Some of us have been tracking the long overdue Congressional mandate for the United States to achieve a ready-state for auditable financial statements. Although it may come as a surprise, we’ve uncovered a somewhat reliable (thus somewhat unreliable) rumor that the next NDAA (National Defense Authorization Act) will include section 401(A.F.) which will require the Department of Defense (more specifically DCAA/Defense Contract Audit Agency) to provide technical assistance to all other agencies, inspector generals’, GAO (Government Accountability Office) and the hordes of independent private auditors who have thus-far failed in achieving that mystical milestone of fully auditable federal government financial statements.
In order to comprehend the scope and significance of this directive, one has to understand the timeline of events, going back to a brief review of the 1990 Chief Financial Officers’ Act, issued (believe it or not) in 1990.
Timeline of Audited Financial Statements
1990:
As some may be aware, auditable financial statements was a requirement of the 1990 act, expanded by the Government Management Reform Act (the logic for expanding the original act was apparently to make the unachievable even more unachievable). In September 1990 an esteemed group, representing various Government agencies and private auditing firms, developed the implementation plan for Audited Financial Statements in the Federal Government. Their goal was to achieve audited financial statements for each cabinet department (and other large agencies) by 1994. Notably, a partner representing Arthur Anderson was among those discussing the plan and predicting its success (some may recall, Arthur Anderson imploded in the wake of the Enron Financial Audit fiasco).
2003:
October 2003, the GAO (Government Accountability Agency) issued a report noting that it had tried for six years but has yet to come close to expressing an opinion on the Financial Statements of the US Federal Government. No mention as to what went wrong with the original plan and the 1994 date, but notably there was no longer a promised date for achieving the objective.
2018:
March 2018, the GAO’s 268-page report on FY’s 2016 and 2017 disclaims an opinion, in particular, citing issues with agencies who represented 38% of total Federal assets and 20% of Federal net costs (one unnamed agency is the Department of Defense, which has spent billions towards readiness for audited financial statements). The GAO also specifically noted problems with agencies responsible for valuing future liabilities in excess of future assets (suggesting that there might be an understatement of liabilities caused by overly optimistic projections of cost reductions and understated life expectancy data).
2018, Continued:
As required by the 2014 NDAA, the DoD attempted its first ever financial statement audit, a very expensive endeavor involving more than 1,000 auditors (Government and five private accounting firms) overseen by the DoD-IG, even though DoD had already stated that it did not expect a clean opinion. Apparently 20 material weaknesses and 2,400 notices of findings and recommendations do not equate to a clean opinion (which is not actually a professionally recognized audit opinion). The good news, 28 years after the 1990 act, DoD now knows the deficiencies keeping it from a “clean opinion." Of passing interest, the DoD-IG also issued a separate 40-page report, “Understanding the Audit of the DOD 2018 Financial Statements” (to explain the actual audit in terms understandable to non-auditors). Apparently, the actual report used for reporting standards is only understandable by auditors. Great concept--spend billions trying to achieve a clean audit opinion (knowing before the audit that it would not happen while explaining all of the issues in a 200+ page report) supplemented by a 40-page report to explain the explanations in the 200+ page report.
The Silver Bullet (Miracle Solution): Defense Contract Audit Agency (DCAA)
In something of an epiphany, apparently Congress and the GAO now realize that the solution (to auditable US Financial Statements) may be right under their collective noses...tapping into the expertise of the DCAA. After all, DCAA is one of the few agencies which has “audit” in its name and has gone from an agency which left billions at risk (reference to very negative 2008 and 2009 GAO reports on DCAA audits) to an agency which has almost miraculously overcome grossly insufficient audit resources to successfully address its so-called “incurred cost audit backlog.” In addition, DCAA has improved (albeit moderately) its Audit Quality Control System, moving from a DoD-IG disclaimer (2009) to achieve a “pass with deficiencies” on its two most recent audits (as the entity being audited).
The DCAA Q&A Session (Explanation)
In anticipation of widespread public interest in the strategy of bringing DCAA in to solve the unsolvable, thus, to achieve the unachievable, the following Q&A was posted:
Q: Why DCAA (beyond the name inclusive of the word “audit”)?
