Michael J. McCord, Under Secretary of Defense (Comptroller), Holds a Press Briefing on the Results of DOD FY 2024 Department-Wide Financial Statement Audit

View Online Michael J. McCord, Under Secretary of Defense (Comptroller), Holds a Press Briefing on the Results of DOD FY 2024 Department-Wide Financial Statement Audit Nov. 15, 2024 STAFF: Okay, we're going to go ahead and get started. Good afternoon, all. Thank you for being here today and thank you to those who are joining on the phone as well. I'm Bob Ditchey. I'll be moderating today's press briefing and following discussion on DOD's results of the FY 2024 full financial statement audit. Joining me today is the Undersecretary of Defense Comptroller and Chief Financial Officer, Honorable Michael J. McCord. Our discussion is on the record though embargoed until you receive an email from me later this evening. Once the Office of Inspector General sends agency wide results to the Comptroller, I will send you an email releasing the embargo. For this discussion, we have 30 minutes, I'll provide a final five-minute warning before the end of the briefing. When I call on you, please introduce yourself and your organization and please limit your questions to one and one follow up. With that, it is my pleasure to introduce to you the Honorable Michael J. McCord. UNDER SECRETARY OF DEFENSE (COMPTROLLER)/CFO MICHAEL J. MCCORD: Thank you, Bob. Good afternoon and thank you all for joining us. I'm Mike McCord, the department's CFO, and this will be my final time discussing our financial audit with you today. We're here to discuss the completion of the department's seventh consecutive audit of the DOD consolidated financial statements. Each year teams of independent public accountants audit the department's $4.1 trillion in assets and $4.3 trillion in liabilities. The DOD Office of Inspector General audits the department's overall or consolidated financial statements in support of that independent public accounting firms audit the individual military services and other DOD reporting entities, including the defense agencies that are all pieces of that overall audit that that the IG looks at. In total, the overall DOD audit is comprised of or supported by 28 separate audits of these different components. There are also audits or exams of DOD processes such as military pay or civilian pay across multiple entities and I will speak to those exams as well. I understand from my team, we just got the DOD IG's final report. So we will be able to release that DOD agency financial report later today. DOD reporting entities will also be releasing their individual supporting audit reports today. These reports represent a great deal of hard work by the department's financial management community and other key personnel, both military and civilian. I want to thank them the independent public accounting firms and the IG for their hard work and dedication to transparency and financial management excellence. The Inspector General will provide a disclaimer of opinion on the overall DOD financial statements. This result was not a surprise and I know that on the surface it doesn't sound like we're making progress. However, that is not the case. I believe the department has turned a corner in its understanding of the challenges and more importantly in addressing those challenges. Momentum is on our side and throughout the department. There is a strong commitment and belief in our ability to achieve an unmodified opinion on behalf of the department's senior management. I assess that DOD continues to make progress toward the Congressional mandate for achieving an unmodified audit opinion. In FY '28, We were already halfway there last year in terms of assets under clean opinions. This year, the Defense Threat Reduction Agency or DTRA, achieved an unmodified audit opinion in only its second year of doing a standalone audit. This brings the total of unmodified opinions up to nine so far and one entity maintained its qualified opinion. Three additional opinions are pending as testing continues and we expect to hold our ground and maintain our progress for these three as well. The FY '23 Marine Corps unmodified opinion and now the FY '24 DTRA unmodified opinion are the first two new ones that we've gotten since FY '20. So, we've made progress both those last two years. I want to make five points about the results of this year's audit. The first point is our progress on addressing material weaknesses. A key metric that we track is the presence or absence of material weaknesses. This term roughly translates to a concern that you must resolve to be successful. In FY '20 for the department as a whole closed one DOD wide material weakness called Contingent Legal Liabilities, which demonstrated our progress on developing and executing our internal controls. Beyond that, there was real progress inside our DOD components. These are the 28 different audits I talked about on this front this year. The military departments and defense agencies closed seven material weaknesses and got downgrades. Downgrade is a positive statement for those of you who don't track the terminology. Downgrade is good on 12 more, so that's a 46 percent increase over the 13 weaknesses that we addressed or closed last year. Momentum we gained last year to resolving DOD's fund balance with Treasury material weakness, which is one of Secretary Austin's foundational priorities for the audit carried forward this year. In FY '24, eight DOD reporting entities closed or