The Department of Defense (DoD) has failed every audit since 2018, costing taxpayers over $1 billion each year, marked by "disclaimers of opinion," along with thousands of formal “notices of findings and recommendations” (NFRs) from the auditors. The DoD Inspector General’s FY 2024 Agency Financial Report documented 28 material weaknesses and more than $1 trillion in asset discrepancies, leading auditors to issue their seventh consecutive disclaimer.
Audits of the DoD’s financial statements, guided by Federal Accounting Standards Advisory Board (FASAB) rules based on private-sector Generally Accepted Accounting Principles (GAAP), assess the DoD’s $850 billion budget using the profit-driven reporting mechanisms of balance sheets and income statements. This approach is suitable for private-sector, profit-seeking businesses like Boeing, IBM, and General Motors, but not for the DoD, a public-sector, taxpayer-funded federal agency whose primary purpose is to defend the homeland, not generate profits.
This mismatch stems from the 1990 Chief Financial Officers (CFO) Act, which, although well-intended, has unfortunately caused Congress and the public to prioritize financial health over military accountability. Rather than seeking auditor opinions, Congress and taxpayers should look for answers to questions like: Did $5 billion buy 55 F-35 jets? Did $18 billion deliver five ships? Did $330 billion in Operations and Maintenance obligations ensure wartime readiness?
The complete inability of GAAP-based financial accounting and reporting to address such questions or explain the causes of ongoing inefficiency and waste, such as the Navy’s $1.8 billion wasted on cruiser modernization (2024 GAO audit), highlights GAAP’s irrelevance for an agency that spends, not earns.
Instead, the DoD should implement a budgetary audit process focusing on the Statement of Budgetary Resources (SBR), incorporating managerial cost accounting as outlined in the Statement of Federal Financial Accounting Standards (SFFAS) 4, and utilizing AI-driven forensic analysis through the DoD’s Advana data analytics platform.
This transition would better synchronize audits with the DoD’s Planning, Programming, Budgeting, and Execution (PPBE) process, ensuring that the $850 billion enhances security, not just balances the books.
The Problem: Scale and Systemic Flaws
The DoD’s complexity dwarfs private-sector firms. The FY 2023 DoD Agency Financial Report revealed that the DoD employed 2.1 million service members and 778,000 civilians across 4,600 global sites, managing $851.7 billion in discretionary funds—half of U.S. discretionary spending—and $3.8 trillion in assets, 70% of the government’s total.
Tracking these resources across 4,500 financial systems makes monitoring obligations and matching them to appropriations difficult; at least 232 are critical for internal controls over data entry, transaction processing, and reporting—an auditing nightmare.
For example, the 2022 GAO Audit found discrepancies in 61% of $3.5 trillion in assets, and the 2024 DoD Financial Agency report found 28 material weaknesses, showing weak internal accounting controls, like failing to reconcile Fund Balances with Treasury (FBwT)—akin to a checkbook not matching a bank statement.
Issues include outdated systems, manual data entry, and training gaps. A 2023 GAO report noted that 18 out of 22 financial systems faced workforce shortages, hindering modernization. Further, multi-year programs like aircraft development blur committed versus available funds, complicating audits. The result? Seven years of disclaimers, with headlines claiming the DoD “can’t pass an audit” and wastes taxpayer money.
But is the DoD truly failing its fiduciary responsibility, or is it trapped in a flawed GAAP-based process irrelevant to its purpose? Cultural and political pressures, like Congress’s demand for “clean audits” to signal fiscal responsibility, perpetuate this misalignment, distracting from the real question: Are funds delivering security?
Why GAAP and FASAB Fail the DoD
GAAP, and by extension FASAB, measures profitability and equity for revenue-generating businesses. Boeing’s $66 billion revenue and $13 billion loss fit this model, but the DoD’s $850 billion budget is all outflows—$5 billion for F-35s, $145 billion for R&D, $330 billion for operations and maintenance, with no income to tally.
FASAB’s directed balance sheets show $3.5 trillion in assets and a “net cost” of $821 billion spent in FY2022, mimicking GAAP’s business-focused standards. However, 37% of unverifiable assets, according to a GAO Independent Auditor report, aren’t a “loss” but record-keeping issues. In particular, material weaknesses contributing to $2.4 trillion or 61% in untracked assets and $14 billion in “missing” parts, flagging “ bookkeeping “control gaps, not “mission” gaps.