A: DCAA has demonstrated the tenacity to identify and address problems through creative thinking, in particular, redefining audit risk to effectively reduce its workload and to eliminate its incurred cost backlog. It is actually doing less auditing, but it sure sounds good.
- But can DCAA summarily and unilaterally redefine audit risk in application to a comprehensive audit of the Federal Government Financial Statements?
- Why not? DCAA, in collaboration with the DoD-IG and the GAO, decided that $250 million of a contractor’s incurred costs isn’t worth auditing and that’s in a universe of perhaps $250 billion. If we extract that to the amounts in the total Government Financial Statements, only a few agencies will even be audited. Why worry about a few hundred billion here and there in a world of $23 trillion-dollar deficits? It will, in fact, materiality be a percentage of the national debt, a concept which will constantly increase the level of materiality.
Q: Specifically, how will DCAA assist the Government in obtaining a clean opinion on the Federal Government Financial Statements?
A: The simple answer, manipulate (err…change) the definition of a “clean opinion” to fit whatever happens. If one is dealing with terminology which is a “work of art”, one should become an artist and reinterpret the “work of art.” That’s how DCAA eliminated its incurred cost backlog, by unilaterally and quietly changing its definition of “backlog”. It started out as the total number in DCAA’s in-box, but DCAA quietly changed that to be the number of incurred cost submissions greater than two years old. If a goal is too high, simply lower the bar.
Q: Are there any other strategies to achieve auditable Federal Government Financial Statements?
A: Employ alternative evaluation techniques such as that used to quantify the annual amounts the Government disbursed on “improper payments."
Q: What’s that evaluation technique?
A: Don’t measure actual payments, but merely estimate those amounts. If they seem to be too high, change the estimating techniques to achieve success (lower estimates).
Q: When do you expect these strategies to yield auditable financial statements?
A: 2040.
Q: 2040?
A: Sure, it’s not in DCAA’s nature to rush anything and besides, 2040 is the 50th anniversary of the 1990 CFO Act, when we can then celebrate audited financial statements; except for the thousands of Government employees and independent consultants (Government contractors) who have been part of this expensive and seemingly endless effort to obtain Government Financial Data which (if achieved), will probably raise questions as to the fiscal survivability of the US Government..
Q: OMG, what if those 2040 financial statements show extremely dire financial data?
A: Change the estimates and replace the report.
This blog has been prepared especially for April First.
Mike Steen is a Emeritus Advisor with Redstone Government Consulting, Inc. and a specialist in complex compliance issues to include major contractor cost accounting & business system regulations, financial compliance, resolution of DCAA audit issues, Cost Accounting Standards application, litigation support, and claims preparation. Prior to joining Redstone Government Consulting, Mike served in a number of capacities with DCAA for over thirty years, and upon his retirement, he was one of the top seven senior executives with DCAA. Mike Served as a Regional Director for two DCAA regions, and during that time was responsible for audits of approximately $25B and 800 employees. In October 2001, he was selected for the Senior Executive Service and in 2006 he received the Presidential Rank Award. During Mike’s tenure with DCAA, he was involved in conducting or managing a variety of compliance audits, to include cost proposals, billing systems, Cost Accounting Standards, claims, defective pricing, and then-evolving programs such as restructuring, financial capability and agreed-upon procedures. He directly supported the government litigation team on significant contract disputes and has prepared and presented various lectures and seminars to DCAA staff and business community leaders. Since joining Redstone Government Consulting in June 2007, Mike has developed and presented training and seminars on Government Contracts Compliance to NCMA, Federal Publications Seminars and various clients. Mike also is a prolific contributor of written articles to government contracting publications, as well as to our own Government Insights Newsletter. Mike also serves as the director of our training service offerings, with responsibilities for preparing and developing course content as well as instructing our seminars to clients and general audiences throughout the U.S. Mike also serves as a faculty instructor for the Federal Publications Seminars organization. Education Mike has a BS Degree in Business Administration from Wichita State University. He is also a graduate of the DCAA Director’s Fellowship Program in Management, and has a Masters Degree in Administration from Central Michigan University. Mr. Steen also completed a number of OPM’s management and executive development courses.