Military equipment valuation to achieve a clean audit: who cares?

Defense AT&L, Nov-Dec, 2004 by Richard K. Sylvester

The headline for a Feb. 27, 2004, article on <www.GovExec.com> reads, "Clean Government Audit Remains Elusive." The article opens with this statement: "Financial management problems at the Pentagon continue to prevent the federal government from earning a passing audit."

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This is not the kind of publicity that the Department of Defense needs--particularly when the nation is fighting a war. That article and others like it were followed up by testimony from the comptroller general of the United States to the Senate Armed Services Committee, Subcommittee on Readiness and Management Support: "DoD's substantial long-standing financial and business management problems adversely affect the economy, effectiveness, and efficiency of its operations, and have resulted in a lack of adequate transparency and appropriate accountability across all major business areas. As a result, DoD does not have timely, reliable information for management to use in making informed decisions."

Where did the requirement for a clean audit originate? Is a clean audit important? Should program managers (PMs), contracting officers, logisticians, and industry care?

The Requirement for a Clean Audit

In 1990, the Chief Financial Officers (CFO) Act established a requirement that each executive agency of the federal government (DoD and the military departments are classified as executive agencies) will annually prepare and submit to the director of the Office of Management and Budget (OMB) a financial statement for the preceding fiscal year. In addition, the act required that each financial statement be audited by the inspector general of the preparing agency or by an external auditor determined by the inspector general. Further, the comptroller general of the United States can review any inspector general audit and make recommendations to Congress.

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In 1996, Congress found that the federal government had made little progress in complying with the intent of the CFO Act over the previous five years. Federal accounting practices still didn't result in accurate financial reporting, nor could financial information generated through current accounting practices be used to determine the full costs of programs and activities to support decision making. To restore public confidence in the federal government, federal agencies needed to make more substantial reforms to their financial management systems. In 1996, Congress passed, and the president signed, the Federal Financial Management Improvement Act. Among other equally important objectives, this act required each executive agency to implement and maintain financial management systems that comply with accounting standards established by the Federal Accounting Standards Advisory Board (FASAB).

When President George W. Bush assumed office, one of his early actions was to develop the President's Management Agenda. In the agenda, President Bush said, "In the long term, there are few items more urgent than ensuring that the federal government is well-run and results-oriented. This Administration is dedicated to ensuring that the resources entrusted to the federal government are well-managed and wisely used. We owe that to the American people." The agenda laid out five initiatives, one of which was improved financial performance. Improving financial performance, according to the agenda, includes obtaining a clean audit opinion because "a clean financial audit is a basic prescription for any well-managed organization."

Getting to Green

In response to the president's direction to obtain a clean audit opinion and thereby "get to green" on the performance scorecard, the secretary of defense immediately established the Financial Management Modernization Program (FMMP) and directed the under secretary of defense (comptroller) and the assistant secretary of defense (network information infrastructure) to work together to get a clean financial audit opinion as quickly as possible. DoD's comptroller made a commitment to the director of OMB that DoD would begin implementing policy, process, and system changes in fiscal 2003 with the goal of completing implementation in time to achieve a clean audit opinion by the end of fiscal 2006.

After a year and a half, it became clear that the FMMP was misnamed. While the word "financial" captured the attention of all financial personnel throughout DoD, most of the other communities assumed it had little to do with them. In reality, all critical business systems in DoD are impacted by this initiative because they interface with financial systems and rely on accurate financial information to conduct business. So in May 2003, the program was renamed the Business Management Modernization Program (BMMP) to better reflect the scope of the initiative, which will impose strict standards on all business systems in DoD and require them to be compliant with DoD's business enterprise architecture (BEA). The BEA will ensure financial compliancy, data accuracy, streamlined processes, and improved decision making across DoD.