U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

i 

28–967 2018

[H.A.S.C. No. 115–64] 

DEPARTMENT OF DEFENSE UPDATE ON 

THE FINANCIAL IMPROVEMENT AND 

AUDIT REMEDIATION PLAN 

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

JANUARY 10, 2018 
(II) 

COMMITTEE ON ARMED SERVICES 

ONE HUNDRED FIFTEENTH CONGRESS

WILLIAM M. ‘‘MAC’’ THORNBERRY, Texas, Chairman 

WALTER B. JONES, North Carolina 

JOE WILSON, South Carolina 

FRANK A. LOBIONDO, New Jersey 

ROB BISHOP, Utah 

MICHAEL R. TURNER, Ohio 

MIKE ROGERS, Alabama 

BILL SHUSTER, Pennsylvania 

K. MICHAEL CONAWAY, Texas 

DOUG LAMBORN, Colorado 

ROBERT J. WITTMAN, Virginia 

DUNCAN HUNTER, California 

MIKE COFFMAN, Colorado 

VICKY HARTZLER, Missouri 

AUSTIN SCOTT, Georgia 

MO BROOKS, Alabama 

PAUL COOK, California 

JIM BRIDENSTINE, Oklahoma 

BRAD R. WENSTRUP, Ohio 

BRADLEY BYRNE, Alabama 

SAM GRAVES, Missouri 

ELISE M. STEFANIK, New York 

MARTHA MCSALLY, Arizona 

STEPHEN KNIGHT, California 

STEVE RUSSELL, Oklahoma 

SCOTT DESJARLAIS, Tennessee 

RALPH LEE ABRAHAM, Louisiana 

TRENT KELLY, Mississippi 

MIKE GALLAGHER, Wisconsin 

MATT GAETZ, Florida 

DON BACON, Nebraska 

JIM BANKS, Indiana 

LIZ CHENEY, Wyoming 

(Vacancy) 

ADAM SMITH, Washington 

ROBERT A. BRADY, Pennsylvania 

SUSAN A. DAVIS, California 

JAMES R. LANGEVIN, Rhode Island 

RICK LARSEN, Washington 

JIM COOPER, Tennessee 

MADELEINE Z. BORDALLO, Guam 

JOE COURTNEY, Connecticut 

NIKI TSONGAS, Massachusetts 

JOHN GARAMENDI, California 

JACKIE SPEIER, California 

MARC A. VEASEY, Texas 

TULSI GABBARD, Hawaii 

BETO O’ROURKE, Texas 

DONALD NORCROSS, New Jersey 

RUBEN GALLEGO, Arizona 

SETH MOULTON, Massachusetts 

COLLEEN HANABUSA, Hawaii 

CAROL SHEA–PORTER, New Hampshire 

JACKY ROSEN, Nevada 

A. DONALD MCEACHIN, Virginia 

SALUD O. CARBAJAL, California 

ANTHONY G. BROWN, Maryland 

STEPHANIE N. MURPHY, Florida 

RO KHANNA, California 

TOM O’HALLERAN, Arizona 

THOMAS R. SUOZZI, New York 

JIMMY PANETTA, California 

JEN STEWART, Staff Director 

JACK SCHULER, Professional Staff Member 

BRIAN GREER, Professional Staff Member 

BRITTON BURKETT, Clerk 
(III) 

C O N T E N T S 

Page 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

Smith, Hon. Adam, a Representative from Washington, Ranking Member, 

Committee on Armed Services ............................................................................ 2 

Thornberry, Hon. William M. ‘‘Mac,’’ a Representative from Texas, Chairman, 

Committee on Armed Services ............................................................................ 1 

WITNESSES 

Norquist, David L., Under Secretary of Defense (Comptroller) and Chief Financial Officer, Department of Defense ............................................................. 2 

APPENDIX 

PREPARED STATEMENTS: 

Norquist, David L. ............................................................................................ 41 

Smith, Hon. Adam ............................................................................................ 40 

Thornberry, Hon. William M. ‘‘Mac’’ ............................................................... 39 

DOCUMENTS SUBMITTED FOR THE RECORD: 

[There were no Documents submitted.] 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

[There were no Questions submitted during the hearing.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

Mr. Conaway ..................................................................................................... 53 

Mr. Langevin ..................................................................................................... 53 

(1) 

DEPARTMENT OF DEFENSE UPDATE ON THE FINANCIAL 

IMPROVEMENT AND AUDIT REMEDIATION PLAN 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, Washington, DC, Wednesday, January 10, 2018. 

The committee met, pursuant to call, at 10:00 a.m., in room 

2118, Rayburn House Office Building, Hon. William M. ‘‘Mac’’ 

Thornberry (chairman of the committee) presiding. 

OPENING STATEMENT OF HON. WILLIAM M. ‘‘MAC’’ THORNBERRY, A REPRESENTATIVE FROM TEXAS, CHAIRMAN, COMMITTEE ON ARMED SERVICES 

Chairman THORNBERRY. The committee will come to order. 

The committee welcomes Mr. David Norquist, the Under Secretary of Defense, Comptroller, and Chief Financial Officer as our 

witness today. The topic is the audit of the Department of Defense 

which, by law, begins this fiscal year. And I would just say it is 

not by accident that the committee will start our year on this topic. 

Requiring that the Department conduct an audit has been a bipartisan priority of this committee for some time. The Chief Financial Officer Act of 1990 required all Federal departments conduct 

an annual financial audit, and partly out of frustration with the 

lack of progress toward that end at the Department of Defense, the 

2010 NDAA [National Defense Authorization Act] required the financial statements of the Department be ready for audit by September 30, 2017. 

This committee’s Panel on Defense Financial Management and 

Auditability Reform put close scrutiny on the Department’s efforts 

and issued a number of recommendations that have enabled us to 

arrive at this point. The 2014 NDAA again required a full audit be 

conducted of the Department’s fiscal year 2018 financial statements, the results of which are to be delivered next year. 

I want to commend Chairman Conaway for his expertise and his 

persistence on this issue, as well as Mr. Courtney, who was also 

a member of the audit panel several years ago. They will both be 

glad to know that we have had additional members join this committee in recent years, who can also contribute their background 

and experience to this issue as it moves ahead. 

This issue is important. Members of this committee hear evidence every week that we are not providing our military with the 

funding they need to carry out the missions they have been assigned. We must spend more. At the same time, we have a responsibility to the American people to see that each of their tax dollars 

being spent to protect them is being spent in a transparent way 

with appropriate accountability. 
2 

We should never assume that an audit will solve all the problems 

of waste and inefficiency, but it seems to me that an essential requirement of spending money smarter is knowing with certainty 

how it is being spent. 

It is likely that the result of the first audit will not be pretty. 

But those results will help direct us all, Congress and the Department, on where we need to apply our efforts to improve. 

This issue is important. And this committee will continue to pursue it. The ranking member is recognized. 

[The prepared statement of Mr. Thornberry can be found in the 

Appendix on page 39.] 

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM 

WASHINGTON, RANKING MEMBER, COMMITTEE ON ARMED 

SERVICES 

Mr. SMITH. Thank you, Mr. Chairman. 

And by and large, I would simply repeat word for word the opening statement of the chairman, so in the interest of time I will not 

do that. And will simplify it by saying that this is enormously important. There are a lot of concerns at the Pentagon, and there are 

really two big issues here. One, as the chairman mentioned, we are 

in a time of very tight resources and very great needs. And that 

means we have to get everything we can out of every dollar we 

spend. There are many, many issues that this committee has covered to make that clear. 

And second, if we cannot explain where we spend the money in 

the Pentagon, we are failing in that first mission. I know it is a 

lot of money. I know it is a big bureaucracy. I know there is a lot 

going on, but we ought to be able to do an audit that tells us where 

we are spending the money. It is just that simple. And, you know, 

that is your mission. That is the Pentagon’s mission. 

