This Isn’t a Good Sign for Defense Audit
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More reports of troubled Defense spending have arisen.

Project on Government Oversight (POGO) recently wrote about the inability of the Defense Logistics Agency (DLA) to complete an independent audit for the second straight year. The government watchdog pointed out that DLA handles more taxpayer money annually ($35 billion) than a number of Cabinet-level departments.

The September/October newsletter for the DLA provides some details about the issue, noting that Ernst & Young said it would issue a disclaimer of opinion on the department’s working capital, transaction and general funds for fiscal year 2018 – as it did in 2017.

A disclaimer of opinion means that auditors don’t have enough information to make an informed opinion about an audited entity’s finances. Since that doesn’t necessarily imply a negative issue with finances, DLA Director Lt. Gen. Darrell Williams was quick to spin the situation into a somewhat positive situation in a letter last year to the agency’s 27,000 employees after the first disclaimer of opinion.

“It is important to note that a disclaimer of opinion is not considered a failure,” Williams wrote. “DLA has been transparent in its problem areas and identified material weaknesses and critical corrective action plans where necessary.”

“Disclaimers of opinion are actually quite common for Agencies undergoing a first-year audit,” he continued, noting that the Department of Homeland Security took more than a decade before it received its first clean audit.

Now DLA just got its second strike. That may be of particular concern because of another comment made by Williams that “DLA has been a leading force in the Department of Defense’s journey to audiability.”

Defense is now undergoing the largest audit in federal government history and if its “leading force” still cannot be audited that’s not a good sign for the overall department’s financial examination.

Ernst & Young’s 2017 report on DLA detailed a number of weak financial controls and gave a plethora of recommendations. The DLA newsletter notes the department got another round of “actionable feedback” in 2018 in the auditor’s notice of findings, “effectively providing DLA with a roadmap to improvement.”

Perhaps the third time will be the charm for DLA in 2019.

The newsletter also notes – as Williams did in 2017 – that a disclaimer of opinion is “neither a positive nor a negative opinion,” but POGO wasn’t buying that spin.

“The fact that the Agency’s financial controls are so full of holes that auditors couldn’t finish their review is clearly not a success,” the watchdog wrote. “The fact that it happened a second time because the Agency failed to complete or implement Corrective Action Plans also clearly goes into the ‘negative’ column, even if improvements have been made.”

DLA purchases products for the Defense Department in bulk to negotiate lower prices and ships them to military installations around the world. It supplies almost all fuel to Defense and the vast majority of spare parts and other materials.

But it evidently hasn’t been good stewards of taxpayer money in those efforts, some other examinations have found.

The Government Accountability Office dinged the DLA in a May 2010 report that said most of the agency’s inventory exceeded agency acquisition requirements. And the Department of Defense Office of Inspector General discovered in 2015 that DLA had overpaid for some parts and overstocked other materials.

The results of the Defense audit – which involves 1,200 examiners and is expected to cost nearly $370 million – should be released this month.

The Congressional Research Service said in a report in July that Defense is likely to receive a disclaimer of opinion, which should come as no surprise.

Pentagon chief financial officer David L. Norquist told the Senate Budget Committee in March that he expects the audit will uncover a number of areas in which controls or processes are broken.

“There will be unpleasant surprises,” he said. “Some of these problems may also prove frustratingly difficult to fix.”

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