Act (NDAA) for Fiscal Year 2010 that DOD develop and maintain a FIAR Plan that includes the specific actions to be taken and costs associated with (1) correcting the financial management deficiencies that impair DOD’s ability to prepare complete, reliable, and timely financial management information and (2) ensuring that DOD’s financial statements are validated as ready for audit not later than September 30, 2017. Pub. L. No. 111-84, § 1003(a),123 Stat. 2190, 2439-40 (Oct. 28, 2009), codified at 10 U.S.C. § 2222 note. DOD is required to provide semi-annual reports to the congressional Defense committees on the status of the implementation of the FIAR Plan.

DOD Financial Management


Since 2015, DOD's progress in improving its financial management processes and operations has been mixed. DOD has made partial progress toward demonstrating leadership commitment and developing capacity and action plans. For example, DOD continues its efforts to address its financial management challenges through (1) updating the FIAR Guidance related to service providers, financial reporting of property, and seven critical capabilities for full audit readiness; (2) implementing training programs to build a skilled financial management workforce; and (3) developing a number of action plans. However, DOD continues to face challenges in monitoring corrective actions and demonstrating progress.

In furtherance of financial management reform, Congress took the following actions during fiscal years 2013 through 2016:

  • The National Defense Authorization Act (NDAA) for Fiscal Year 2013 established certain requirements for the FIAR Plan, including actions to be taken to ensure that DOD's Schedule of Budgetary Resources is validated as ready for audit not later than September 30, 2014, and an assessment of readiness for the SBR audit.
  • The NDAA for Fiscal Year 2014 mandated an audit of DOD's fiscal year 2018 full financial statements, and that the results be submitted to Congress not later than March 31, 2019.
  • Further, the NDAA for Fiscal Year 2016 had several relevant financial management provisions that, among other things
    • required coordination with the Federal Accounting Standards Advisory Board to establish accounting standards to value large and unordinary general property, plant, and equipment items no later than September 30, 2017;
    • required the Secretary of Defense to report to Congress, ranking the military departments and defense agencies in order of how advanced they are in achieving auditable financial statements;
    • provided for DOD Office of Inspector General (OIG) involvement in each DOD component's annual audit, including obtaining an audit of each component by an independent external auditor, participating in selecting the auditors, and monitoring the audits;
    • required the financial audit reports issued by the independent external auditors to be submitted to the Under Secretary of Defense (Comptroller), Controller of the Office of Management and Budget's (OMB) Office of Federal Financial Management, and appropriate congressional committees; and
    • authorized the Secretary of Defense to carry out a pilot program allowing financial management personnel to temporarily exchange between DOD and contractors.
  • Congressional oversight committees have continued to press for increased progress at DOD through hearings.


DOD needs to assure the sustained involvement of leadership at all levels of the department in addressing financial management reform and business transformation. DOD leadership has stated that it is committed to achieving effective financial management controls to support financial accountability and reliable and timely information for day-to-day management decision making, and auditable financial statements. However, DOD reported in its November 2016 FIAR Plan Status Report that because some remediation actions and major system and process changes will not be fully completed, it expects the fiscal year 2018 full financial statements audit to result in significant audit findings and a disclaimer of opinion. In addition, DOD reported that it anticipates receiving disclaimers of opinion on its financial statements for several years. DOD leadership needs to reasonably assure that DOD components adhere to the processes in the FIAR Plan and the accompanying FIAR Guidance so that components have effective leadership, processes, systems, and controls in place to sustainably improve DOD's financial management operations and audit readiness. Sustained leadership commitment is critical to DOD's success in achieving financial accountability and in providing reliable information for day-to-day management decision making as well as financial audit readiness.


DOD needs to continue building a workforce with the level of training and experience needed to support and sustain sound financial management. DOD needs to address the availability of financial management staff in light of the mandatory workforce reductions at headquarters.1 In addition, to continue building a skilled and knowledgeable workforce, DOD needs to assure that its financial management certification program continues developing and refreshing required competencies, periodically assessing the workforce's capabilities, identifying competency gaps, and closing those gaps.

DOD needs to continue to develop and deploy enterprise resource planning (ERP) systems as a critical component of DOD's financial improvement and audit readiness strategy. DOD also will need to strengthen automated controls or design manual workarounds for the remaining legacy systems to satisfy audit requirements and improve data used for day-to-day decision making. The DOD OIG has reported that DOD continues to have schedule delays in effectively implementing its ERPs. These delays in implementing ERP systems increase the risk that DOD will not have reliable information for making important decisions on mission and operations or meet its goal of being validated as ready for an audit of its full financial statements by September 30, 2017.

DOD needs to address identified deficiencies in service providers' systems, processes, and controls that affect the reliability of financial data and information used in the related business processes. In addition, each of the components needs to resolve integration issues with DOD service providers. Further, the military services need to work with Defense Finance and Accounting Service (DFAS) management to address suspense accounts and support for adjustments made by journal vouchers.

Action Plan

DOD needs to assure that military services enhance their policies and procedures for developing CAPs and improve processes for identifying, tracking, and remediating financial management related audit findings and recommendations. Improving remediation processes over these deficiencies will be more important in light of the hundreds of findings and recommendations resulting from the fiscal year 2015 and 2016 Budgetary Schedule audits.