I too want to specifically thank Mr. Conaway for his great leadership on this issue. Who knew having an accountant on the committee would be critical. Well, actually, most people should have 

known that. But he has done a great job on this issue, and appreciate his leadership. And I just hope that—you know, I think everybody on this committee would just feel great if at some point this 

year we can say the Pentagon has been audited. It has happened 

some 20 years after we started trying to make it happen. I think 

we are close. I think we can get there. 

I look forward to hearing your testimony about how we are progressing in that. And I thank the chairman for his leadership on 

this very important issue. 

[The prepared statement of Mr. Smith can be found in the Appendix on page 40.] 

Chairman THORNBERRY. I thank the gentleman. 

Mr. Norquist, welcome. Without objection, your full written statement will be made part of the record, and you are recognized to 

make any oral comments you wish to make. 

STATEMENT OF DAVID L. NORQUIST, UNDER SECRETARY OF 

DEFENSE (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, 

DEPARTMENT OF DEFENSE 

Secretary NORQUIST. Thank you, Mr. Chairman. 
3 

Chairman Thornberry, Ranking Member Smith, and members of 

the committee, thank you for the opportunity to provide an overview of the Department’s financial statement audit progress and 

plans. I appreciate your committee’s long and unwavering support 

for this effort. I also want to thank Congressman Conaway for his 

leadership over the years related to the audit. His direction of the 

committee’s 2011 Panel on Financial Management and Auditability 

helped the Department maintain its focus on audit. 

When the President made a promise to the American people to 

rebuild the U.S. Armed Forces, he also made a commitment to 

start the audit. Inside the Department of Defense, Secretary Mattis 

and Deputy Secretary Shanahan have set a tone from the top that 

embraces the audit as part of their vision to bring business reform 

to the Department of Defense. I know you have had many hearings 

where witnesses have told you that they support the start of an 

audit eventually. This hearing is different. We have started the 

audit. 

But we are only able to have today’s hearing with the Department of Defense under its first full financial statement audit because of this committee’s continued support. I should note that audits themselves are not new to the Department of Defense. Numerous audits covering program performance and contract costs are 

completed each year by the Government Accountability Office, the 

Defense Contract Audit Agency [DCAA], the Department of Defense Office of the Inspector General, and the service audit agencies. 

For example, DCAA employs over 4,000 auditors to perform contract audits that are focused on identifying inappropriate charges 

by contractors to the government. However, this is the first time 

that the Department is undergoing a full financial statement audit. 

A financial statement audit is comprehensive, it occurs annually, 

and it covers more than financial management. 

For example, financial statement audits include verifying count, 

location, and condition of military equipment, real property, and inventory. It tests the security vulnerabilities of our business systems, and it validates the accuracy of personnel records and actions, such as promotions and separations. 

The Department of Defense anticipates that this spring and early 

summer we will have approximately 1,200 financial statement 

auditors assessing whether our books and records present a true 

and accurate picture of our financial condition and results of our 

operations in accordance with accounting standards. These financial statement audits complement but are distinct from program 

performance or contract audits. 

Based on my experience at the Department of Homeland Security, it will take time to implement all the processes and system 

changes necessary to pass the audit. It took the Department of 

Homeland Security, a relatively new and smaller enterprise, about 

10 years to get its first clean opinion. But we do not have to wait 

for a clean opinion to see the benefits of the audit. The financial 

statement audit helps drive enterprise-wide improvements to standardize our business processes and improve the quality of our data. 

Just like private sector companies and other Federal agencies, 

the Department of Defense [DOD] prepares financial statements 
4 

every year to report its assets, liabilities, revenues, and expenses. 

Though not a corporation, DOD owes accountability to the American people. The taxpayers deserve the same level of confidence as 

a shareholder that DOD’s financial statements present a true and 

accurate position—picture of its financial condition and operations. 

Transparency, accountability, and business process reform are 

some of the benefits of a financial statement audit. 

Regarding transparency, the audit improves the quality of our financial statements and the underlying data that we make available to the public, including a reliable picture of our assets, liabilities, and spending. And DOD’s progress towards a positive audit 

opinion will also directly contribute to an audit opinion on the entire Federal Government’s assets and liabilities. 

With regard to accounting, the audit will highlight areas where 

we need to improve our accountability over assets and resources. 

For example, during initial audit, the Army found 39 Black Hawk 

helicopters that had not been properly recorded in its property system. The Air Force identified 478 buildings and structures at 12 installations that were not in its real property system. By fixing the 

property records, we can help demonstrate the accountability of our 

assets. 

In other cases, as the Department invests in new business systems, we will be able to obtain independent auditor feedback on 

that system’s compliance so we can better hold those vendors accountable for their solutions. 

Third, the combination of better data, business process reengineering, and the use of modern data analytics directly supports 

Congress’ vision of the chief management officer position and the 

Department’s effort to bring business reforms to its operations. 

These reforms will lead to business operation savings that can be 

reinvested in lethality. The cost of performing the audit will be about $367 million in fiscal year 2018. This amount covers the audit fees to the independent public accounting firms, about $181 million, and the infrastructure, including the cost of the government salaries of the people supporting the audit of about $186 million. The $181 million in 

audit contract costs is 1/30th of 1 percent of the DOD budget. And 

as a percentage of revenue, it is equal to or less than what a Fortune 100 company such as General Electric, Procter & Gamble, or 

IBM [International Business Machines] pays for their auditors. In 

addition, we anticipate spending about $551 million in 2018 fixing 

problems identified by the auditors. 

The DOD consolidated audit will likely be one of the largest audits ever undertaken, and comprises more than 24 standalone audits and an overarching, consolidated audit. DOD is currently sustaining clean opinions for nine standalone audits. Our audits are 

conducted by IPA [independent public accounting] firms with the 

DOD IG [Department of Defense Inspector General] performing the 

consolidated audit, and all the contract audits have been awarded 

and the auditors have begun to arrive. 

In order to track progress, the Department has established a tool 

and a process to capture, prioritize, assign responsibility for, and 

develop corrective actions for audit findings. Each year, the auditors will assess and report on whether the Department has success-
5 

fully addressed the findings. Going forward, we will measure 

progress and report on it towards achieving a positive opinion by 

using the number of findings resolved. 

In closing, I want to thank this committee for its continued focus 

on the importance of a DOD audit. Your insight through the years 

has been—your oversight through the years has been a catalyst, 

and we appreciate the partnership we enjoy with you and with the 

committee staff on this important process. With your oversight and 

under this administration’s leadership, we are now and will continue to be a department that is not only under audit, but improving year after year. 

As we move forward, your continued support for budget stability, 

related information technology and funding to remediate audit 

findings remains critical in moving the Department towards 

achieving a positive opinion. I thank you and I look forward to your 

questions. 

[The prepared statement of Secretary Norquist can be found in 

the Appendix on page 41.] 

Chairman THORNBERRY. Thank you, sir. And I appreciate your 

differentiating what we are talking about here, a full financial 

audit with contract audits. I might just highlight that we had a 

number of provisions to reform the contract audit process in the 

last year’s defense authorization bill, and hopefully that will improve as well. 

I just want to ask you one question. I was interested to read 

where a retired general says basically this audit is not worth doing. 

Secretary NORQUIST. Uh-huh. 

Chairman THORNBERRY. As you highlight, it requires going and 

checking the real property, you have got to check and see whether 

all the weapons and equipment are accounted for, the various 

records and so forth, it is going to be expensive. And as—his point 

basically is it is not worth the cost. 

Now, you are doing it because the law requires you to, I understand. But what would be your response to the argument that the 

cost is more than the benefit of doing a full financial audit of the 

Department? 

Secretary NORQUIST. Sure. I would first respond, he noted that the—referred to the audit as costing over $800 to $900 million. The 

amount we are paying the IPAs, $181 million, is 1/30th of 1 percent 

of the budget. This is not a significant—I mean, any number then 

in the millions is a large number, but on the scale of the enterprise, that type of money for accountability is money well spent. The additional money, the $500 to $600 million we have talked 

about, is to fix problems that we find. Now, this is always a choice 

going forward. If we can live with the problem, we can fix it. But 

I do not think operating in ignorance of the problem is the right 

way forward. 