downgraded a material weakness on fund balance with Treasury. This includes the Army's General Fund, the Navy's Working Capital Fund and the Air Force working capital fund. So these are big rocks. For our defense agencies, Defense Information Systems Agency, DISA resolved, both their general fund and their working capital fund balance weakness, DTRA, DARPA and National Geospatial Intelligence Agency also got it done this year. So, DOD has closed or downgraded 12 material weaknesses on fund balance with Treasury over the last two fiscal years. So, in addition to the reporting entities that already had favorable audit opinions, $703 billion or 82 percent of our DOD wide 8$00 and $856 billion balance is now free of material weaknesses. So, this now means that the Army, the Navy, the Marine Corps, the Air Force and DISA have gotten their house in order on all of their funding or cash as some people might think of it for both their general funds and their working capital funds. Unless you think this is simple to do for context, the department has improved from less than 7 percent to over 82 percent of its funding being free of material weaknesses. Since I returned to this job and we're talking about a universe here of approximately 1,500 different active DOD accounts in the Treasury with a value of over $856 billion that must be reconciled. Second Point Department also demonstrated improvements in system controls, completing 27 DOD-wide system of process exams and achieving 17 unmodified and eight qualified opinions. So that's 17 plus 8, 25 out of 27 were positive, only two exams were adverse. So 25 favorable opinions is 93 percent of the processes that were examined and that's up from 81 percent that were favorable when I returned in FY '21. The results of these exams are used by other auditors, so a positive result on a system wide process means other people don't have to recheck that same thing. It reduces duplication. Third point, in addition to the progress we've made on the funding side of the House and the systems and processes, which was my second point. We're also moving the needle on our physical assets. One of the most impactful efforts was the Air Force's successful push to downgrade their material weakness on their general fund military equipment. We're talking here about $115 billion or 26 percent of their assets. So, in the last two years, I just mentioned that all their funding in the Treasury and their military equipment, they've gone from 0 to 71 percent of their assets being clean, if you will, in two years. So, this downgrade means that there are two most significant balance sheet accounts are now free of material weakness. So that's point number three on the property side. Fourth, leadership engagement is critical to success and we're seeing the results of sustained commitment in this department. The Marine Corps led the way by being the first military service to achieve an unmodified opinion last year. We do expect them to hold that, although that is one of the three that is pending more testing when I said there were three that are not done yet. To further accelerate remediation efforts toward achieving the 2028 DOD-wide goal, we're prioritizing our efforts to strengthen our control environment and continuing to resolve material weaknesses that are in our way. Fifth point. No single tool or process change is the one silver bullet that's going to get us over the goal line. But the use of data analytics and AI specifically are advanced platform is definitely helping us pick up the pace of progress, expanding our use of these kind of tools is certainly part of that path to meeting the goal. So that's five points about kind of the substance. I just want to take one step, not back, but to the side on what is the point of it, what is the value of it. We all realize there is benefits from all the time and effort and money that goes into this beyond just getting an opinion. In a recent report, GAO report entitled quote, "DOD has identified benefits of financial statement audits and could expand its monitoring." GAO agreed with this point that there's value beyond the opinion itself. GAO cited operational benefits, including improvements to our systems and data, mitigating cybersecurity risk, enhancing visibility over your assets, having more efficient processes and that there could be additional benefits beyond that. Some of the benefits that we're seeing so far include the Army's improvements to its integrated personnel and pay system that consolidates pay information personnel information from over 50 different legacy systems also promotes secure and consistent processes in support of our troops and improves the service delivery to those troops. Air Force has deployed 76 robotic process automation tools, also known as RPAs or bots, more commonly since they began that program in 2019. These RPAs have saved roughly 577,000 labor hours and improved the audit ability of 76 different processes through better or quicker documentation. On the Navy side, they've converted or moved $20 billion of their funding to their more auditable Navy enterprise resource planning system, CRP, through migrating nine major nine major Navy commands and decommissioning 11 systems and transitioning three more budget offices to the CRP. They also migrated their BUPERs Bureau of Naval Personnel to the CRP that has 1,400 users. So that was also a big lift for them. Finally, I mentioned ADVANA a second ago, I'll just touch on it again. ADVANA, of course, was developed