Homeland Security Watch

News and analysis of critical issues in homeland security

July 15, 2014

Why DHS is cleaner than DoD

Filed under: General Homeland Security — by Christopher Bellavita on July 15, 2014

I think I understood most of the 2014 QHSR.  But there’s one piece I did not get.

Today’s post is about my effort to discover what a “clean audit opinion” means.  In 2013, DHS received a clean audit.  The Department of Defense has never had a clean audit.  Never.  But I believe it hopes to have a clean audit in 2017, when it turns 70 years old.

That’s basically what I have to say today.  The details follow.

———————————————————————

“It is also worth noting that, in late 2013, DHS received its first unqualified or ‘clean’ audit opinion; this occurred just 10 years after the Department’s formation, which was the largest realignment and consolidation of Federal Government agencies and functions since the creation of the Department of Defense in 1947.”

This 49 word sentence appears twice in the 2014 QHSR.

It sounded like accounting language. I had no idea what it meant. But it seemed like a big deal. So I tried to find out.

The QHSR says DHS got the clean opinion in late 2013. I searched and found a GAO report published on November 15, 2013. That counts as “late 2013″ to me.

The report did not appear to confirm the “DHS is Clean” claim: [my emphasis]

GAO reported that the Department of Homeland Security (DHS) had made considerable progress toward obtaining a clean opinion on its financial statements…. DHS has a goal of achieving a clean opinion for fiscal year 2013. However, the DHS auditors’ report for fiscal year 2012, the most recently completed audit, indicated that DHS continues to rely on compensating controls and complex manual work-arounds to support its financial reporting, rather than sound internal control and effective financial management systems.

…GAO also reported that DHS had made limited progress in establishing effective controls to obtain a clean opinion on its internal control over financial reporting.

…DHS has plans to resolve the remaining five material internal control weaknesses, with a goal of achieving a clean opinion on internal control over financial reporting for fiscal year 2016. DHS will continue to face challenges in attaining a clean opinion on its internal control over financial reporting, as well as obtaining and sustaining a clean opinion on its financial statements, until serious internal control and financial management systems deficiencies are resolved.

The GAO report seemed so antithetical to the DHS is Clean assertion that I had to be missing something.

I kept searching and found a DHS press release  that proclaimed “DHS Financial Statements Earn a Clean Audit.”

The release was dated December 12, 2013. You could not get much deeper into “late 2013″ than that. So this is probably what the QHSR statement meant.

The press release said [my emphasis]:

This year, the Department of Homeland Security reached a major goal by achieving a clean audit opinion of the Department’s financial statements by an independent auditor. Simply put, the clean audit is in line with our ultimate goal to increase transparency and accountability for the taxpayer resources entrusted to the Department. …

In order to achieve a clean audit opinion, DHS worked across the entire Department to complete a comprehensive inventory process of its property for the financial statements…. This enterprise-wide approach made it possible for the Department to account for an additional $8 billion in property, which was the last factor we needed to earn a clean audit.

In less than a month, DHS apparently went from not having a chance of getting clean “until serious internal control and financial management systems deficiencies are resolved” to receiving “a clean audit opinion of the Department’s financial statements.”

That is a remarkable achievement.

So remarkable that I must still be seriously not understanding what any of this means.

I located a December 11, 2013 DHS Office of Inspector General report that contained the “independent audit” referred to in the DHS press release.

The IG document did confirm the cleanliness of the audit.

Sort of.

The Department continued to improve financial management in FY 2013 and has achieved a significant milestone. This is the first year the Department has received an unmodified (clean) opinion on all financial statements.

OK, so “unmodified” is a synonym for “clean.” It was starting to become clear to me. I continued reading the IG summary: [my emphasis again]

 However, KPMG [the independent auditor] issued an adverse opinion on DHS’ internal control over financial reporting of the FY 2013 financial statements. Further, as stated in the Secretary’s Assurance Statement, the Department has material weaknesses in internal control over financial reporting. In order to sustain the unmodified opinion, the Department must continue remediating the remaining control deficiencies. 

More accounting speak, I assume. Unmodified means clean. And while phrases like “adverse opinion on DHS’ internal control over financial reporting,” and “material weaknesses in internal control” may appear to my untrained eye to modify “unmodified opinion,” they apparently don’t.

So it’s all still clean. I guess.  And probably transparent. And definitely accountable.

