The Inspector General’s Office released a report last month entitled: Understanding the results of the Audit of the DoD FY 2020 Financial Statements.

The Office of the Inspector General has been performing the DoD department-wide, full financial statement Audit for the past 3 years. In the 2018, 2019, and now again in the 2020 Audit — the DoD was unable to provide sufficient evidence for the auditors to support an opinion.  Which means they failed to pass the audit.

The DoD is quick to admit that they have been unable to achieve a clean audit opinion. However, they understand the importance of this audit process and remain committed to performing this annual exercise with the goal of identifying weaknesses and addressing deficiencies.

It’s important to note that this audit commitment has been expressed before; but, with this report has been reinforced under the new administration. 

Identifying Weaknesses

The Auditors, which includes a combination of individuals from  the Inspector General’s Office and independent public accounting firms, noted progress in the FY2020 Audit — but, much more progress is needed. Most importantly, the auditors identified 26 agency-wide material weaknesses. These “Material Weaknesses” are limitations of the DoD internal controls that are unable to correct, or prevent an error in the financial statements.

In looking at these Material Weaknesses for FY2020 the DoD identified 7 priority areas:

  • Information Technology 
  • Inventory 
  • Real Property 
  • Government Property in the Possession of Contractors 
  • Joint Strike Fighter Program 
  • Fund Balance with Treasury 
  • Oversight and Monitoring 

For the purposes of this blog and our interest in the Government Contractor community we will focus on priority #4 – Government Property in the Possession of Contractors.

Government Property in the Possession of Contractors

In order to fulfill their contracts, Government Contractors will often take possession of government property — whether that is Government Furnished Property (GFP) or Contractor- Acquired Property (CAP). 

As you might imagine, Federal law requires the DoD to establish recordkeeping controls to maintain accountability of this property. The Government (rightfully so…) wants to know where their stuff is located, the current condition and who is managing it. 

When government property is managed by a contractor, that recordkeeping obligation is passed on to the contractor and clearly defined in the government contract.  However, the DoD is responsible to make sure that the contractors fulfill this obligation.

In all three of the annual Defense Audits the auditors found:

“The Department lacked policies, procedures, controls, and documentation necessary to accurately record and monitor Government property in the possession of contractors.”

Which is all to say, that the DoD does not have an accurate inventory of the Government property in the possession of contractors. 

What this means for Government Contractors

Keeping in mind, that the Inspector General identified a short list of material weaknesses for the DoD. And then went further to identify 7 priority areas of particular importance where he sees a need for significant improvement. It is pretty clear where the auditors’ focus will be in 2021.

Make no mistake, the pressure is on the DoD to achieve a clean audit opinion. The new Administration, Congress and the Pentagon will be looking for improvements in all 7 of these priority areas. 

It is safe to assume that Government Contractors need to take a close look at how they track, manage and report their government property. Now is a good time to make certain that your internal business systems and procedures are in accordance with your contract obligations.

Contractor Business Systems

Most of us in the GovCon community are aware that an adequate Property Management System is required per the Contractors Business Systems requirement (DFARS 252.242-7005). But, what is important to note here is that all six systems are interconnected. And a weakness in one system can cause deficiencies in others.

  • Accounting System
  • Earned Value Management System
  • Estimating System
  • Material Management and Accounting System
  • Property Management System
  • Purchasing System

In 2021, DCMA Auditors will be analyzing Contractor Business Systems and performing Property Management Systems Analysis (PMSA) and looking for deficiencies. If your organization is currently relying on an antiquated Government Property Management System, or if your system is really only a collection of spreadsheets — there is a good chance that you risk non-compliance. 

Now is the time to address a deficiency like this. Waiting for the auditors to apply a Corrective Action Request, or withhold payment on your contract, is foolishness. Be proactive and make sure that your business systems are in compliance.

For more information on this topic, or to learn how an A2B Tracking expert can help contact our team.