Pentagon Fails 7th Audit in a Row but Hopes To Pass by 2028

Congress required all federal agencies to submit annual financial reports in 1990. The Pentagon finally got around to complying in 2018, and it still hasn't passed an audit.

The Pentagon has failed its annual financial audit for the seventh year in a row. This means the Department of Defense (DOD) has failed every single audit it has been subjected to, but officials hope to have things under control by the time audit No. 11 rolls around.

The DOD announced the results on Friday. "Each year teams of independent public accountants audit the department's $4.1 trillion in assets and $4.3 trillion in liabilities," which are then audited by the DOD Office of the Inspector General, Pentagon comptroller Michael McCord told reporters. "In total, the overall DOD audit is comprised of or supported by 28 separate audits of these different components."

Of those 28 components, only nine passed inspection with an "unmodified audit opinion," which the DOD says means "auditors determined the financial statements were presented fairly and in accordance with [generally accepted accounting principles]." One component received a "qualified" opinion, meaning "auditors concluded there were misstatements or potentially undetected misstatements that were material but not pervasive to the financial statements."

Fifteen others earned "disclaimers," meaning auditors "could not obtain sufficient, appropriate evidence to provide a basis for an audit opinion." Among those receiving disclaimers were such big-ticket items as the National Security Agency, the Defense Intelligence Agency, and the Defense Advanced Research Projects Agency.

"The DoD reporting entities that received disclaimers of opinion on their financial
statements, when combined, account for at least 44 percent of the DoD's total assets
and at least 68 percent of the DoD's total budgetary resources," the report noted.

Opinions on three components are still pending. But even if all three pass with flying colors, more than half of the DOD's elements will have failed to pass inspection.

Still, the department tried to spin the results as a positive. "The Department has turned a corner in its understanding of the depth and breadth of its challenges," McCord noted on Friday. "Momentum is on our side, and throughout the Department there is strong commitment—and belief in our ability—to achieve an unmodified audit opinion."

McCord told reporters that it was "very unfair" to say the department failed. "We have about half clean opinions. We have half that are not clean opinions," he explained. "If someone had a report card that is half good and half not good, I don't know that you call the student or the report card a failure. We have a lot of work to do…I think we're making progress."

In the 2024 National Defense Authorization Act (NDAA)—the annual must-pass legislation that funds the entire federal defense apparatus—Congress included a provision that "the Secretary of Defense shall ensure that the Department of Defense has received an unqualified opinion on the financial statements of the Department by not later than December 31, 2028," which would be the department's 11th annual audit.

"We are determined to reach this milestone," Defense Secretary Lloyd Austin wrote in the 2024 report's opening. McCord added that "the Department is firmly committed and is taking actions to achieve an unmodified audit opinion on its financial statements" by that deadline.

The DOD is America's largest federal agency and has an annual budget of $824 billion. Until 2018, the department had never audited its finances—despite the fact that a law passed in 1990 requires federal agencies to prepare annual financial reports. For decades, the DOD simply did not do so.

The 2010 NDAA included a provision requiring that the "financial statements of the Department of Defense [be] validated as ready for audit by not later than September 30, 2017." This gave the department seven years to get ready.

The DOD failed its first audit, achieving a passing grade in just five out of 21 components. "We never thought we were going to pass an audit, right?" then–Deputy Defense Secretary Patrick Shanahan shrugged at the time. "Everyone was betting against us, that we wouldn't even do the audit." (To be clear, that audit took place more than 25 years after Congress first began requiring all departments to investigate their own finances.)

Contrary to officials' assurances, this is not a minor issue. If a private company failed its financial audits year after year, with only vague assurances that it would get things under control in a few more years, shareholders would revolt and heads would roll.

Certainly, auditing the Pentagon is not an easy job—its numerous subsidiary agencies encompass trillions of dollars in assets, and a trillion-dollar Pentagon budget seems inevitable. But the DOD has proven itself either unwilling or incapable of doing the job in a timely manner. If the department can't do a better job than it has so far, perhaps that's a sign that it needs fewer resources to keep track of in the first place.