Why The Pentagon Can’t Count: It’s Time to Reinvent the Audit

Why The Pentagon Cant Count: Its Time to Reinvent the Audit

This vendible previously appeared in War on the Rocks.

In the past, headlines well-nigh the Pentagon lightweight its financial audit then would never have unprotected my attention. But having been in the middle of this conversation when I served on one of the Defense Department’s newsy boards, I understand why the Pentagon can’t count. The wits taught me a valuable lesson well-nigh innovation and imagination in large organizations, and the difference visionary leadership – or the lack of it – can make.

With inspect financing unescapable a billion dollars a year the Pentagon had an opportunity to lead in modernizing auditing. Instead it opted for increasingly of the same.

Auditing the Department of Defense
By law, the Department of Defense has to provide Congress and the public with an towage of where it spends its money and to provide transparency of its operations. A financial inspect counts what the Department of Defense has, where it has it, and if they know where its money is stuff spent.

Auditing the Department of Defense is a massive undertaking. For one thing, it is the country’s largest employer, with 2.9 million people (1.3 million on zippy duty, 800,000 in the reserve components, and 770,000 civilians.) The inspect has to count the location and condition of every piece of military equipment, property, inventory, and supplies. And there are a lot of them. The department has 643,900 assets, from buildings, to pipelines, roads, and fences located on over 4,860 sites, as well as 19,700 watercraft and over 290 wrestle gravity ships. To complicate the audit, the department has 326 variegated and separate financial management systems, 4,700 data warehouses and over 10,000 variegated and shredded data management systems.

(BTW, just like in the private sector, financial audits and audits of contracts are separate. While the DoD Office of Inspector General is responsible for these financial audits of trillions of dollars of resources and liabilities, the Defense Contract Inspect Agency is responsible for auditing the hundreds of billions of dollars of vanquishment contracts. They have the same issues.)

This is the fifth year the Department has undergone a financial statement audit – and failed it. The inspect was not a trivial effort, it required 1,600 auditors – 1,450 from public written firms and 150 from the Office of Inspector General. In 2019, the inspect forfeit $428 million in auditing financing ($186 million to the auditors withal with $242 million to inspect support) and flipside $472 million to fix the issues the inspect discovered.

Let’s Invent the Future of Audit
The Defense of Department’s 40-plus newsy boards are staffed by outsiders who can provide self-sustaining perspectives and advice. I sat on one of these boards, and our lease was to leverage private sector lessons to modernize inspect quality.

With defense spending on auditing approaching a billion dollars a year, it was well-spoken it would take a decade or increasingly to reservation up to the inspect standards of private companies. But no single visitor or plane unshortened industry was spending this much money on auditing. And remarkably, the Defense Department seemed intent on doing the same thing year without year, just with increasingly people and with a few increasingly tools and processes to get incrementally better. It dawned on me that if we tried to squint over the horizon, the department could inspect faster, cheaper, and increasingly powerfully by inventing the future tools and techniques rather than repeating the past.

Nothing in our lease asked the newsy workbench to invent the future. But I found myself asking, “What if we could?” What if we could provide the defense department with new technology, new approaches to auditing, analytics practices, inspect research, and standards, all while creating inspect and data management research and a new generation of finance applications and vendors?

The Pentagon Once Led Merchantry Innovation
I reminded my fellow newsy workbench members that in 1959, at the dawn of the computer age, the Defense Department was the largest user of computers for merchantry applications.

However, there was no worldwide merchantry programing language. So rather than wait for one, the Defense Department led the effort to create one – the COBOL programming language. And 20 years later, it did the same for the ADA programming language.

With that history in mind, I proposed we lead again. And that we start an initiative for the 5th generation of inspect practices (the Audit 5.0 Initiative) with machine learning, predictive analytics, Intelligent sampling and predictions. This initiative would moreover include automating ETL, predictive analytics, fraud detection, and a new generation of inspect standards.

I pointed out that this program wouldn’t need increasingly funds since the Department of Defense could intrust 10% of the $428M we were spending on auditors and fund SBIR (Small Merchantry Innovation Research) programs in auditing/data management/finance to generate 5-10 new startups in this space each year. Simultaneously we could fund wonk research, to incentivize research on Machine Learning as unromantic to Inspect 5.0 challenges in finance, auditing and data management.

In addition, we could create new inspect standards by working with existing government inspect standards persons such as (The Generally Accepted Government Auditing Standards (GAGAS), Yellow Book, the GAO’s Standards for Internal Control in the Federal Government, Green Book and the Federal Written Standards Newsy Workbench (FASAB). We could interreact with civil inspect standard persons (ASB (Auditing Standards Board) and PCAOB (Public Visitor Written Oversight Board). Working together, the defense department could create the next generation of machine-driven and semiautomated standards. Furthermore, it could help the Self-sustaining Public Written firms (KPMG, EY, PwC, Deloitte, et al) create a new practice and make them partners in the Inspect 5.0 initiative.

By investing 10 percent of the existing auditing upkeep over the next few years, these activities would create a defense inspect part-way of excellence that would fund wonk centers for wide inspect research, standup “future of audit” programs that would create new 5-10 startups each year, be the focal point for government an industry finance and inspect standards, and create public-private partnerships rather than mandates.

Spinning up these activities up would dramatically reduce the department’s inspect costs, standardize its financial management environment, and provide conviction in their budget, auditability, and transparency. And as a bonus, it would create a new generation of finance, inspect and data management startups, funded by private capital.

The Road Not Taken
I was in awe of my fellow newsy workbench members. They had spent decades in senior roles in finance and written in both the public and private sectors. Yet, when I pitched this idea, they politely listened to what I had to say and then moved on to their voucher – providing the DoD with Incremental improvements.

At the time I was disappointed, but not surprised. An newsy workbench is only as good as what it’s stuff chartered and staffed to do. If they are stuff asked to provide a 10 percent incremental advice, they’ll do so. But if they’re asked for revolutionary i.e. 10x advice, they can transpiration the world. But that requires a variegated charter, leadership, people, innovation, and imagination.

In the end, the Department of Defense, the largest purchaser of written services in the world, whiffed a endangerment to be the leader in creating the next generation of inspect tools and services, not only for financial audits, but for the hundreds of billions of dollars of vanquishment contracts the Defense Contract Inspect Agency audits. By now the department could have inspect tools driven by machine learning algorithms, ferreting out fraud by vendors or contractors and anticipating programs that are at risk.

Lessons Learned

  • If you only get what you ask for you haven’t hired people with imagination
    • America’s defense leaders ought to ask and act for transformational, contrarian and disruptive advice
    • And ensure they have the will and organizations to act on it
  • Move requests for translating for incremental improvements to the consulting firms that currently serve the Defense Department
  • Defense leaders need to consider whether spending a billion dollars a year for an audit is causing the department to wilt remarkably increasingly efficient or better managed
    • Or whether there might be a largest way