in this shop for audit purposes, but it has been and will continue to be used to help the department of both across both audit and non-audit purposes. It's been used for COVID response, for operational response. We're using it for contingency reporting going forward, including support to Haiti today, Tracking Pacific Deterrence Initiative, Hurricane Helene or Milton response. So it's proven to be a valuable tool and is now foundational to how we work. So, to conclude just on the audit, Secretary Austin, Deputy Secretary Hicks and I, as well as leaders and financial managers throughout the department, remain committed to sustaining the progress we've made, increasing our unmodified opinion accounts and supporting our goal of achieving an unmodified opinion by 2028. We'll continue to need Congressional support and other stakeholder support, including Office of Management and Budget, the Treasury and GAO, not just for audit success, but also to fix a dysfunctional pattern of repeated lengthy continuing resolutions and replace it with timely and predictable funding. Also, we need this cooperation to move to that next stage of implementing meaningful planning program, budgeting execution reform and on the audit where appropriate, we may need help for targeted legislative relief on audit issues such as the help we got from Congress in the National Defense Authorization Act for FY '24 to fix an otherwise unresolvable problem for DLA. I'm proud of all that's been accomplished by the people across the department in my time back in this position. I also want to thank the members of the Defense press in case I don't see you again for your continued interest in what we do here in my team to try and make government work and protect our national security in a transparent and accountable way. We have issued a press release or are about to issue a press release on this, which will be made available online. And with that, I am ready to take your questions. STAFF: Thank you very much, sir. And we'll start in the room and if you would when I call on you just state your name and outlet again for us. Mike Stone. Thanks. Q: I'm Mike Stone from Reuters. Thanks for coming in and congratulations on a successful four years. I think it's been probably pretty interesting for you, not just with audit but with the other stuff. A couple questions. Are we to understand that these downgrades, that's the real progress that we should be highlighting? Or can you tease out specifically where you're seeing progress because it's the exact same number of clean opinions and the exact and the same number of failures. I mean, obviously you spent a whole year on this. And then 28 is the goal. Is it an achievable goal? MR. MCCORD: Okay, so yes. The number of opinions you can think about it, what the DOD IG is doing is a consolidated opinion of the entire department. There's only one answer to that. It's modified, unmodified or disclaimer. I said that and that's made up of 28 supporting opinions within that 28, the number of positive opinions has gone up by one, that's DITRA. We expect when we get the final three to come in, we expect them to come in where they were last year. So that would be just an increase of one. So that's top of the list is opinions one for DOD or the 28 parts kind of a pass-fail mentality. At the far end of the scale are every single thing that an auditor writes up called a notice of finding and recommendation and there can be thousands of these across every single part of the department. All these 28 audits checklist of things to go work on. In between that is the material weakness and these number in like the two dozen say for the department. So, these are the big rocks. And we have picked == Secretary Austin has picked with us three or four areas to focus on. And one of those, this is the one I highlighted, Fund balance with Treasury is — in layperson's terms, it's like balancing your checkbook, except I said we have 1500 checkbooks with $850 billion in them, so it's a little more complicated than it might sound. But that's basically what it is, right? It's reconciling your version of all the money you have with Treasury's version of all the money you have in these 1500 pots. And that is where the — I agree — I agree — I'm coming to agree with the premise of your question. That is where the most progress was this year. I'm more pleased with that than having one new opinion out of 28. That's good. But I'm more pleased with seeing that Fund balance with Treasury move up in two years from — fairly low number to — I think we knocked off like $400 billion last year and $250 or maybe more than $250 this year on the — additional amount that we got closed out. So the — to the point now where the Army — all four services have checked off the money side. Property, you know, buildings, supplies, planes, ships, all the equipment stuff, the physical assets has always been the hardest part, I think. And that is still — we need a lot of progress there, but I am pleased that on one of the things the secretary said, let's get on top of this. We saw a real — movement in the last two years in a row and so that to me is the biggest sign of progress. There's — some more intangible things I think that came out of our discussions when the auditors come in and kind of read out to me what they saw when they audited the Navy, what they saw when they audited the Army. But in terms of measurable results, yeah, the Fund balance with Treasury, the closing down some big areas there are, um, is