Time to refresh the audit.

This article has previously appeared in War on the Rocks.

In the past, headlines about the failure of the Pentagon’s financial audits would not have held my attention. But in the middle of this conversation, serving on one of the Defense Department’s advisory boards, I understand why the Pentagon can’t be counted out. The experience taught me valuable lessons about creativity and imagination in large organizations, and the difference visionary leadership – or lack thereof – can make.

With auditing costs approaching a billion dollars a year, the Pentagon had an opportunity to take the lead in modernizing auditing. Instead, he chose many of the same things.

Auditing the Ministry of Defense
By law, the Department of Defense must provide Congress and the public with an assessment of where it spends its money and ensure transparency of its operations. A financial audit counts if you know what the Ministry of Defense has, where it is and where the money is being spent.

Auditing the Ministry of Defense is a big job. For one thing, it is the nation’s largest employer, with 2.9 million people (1.3 million active duty, 800,000 in the reserves and 770,000 civilians). , inventory and supplies. And there are many of them. The department owns 643,900 assets ranging from buildings to pipelines, roads and fences, more than 4,860 stations, as well as 19,700 aircraft and more than 290 warships. To complicate the audit, the department has 326 separate financial management systems, 4,700 data warehouses and more than 10,000 separate and unrelated data management systems.

(BTW, like private sector financial audits and contract audits, are separate. The DOD Office of Inspector General is responsible for financial audits of these trillions of dollars of assets and liabilities, and the Defense Contract Audit Agency is responsible for auditing them. Hundreds of billions of dollars in procurement contracts have similar issues.)

This is the fifth year the department has audited its financial statements – and it has failed. The audit, a no-nonsense endeavor, requires 1,600 auditors — 1,450 from public accounting firms and 150 from the Office of the Inspector General. In the year In 2019, it spent $428 million on audits (186 million auditors and $242 million for audit support) and another $472 million to correct issues the audit found.

Let’s create the future of auditing
The Department of Defense’s 40-plus advisory boards are staffed by outsiders who provide independent perspectives and recommendations. I sat on one of these boards, and our charter was to use lessons from the private sector to improve audit quality.

along with defense costs for audit A billion dollars a year. It was clear that it would take ten or more to meet the audit standards of private companies. But no single company, or even an entire industry, spends so much on auditing. And surprisingly, the Department of Defense seems intent on doing the same thing year after year, with more people and a few more tools and processes to get better and better over time. If we try to see the horizon, I realized that the department can audit faster, cheaper and more efficiently by inventing the tools and techniques of the future instead of repeating the past.

Nothing in our charter calls for the creation of an advisory board in the future. But I asked myself, “What if we can?” I posed a question. What if we gave the Department of Defense new technology, new audit approaches, analytical methods, audit research and standards, audit data management research and a new generation of financial applications and providers?

The Pentagon once led business innovation.
I reminded my fellow advisory board members that at the dawn of the computer age in 1959, the Department of Defense was the largest user of computers for business applications.

However, there was no common commercial programming language. So instead of waiting for one, the Ministry of Defense Mr The effort to create one – COBOL programming language. And 20 years later, he did the same for the ADA programming language.

With that story in mind, I suggested we rerun. And we’re launching an initiative for 5th generation audit practices (of Audit 5.0 initiatives) in machine learning, predictive analytics, intelligent sampling and forecasting. This initiative includes ETL, predictive analytics, fraud detection and automation of new generation audit standards.

I have indicated that this program does not need additional funding as the Department of Defense allocates 10% of the $428M we spend on auditors and allows it to generate SBIR (Small Business Innovation Research) programs in Audit/Information Management/Finance 5. – 10 new starters at this location every year. At the same time, we can fund academic research to encourage research in machine learning by applying Audit 5.0 challenges in finance, auditing and data management.

We can also work with government auditing standards bodies such as the Generally Accepted Government Auditing Standards (GAGAS) to create new auditing standards. Yellow book, GAO Internal Control Standards in the Federal Government; Green book and the Federal Accounting Standards Advisory Board (FASAB). We can partner with civilian auditing standards bodies (ASB (Audit Standards Board) and PCAOB (Public Company Accounting Oversight Board). Working together, the Department of Defense can create the next generation of machine-driven and semi-automated standards. In addition, independent public accounting firms (KPMG, EY, PwC, Deloitte, et al) will create new practices and partner in the Audit 5.0 initiative.

Investing 10 percent of the audit budget over the next few years, these activities will create a Defense Audit Center of Excellence that will support 5-10 new startups and academic centers for advanced audit research. Be the focal point of government industry finance and audit standards each year and create a public-private partnership rather than a mandate.

Consolidating these functions will significantly reduce departmental audit costs, standardize the financial management environment and build confidence in their budgets, auditability and transparency. And as a bonus, it creates new finance, audit and data management startups backed by private capital.

The road not taken
I was in awe of my fellow advisory board members. He has spent several decades in senior roles in finance and accounting in the public and private sectors. However, when I raised this point, they politely listened to what I had to say and went about their agenda – giving DoD more updates.

I was disappointed at the time, but not surprised. An advisory board is only as good as it is chartered and functioning. If asked to tip a 10 percent raise, they would. But revolutionary ie 10x advice can change the world. But that requires a different charter, leadership, people, creativity and imagination.

In the end, the Department of Defense, the largest purchase of accounting services in the world, whiffed the opportunity to become a leader in creating the next generation of audit tools and services for not only financial audit but also for hundreds of billions. The Defense Contract Audit Agency conducts audits of dollar purchase contracts. Currently, the department may have audit tools that use machine learning algorithms, eliminate fraud by suppliers or contractors, and assess programs at risk.

Lessons learned

• If you only get what you ask for, you haven’t hired people by imagination.
  • America’s defense leaders must seek and act on transformative, counterintuitive, and disruptive advice
  • And make sure they have the will and organizations to work on it
• Take requests for advice on additional improvements to consulting firms currently serving the Department of Defense
• Defense leaders need to consider whether spending a billion dollars a year on audits is making the department dramatically more efficient or better run.
  • Or maybe there is a better way.

Filed under: Technological innovation and the great power race |