DOD needs to effectively implement its FIAR Plan and FIAR Guidance to focus on strengthening processes, controls, and systems to improve the accuracy, reliability, and reporting for the Budgetary Schedule and the SBR and assess the existence, completeness, and valuation of mission-critical assets. It also needs to fully define, in the FIAR Guidance, actions needed to resolve long-standing department and component financial management weaknesses. In taking such actions, DOD should not lose sight of the ultimate goal of implementing lasting and sustainable financial management reform which provides reliable, useful, and timely information for decision making as a routine part of financial management operations. Auditable financial statements would be a natural byproduct of the department's success.


To effectively monitor its components as they implement the FIAR Guidance and assess and test controls and remediate control deficiencies, DOD needs to establish a process for assuring that financial improvement plans have been effectively implemented.2 DOD management will need to monitor and assess the progress that the department is making. Additionally, the FIAR Directorate should validate that the military services and other components have achieved the seven critical capabilities. According to the April 2016 FIAR Guidance, these seven critical capabilities are related to DOD's ability to: (1) produce a universe of transactions; (2) reconcile its Fund Balance with Treasury (FBWT) (i.e., balance its checkbook); (3) provide supporting documentation for material adjustments to its financial records; (4) validate the existence, completeness, and rights of its assets; (5) establish processes to manage and value its assets correctly; (6) establish an auditable process for estimating and recording its environmental and disposal liabilities; and (7) implement critical information technology controls for its financial systems.

DOD should take the following actions:

  • assure that the Navy fully implements the FIAR Guidance for FBWT in the areas of analyzing processes, prioritizing, assessing and testing internal controls, and evaluating supporting documentation to support audit readiness;
  • require the military services to improve their policies and procedures for monitoring their CAPs for financial management related findings and recommendations;
  • improve its process for monitoring the military services' audit remediation efforts by preparing a consolidated CAP management summary that provides a comprehensive picture of the status of corrective actions throughout the department; and
  • expand the FIAR Plan Status Report so that Congress and other decision makers will have more sufficient information to assess DOD's current audit readiness status and the improvements that still need to be made.

In addition, with regard to our open priority recommendations, DOD should monitor actions components are taking to

  • direct DFAS to complete actions in response to our recommendations for implementing the requirements in the FIAR Guidance in the areas of planning, testing, and corrective actions;
  • improve DOD processes to identify, estimate, reduce, recover, and report on improper payments to assure these processes fully comply with OMB guidance, the Improper Payments Information Act of 2002, as amended, and the Improper Payments Elimination and Recovery Act of 2010, and
  • reconsider the status of three recommendations made by the House Armed Services Committee Panel on Defense Financial Management and Auditability Reform that the department determined to be met but that we determined to be partially met; these recommendations related to:
  • attesting to audit readiness in each of the FIAR Plan Status Reports;
  • including FIAR-related goals in Senior Executive Service performance plans and rewarding and evaluating performance over time based on these goals; and
  • reviewing audit readiness assertions before component senior executive committees.

Demonstrated Progress

Improving the department's financial management operations—and thereby providing DOD management and the Congress with more accurate and more reliable information on the results of its business operations—will not be an easy task. Key challenges remain, such as allocating the department's workforce and budget among competing priorities, achieving the critical capabilities detailed in the FIAR Guidance, and executing CAPs to effectively remediate findings and recommendations from IPAs, the DOD OIG, and us.

According to its November 2016 FIAR Plan Status Report, DOD is continuing to work toward undergoing a full financial statement audit for fiscal year 2018; however, it expects to receive disclaimers of opinion on its financial statements for a number of years. This is why it is important for DOD and the military services to improve their processes for identifying, tracking, remediating, and monitoring audit findings and recommendations related to financial management. The military services will need to assure that they enhance their policies and procedures for remediating these findings and recommendations and DOD will need to obtain comprehensive information on the status of CAPs throughout the department in order to fully monitor and report on the progress being made to resolve financial management deficiencies. A lack of comprehensive information on the CAPs limits the ability of DOD and Congress to evaluate DOD's progress toward achieving audit readiness, especially given the short amount of time remaining before DOD is required to undergo an audit of the department-wide financial statements for fiscal year 2018. Being able to show the progress that the department is making in remediating its financial management deficiencies will be useful as the department works toward implementing lasting financial management reform to ensure that it can generate reliable, useful, and timely information for financial reporting as well as for decision making and effective operations.

[1] The NDAA for Fiscal Year 2016 requires that the Secretary of Defense implement a plan to ensure that DOD achieves a minimum of $10 billion in cost savings from the headquarters, administrative, and support activities of the department, including through streamlining the department's headquarters workforce, during the period beginning with fiscal year 2015 and ending with fiscal year 2019 with at least half the reductions occurring for fiscal years before fiscal year 2018. Pub. L. No. 114-92, § 346, 129 Stat. 796 (Nov. 25, 2015), codified at 10 U.S.C. § 111, note.

[2] A financial improvement plan is a standard framework that organizes and prioritizes the financial improvement efforts of the reporting entities and aligns to the FIAR Methodology.

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  • portrait of Asif Khan
    • Asif Khan
    • Director, Financial Management and Assurance
    • (202) 512-9869