I fully support the committee and the legislative direction. Conduct the audit, do the findings. Some of the things I will point out 

is the article said that it is expensive because it covers so much. 

And the answer is, yes, that is the point. 

You know, one of the things that the law requires is that we do 

information security of our business systems. This is the FISMA 

[Federal Information Security Management Act] and FISCAM 
6 

[Federal Information System Controls Audit Manual] standards. 

The audits are done to those. We will be able to understand the 

weaknesses and do more to hold people accountable for closing 

cybersecurity vulnerabilities in our systems. You would want that 

anyhow. You would want that done under any circumstance. And 

when we find those, you will want the Department to be closing 

them. 

The other comment that he talked about, there are other ways 

to do this. Yes, there are. And you talked about contract audits. 

While the defense financial statement is large, 1,200 auditors, we 

have 4,000 who look at contractors. So on the scale of what we 

spend looking at contractors, the size of the team that will be looking at the government is appropriate and proportionate. 

Lastly, I think the biggest concern I have is the statement that 

they make that the Department is not a corporation and does not 

need to undergo a strict financial audit. Well, first of all, the law 

requires a financial audit. And more importantly, I think the taxpayers deserve at least the same level of confidence as a shareholder in the use of their money. 

Chairman THORNBERRY. Thank you. 

Mr. Smith. 

Mr. SMITH. I do not have a question. I just want to totally agree 

with your remarks that you just made. You know, to say that it 

is not worth doing is like saying, hey, we have screwed it up so bad 

for so long that, you know, the cost of fixing it has just become 

overwhelming, so just let us keep screwing it up. And I get that 

the upfront cost is going to be enormous. 

Secretary NORQUIST. Uh-huh. 

Mr. SMITH. But long term, the benefits are exactly as you described. You know, if we got to sort of suck it up for a couple of 

years and absorb some cost to get back on track, it is going to make 

significant improvements. All of the work on acquisition reform 

that I know the chairman and I and many others have done can 

be so much better informed if we have this information. All right. 

We can say, well, gosh, here is an area that we—instead of—so 

when we pass legislation aimed at making the acquisition process 

better, if we have this full audit, that legislation has a much better 

chance of actually accomplishing that task. 

So, yeah, it is pretty bad, and in some ways you would like to 

just sort of close your eyes and say, let us just not deal with it. But 

it is just too important for all the reasons you stated. 

Secretary NORQUIST. Uh-huh. 

Mr. SMITH. So I completely agree with that statement. I applaud 

your commitment to doing this, and stand ready to have the committee help you in any way we can. 

So I will yield back my time. If you have a comment, you may, 

but I have nothing further. 

Secretary NORQUIST. My only comment is to reinforce your point 

about the better data to support information. I mean, the primary 

thing an audit promises is better data accuracy and accountability. 

And when many of the other reforms depend on the accuracy of 

that data, not having it complicates those efforts. 

Chairman THORNBERRY. Mr. Jones. 

Mr. JONES. Mr. Chairman, thank you. 
7 

I have been here 22 years, and this is the best news of hoping 

for something good to come from this effort. And I commend my 

friends on my side and other side who worked with the chairman 

and ranking member to put this effort together. 

I never will forget Donald Rumsfeld, the former Secretary of 

State—excuse me, Defense, Defense—sitting where you are telling 

this committee that he will account for every dollar of the taxpayer 

and how it is going to be spent at the Department of Defense. He 

might have meant well, but it never happened, obviously, because 

that is why you are here today. Because we have never been able 

to do anything to take a problem and even in a small way make 

it better. 

I got one question. It does deal not directly with you, but because 

of your position and your oversight. Of all the articles I have seen 

about waste—— 

Secretary NORQUIST. Uh-huh. 

Mr. JONES [continuing]. In the 22 years I have been here, probably this is in the top four or five. It is from 2 years ago. ‘‘U.S. 

Army fudged its accounts by trillions of dollars, auditors found.’’ 

‘‘The Defense Department Inspector General in a June report [2 

years ago] said the Army made a $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 

trillion for the year. Yet the Army lacked receipts and invoices to 

support these numbers or simply made them up.’’ 

This would be something, I would think, would be under your department’s jurisdiction, if it happened within the system. This is 

one of those things that I would like to ask you, how in the world 

do you fix a problem when you keep funding the problem? 

And there has got to be—you fellows, CPAs [certified public accountants] and accountants, can give me some assurance that when 

stories like this go public and the taxpayer reads it, Mr. Norquist, 

that is why they are so frustrated with Congress and why we have 

an 18 percent approval rating. 

So I would hope that this would be a kind of a situation that you 

can, in a short period of time, give me some hope that this would 

be dealt with, and somebody—instead of saying that, well, this 

happened and that happened, but we keep funding it. I just do not 

know how you catch up when you keep funding the problem. 

Secretary NORQUIST. So let me address that, because that is a 

very important one. One of the issues you are talking about relates 

to journal vouchers, which occurs after the money is spent. So 

when you see an article that says trillions of dollars, and you realize we only receive about $600 billion in a year, there is something—there is a mismatch in the story. And what this refers to 

is, we have systems that do not automatically pass data from one 

to the other. So the Army goes in, and others, at the end of their 

financial statements, finds the number from their property book, 

and writes it into their general ledger. That is called a journal 

voucher entry. Depending on the amount of property, that can be 

hundreds of billions of dollars. 

Because they do not have adequate support for that journal 

voucher, the whole entry is considered unsupported. Now, from a 

management point of view, this is bad. It is not the same thing as 

not being able to account for money that Congress has given you 
8 

to spend, but it is still a problem that needs to be fixed. And part 

of that relates to systems that were built as stovepipes. In the private sector, they would all talk to each other. You would not let 

them field the system that did not automatically pass up its data. 

So we are addressing exactly that type of challenge. 

And one of my concerns is, only by eliminating the types of ones 

that are just an entry issue can you find underlying issues that are 

hidden among inaccurate data. So it is important. I would not want 

the taxpayer to confuse that with not—with a loss of something 

like a trillion dollars. That would not be accurate. But it is an accounting problem that does need to be solved because it can help 

hide other underlying issues. 

Mr. JONES. Thank you very much. I am going to tell you that I 

might not be here when you resolve the problem, but I will still be 

reading the paper. I wish you and your staff the very best. Thank 

you. 

Secretary NORQUIST. Thank you, sir. 

Chairman THORNBERRY. Mr. Carbajal. 

Mr. CARBAJAL. Thank you, Mr. Chairman. 

Thank you, Mr. Norquist, for being here today. You know, this 

is my first year in Congress, and I will tell you that oftentimes I 

am asked for my observations. I served in local government for 

over 24 years. And the most shocking thing about being in Congress is that there has never been a comprehensive audit of the 

DOD. 

Secretary NORQUIST. Uh-huh. 

Mr. CARBAJAL. It is just outright ridiculous. There is no other 

way of putting it. And it has been said that if you cannot measure 

it, you cannot evaluate it. 

Secretary NORQUIST. Uh-huh. 

Mr. CARBAJAL. And I think this is one of the most significant 

issues facing the American people and having trust in our being 

able to adequately fund our military and our Department of Defense. I think if we do not get it together, we are going to lose the 

American people’s trust in what we are trying to do here. 

There is no question as to how daunting this task is going to be. 

The stakes are high. Last year, Congress approved almost $700 billion for the Department of Defense, and we owe it to the taxpayers 

to provide oversight and accountability over their tax dollars. 

Mr. Norquist, in your written testimony, you mentioned that for 

years, the Department has received disclaimer of opinion on DODwide financial statements because it was not able to provide the 

evidence to support its financial information, and that these disclaimers were based on management’s assertions and not based on 

independent audit testing. 

Can you provide some clarification and detail on this issue? What 

do you mean when you say it was based on management assertions 

and not independent audit testing? Because, it is my understanding, audits such as the one conducted for fiscal year 2015 was 

conducted by independent public accountants. If you could shed 

some light on that I would greatly appreciate it. 

