Introduction. The Chief Financial Officers Act of 1990, as amended by the Federal Financial Management Act of 1994, requires DoD to prepare annual audited financial statements. This is the first in a series of reports related to the DoD Agency-Wide financial statements for FY 1999.
The DoD Agency-Wide financial statements for FY 1999 are compiled from the financial statements of the DoD reporting entities: the Army, Navy, and Air Force General Funds; the Army, Navy, and Air Force Working Capital Funds; the Military Retirement Fund; the U.S. Army Corps of Engineers, Civil Works Program; and financial data for the Other Defense Organizations-General Funds and Working Capital Funds. In FY 1999, the DoD Components reported total assets of $599 billion, total liabilities of $999 billion, total net costs of operations of $378 billion, and total budgetary resources of $628 billion.
Audit Objectives. Our overall objective was to determine whether the DoD Agency-Wide financial statements for FY 1999 were prepared in accordance with Office of Management and Budget Bulletin No. 97-01, "Form and Content of Agency Financial Statements," October 16, 1996, as amended January 7, 2000. We also evaluated internal controls and compliance with laws and regulations.
Disclaimer of Opinion. DoD did not provide the DoD Agency-Wide financial statements for FY 1999 in time for us to perform all of the necessary audit work. Therefore, we did not verify the reported amounts. However, we identified deficiencies in internal controls and accounting systems related to $119.3 billion of general property, plant, and equipment; inventory; $80 billion of environmental liabilities; $196 billion of military retirement health benefits liability; and material lines within the Statement of Budgetary Resources. Those deficiencies would have precluded an audit opinion. We also identified $6.9 trillion in accounting entries to financial data used to prepare financial statements for the Army, Navy, and Air Force General Funds; the Army, Navy, and Air Force Working Capital Funds; Other Defense Organizations-General Funds; and Other Defense Organizations-Working Capital Funds. For the accounting entries, $2.3 trillion was not supported by adequate audit trails or sufficient evidence to determine their validity, $2 trillion was not reviewed because of time constraints, and $2.6 trillion were supported.
The financial data reported on the FY 1999 financial statements for the Army, Navy, and Air Force General Funds and the Army, Navy, and Air Force Working Capital Funds were unauditable and represented a significant portion of the financial data reported on the DoD Agency-Wide financial statements for FY 1999. Because the financial statements were not provided in a timely manner and because internal control weaknesses, compilation problems, and deficiencies in financial management systems continued to exist, we were unable to perform adequate audit tests of the various line item amounts reported on the financial statements. Therefore, we do not express an opinion on the DoD Agency-Wide financial statements for FY 1999. DoD has initiated numerous actions to improve financial accounting, but the actions are not complete. The unqualified opinion on the Military Retirement Fund is an example of positive accomplishments by DoD.
Review of Internal Controls. We performed applicable tests of the internal controls to determine whether the controls were effective and working as designed. However, these tests did not provide sufficient evidence to support an opinion on internal controls; therefore, we did not express an opinion on DoD internal controls. DoD internal controls were not adequate to ensure that resources were properly managed and accounted for, that DoD complied with applicable laws and regulations, and that the financial statements were free of material misstatements. DoD internal controls did not ensure that adjustments to financial data were fully supported and that assets and liabilities were properly accounted for and valued. The material weaknesses and reportable conditions we identified were also reported in the management representation letter for the DoD Agency-Wide financial statements for FY 1999, the DoD Annual Statement of Assurance for FY 1999, and the DoD Financial Management Improvement Plan.
Review of Compliance With Laws and Regulations. Our objective was to assess compliance with laws and regulations related to the DoD Agency-Wide financial statements for FY 1999 and not to express an opinion. Therefore, we did not express an opinion on compliance with laws and regulations. DoD did not fully comply with laws and regulations that had a direct and material affect on its ability to determine financial statement amounts. We identified noncompliance issues related to the Federal Financial Management Improvement Act of 1996; the Chief Financial Officers Act of 1990; section 3512, title 31, United States Code (formerly the Federal Managers' Financial Integrity Act of 1982); and the Government Performance and Results Act of 1993.
Management Comments. The Deputy Chief Financial Officer commented that the Department did not have sufficient time to review and determine the validity of individual assertions in the report. The DoD has a two-track approach to comply with new Federal accounting standards. The DoD does not expect to have systems necessary to meet these new requirements before the year 2003. The DoD has undertaken an interim track that includes the use of contractors to address many of the existing deficiencies. As a result, DoD expects to make incremental progress in addressing a number of financial management challenges that impact the ability to produce audited financial statements. Appendix C contains the full text of the comments.
Any comments or suggestions should be sent to: auditnet@dodig.mil