Save your crayon-counting jokes for the comments.
As you may have heard, the United States Marine Corps recently received an unmodified opinion from EY. In any other sector this might prompt a hearty “who cares?” but for the Marines it’s a huge deal, the first of its kind for any branch of the military. And for real this time (we’ll get to that in a minute).
As you can imagine, the two-year process was no easy feat. Wrote Military.com of prior attempts:
In 2017, the Marine Corps became the first military service within the Defense Department to undergo a full financial audit, which at the time meant sifting through more than 4,300 sample items and 30,000 documents. Verifying similar items in a 2012 limited audit included a trip to Afghanistan. Ultimately, the service failed to pass either previous attempt.
This time around it was no less daunting:
In 2023, it meant going to more than 70 sites worldwide to look at thousands of real property assets; more than a million other operating assets, such as vehicle spare parts and weapons and communications systems; and more than 24 million rounds of ammunition — sometimes within Army and Navy stockpiles where the Marine Corps had property stored.
The ammo was just one checkbox among assets of $46.3 billion. “We had to have documentation for that asset, in addition to the auditors having to view those assets and count those assets,” said Gregory Koval, the assistant deputy commandant for resources, to Military.com in an interview. “So, not just numbers, not just systems, not just data, but they were actually evaluating what we have on hand, what we have on site, and if something was not there, we had to provide them with information to show where it was.”
From the DoD OIG’s press release:
The auditors considered the material weaknesses in determining the type and extent of audit procedures performed. The auditors used a substantive-based testing approach throughout FY 2022 and FY 2023. A substantive-based approach means that the auditors had to increase the amount of testing necessary because they were unable to rely solely on USMC’s internal control over financial transactions. This included the auditors examining specific transactions, account balances, and other adjustments made while preparing financial statements, as well as physically counting military equipment, ammunition, and other property – all designed to result in adequate audit evidence.
Inspector General Storch noted, “The two-year audit cycle of the U.S. Marine Corps was unprecedented for the Department of Defense. The U.S. Marine Corps staff, EY, and DoD OIG auditors performed a tremendous amount of work to complete the audit. I encourage the U.S. Marine Corps to continue the momentum of this unmodified (clean) opinion and focus on improving its internal controls to remediate the identified material weaknesses. These efforts will be important for the U.S. Marine Corps to improve audit efficiency and establish sustained financial reporting and operational readiness.”
If this announcement sounds familiar, it’s because the Marines were the first military branch to “pass” an audit before. After a big celebration in 2014 — then-Secretary of Defense Chuck Hagel famously told revelers at a Pentagon Hall of Heroes party “I know that it might seem a bit unusual to be in the Hall of Heroes to honor a bookkeeping accomplishment, but, damn, this is an accomplishment” — the opinion was rescinded and then promptly ragged on as just more piss poor work from Grant Thornton. Full story on that here:
This time the Marines contracted a real firm and here we are. Although the opinion is good, EY identified seven material weaknesses related to internal controls over financial reporting within the USMC so they have some homework to do. But overall it seems they’ve done the impossible. Impossible for the Pentagon anyway.
The Sarbanes-Oxley legislation of 2002 required financial-statement auditors to start issuing ICFR (Internal Controls over Financial Reporting) opinions in addition to their opinions on the financial statements of their private-sector audit clients. As E&Y has now rendered an unqualified opinion on the USMC’s FY 2023 financial statements, it would be interesting, for comparison purposes, to know how often E&Y is issuing clean opinions on the financial statements of its private-sector clients, when it has also found material weaknesses in its audits of internal controls in its clients’ accounting systems.
The pressure on DoD to produce private-sector-style financial statements able to win clean auditor opinions has been growing for more than 30 years, ever since the passage of the CFO Act of 1990. That pressure has grown significantly since 2018, when the first full audit of the Department was attempted. Indeed, beginning with FY2018, the Department has been spending roughly $1.0 billion a year on contracts with private firms (like E&Y) to perform the audits and to assist the Department with “remediation” efforts to address the large number of “NFR’s” (Notices of Findings and Recommendations) auditors are issuing each year (2500 for FY23) regarding the internal-control problems they’ve identified in their ICFR audits.
Given the substantial scale-ups that will be necessary, the extensive extra work auditors had to do to deliver a clean opinion for the Marines pales in comparison to the extra work that will be necessary for the Army, Navy, Air Force, and Defense Agencies to get to clean opinions, which means that $1.0 billion-per-year cost is going to grow if those Components try to do it the way the Marines did.
“This time the Marines contracted a real firm and here we are.”
Great fucking line, Adrienne. Bravo.