Secretary NORQUIST. Sure, I would be happy to. There are a 

number of parts of the Department of Defense that have been 

under audit for a number of years, Defense Finance and Account-
9 

ing Service, the commissaries, our pension plan and so forth, and 

many of those receive clean audit opinions, but it is not the entire 

Department. It is not even the majority of the Department. And so 

when you do not have an auditor’s opinion, management is not able 

to represent that everything is in order. And so the IG [Inspector 

General] does not even begin the testing. They just said, then you 

failed. 

This is one of the reasons why I have been a strong advocate and 

supporter of the audit. When I was at the Department of Homeland 

Security, when I arrived as a CFO [chief financial officer] there, 

they had actually already had the audit the first year. With the 

amount of information you received from the audit as management 

in order to fix things was tremendous. And so I understand your 

concern of, you know, an entity that does not have an audit, that 

will provide a lot of useful information. And I think operating without it, there is a limit to how much you can reform and fix without 

that independent check validating that what was done was done 

correctly and effectively. And I think that is the biggest transition 

that we are going to see from this year to previous years. 

Mr. CARBAJAL. Thank you. Once we see a Department of Defense 

audit for fiscal year 2018, how will DOD track its process for correcting errors? Specifically, how will the audit remediation process 

be executed? And what is the timeline for analysis, execution, and 

implementation of lessons learned from the audit? 

Secretary NORQUIST. So here is how we will do that. We have set 

up a dataset where every time there is a finding by the auditor, 

what they call an NFR, notice of finding and recommendations, and 

it is made up of several conditions, the auditors will enter that into 

the database. So we will have their view for every entity of each 

of the findings. And they will have codes according to the type. Was 

it against an IT [information technology] system? Was it related to 

property? We will then have an organization or individual associated with that NFR and the responsibility to correct it. 

This is important because it gets us past the habit of saying, 

does the Department have a clean opinion? No. And then no one 

feeling that they individually are accountable. Here, all these findings will be associated with an organization, office, or individual 

who will be responsible for the corrective action plan. And I will 

be able to come back and report to you each year which of those 

were closed and which of those were not, who we should write to 

and say, well done, good job, and who either needs more help or 

more encouragement to get their piece of it done. But we will be 

able to track it finding by finding and hold accountable over time. 

And this is, again, one of the tools that the audit gives us. 

As we move from the higher level, it is hard to solve to very specific things. One of the things I like about that is you may have 

a large number of findings, and somebody says, well, why do I need 

to fix my piece, look at how big the problem is. And this is—yes, 

but there are two assigned to you. If you can fix those two, that 

is all that you need to do. And then as more people do that, the 

whole organization moves in the right direction. So we will have 

that information for you, sir. 

Mr. CARBAJAL. Thank you. Mr. Chairman, I yield back. 

Chairman THORNBERRY. Mr. LoBiondo. 
10 

Mr. LOBIONDO. Thank you, Mr. Chairman. 

I would like to join with my colleagues in saying how much we 

look forward to your efforts and wish you good luck. 

Secretary NORQUIST. Thank you. 

Mr. LOBIONDO. It is certainly long overdue. And I want to take 

the opportunity to thank and applaud Mr. Conaway for being so 

dogged in this with his hard work. 

And with that, I yield my time to Mr. Conaway. 

Mr. CONAWAY. Thank you, Frank. 

David, please pass on to your team a thank you for where you 

have gotten us to today. The thousands and thousands of manhours, people-hours, however you want to refer to it, that got you 

to—however flawed we are at this point, we are far, far better off 

than when I first took up this task, and I for one have seen that 

progress. And so thank your team for it. Got a long, long way to 

go. 

We do not want to overpromise and under-deliver. The 2018 

audit is unlikely to be a clean opinion, given the scope of what all 

has to be done, but we are so much further along based on the 

leadership that you and your team have provided and the hard 

work of the folks who every day get up and go to work to face this 

daunting problem that does not—it is like Sisyphus, trying to push 

that rock up the hill every day and you get up the next morning 

and it is all the way back down at the bottom. So please tell— 

thank you. 

Secretary NORQUIST. Sure. 

Mr. CONAWAY. Part of what we will try to do is to keep that process moving forward and not, you know, do anything that hampers, 

from a legislative standpoint, because we are frustrated that it had 

not gotten done sooner. We just have to recognize that it is getting 

done. 

Would you—you talked about findings, and that has got a certain 

definition to you. Would you explain to the committee what a finding really is, what that means from an auditor’s standpoint and 

why that is important that those get fixed? 

Secretary NORQUIST. Sure. So what the auditor does is, they are 

holding the Department accountable against certain well-recognized standards. And so the finding can consist of, you were unable 

to produce the records to support this transaction. Or we looked at 

your property system and it indicated you should have 100 of 

these, and when we walked the floor and looked at inventory, there 

were 95. They are basically things that are wrong in the way that 

either we are accounting for our assets or recording. And so then 

those are items that are priorities for us to fix. 

Mr. CONAWAY. So would those also include weaknesses in internal controls? You mentioned a circumstance where you had trillions of dollars of journal entries going back and forth. That is typically a failure of internal controls. So the auditors are looking at 

your internal control system. Those findings would include weaknesses or failures within the internal control system? 

Secretary NORQUIST. Correct. 

Mr. CONAWAY. All right. While we are not going to get all the 

way to a clean opinion soon—— 

Secretary NORQUIST. Uh-huh. 
11 

Mr. CONAWAY [continuing]. You mentioned a couple of reasons 

why we have made—why it was important that we do this add 

value along the way. Can you expand on the 39 helicopters or the 

400 buildings and—— 

Secretary NORQUIST. Sure. 

Mr. CONAWAY [continuing]. And why not knowing—I mean, we 

obviously knew—the pilots that were flying those 39 helicopters 

knew they were there, but somewhere further up the management 

chain they disappeared from the inventory and may not have been 

known that they were there. Four hundred buildings may not seem 

like a big deal because they were not moving, but at some point 

in time we have to address, you know, a BRAC [base realignment 

and closure] or something of that nature. 

Can you talk to us about value added along this path over the 

next couple of years that we will get as a result of doing these audits? 

Secretary NORQUIST. Absolutely. You know, in order to get a 

clean opinion, there is a number of steps you have to solve. But 

even along the way, fixing the pieces along the way produce a tremendous benefit. So if you think of the inventory in a warehouse 

of how many spare parts or munitions that you have, or the helicopters. Those had been delivered by the vendor but had not been 

recorded in the property system, which meant folks who were anticipating using them were waiting to take advantage of it. Or if 

you have, the case of the buildings, the person on the base may 

know they are there, but somebody at headquarters trying to figure 

out do we have enough square footage where we need to do things, 

is operating with incomplete information. So as the leadership 

mentioned at the beginning, accurate data helps drive more accurate decision making. 

There is a couple other benefits. For example, DISA [Defense Information System Agency], one of the agencies that received a 

clean opinion on one of its funds, a modified on the other, was able 

to return $230 million to the services. It lowered its bills to them 

and allowed them to spend that money on operations and readiness, because it had a more accurate understanding and better 

management of its finances. 

Likewise, in terms of identifying errors, the Navy changed its 

process of how it handed information to DFAS [Defense Finance 

and Accounting Services] to be more automated, reducing how 

much work DFAS had to do for them. That saved them $65 million. 

So while we are focused primarily on data accuracy, there are financial savings that come, and then there are other things, which 

is just a benefit for the men and women of the Armed Forces. 

The Air Force, when they were doing a walk-through, discovered 

their enlistment records were being set up incorrectly for new recruits, as to whether they were 6- or 4-year enlistment. So they 

were updating, manually, hundreds of records every year as people 

arrived basically because the entry was done incorrectly at the beginning. 