Here’s more confusion on my part: I don’t quite get the “independent auditor” business.

The November 2013 report came from GAO.  Does that mean GAO is not independent because it is an arm of Congress?

Why are we supposed to believe the firm that conducted the audit reported in December 2013 is independent? Because it doesn’t report to Congress?

Who does it report to?

The company, KPMG, received its auditing contract from the DHS.

That’s what the DHS Office of Inspector General wrote when the auditor’s  report was released in December 2013: “We contracted with the independent public accounting firm KPMG LLP (KPMG) to perform the integrated audit.” 

The KPMG tagline is “cutting through complexity.”  Maybe creating unmodified opinions that are modified by other opinions is one way of cutting through complexity.

I know these are all cheap shots on my part. My confusion is undoubtably caused by not speaking Accountantese.

I found a source that did speak like an accountant, or an accountant who was good at translating accounting speak into English. I conducted what in this context might be called an “unmodified interview” [the unmodified emphasis is mine]:

Q: First, what’s an “unmodified opinion?”

A: An unmodified auditor’s report effectively states the auditor believes the financial statements present a true and fair view, and are in accordance with accounting standards and relevant legislation. This is sometimes also called an “unqualified” or a “clean” audit opinion.

Q: Great. Does a clean auditor’s report mean a clean bill of health…?

A: Auditor’s reports are intended to increase the degree of confidence users have in the information in financial statements – not about the state of the [organization] itself …. An unmodified auditor’s report means … stakeholders can make an assessment of the [organization] based on its financial statements, with a higher degree of confidence that the information is materially correct and unbiased.

If I’m understanding this correctly, then, a “clean opinion” does not say anything about efficiency, effectiveness, or  other significant output or outcome measures. It basically means what you see in the financial statements accurately represents financial reality.  [Correction, suggested by Phil Palin: "It basically means what you see in the financial statements is coherent and consistent with widely accepted standards of accounting."

[Where does one go to find these widely accepted standards of accounting? "The most authoritative source of generally accepted accounting principles (GAAP) developed by FASAB {Federal Accounting Standards Advisory Board} for federal entities is contained in The FASAB Handbook of Accounting Standards and Other Pronouncements, As Amended...."  Here's a link to that Handbook:  http://www.fasab.gov/pdffiles/2013_fasab_handbook.pdf.  It is 2,129 pages. The phrase "clean opinion" appears once, describing how to issue a clean opinion even if there are problems.  I am way out of my depth here.]

The 2014 QHSR believes it is worth noting that for the first time in DHS history, its books are in order.

Is that really a big deal?

Senate Homeland Security and Governmental Affairs Committee Chairman, Tom Carper, thinks it is a big deal.

“Given the size of the Department, the fact that it encompasses 22 separate agencies, and the scope and importance of its mission, producing a clean financial audit is no small task. I credit the Department’s past and current leadership for making financial management a priority and taking the steps necessary to realize this important goal.”

So – returning to the title of this post – how does all this circuitousness make DHS cleaner than DoD?

Senator Carper again [with my emphasis],

“By earning this clean bill of health from an independent auditor, DHS is now in compliance with this law and is on track to continue to do so. The Department of Defense is now the only large federal department that is unable to conduct a financial audit.”

It only took 10 years for DHS to figure out what’s on its books. The Department of Defense has been around for close to 70 years and it still can’t figure out what is on its books.

Maybe DoD can learn something from DHS for a change.

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2 Comments »

Comment by Philip J. Palin

July 15, 2014 @ 4:48 am

Chris:

You write, “It basically means what you see in the financial statements accurately represents financial reality.”

I suggest: It basically means what you see in the financial statements is coherent and consistent with widely accepted standards of accounting.

This can sometimes be a bit different than financial reality. But it is still a big deal, especially for a big bureaucracy.

Comment by Dan O'Connor

July 15, 2014 @ 10:33 am

I am not sure it is a clean bill of health, but perhaps more akin to balancing a checkbook, albeit a large one.

Just because the spending trail has been authenticated does not necessarily mean all purchases and procurements have been accounted for. It is as Phil said a big deal for a bureaucracy. That said the administration of an audit has layers and in the quest for transparency and accountability it would be interesting and difficult to determine replication of aquisition, excess services, etc. A daunting task to be sure.

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