WASHINGTON ― How did the Defense Department succeed in completing its first two full financial-statement audits in the large and complex organization’s history? It embraced failure.

In testimony to the Senate Subcommittee on Readiness and Management Support on Wednesday, the official who spearheaded the first two annual audits, Deputy Defense Secretary David Norquist, said Pentagon leaders in prior years wanted to avoid the hefty expense of an audit until the department felt it was prepared to pass.

That was “a major mistake,” said Norquist, who was the the chief financial officer at the Department of Homeland Security when that agency performed its audit. Instead Norquist planned to use the audit to identify deficiencies and then fix them. DoD just announced it completed the second audit last week.

“The challenge on the audit was an emphasis to get ready for it, and there’s where I brought a fundamentally different view than those who came before me,” Norquist said in an exchange with Sen. Dan Sullivan, R-Alaska. At DHS, “the auditors were already there. I found the auditors and their feedback to be the central piece to get to that clean opinion.”

This year’s audit saw 1,400 auditors conduct 600 site visits, and the department made progress. It closed 23 percent of the 2,300 issues found in the 2018 audit.

That’s not to say the picture’s entirely rosy. There were 1,300 new issues, including $280 million in items Naval Air Station Jacksonville didn’t properly track, and the Defense Logistics Agency found $200 million worth of its inventory.

“What the Navy started discovering was warehouses and storage facilities with items that had never been loaded into their inventory system, so you you’d open it up and fund spare parts that were not where someone trying to order them can get to them,” Norquist said. “Even at the bases they already visited, they found $167 million in useable supplies, that met unmet demands, things on backorder.”

Lawmakers Wednesday weren’t ripping the failures, but lauding the accomplishment of the two audits and the progress towards a clean opinion. Lawmakers had long complained about DoD inability to audit itself.

“We’ve had past comptrollers and chief financial officers at the Pentagon [under administrations of] both political parties. They have complained, they have whined, they have dragged their feet and found every last excuse under the sun,” Sen. Joni Ernst, R-Iowa, told Norquist. “Thanks for doing the hard job, getting it done and not delaying it further.”

The audit follows with DoD leadership’s pursuit of “efficiency for lethality,” which means that it is reforming its business processes, systems, and policies to gain increased effectiveness and higher performance.

But Norquist said his “big surprise” was that rather than military personnel seeing the audit as a paperwork drill, most recognized that finding lost inventory helped military readiness and their performance of their missions.

Asked whether the annual audits would eventually pay for themselves, Norquist said he expected the cost of the audit―which amounted to near $1 billion for 2019―to come down over time. Yet, he defended the expense as necessary for transparency, accountability and independent confirmation that problems have been fixed.

When will DoD pass an audit? Norquist said it would be reasonable to expect some of the 24 organizations within DoD to achieve a clean opinion each year so that the majority of them have a clean opinion within five years. DHS, he said, achieved a clean opinion within ten years, five of which were spent waiting for the Coast Guard. (Seven organizations received clean audit opinions this year.)

“You’ll see the number of problems going down, that’s really helpful for focusing [the audit],” Norquist said. “I don’t know how long it will take because it’s who’s the slowest and who’ll take the longest. That’ll be the final pin to drop.”

Joe Gould was the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He had previously served as Congress reporter.

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