the biggest sign of progress. You'll notice, I didn't say the whole department has cleared that hurdle on that particular issue, even just — even though Army, Navy, Air Force, Marine Corps has gotten there. How can that be? Because there's a couple of things left that that materiality is a very high standard that's like, you know, like a 99 percent thing. So, we have one or two more — we have some more to get on top of before we can say the whole department has entirely fixed that area. But that's why looking — that's part of why we have more than one audit to give us some ability to drill down and look at where — progress is being made Army versus Navy or this issue versus that issue. Q: Before you address that, is a clean audit in 2028 achievable? MR. MCCORD: Oh sorry. Q: I want to drill down one part. What I just heard you say was that if it comes in an Excel sheet, you've made enormous amounts of progress on it. And if it has a tag and sits on a shelf, that is still a very difficult thing for this audit to occur. Did you just say that? MR. MCCORD: Yeah, I would say both are difficult. And that we've made more progress on the one. They're both complicated, partly just because of our scope is so enormous that almost anything we do is a big undertaking, given our size and scope. But yes, we made more progress — on the funding than we have on the property. And your second question was, is 2028 achievable? I believe so, but we do have to get — keep getting faster and keep getting better. If you draw a trend line of, since I've been back at the progress or a trend line back from when we started from year one to year seven, I don't think it's going to show you're getting there in time if you don't continue to pick up the pace, if you know what I mean. And that's — happens with a lot of programs, right? There's learning curves in building airplanes and there needs to be a learning curve here, too. STAFF: Thank you. I'm going to go to the phones. Tony Bertuka, can you hear me? Q: Yes, thank you very much. So, Mr. McCord, one of the things that that we often hear from people who criticize the defense budget as being too large is that, hey, the Pentagon doesn't know where all its money is. Why should we give the Pentagon more money? Now with the closing of the material weaknesses in terms of the services, at least knowing where all the money is, is that still an appropriate risk to — site that the Pentagon shouldn't get more money because it doesn't know where all its money is? MR. MCCORD: Thanks for the question, Tony. I don't — I don't think that's ever been the primary factor on whether or not we have too little money too much money or the right amount of money. I think that should be based on our security situation and our capabilities to respond. Are they what the American people expect? I've said this before and I don't know if there's a different way to say it, but — not passing an audit is not the same as not knowing where you're — what you have, how much money you have, where your airplanes are. Being able to pull the records, demonstrate it to an auditor, any record that they pick out of the stack and do it in the — time they expect, that's what an audit is about. We have seen in a real-world example, most notably, Ukraine over the last two years. We've provided a lot of supplies to them of various types, the Army particularly, but everybody has contributed things. And what we have not seen is people saying, well, my records show I have a thousand of these and I want to give ten of them to Ukraine. And then finding that we don't have a thousand or we can't find a thousand or we don't know what shape the thousand are in. We have some pretty good real-world experience here in that case where knowing what you have, being able to get your hands on it, get it to someone quickly because they're fighting for their lives with it. We have not had that problem. I'm not — trying to downplay the importance of passing an audit, however. I understand those who are critical of our top line are critical of our processes. And we understand the concerns. We — agree that — there's goodness in audit and I touched on that a little bit in my opening statement. Q: And also, now that we know that there's going to be a Presidential transition, a new administration is going to have to take the baton from you guys on this. What do you think is needed to keep the momentum going? But also, what do you fear could derail the progress you've made? MR. MCCORD: Well, what I witnessed last time, because remember we started the audit in earnest really, I would say about 2012 when Bob Hale, my predecessor was in really and Secretary Panetta at the time was here of — making a bigger push than we had made previously. The first consolidated audit came basically right as I was leaving, and Dave Norquist took over for — as the comptroller role. I saw at that time a lot of continuity in what we were trying to do and the way we were trying to do it between the Obama administration, the first Trump term, us — me coming back with the — so — at the Biden team. I think that if we can keep a lot of that continuity of the strategy, not to say the strategy shouldn't be looked at and the new team needs to agree that it's the right strategy. But if so, I think — our strongest path forward is to keep a lot of continuity in what we're doing. It's not a — you know, a classic political, different administration had a different view on how to do an audit, right? It's a — process where the rules