They went back into the system change to try—to make sure 

that did not happen, freed up a lot of labor hours, reduced by 80 

percent the manpower accuracy issues. So it benefits the troops in 

better pay and benefits accuracy. 
12 

Mr. CONAWAY. Thank you. Mr. Chairman, I yield back. 

Chairman THORNBERRY. Mr. O’Halleran. 

Mr. O’HALLERAN. Thank you, Mr. Chairman. 

First of all, I want to thank all those that have worked on this 

over the past decades. And as a new person, just like Mr. Carbajal 

and all us front row people, I am kind of—after having read the 

information on this, I am kind of shocked. 

Secretary NORQUIST. Uh-huh. 

Mr. O’HALLERAN. You know, as a new person here, to look at decade after decade and trillions of dollars after trillions of dollars, 

and apparently no real rush to get to the point where we have an 

audit, a meaningful audit, is disturbing. But I do want to thank 

you for being here today to discuss this critical issue for our 

warfighters and American taxpayers, and thank you for your service. 

I want to echo my colleagues who have rightfully stated that 

proper financial oversight is long overdue at DOD. Waste, fraud, 

abuse have no place in any agency, especially not when it comes 

to guaranteeing our national security and readiness. Every dollar 

wasted or fraudulently spent is a dollar lost to our warfighters. 

They deserve better. And I look forward to working with you and 

the rest of this committee to increase transparency and financial 

integrity. 

I also share concerns about what we can expect from this process. As you know, the GAO [Government Accountability Office] has 

stated DOD has not yet demonstrated that its leadership has the 

ability to achieve effective financial management reform. The DOD 

lacks a sufficient cadre of financial managers with qualifications 

and level of expertise needed to lead reform throughout the Department. 

Additionally, having looked at what occurred in the financial industry over time—— 

Secretary NORQUIST. Uh-huh. 

Mr. O’HALLERAN [continuing]. I have concerns about how we are 

going about—go about guaranteeing that this marriage between 

the DOD and the different auditors is one that is going to be transparent enough for us to understand that the taxpayer is getting the 

appropriate audits that we should be getting. Because, as you 

know, what occurred in the financial industry was that, basically, 

the auditors did what the people being audited wanted them to do 

so that they can get the next contract the next time it was around 

or keep that contract. I really want to know how we are going to 

watch that issue. 

And, Mr. Norquist, has DOD developed not only a process to 

guarantee that we are getting what we say we are going to get, but 

brought on additional personnel who demonstrated financial management experience? What barriers continue to impact DOD’s ability to attract, retain, and develop qualified personnel? And retain 

is a very important issue when it comes to these types of things. 

And how will we verify the audits in the long term? 

Secretary NORQUIST. So let me cover a couple of points that you 

brought up, and I will start first with the independence of the auditors, because that is a central one that we had to address at the 

very beginning. The auditors do not report to the Army, the Navy, 
13 

Air Force. They do not report to me. They report to the IG. The 

IG is the contracting officer, oversees them, and makes the decisions about what they do, and so they have the same protected 

independence of the IG. 

But it is also a reason why we split the audit into lots of pieces. 

One is an auditor cannot audit an agency if they have consulting 

work there. And so finding an audit firm who had no consulting 

work anywhere in the Department of Defense would be somewhat 

limited. But if you break it Army, Navy, Air Force, DISA, Working 

Capital Fund, so forth, you will find firms that are, and you will 

find multiple ones so you can have competition. 

So part of the having the 24 or more separate audits is, first, you 

get people who are independent. And second, we have sustained 

the competition, that if there is an auditor who is not performing, 

the IG has multiple other auditors with DOD audit experience that 

they can go look to. So we thought through—because there was the 

question, why do you not just use one large audit? And my answer 

is, you have created a monopoly. We would never, after they 

learned our business process, be able to find another auditor who 

could compete, and then I would be explaining to you why the 

audit costs went through the ceiling. 

So I think we tried to pay attention to the concerns that you 

have raised, and I think the IG function is a tremendous help for 

us in maintaining that independence. 

Mr. O’HALLERAN. Just to that point, because my time is running 

short. I appreciate the IG and its independence, but in the long 

run, the IG has been around for a long time. 

Secretary NORQUIST. Uh-huh. 

Mr. O’HALLERAN. And a lot of things have been going on for a 

long time, whether it is fraud or abuse or just lack of information. 

Secretary NORQUIST. Uh-huh. 

Mr. O’HALLERAN. And it has not come to anybody’s attention of 

how to correct that. And so just the idea that the IG is going to 

be the independent evaluator of the process does not guarantee the 

taxpayer of America that this relationship is not going to be one 

that is controlled by those that know and can manipulate the system versus those that are responsible for making sure that we get 

what we are paying for, and it is verifiable. So I would like to talk 

to you a little bit more in depth about just where that goes. 

And I yield back. 

Chairman THORNBERRY. Chairman Conaway. 

Mr. CONAWAY. So thank you. 

David, DFAS is an integral part of several of the accounting systems. Can you talk to the committee about the audit of DFAS per 

se, but also the conflict between the services that DFAS provided 

to the Army, Navy, Marine Corps, that on a standalone basis, if 

those were audited separately going into DFAS, to audit that service that was provided would be really disruptive and inefficient? 

Can you talk to the committee about how the team is looking at 

solving that issue with respect to DFAS? 

Secretary NORQUIST. Sure. So we have a number of places where 

an audit of one of our entities would extend into another. So if you 

think of the Army, Navy, and the Air Force have financial management processes that extend into the Defense Finance and Account-
14 

ing Service. So the way that we address that is we have what— 

the acronym is SSAE [Statement on Standards for Attestation Engagements] 16. It is basically an audit of that organization’s support to the others that external auditors can rely on. Otherwise, we 

would be paying for the three or four different auditors to all show 

up and re-audit a single step. 

It is interesting it shows up in DFAS. It also shows up with ammunition storage where the—several different services’ ammunition are held in one place, and the answer is rather than each auditor coming in, we will do a similar thing over ammunition storage 

and say, you can all rely on this audit piece so you do not have duplication of work. 

Mr. CONAWAY. So you talked about the accountability that you 

are going to create with this database findings that are out there. 

Can you talk to us about the accountability piece? You have got 

two groups of folks that will be responsible for correcting or addressing the findings. You have got civilian folks as well as uniform 

people. Can you talk to us about the carrots and sticks that you 

have got available to you to hold people accountable within your 

system for getting those findings resolved to the satisfaction of the 

auditor? 

Secretary NORQUIST. Absolutely. I think there is a limit to them, 

and we may need to work with this committee on alternatives and 

additions going forward. But this is actually one of the first things 

that the Secretary of Defense brought up with me, even before I 

was nominated, to say, ‘‘How do you motivate people in a Federal 

agency to stay focused on fixing things when you lack some of the 

incentives and controls you have in the private sector?’’ 

So I think there is a couple things. One is being able to clearly 

identify who is accountable is one of the first steps, and so that is 

the part of it that the database gives us so the people know who 

it is on. The second is audit support shows up in people’s performance evaluations, so there is no way around that comment being 

made about your contribution or your success. So that helps to 

drive it. Both the civilian and the military will have—there are 

limits to how far we can go, compared to a private sector, but I 

think the transparency and the accountability, knowing—one of 

your biggest challenges, no one thinks it is their responsibility. And 

so fixing that and being very clear whose responsibility it is helps 

to drive that performance improvement. But there are limits to this 

that I recognize. 

Mr. CONAWAY. Well, it is a—that database has been—is a big improvement from where we have been in the past, because sometimes the tasks are just so daunting that you could get away with 

not addressing it. But having it broken down into, relatively speaking, bite-size pieces, I think we will see progress over the coming 

future. 

To Mr. O’Halleran’s issue. These CPA firms that provide the 

audit are held to professional standards by their own industry and 

by the very State boards of accountancy. So it is not like you have 

got a group of folks out there who are not without oversight from 

professional standards that they would have to ascribe to if they 

working in a private secretary audit as well? 
15 

Secretary NORQUIST. Correct. And they are, in fact, audited on 

whether or not they met those audit standards. And they will have 

to produce, to an external firm, evidence that they did their audits 

to an acceptable standard. 

