EVALUATING THE IMPACT OF FEDERAL IMPROVEMENT AND AUDIT READINESS (FIAR) COMPLIANCE ON THE DEFENSE INDUSTRIAL BASE
Abstract
The DoD is undergoing a complete financial audit for the first time in its history. Audit readiness and preparation comes at a cost to the government—but also to defense firms. For example, firms must identify, mark, and track assets—to include small parts—in accordance with the DoD’s Item Unique Identification (IUID) system. They must also adopt DoD processes for transferring equipment when its internal processes might suffice. In due course, these costs are borne by the defense acquisition system, as firms raise prices. The proposed research seeks to quantify the cost of FIAR compliance to defense firms in light of the perceived limited practical value offered by annual financial audits. The research will be conducted by the Center for Public Policy and Private Enterprise (CPPPE) at the University of Maryland’s School of Public Policy. Research Professor William Lucyshyn will serve as the principal investigator. The Chief Financial Officers (CFO) Act of 1990 requires that federal agencies be able to produce financial statements that, when audited, receive unqualified opinions (i.e., the statements are free of material misstatements and comply with generally accepted accounting principles). Despite decades of effort, the DoD has yet to comply. In fact, the Government Accountability Office (GAO) has noted in 2013 that the DoD is “the only major federal agency that has been unable to receive an audit opinion of any kind on its department-wide financial statements”. This will change in the Fall of 2018 when the DoD is expected to have completed its first consolidated full financial statement audit wherein some 1,200 auditors (Serbu, 2018) will review inventory and property (totaling more than $2 trillion) from “book to floor” and from “floor to book.” The services and DoD agencies must be able to “assert the audit readiness of all business processes…including acquisitions, depreciation, transfers, dispositions, and general ledger recording” (DoD, 2016, p. 147). Under Secretary of Defense (Comptroller) David Norquist recently reflected on the daunting task of conducting what is “likely the largest financial audit ever undertaken,” writing that “Remediating audit findings is at the center of our financial improvement strategy. As our data and systems become more reliable, we will be able to use that information to optimize our processes and foster lasting change” (DoD, 2017, p. 1). Assistant Deputy Chief Management Officer David Tillotson III stated that the “full financial statement audits directly support our mission to optimize our business environment.” Vague assertions aside, one might ask what, exactly, are the benefits to the Department? Harvard University professors Robert Kaplan and Robin Cooper have asserted that financial accounting systems are “completely inadequate” for either “estimating the costs of activities and business processes” Page 2 of 3 or for “providing useful feedback to improve business processes” (Kaplan & Cooper, 1998, p. 14). Rather, financial statements are used to demonstrate (to shareholders) that a firm is operating profitably. The DoD is not a business, nor does it earn a profit. FIAR compliance is emblematic of the many mandates that are “flowed down” to firms doing business with the DoD. The benefits of compliance—to the government, industry, and the taxpayer—are not well defined. With the nation facing fiscal challenges and budget uncertainty, more attention must be paid to the true cost of the regulations imposed.
Document Details
- Document Type
- DoD Grant Award
- Publication Date
- Oct 29, 2021
- Source ID
- HQ00341910008
Entities
People
- William Lucyshyn
Organizations
- Office of the Secretary of Defense
- University of Maryland
- Washington Headquarters Services