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SHOCKER: Audit of the Defense Department Had Serious Problems

Thumbnail image for DoD.pngWe’re pretty surprised that the Defense Department has an audit of its contracts at all but since they do, we’ll give them credit for at least setting up some faux-oversight. That’s where the credit stops however, since the auditors work for “The Pentagon’s Defense Contract Audit Agency” (“DCAA”) which just reeks of independence.
As we mentioned, the fact that anyone would attempt to audit the Defense Department is laughable at best. Some problems that the General Accounting Office found, according to Web CPA:

The problems uncovered by the investigation included waste of time and resources by the audit agency. As an example, the GAO noted that DCAA auditors spent 530 hours to support an audit of the cash management system at a research and development grantee, only to discover that the billing system was non-existent.

Awesome. Three months of work to discover a phantom billing system. Oh, but there’s more:

During a separate billing system audit of a supplier of combat systems, “Auditors deleted key audit steps related to the contractor policies and internal controls over progress payments without explanation.” One DCAA auditor told the GAO he did not perform detailed tests because, “The contractor would not appreciate it.”

Testing is rather inconvenient when accountability is involved. Especially in the name of national security.
For one of the 69 reviews the GAO performed, the audit report cited eight significant deficiencies in the contractor’s accounting system but since the contractor wasn’t really cool with that, the auditors dropped five of the SD’s and recommended that the other three be “improved without additional work”.
Buckling to clients isn’t as unusual so we’ll let this one slide and considering the DoD’s track record, they’ll continue doing whatever they hell they want. We just thought we’d bring it up here for the record.
GAO: DOD Audit Oversight Has “Widespread Problems” [Web CPA]

Fraud Risk, Staffing Reductions, and OJ Logic at CFO.com

orangejuice_Full.jpgEditor’s Note: Robert Stewart is a former Big 4 auditor and ex-Marine who has since served in several executive management roles in both Internal Audit and Corporate Finance. He is also the founder and chief contributor to the online accounting and audit community, The Accounting Nation. Outside of work, he is a husband, father, brother, writer,uate aspiring triathlete.
You can always count on CFO.com for logic flaws and surface reporting. It’s like drinking that concentrated orange juice in a can when you add three parts too much water and then put ice cubes in it because it’s warm, which makes it even more watery which… Where was I going with this?
Oh yeah. In one of their latest articles, entitled “As Internal Audit Staffs Shrink, Will Fraud Rise?“, the author portends — based on a Deloitte survey and subsequent interview — that the decrease in internal audit personnel somehow increases the risk of organizational exposure to fraud. What? Ever hear the phrase “Correlation is not Causation”? Symptom or cause.


Here’s my $0.02: such staffing reductions may increase the risk that fraud will go undetected (though only nominally given that IA only uncovers about 12% percent of frauds according to the ACFE’s Report to the Nation), but the risk to the organization more than likely remains constant, right? Am I missing something here?
After all, Internal Audit is a downstream event unless you make the argument that the organizational perception of being “watched” has diminished with the reductions in internal audit/compliance staffing, thus emboldening would-be fraudsters (i.e. strengthening the “opportunity” leg of Cressey’s Fraud Triangle). But this article doesn’t make that argument.
The article further states that:

Despite the reduction in compliance personnel, 50% of respondents to the Deloitte survey, who included CFOs, CEOs, board members, and middle managers in finance and risk management, said their compliance and ethics programs are strong. Another 36% said they are adequate. Many public companies and some private companies invested significantly in their compliance programs after the passage of Sarbox in 2002, notes Francis, and they may now feel confident that those programs are effective even with a reduced staff. But that confidence may not always be justified.

Confidence? I would hardly call the above percentages “confidence” on the part of the respondents. If I told you that 50% of the airline pilots felt that their pre-flight checklist procedures were strong, how would you feel about flying? No F*#$ing way I’m getting on that plane.
The words wrapped around the survey results and subsequent interview quotes don’t at all support the conclusion that this article is trying to draw. Perhaps it’s because the survey was designed and administered by a firm (Deloitte) that has a vested interest in drumming up some business through fear tactics? After all, you’re never going to hear a burglar alarm company extolling the improvements in public safety.
And you’re never going to hear a company that sells risk-related services conducting and publicly releasing results that don’t support their strategic objectives. Or perhaps it’s just bad writing at CFO.com in order to satisfy a quota? The World may never know (I think the World will be fine with this). Either way, I’ve wasted double the amount of time that I should have on this topic (i.e. read it and wrote about it). And so with that…I bid you adieu.