Updated January 9, 2019

Defense Primer: FY2018 Department of Defense Audit Results

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

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 Defense Primer: FY2018 Department of Defense Audit Results

Types of Audit Opinions DOD receiving a disclaimer of opinion on its first-ever,

Auditors form opinions by examining the types of risks an agency-wide audit in FY2018 was not unexpected; many
organization might face and the types of controls that exist organizations do not receive an unmodified audit opinion
to mitigate those risks. Once the risks and controls to during the initial audit. It is estimated that it could take
mitigate those risks have been determined, the auditors will DOD up to 10 years to receive an unmodified audit opinion.
examine supporting evidence to determine if management The November 2018 audit report identified areas for
is presenting the financial statements fairly in all material corrective action and revealed needed process
respects. Although many entities in the federal government improvements.
usually receive unmodified opinions, auditors may express
other types of opinions based on the circumstances. There “The Department's assets total more than $2 trillion,
are four types of audit opinions: making this likely the largest financial audit ever
Unmodified Opinion. An unmodified opinion (clean undertaken. Along with sheer size, there exists
opinion) states that the financial statements present fairly, significant complexity. However, these are not reasons
in all material respects, the consolidated balance sheets, to delay the audit; they are reasons to begin. Where
related consolidated statements of net cost and changes in we find problems, we will also find opportunities.
net position, combined statements of budgetary resources, Remediating audit findings is at the center of our
and related notes to the consolidated financial statements in financial improvement strategy.”
accordance with GAAP. This opinion is expressed in a David L. Norquist, Under Secretary of Defense
standard report. In certain circumstances, explanatory Comptroller/CFO
language might be added to the auditor's standard report,
which does not affect the unmodified opinion.
Modified Opinion. A modified opinion states that, except Congress may consider reviewing the results of the FY2018
for the effects of the matter(s) identified in the opinion, the DOD audit and using the findings to enhance oversight of
financial statements present fairly in all material respects in DOD’s remediation of issues identified in it. Possible
conformity with GAAP. policy responses could include implementation of process
improvements, investments in information technology
Adverse Opinion. An adverse opinion states that the systems, and changes in accounting practices.
financial statement(s) do not present fairly in accordance
with GAAP.
CRS Resources
Disclaimer of Opinion. A disclaimer of opinion states that
the auditor does not express an opinion on the financial CRS Seminar, Understanding the DOD Audit, by Moshe
statements. The auditor’s report should give all of the Schwartz and Raj Gnanarajah, January 11, 2019
substantive reasons for the disclaimer. Some of the reasons CRS Report R44894, Accounting and Auditing Regulatory
for a disclaimer of opinion include financial statements not Structure: U.S. and International, by Raj Gnanarajah
conforming to GAAP and financial management systems CRS In Focus IF10701, Introduction to Financial Services:
that are unable to provide sufficient evidence for the auditor Accounting and Auditing Regulatory Structure, U.S. and
to express an opinion. International, by Raj Gnanarajah

Limitation of Audits
Independent audit opinions provide reasonable assurance,
but for the following reasons do not fully guarantee, that
financial statements present fairly in all material respects: Other Resources
Office of the Under Secretary of Defense (Comptroller)/
 Auditors use statistical methods for random sampling
Chief Financial Officer, Department of Defense Agency Financial
and look at only a fraction of economic events or
Report FY 2018, November 2018
documents during an audit. It is cost—and time—
prohibitive to recreate or sample all economic events; Office of the Under Secretary of Defense (Comptroller)/
Chief Financial Officer, Defense Budget Overview, Fiscal Year
 Some line items on the financial statements involve 2019 Budget Request, February 13, 2018
subjective decisions or a degree of uncertainty as a U.S. Government Accountability Office, High-Risk Series, GAO-
result of using estimates; and 17-317, February 15, 2017, p. 282
Department of Defense Office of Inspector General,
 Audit procedures cannot eliminate potential fraud, Understanding the Results of the Audit of the DoD FY2018
though it is possible that an auditor may find fraud Financial Statements, January 8, 2019
during the audit process.

Considerations for Congress

The federal government is unable to receive an unmodified
opinion on its Financial Report of the entire United States Moshe Schwartz, mschwartz@crs.loc.gov, 7-1463
Government because agencies with significant assets and Raj Gnanarajah, rgnanarajah@crs.loc.gov, 7-2175
budgetary costs such as DOD, Department of Housing and IF10913
Urban Development, and Railroad Retirement Board have
each received a disclaimer of opinion in recent fiscal years.

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