The Department of Defense (DoD) has released its FY 2025 Agency Financial Report (AFR), documenting the results of the Department’s eighth full-scope financial statement audit. As in prior years, the 2025 Defense Audit provides important signals for government contractors responsible for managing Government Property.
For 2025, the Pentagon failed its financial audit for the 8th year in a row. The independent public accountants issued a disclaimer of opinion on the DoD’s agency-wide financial statements. A disclaimer indicates that auditors were unable to obtain sufficient evidence to form an opinion.
The report identified 26 material weaknesses and 2 significant deficiencies in internal control over financial reporting. Material weaknesses represent deficiencies severe enough to raise a reasonable possibility that material misstatements may not be prevented or detected in a timely manner. Many of these weaknesses continue to relate to financial systems, asset accountability, and data reliability — areas that directly intersect with government property management.
Government Property
One of the highlighted 26 Material Weaknesses in the report is “Government Property in the Possession of Contractors”. Auditors reported that:
“DoD Components could not reconcile the Government Property in the Possession of Contractors balances reported on their financial statements to an accountable property system of record; and the DoD could not substantiate the existence, completeness, valuation, presentation and disclosure of Government Property in the Possession of Contractors reported on the consolidated balance sheet.”
To improve this material weakness, the report recommended that the agency implement Department-wide policies and procedures for measuring and reporting Government Property. Furthermore, they encourage standard inventory management policies and procedures to improve the accountability of property in the possession of contractors.
The 2025 Agency Financial Report reinforces that government property accountability remains a persistent risk area. The audit cites ongoing challenges in verifying the existence, completeness, and valuation of assets due in large part to inconsistent internal controls. In several cases, auditors were unable to obtain sufficient evidence to support reported asset balances, contributing directly to the disclaimer of opinion.
This highlights the importance for contractors to maintain accurate records and provide auditable evidence for government-owned property in their possession — particularly where DoD systems depend on contractor-furnished data to support financial reporting.
What This Means for Contractors Managing GFP
For government contractors, the FY 2025 audit results reinforce a familiar trend: audit pressure is not easing. As DoD works to strengthen internal controls and improve asset accountability, contractors managing GFP will continue to face heightened expectations around accuracy and accountability.
The Pentagon has made it clear multiple times that they are fully committed to the full-financial audit. DoD Comptroller, Jules Hurst, reiterated that the Department plans to resolve critical issues and achieve an unmodified audit opinion by 2028. Hurst continued to say:
“We will change the trajectory in FY2026 to rapidly address longstanding issues through a revised strategy and approach.”
Contractors should be prepared to demonstrate clear property records, reliable inventories, and auditable processes that support government reporting requirements. Strong GFP controls and modern inventory procedures are no longer just a contract requirement — they are a critical component of DoD’s broader audit strategy.