Former Navy Comptroller Russ Rumbaugh made this point in a recent interview:“DoD is very accountable, it’s just not auditable,” Rumbaugh told the conference. “We know where the things that go ‘boom’ are, we know where the dollars get spent, [but] to answer those questions [to the satisfaction of auditors], we have to go ask a bunch of stove-piped systems.”
The DoD’s 4,800 sites and 2,000+ budget line items for RDT&E and Procurement alone defy GAAP’s clean ledgers, asking “Is it financially healthy?” when the real question is, “What did the taxpayer get?”
A Better Approach: Managerial Cost Accounting
A budgetary review process using managerial cost accounting organizes financial data to help DoD leaders allocate resources efficiently—a cost-benefit approach, not a balance sheet. In a published paper, A Proposal to Emphasize Managerial Cost Accounting in the Department of Defense, Dr. Christopher Hanks, a former RAND analyst, argues that the DoD has neglected this tool, which is “unappreciated and underused.”
He argues that the Statement of Federal Financial Accounting Standards 4 (SFFAS 4) mandated by Congress tracks costs to outputs and is a better approach to evaluating the DoD budget, ensuring funds align with goals. For example, $82 billion in aid for Ukraine can be traced to emergency laws and evaluated for outcomes.
Unlike GAAP, this approach monitors obligations (commitments), ensuring compliance with appropriations and justifying variances, not chasing asset-liability matches. Instead, it should assess how budget approvals are documented. Are controls preventing overspending? Are goods being produced efficiently and providing the intended capabilities? This shift better aligns with Congress’s mandate to spend effectively, not mimic private-sector accounting.
Aligning Managerial Cost Accounting to DoD’s Budget Process
The DoD uses a detailed, although cumbersome, process to develop its annual budget. It goes through several steps: aligning the president’s and defense secretary’s security strategy through planning, developing proposed funding for programs that support it, converting those programs into budget requests, and executing it, or what is referred to as the Planning, Programming, Budgeting, and Execution (PPBE) process.
This process was first introduced in the 1960s by Secretary of Defense Robert McNamara, who brought this business-like budgeting process from Ford Motor Company to the DoD. It has undergone several adjustments and improvements, creating an arduous but, for the most part, effective method. However, it routinely receives scrutiny and is the subject of recent reform and questionable overhaul requests.
For instance, the recent congressionally directed PPBE Reform Commission has called for stronger, more responsive connections between strategy and spending within the PPBE process. However, the commission's primary goal is to offer recommendations for the PPBE process that meet Congress’s demand for a “clean audit opinion.”
While the commission made several strong recommendations to enhance the PPBE process, it neglected to tackle the elephant in the room: the way the DoD conducts audits. Instead, it reinforced a business-oriented audit approach, focusing on better managing financial statements rather than recognizing that imitating them is the issue.
Integrating SFFAS 4 into PPBE is a better reform solution – tracking obligations to capabilities (e.g., $145 billion in R&D for 10 hypersonic missiles) and ensuring that funds deliver results. Changing the term “costs” to “obligations” (both measured in dollars) allows SFFAS 4 to more effectively support PPBE reform by addressing the question, “Does $850 billion of approved obligation authority in the DoD’s budget, executed as planned, fulfill the president’s security strategy?”
AI-Driven Forensic Approach for Execution
One of the primary challenges in achieving a clean audit is reconciling how the DoD distributes funds. Thousands of systems, hundreds of checkbooks, and various financial systems create an almost insurmountable bookkeeping task.
Until recently, manual efforts by thousands of auditors—costing $4 billion in audit remediation since 2018—were necessary to examine DoD finances as if the DoD were a business struggling to reconcile billions in obligations and payments due to chaotic financial systems, poor bookkeeping, and internal control challenges—essentially trying to fit a square peg (accounting) into a round hole (accountability).
With the advent of AI and a more forensic accounting approach to execution, it has become possible to scour the DoD’s 4,500 financial systems to trace obligations, detect fraud and waste, and confirm legal transactions. Using the Advana platform, AI-driven forensic accounting can trace questionable spending, such as the DoD Inspector General’s 2023 report that found “47 (or 80 percent) of the 59 contracts reviewed, DoD contracting officers did not obtain sufficient documentation to support their positive determination of financial responsibility…”
What needs to change
Is a traditional business audit suitable for the DoD, which does not generate revenue but relies on an annual influx of capital? Like most federal government agencies, the DoD depends on approved budgets from Congress to continue existing and operating. Like all businesses, it does not rely on sales to customers and profits for investors to assess its financial health.
