Getting to cost in the Department of Defense

Knowing the cost of operations is fundamental to successful management of any enterprise. That is why Congress has ordered clean audit opinions on the federal government’s departments’ and agencies’ annual budgets. For the Defense Department, however, getting there is posing a persistent, elusive challenge.

In 2009, Congress set September 30, 2017 as the final date for the department to have auditable books. The department took a step toward that goal when, in December 2013, its inspector general (IG) granted an “unqualified, favorable audit opinion” to the United States Marine Corps. Self-congratulations and kudos ensued. But let’s parse that commendation a bit more thoroughly.

{mosads}What the IG passed on was the Corps’ Statement of Budgetary Activity, which is a single fiscal year’s appropriations (money-in) and transactions (money-out). And, likewise, the entire department is focused on producing the Statement by September 2014. Left uncompleted will be the Statement of Budgetary Resources (SBR)—the financial statement that the law anticipates—that includes accounting for previous multi-year appropriations and unobligated balances.

Nor does the SBR complete a full financial statement. That undertaking would include producing customary accounting documents like the Balance Sheet, Statement of Net Cost, and Statement of Changes in Net Position. According to the Pentagon Comptroller’s Financial Improvement and Audit Readiness (FIAR) plan, these elements are not even to be considered until so-called “Wave 4” of its full cost accounting timeline.

The real question that has plagued the Pentagon is why accounting for cost is so hard. We believe that it has to do with the quality of the underlying financial data. And there is a solution to that shortcoming.

Timeliness and accuracy, two key ingredients of quality, are important reasons for the Pentagon to implement commercial Enterprise Resource Planning (ERP) systems. It has spent more than $5.8 billion through 2009 on ERPs and undoubtedly many billions since. The aim is to improve business processes in addition to the quality of financial information. The Department has nine ERPs in various stages of implementation. The ERPs, most of which will not be mature in time to support the 2017 audit readiness deadline, are nonetheless essential if the Department is to obtain quality financial data.

The problem is that the Department’s culture has not made the conscious connection between what the ERPs usefully provide and what auditability means in the context of DoD’s business model. Nor is it clear that Congress has any greater appreciation of what auditable financial statements will do to improve operating efficiency. Going all the way to Wave 4 may provide a public sector approximation of a set of auditable books. But is that really going to make the Pentagon’s financial management better?

Instead, DoD should set its goal as knowing the cost of doing business. The ERPs should be viewed less as a way of achieving audit readiness and more as a means for obtaining quality financial data. The FIAR plan should place more stress on the financial improvement part of the proposition. The Statement of Budgetary Resources and the Asset Existence and Completeness audits will give form to the audit readiness enterprise, but getting to full cost accounting in its most literal sense will make managing the Department most successful.

Moreover, the standards suggested above are not enough. Personnel must be trained in their use, and they must understand that formal compliance with standards is only the beginning—practical application and implementation in day-to-day financial decisions is necessary to achieve the audit visibility Congress mandates and the American taxpayer deserves.  

Schwartz is president and CEO of Business Executives for National Security and served as Air Force Chief of Staff from 2008-2012. Rowland is chairman of Lead Bank and serves as vice chairman of Business Executives for National Security.