Mr. CONAWAY. So while not perfect, we are all humans and there 

have been some audit failures in the past. Nevertheless, there are 

professionals and professional standards that those folks are held 

to? 

Secretary NORQUIST. Correct. 

Mr. CONAWAY. Just a quick anecdote. Part of the issue has been 

over this timeframe is making sure you had the right tone from the 

top. Leon Panetta started that, and I think it has been transitioned 

to the new administration this time really, really well. 

I was encouraged by the experience I had in Hawaii awhile back. 

I was at a—touring the USS Texas, which is a submarine. We were 

in the galley doing a townhall meeting for the enlisted guys, and 

somewhere during that conversation one of the petty officers asked 

me, he said, Congressman, how is the audit going of the Department of Defense? Which I thought was—two things: you guys 

planted that guy down there because you knew I was going to be 

onboard that ship, or you have got some really bright enlisted guys 

who are paying attention to conversations that are going on 

throughout the food chain of the Department of Defense. And if the 

issue of auditability has gotten all the way down to a petty officer 

in the bowels of the USS Texas, then we must be making some 

progress. 

So, with that, I yield back. 

Chairman THORNBERRY. Mrs. Davis. 

Mrs. DAVIS. Thank you very much, Chairman. And thank you as 

well, Mr. Norquist, in the efforts that are going in there. It has 

been a longstanding problem, and we all know that. 

I wanted you to just speak a little bit, and I think we have addressed a few of the process issues, but particularly the concerns 

around cultural resistance to change. And if you could, I think one 

of the things that we are very aware of right now in any large bureaucracy, that there are a lot of issues, retribution for people who 

are trying to do the right thing and other people do not want them 

to is a concern. Sexual harassment at the Pentagon is a big concern, as you have probably noticed through numerous reports. 

So I wonder if you could just speak to—you know, there are all 

these issues that go on in people’s workplaces, and that cultural resistance to change is one that really has to be monitored closely. 

And how are you dealing with that? How are you expecting to be 

able to bring everybody to the table on these issues and get the 

kind of buy-in that is necessary without individuals picking one another off. 

Secretary NORQUIST. The cultural resistance—I mean, no one 

wants to be audited. I do not know how many witnesses you have 

had come excitedly, tell you, hey, I am under audit today. But it 

is also that in order to fix the findings, we are taking systems and 

processes that were built to maximize support to one thing and requiring them to pay attention to the functions around them that 

they work with. And that can be a challenge because somebody 

says, well, this is how it disrupts it. 
16 

So there is a couple of factors that go into this. The first is the 

tone from the top, and that comes from the Secretary and the Deputy Secretary who are unambiguously clear, this is about accountability, and they have sent letters to the workforce that emphasize, 

this is about doing your job the way you are supposed to. These are 

what the accounting standards and the property standards and everything come from. You are responsible for this. So it is very clear, 

running up your chain, to say, I do not want to do this is not going 

to run into success. 

The other one is Congress has been very clear. Because the other 

place you go is to say, tell them to make them stop, right? And the 

likelihood of someone coming to Congress and saying, please make 

them stop the audit, and getting a warm and fuzzy hearing is pretty limited. So those two things help create the realization that the 

organization will need to change. 

The second part of that process is explaining to them the benefit 

of the change. In many cases, we have labor-intensive processes 

where data is transferred from one place to the other, and you have 

to fix errors because it was not done right at the beginning. Or it 

was only filled in with the fields the people at the beginning needed. Well, if you can explain that when you get that fixed, you are 

going to spend less time doing this and more time on the things 

that you believe is your core mission. 

So, yes, it is a little bit of work, and certainly the first year of 

an audit, when you are asked for records you do not necessarily 

have easy access to and you have to spend some time finding them, 

is a challenge. But over time, this will make your life easier. And 

we have to work that office by office and organization by organization. But, as you pointed out, this is as much changing people’s 

views about how to do things so that they understand the importance. 

The third factor is the audit is annual. You know, if you did this 

once and came back in 10 years, I do not know you have the same 

incentive to cultural change as the realization is they are coming 

back in 6 to 9 months. So you can make the change or you can 

watch them find the same things again. So that third factor—what 

makes the financial statement a lot different is it repeats. And they 

are not going to change the questions; they are just expecting you 

to change your ability to provide an answer. 

Mrs. DAVIS. Do you anticipate any need for a feedback system so 

everyone who is engaged in this can be giving their input all along 

the way, and some of that may be anonymous? 

Secretary NORQUIST. Yes. We need a feedback. And one of the 

things that I have tried to draw attention to is, because the audit 

is going to repeat, what is important is that we be able to sustain 

this. So if you are given a task where the resistance is this is just 

way too labor intensive, stop. Let us figure out why answering that 

auditor request is labor intensive and fix the way we store the data 

or do the check so we can answer them efficiently every year. I 

would rather take the finding the first year than do some Herculean expensive effort that I am going to have to repeat the next 

year. 

So if we are not able to find the records efficiently, let us create 

a data warehouse, let us put the records where they can be easily 
17 

searched so next year it is a very quick process. We want to make 

this efficient over time, and that is another way of reducing some 

of the resistance so it is not—you know, the people have a way of 

saying, hey, I do not understand why this is happening this way. 

And the answer is maybe we can do it differently. But we are still 

going to have to meet the standards of the audit. 

Mrs. DAVIS. Thank you. And just speaking of the auditors—and 

obviously you are going to be using a lot of different ways of responding to some of the concerns that have been existing for some 

time. Is there anything in the training or preparation as you move 

forward that needs to be changed and that you are addressing as 

it relates to the way that people are approaching it? 

Secretary NORQUIST. So there has been a lot of effort on that. My 

predecessor, Bob Hale, set up a relatively robust training program 

for the financial management community that has been focused on 

introducing audits and audit readiness as a result of the input from 

committees and others. Extending that thoroughly through the logistics and the other organizations is probably one of our challenges. There has been some training, but those areas are as equally affected. 

Chairman THORNBERRY. Mrs. Hartzler. 

Mrs. HARTZLER. Thank you, Mr. Chairman. 

Thank you, Mr. Norquist. This is a very encouraging day. It is 

a day that we have been waiting on for a long time. I certainly 

want to commend the chairman and ranking member and certainly 

my colleague, Representative Conaway, for his leadership on this, 

because certainly we are facing so many threats around the world, 

and we need more dollars to modernize and to increase our readiness. But at the same time, I hear back home concerns about 

waste. And any time there is waste, we need to make sure that it 

is rooted out, and that we are investing our precious defense dollars where they need to go. And so this process that you are leading is critical in this effort. 

And so you noted that one of the chief benefits of the audit process is improved accountability of the assets and resources. So I was 

wondering, are classified assets part of the audit process? 

Secretary NORQUIST. Yes. Classified programs are included. I will 

also tell you that—all of the intelligence, defense intelligence agencies, have standalone full-scope audits, and most of them have been 

under audit for 3 years. But being a classified program does not exempt you from the scope of the audit. 

Mrs. HARTZLER. Okay. And then will there be a separate addendum then that we in Congress will be able to access to look at that 

portion or how will that—how will there be accountability for the 

classified side? 

Secretary NORQUIST. Sure. So for the standalone audits, those 

are classified, the ones of an intelligence organization. For the others, how that shows up, I would rather talk to you in a closed 

forum. 

Mrs. HARTZLER. Okay. 

Secretary NORQUIST. But we address all of the classified programs as they are in the scope of the audit. 

Mrs. HARTZLER. How about OCO [overseas contingency operations]? 
18 

Secretary NORQUIST. OCO would be in the scope of the audit, 

yes. 

Mrs. HARTZLER. Okay. Very good. In your testimony, you said 

something here that caught my attention, and of course, the cost 

you anticipate is $367 million, which we have already talked about 

the long-term benefit of that investment in getting this—a handle 

on everything. But you go on to say, you anticipate spending about 

$551 million this year, in fiscal year 2018, fixing problems identified. 