What needs to change is a more practical approach to assessing the budget, one that seeks accountability in the utilization of capital rather than a strict audit of expenditures. Did the obligations effectively support the mission and achieve the intended outcomes? Were the obligations used efficiently, effectively, and correctly accounted for?
Furthermore, can the organization monitor every dollar of its commitments to ensure alignment with strategic objectives and compliance with legal requirements? Can internal controls effectively reduce fraud, waste, or abuse, and can this assessment inform next year's budget request by considering anticipated challenges and new initiatives?
This approach to the DoD audit situation is not merely a cultural shift; it signifies a new method for assessing how efficiently and effectively taxpayer funds are utilized by the DoD and how they support future funding needs.
How It Works
- SFFAS 4 for PPB tracks costs to capabilities: The $44 billion for F-35s allocates $30 billion to aircraft, $10 billion to spares, and $4 billion to training, aligning with national defense goals. It measures unit costs (e.g., cost per jet) and ensures funds are cost-effective and provide the intended capability.
- AI Forensics for Execution: AI using Advana analytics verifies obligations traced to laws, enhancing accountability—did $5 billion produce 55 F-35s? It flags waste, like $80 million in misallocated funds, by analyzing hundreds of DoD “checkbooks” across systems. A well-funded AI pilot could recover billions and trace them to obligations.
- Restoring Advana’s Role: Advana, mandated by the 2018 NDAA, has drifted into logistics and readiness but should refocus on its initially intended “audit” role. Additional funding could integrate SFFAS 4 and AI, streamlining financial tracking and quickly paying for itself within a few years.
Recommendations
- Amend the 1990 CFO Act by limiting the requirement for financial-statement audits at the DoD to the Statement of Budgetary Resources (SBR) alone. Clean auditor opinions on SBRs will reflect, among other things, solutions to reconciling DoD’s checkbook problems and ensure that intended deliverables (e.g., $4 billion = ships) are tied to appropriations.
- Revise the FASAB mandate to prioritize SFFAS 4 managerial obligation accounting to support budgeting and AI forensics for execution, replacing GAAP/FASAB’s financial focus with a more accountable approach to DoD’s budget.
- Mandate SFFAS 4 in PPBE: The FY2026 NDAA should lock SFFAS 4 into budgeting, splitting $145 billion R&D into traceable costs (e.g., 10 hypersonic missiles that produce intended capability), not vague assets.
- nbsp; Fund AI Forensics: Launch a DoD Inspector General AI pilot, testing, for example, $50 billion in procurement. Scale it to $850 billion, flagging obligations like “F-35 spares and parts to meet future operations and maintenance requirements.”
- Reintegrate Advana: Refocus Advana on audit readiness with proper funding, incorporating SFFAS 4 and AI to trace funds. Train financial staff and associate managers to support implementation.
Conclusion
The DoD’s audit failures stem from applying GAAP’s profit lens to a spender’s mission. Seven disclaimers, over $1 trillion in asset discrepancies, and 28 weaknesses prove FASAB’s flaws. SFFAS 4 and AI forensics offer a fix: $18 billion = 5 ships, $5 billion = 55 F-35s, traceable to law, not ledgers.
Amending the CFO Act, mandating SFFAS 4, and funding AI and Advana will deliver accountability. Despite challenges like training and resistance, a phased approach ensures feasibility. Congress and taxpayers deserve answers to “What’d we get?” not “Where’s the receipt?” This shift makes $850 billion count.
Major General Don McGregor (USAF, ret.) is a combat veteran and an F-16 fighter pilot. While serving as a General Officer in the Pentagon, he was the National Guard Director of Strategy, Policy, Plans, and International Affairs, advising a four-star Joint Chiefs of Staff member. He is an expert in defense strategy, policy, planning, and global security and has been published in several defense news outlets. He holds a B.A. in Computer Science from the University of Minnesota and a master’s degree in Diplomacy and International Conflict Resolution from Norwich University. General McGregor would like to acknowledge Dr. Christopher Hanks, a defense analyst and working capital funds expert, for his review and beneficial suggestions regarding the content.