are set by government wide accounting and auditing standards. There's not like there's different ways to get at solving that problem, but there's not different ways to define the problem or to define the way the problem. So, I think that continuity would probably be well served here. Now if there's substantial gaps in getting people in or you know all that sort of thing, we'll — the Army, the Navy, the Air Force as well as the department as a whole, have you know, financial management appointees that come in. So, if those positions are vacant for a long time, that's not helpful. But this is largely a career workforce, you know, do the heavy lifting and the most of the lifting in this process, military and civilian. So, I think there's good prospects for the work continuing across — all parts of the department, regardless of personalities. STAFF: I'm going to go ahead and take another from the phone. Matthew Adams, did you have a question? Q: Hi. Yes, thank you. I wanted to ask; I think in the embargo stuff we got — I think it was said that this audit cost $178 million. How many auditors worked on this? MR. MCCORD: I believe the number was 1700. And $178 million was the audit. That of course we spend — additional funds to do something with the recommendations the auditors make. You probably have seen those figures as well. Q: OK. And I wanted to follow up. I think, I — if I heard you right, in terms of the pacing challenge, that's where your concern is that you won't meet the 28 — the 2028 deadline. Is that correct if I heard you right? MR. MCCORD: Yeah, what I said was I think we have to keep getting better and faster to make that deadline that — I mean, just for example, right, we — we're — at about halfway now in terms of within the — whole department, the number of entities that have clean opinions is slightly over half. But I described there being 28 entities. So, if you — are halfway and you've got to get the other half in three or four years, you know, that tells you you're going to have to — make enormous progress. I've said before the — biggest part of what remains is the Department of the Air Force, the Department of the Navy, separate from the Marine Corps and the Department of the Army, without all three of those turning green, it is mathematically impossible for the Department to have a clean opinion. So, the big picture regardless of whether—you know, how many different audits we have is getting an entire military department to have to have a clean opinion on it — it's statements. Each — and each of those, you know, an IPA is looking at each of those separately. That — one of those alone or even two of those alone would not move the needle with the IG, understandably. If one of the three military departments had a disclaimer, the whole department cannot pass. But we need to have progress. And the other thing I would say, this is not like, what could I give as a colloquial example, doing your taxes where if it's due on April 15th and you get it done on April 14th, you're good. It's not going to work that way for this much work with this big organization. If everybody that had a piece of this got their part done on April 14th, it doesn't work that the whole department will then be good, you know, and you can beat the deadline by one minute. It's just more — there's more interconnections than that. So, 2028 doesn't mean that, you know, halfway through 2027, you can be halfway there, but — work real hard for half a year and catch up. It's not going to work that way. And our team understands that already. I'm not telling you anything that the people working on this don't already know, but I just want to explain why you have to — get there a little bit ahead of time. There's testing. There's a lot of stuff that has to happen to confirm and have an auditor, say in time that you have done what you needed to do. STAFF: From in the room, do you have a question, Todd? Q: Well, sir. I think last year in 2023 there was 29 agencies that were audited and this year 28. Who dropped out? MR. MCCORD: I'm going to ask my team — SOCOM, Special Operations Command. Yeah, they're — Q: all the same? MC. MCCORD: They are — they had to be moved into what's called the consolidated audit. Their — the firm that audited them declined to pick up the option year, and basically. So, there wasn't — a quick solution to get somebody else on contract in time, so they moved into the consolidated audit, which is what we call a number — I'm going to lose track of how many pieces are in the consolidated, but a fair number who are — it doesn't make sense to individually do them there. They're too numerous and too small in the scope of things. So, SOCOM that's not really where I would want them to be is in the consolidated only. But you know, private sector firm is not obliged to keep working on something if they've got better things to do with their time or other clients that they want to move to. STAFF: We have time for a couple more questions. I'm going to go to the phone, Ashley, Breaking Defense. Q: Hi. Thanks. Just a couple of few follow up questions. One, I guess sort of on the progress you made, especially on the funding, is that something that's easily transferable in the coming years or is that something that the services and the offices need to continue working at? MR. MCCORD: You know, I don't know that there's anything in the audit that — once you get it checked off that you can relax on because you do have to, you know, keep passing the test each year. That's the — psychologically unfortunate — reality of it is, is, you know, you have to keep at it again the next year. And the Marine Corps I would say is a good example of they haven't let up this year and said well, you know, the audits passed and now we can worry about other things. They recognize you have to keep working it. I do think that — progress you know does and will build on progress. So, it's not like — you go back to square one, right? And that the second year of doing something is not as hard as the first time doing it. If you've got your processes right, your people have got the right mindset, your systems have got, you know, the controls squared away, it should be easier the second time. It's just that it still takes work. Q: Great, thanks. And then, I just also wanted to ask, so if continuity is able, you know, to transfer over to the next administration, what — are there some solid tips you would offer to your successor on how to get faster and more efficient towards this — meeting this 2028 goal? MR. MCCORD: I think it just off the top of my head in terms of keys, keys to keeping on pace or picking up the pace, I think I said this a minute ago, I would not fundamentally change strategy unless you really took — a hard look and determined there was something that was just not being done the right way. But — I would give some deference or lean in the direction of keeping, telling the team to keep doing what they're doing. And then adjust at the margins rather than say we're going to do a zero-based review and everybody stop while we think about whether we're doing this the right way. I would not recommend that course myself. The other thing that is — you know, I'm sure GAO if they were here would say is that getting after the systems. Too many systems has — been a consistent point of view of GAO. One that I cannot disagree with. And you know, that's been a hard thing for the department because all the systems perform functions, and you can't just throw them away. So, if — that has always been a challenge for the department is necking down the number of systems. We're seeing some progress on that. That's again something I think that the — any new team should look at what is — what is the best process, what — are the right forcing functions to promptly as you can get systems to old systems, I'm talking about turned off and the process has moved to — the best, most modern type of systems? I think that's an important thing that — lies ahead. I mean, we're already in it, but I think more — work on that is definitely — on the plate of the next team is the systems consolidation business systems. STAFF: Thank you, sir. And Tony Capaccio, are you still on the line? Q: Hi, sir, can you hear me? Is it fair to say that you failed the Pentagon failed for the seventh consecutive year to score an overall clean audit, but progress is being made, is that — still fair? MR. MCCORD: I would think that's very unfair if you say that. I — do not say we failed. As I said, we have about half clean opinions. We have half that are not clean opinions, so. If someone had a report card that is half good and half not good, I don't know that you call the student or the report card a failure. We have a lot of work to do and but — I think we're making progress as I said. Q: What's the more accurate verb then if it's not failed? MR. MCCORD: We had — I — first of all, I guess, I don't know if I would reduce it to one word or not. We — have made progress and we need to get better and faster. Q: OK. Of the 15 agencies that receive disclaimers, was that constant from the last couple of years? Or did more agencies receive disclaimers this year? MR. MCCORD: We did not move backward anywhere. As I said, when you think about the component building blocks that we use, and it was rightly pointed out that the number of building blocks changed by one because of SOCOM, but roughly, the same department with roughly the same number of building blocks, we got one more moved to the — to the clean opinion or green column in DTRA. So, nobody moved backward. One moved forward. As I said, we had one, one last year. Marine Corps was a big one. DITRA is not as big as the Marine Corps, obviously. But if you just added one per year, that is not fast enough, so hence my saying we need to pick up the pace. We need to get one of the big rocks, Army Navy Air Force to that same position where the Marine Corps is now. STAFF: Thank you, Tony. OK, well, thank you everyone. Sir, did you have any closing comments? MR. MCCORD: Yeah, just again, I want to thank everyone for their questions, whether you're in the room or on the line. I just want to acknowledge the important work that so many people across the department undertook to get us here. And I think I've made clear that — a lot of work remains ahead. These financial statement audits are our building blocks for everyone involved from the leadership all the way down to the individuals leading the remediation efforts. And together, all the people that work this have strengthened the foundation of the department. Substantial work remains, but the department is on the right path due to the hard work and dedication of — our people. The next couple of years will be critical time as the department works toward this 2028 mandate, which will require us to keep getting better and faster. And thank you. STAFF: Thank you. Thank you, sir. Thank you everybody. I appreciate your time. That concludes our briefing.

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