So could you expound on what problems you anticipate and what 

the presumptions were to come up with that figure? Where do you 

get $551 [million] for fixing problems? 

Secretary NORQUIST. Sure. So the number comes from talking to 

the services about what funding they have planned for this year 

and what did they have in the budget to address these requirements. And the types of requirements we are talking about is systems that have been already fielded for whom the—either they are 

not storing the data properly or they are not transmitting it properly, reducing manual passages between systems. So some of those 

changes are in there. Improvements in the way they inventory or 

store things. 

One of the steps that is involved, the accuracy of the property 

records. So each one of those places where they are improving their 

process or changing the underlying system or clearing up old 

records so that—those are the things that are driving those types 

of costs. 

Mrs. HARTZLER. So it sounds like the services already have a 

handle on what they know are problems? 

Secretary NORQUIST. Correct. 

Mrs. HARTZLER. And then they put a price tag to that. So most 

of that, it sounds like, is computer software? 

Secretary NORQUIST. Not most of it. That is just a piece of it. 

Mrs. HARTZLER. What? 

Secretary NORQUIST. It is a piece of it. It is not most of it, but 

the systems are certainly a piece of it. 

Mrs. HARTZLER. Can you give a more specific breakdown on that? 

So you anticipate you are going to have to purchase so many more 

computer systems that talk to each other, and you say record management. So are you putting man-hours? Do you anticipate additional personnel to create written records? I mean, get more specific, please. 

Secretary NORQUIST. Sure. So I may have to give you some of 

this for the record, but I will try and talk you through what I can 

at this level. 

So when you are going through the audit and you—for many of 

them, they have either done some work in advance or, in some 

cases, the auditors have done preliminary work on their statement 

of budget activities, other pieces, before we got to the full scope 

audit. So they have some indication of the types of challenges they 

face, and they have developed corrective action plans for those. 

Some of those corrective action plans include modifying one system to allow them to be audit compliant and allow them to turn 

off systems that are not. So there are financial system costs that 
19 

improve the accuracy of the data, and in the long term may save 

us money as we turn off the legacy systems. 

The second is improving their processes that allow them to be 

more accountable for their property. And so they may be changing 

the way they store the information or they store the assets to support the accountability, depending on some of them may be switching to barcoding things that were not, so that they can have clearer 

accountability of the status of each asset, where they know where 

they are. Some of it is the documentation behind it, making sure 

that is centralized in a way that they can respond and make sure 

it is complete. 

If you need it broken down further, I will probably have to go 

back and get the details behind it, but that is the types of—at a 

high level, the changes they are doing. 

Mrs. HARTZLER. My time is almost gone. I would just say we 

need to watch this. 

Secretary NORQUIST. Uh-huh. 

Mrs. HARTZLER. And do not let them get more money for something that simply should be their job—doing their job. 

Secretary NORQUIST. Correct. Uh-huh. 

Mrs. HARTZLER. Okay. Thank you. 

I yield back. 

Chairman THORNBERRY. Ms. Shea-Porter. 

Ms. SHEA-PORTER. Thank you. 

And I also want to thank you, Mr. Norquist. I am very excited 

about this. We have hoped this and—for this for years, and I wanted to ask you a couple of questions about it. In, I think it was 2007 

maybe, I was sitting here on this committee, and we had found out 

that a lot of the weapons, the guns, that had been sent to Iraq were 

not traceable anymore. I remember the person, I cannot recall his 

name, but saying, well, we did not have enough auditors. And I 

said something along the lines of, well, should we not have auditors 

in order—when we are spending this kind of money? So this sounds 

familiar to you, I am sure. 

So how did you decide on the number of auditors, and what will 

you do if you discover that you need more? 

Secretary NORQUIST. Sure. So the number of auditors is our estimate based on what the contractors have proposed to do. They 

were given the scope of it. Those contracts, I believe, allow for them 

to make adjustments over time so that if there is a requirement for 

more. One of the things we want to do is make the best use of their 

time and their benefit to the taxpayer. 

So unlike some audits where as soon as they run into a problem 

they get to stop and say, there is a problem, I am done, the IG can 

say, hey, you know, it would be useful to us if you dug deeper into 

the root cause behind it, and that way we make sure we are not 

just fixing the symptoms and so they can drill down. 

And so my view is, the auditor piece of this is like the reconnaissance; it is the guys who go out front and find you the issues, and 

that is a tremendous value to us. So if we need additional ones, I 

am not hesitant to make sure we can get access to that. 

Ms. SHEA-PORTER. So they will not be constrained financially if 

they need that. You will not run up against a wall where there is 
20 

just no money left in the budget for them to put more people in 

if they need to? 

Secretary NORQUIST. It would have to be something in the way 

that the contract had been written, but we would realign funds if 

we needed to. If the IG said they needed additional resources, I will 

help the IG. 

Ms. SHEA-PORTER. Okay. That is pretty essential, because I have 

a feeling it is going to be deeper and longer than you think. 

Secretary NORQUIST. Absolutely. Correct. 

Ms. SHEA-PORTER. Now, my understanding is, right now, you are talking about $870 million, and that is just for 2018? 

Secretary NORQUIST. That is for 2018. 

Ms. SHEA-PORTER. Okay. So how is the CR [continuing resolution] going to be impacting that? 

Secretary NORQUIST. So the CR creates pressure on us fundingwise. And so I am not going to stand in front of you and say if I 

do not get it, we are going to stop the audits. We will not. We are 

going to go ahead with the audit. 

What it does, disruption-wise, is many of the people that I need 

focused on audit remediation are focused on trying to split contracts to accommodate the funding levels of the CR and the next 

increment. And so many of the people that we need to have focusing on this are the ones who are also affected by the incremental 

nature of a CR. It also creates pressure more on the remediation 

side than the audit because we are significantly below either what 

this committee recommended or the President, and we have to 

make tradeoffs within that space. But we will still proceed with the 

audit. 

Ms. SHEA-PORTER. Okay. And then the other question I had is 

you talked about contractors having growing pains. Now—and I 

think this article, you also said, that we should not be looking for 

like billions of savings, but there has always been kind of one of 

those understandings that if we actually did monitor these contracts over time, that the waste and fraud and et cetera, delays, 

actually does add up to billions. 

So how will they experience growing pains? And why do you not 

think that ultimately, over a period of time, we actually could save 

really significant numbers? 

Secretary NORQUIST. Okay. Are you talking about saving numbers by auditing contractors or—— 

Ms. SHEA-PORTER. If we do this work now. And so what will you 

be doing to make sure, for example, that contractors come in on 

time, we do not have cost delays? 

Secretary NORQUIST. Okay. 

Ms. SHEA-PORTER. I know that we have our work to do for the 

oversight, but I just want to know how you think your role will 

play out. 

Secretary NORQUIST. Sure. So let me break that into three parts. 

First is the piece, which is the program manager overseeing it. 

That is not in the scope of the financial statement audit, but we 

support them with better quality data. 

The second, not inside this audit, but we have the Defense Contract Audit Agency that looks directly at billing. And they recovered in 2016, I think, like $3.6 billion by looking at billings that 
21 

were coming in and questioning charges. That keeps up. That we 

will continue to do. 

The third is the financial statement audit, which focuses really 

on the Department and indirectly on the contractors, but it is our 

payments to them. That one I think the place you are going to see 

the biggest opportunity reform over time is by allowing us to operate more like a business. 

And so you think about improvements and the accuracy and the 

completeness of financial systems and the role of the chief management officer [CMO] in trying to bring business reforms, being able 

to put in front of the CMO information closer to what their commercial counterpart would have, allows them to make decisions. 

You are a $600 billion enterprise, better decision making can make 

you make better use of the dollars on a very large scale. 

So I think you will see that type of advantage in driving reform 

within the organization as we are able to do more in estimating 

costs or reforming the way we do something internally. So I think 

those are some of the three. There will be some cost avoidance 

when you have better security of your systems against intrusion. 

