The Pentagon completed its fourth annual Department-wide, full financial Audit this month. And for the fourth year in a row, the Defense Department was unable to achieve a clean audit opinion.
Michael McCord, undersecretary of Defense (comptroller) and chief financial officer stated that “we do not yet have a clean opinion and we have a long way to go” however, McCord also expressed that the Department is making “steady progress” towards a passing grade.
2021 Defense Audit
Understand that this Department of Defense audit initiative is massive. The 2021 Defense Audit covered the department’s $3.2 trillion in assets and included 26 stand-alone audits and one overarching consolidated audit, plus about 30 other smaller funds. About 1,200 independent auditors performed 278 in-person and 1,069 virtual site visits. The estimated cost of the FY2021 Audit was around $207 million.
The 2021 Defense Audit results come as no surprise to most in the Defense Industry. And the Pentagon made it very clear that their work is not done and that they are committed to annual audits and will continue to work towards a clean audit opinion. As former Secretary of Defense, David Norquist famously said back in 2018,
“It’ll be an annual process, and as I like to say to the workforce, it will go on as long as we both shall live.”
What this means for Defense Contractors
In our role as a vendor that supports the Defense Contracting community our attention naturally follows the Government contractors that manage government property. The most notable reference in this announcement came from McCord who explained during the press briefing,
“As in the past, our greatest challenges on the audit lie on the property side, the accounting for and evaluation of our equipment and our real property.”
To clarify further, this audit initiative is more than an investigation into financial accounting and recordkeeping. It’s a department-wide endeavor that requires accountability for all qualifying assets and inventory. The auditors also require the ability to verify the existence and completeness of that inventory.
Which is all to say that not only do the auditors check the inventory recordkeeping (and the completeness of that recordkeeping) but, they also check the actual, physical existence of that inventory. This type of process is also referred to as a “Floor to Book and Book to Floor” inventory.
Government Property in the possession of contractors
Corresponding with these 2021 Defense Audit results, the Pentagon also released its Annual financial report for fiscal 2021 which largely contains further detailed information on the audit. As part of that 380-page report is a section of “Management Challenges” which details the 28 Material Weaknesses as identified by the Office of Inspector General (OIG) in the Independent Auditors report.
Government Property in the Possession of Contractors has been identified in the previous 4 audits as a Material Weakness by the OIG. This is nothing new, nor surprising, but it’s important for Defense Contractors to note that the auditors in 2021 again found that: Government property in the possession of contractors cannot be identified in the Department’s property and financial systems. As a result, the Department’s financial and accountability records are incomplete.
The important element here is that the Pentagon has identified the management of Government Property as a weakness. And that the auditors have put a spotlight on the accountability of Government Property in the possession of contractors.
Defense contractors who manage Government Property should be on high alert to make sure that they understand their contract obligations and that they are doing everything they can to stay in compliance.
FAR 52.245-1 stipulates that Government contractors need to have a system of internal controls to manage Government property in its possession. Furthermore, maintaining an adequate Government Property Management System is required per the Contractors Business Systems clause (DFARS 252.242-7005). If your contract contains either of these clauses, it would be prudent to ensure that your procedures and internal business systems are in accordance with your contract obligations.
A2B Tracking’s Government Property Management solution supports contractors with an Asset Management system that meets all requirements of FAR 52.245-1. If you have questions on Government Property management and would like to speak with one of our experts please feel free to reach out to us here.