You will avoid costs that you otherwise would have inflicted. 

Ms. SHEA-PORTER. I am hoping that we will have more clarity 

when we have to make decisions. We will have more data to help 

us, right? 

Secretary NORQUIST. Yes, yes. 

Ms. SHEA-PORTER. Okay. Thank you very much. I yield back. 

The CHAIRMAN. Mr. Byrne. 

Mr. BYRNE. Thank you, Mr. Norquist. Many of us are familiar 

with the audit function in the private sector. In preparing for this, 

I came across an acronym called an IPA, which, from my understanding, is a really good type of beer. But I think you mean something different. These are major, highly reputable, private sector 

accounting firms to perform audits for large organizations across 

the world. Have I got that right? 

Secretary NORQUIST. Correct. Ernst & Young, KPMG. Large recognized firms. 

Mr. BYRNE. And there is a set of auditing standards that is peculiar to the Pentagon and peculiar to government. In general, what 

standards do they use when they perform their audit? 

Secretary NORQUIST. So there is a Federal board that sets the 

auditing standards, and they basically start with the commercial 

standards and then they add some modifications. For example, to 

defend the power of the purse of Congress, we have budgetary 

rules that do not exist in the private sector. 

Mr. BYRNE. Right. 

Secretary NORQUIST. They have a series of accounting standards 

for how we account for obligations, disbursements, commitments, 

things that matter to us in managing the money inconsistent with 

Congress. So there are changes. All the other Federal agencies follow them as well, but there is an accounting standards board that 

does that. 

Mr. BYRNE. Okay. Let me talk you to about continuing resolutions for a second. 

Recently, the Secretary of the Navy has said publicly that since 

the Budget Control Act was passed, the Navy itself, the Navy 
22 

alone, has lost—or we have wasted $4 billion as a result of continuing resolutions and budget uncertainty. 

Do you believe the audit will show inefficiencies like this in business operations across the Department due to continuing resolutions? 

Secretary NORQUIST. I think the audit will show you some of 

the—yes, the problems that will come out of business, out of the 

disruption from the CR. And I think one of the ways that that 

shows up, if you think about it is, normally, you have a year to 

spend money. And one of the things we tend not to like about Federal agencies is that the 4th quarter, because the way Federal 

money works, if you do not spend it, you lose it. This sort of unusual thing that we do in the Federal Government. 

Well, the CR says wait, wait, wait. And then when you are down 

to only a couple months left in the year, okay, here, have it all. 

Mr. BYRNE. Right. 

Secretary NORQUIST. Spend, spend, spend. And that, if you negotiate a good price, you may now be outside the window of when you 

negotiate an effective price. Your plans for contracting, and so 

forth, get compressed. 

So I think some of those disruptions that you see that are driven 

by the CR, the audit will help be able to figure out, either how to 

manage it or what the consequences are. 

Mr. BYRNE. Well, it would be helpful to us as the people that 

pass continuing resolutions to have that highlighted in your audit 

report so that we know that continuing resolutions have tangible, 

negative results, not just to the operations, but to the expenditure 

of money for the entire Pentagon in each of the constituent services. 

I might add that during another part of my life, I was asked to 

take over the Alabama 2-year college system at a time in which 

there were two criminal investigations going on and the Birmingham News won the Pulitzer Prize reporting on corruption in it. 

And we used both the internal audit function and the external 

audit function, not just to remedy what had happened, but also to 

change the culture within the Alabama 2-year college system. 

Do you believe that there will be some, I am not saying wholesale change, but some change in the culture of the Pentagon as a 

result of these audits? 

Secretary NORQUIST. Absolutely. That is the point. 

Mr. BYRNE. Good. Can you elaborate a little bit about how that 

would manifest itself? 

Secretary NORQUIST. Sure. I think that what you find is there 

are folks who are doing their mission, and at least one of their missions is to make sure information is updated for others to use. 

When their time is tight, that step gets skipped, and they do the 

others. Well, then others who rely on the information have to either redo it themselves, or function with incomplete information. 

Knowing that that is going to be audited and somebody is going to 

point out that difference creates an incentive to make sure that you 

do the complete function and you get those items done. It should 

reduce the amount of phone calls the person gets to answer the 

question because somebody can rely on the system now, but that 

type of culture change is important in an organization that has 
23 

such a spread of functions and has to rely on those types of 

datasets to be able to make decisions. 

Mr. BYRNE. Well, I just want to say, Dr. Wenstrup and I were 

just talking. This may be one of the most important things that we 

accomplish during our terms here in Congress. So I think you will 

see a lot of support for your activities here on this committee and 

throughout Congress. And I appreciate what you are doing. 

With that, Mr. Chairman, I yield back. 

Secretary NORQUIST. Thank you for your support. I appreciate it. 

The CHAIRMAN. Mr. Suozzi. 

Mr. SUOZZI. Thank you, Mr. Chairman. Mr. Norquist, I am very 

excited about the work that you are doing. It is a gargantuan, 

mammoth, really big task that you have ahead of you. And, you 

know, I am trained as a CPA and as an attorney, and I was a 

mayor of a small city and a county executive of a large county that 

did not have proper inventory or procedures and processes in place. 

I went through this on a much smaller scale. 

And when I first came to Congress, I would hear my colleagues 

asking about different weapon systems and different pieces of 

equipment. And I did not know what we owned. And I tried to get 

my staff to figure out what we owned by working together with the 

DOD and other people, and it was very hard to get the limited information we got. There is 14,500 aircraft in the U.S. military, for 

example. You know, how many ships do we have, how many armored vehicles, so on and so forth. Will we have a comprehensive 

inventory at the end of this process that tells us what we own? 

Secretary NORQUIST. So this is the important way of how we implement the audit. It is possible to have that without making it 

easily accessible, and my concern is you miss some of the benefit 

of the audit. So one of the changes we want to drive is not only 

to have the accurate count, but to have it easily researchable. In 

other words, in the dataset where somebody can run the report and 

say to the Secretary of Defense, here is what you have, here is 

where they are, and here is whether or not they are in maintenance because they are not working, or here is whether they are 

working. 

Mr. SUOZZI. Go ahead. Finish what you—— 

Secretary NORQUIST. So the idea is we will have the count, but 

what we want to do is be more like a business, which is, go beyond 

the mere standards of the audit to using that to drive business intelligence so that the leadership will have timely and accurate information, not just about the dollars, but about the facilities, the 

equipment, the military supplies behind those dollars. 

Mr. SUOZZI. So each piece of equipment will be rated, for example, as far as its condition? 

Secretary NORQUIST. I am not quite sure. I think the audit has 

to do with impaired or not impaired, meaning is it usable but we 

will have those. Now, it has to be material enough, right? The 

audit does not worry—— 

Mr. SUOZZI. Yeah. 

Secretary NORQUIST [continuing]. About small items. But the 

larger-end items would certainly be things that we should be able 

to have timely and accurate reporting on. 
24 

Mr. SUOZZI. What percentage of the overall audit would you say 

is going to be devoted to inventory as opposed to procedure and 

process and financial statements? 

Secretary NORQUIST. Well, if you walk through, they will do inventory, they will do property, meaning buildings and other large 

items. They will also do pay and personnel, some of those types of 

things. So over time, that may be more labor intensive than most 

of the other pieces. 

Mr. SUOZZI. Yeah. 

Secretary NORQUIST. But it is one of many items, but it is on our 

property line as one of our largest. 

Mr. SUOZZI. So is it half the task? Is it a quarter of the task? 

Secretary NORQUIST. I am guessing, but probably a quarter of 

the labor hours would be spent looking at those types of items, yes. 

Mr. SUOZZI. And will there be a physical visiting of the sites to 

actually identify the pieces by the auditors or will that be done by 

our in-house, by the people who work for the DOD? 

Secretary NORQUIST. By the auditors. And they will do it two 

ways, what they call book to floor and floor to book, which is, they 

will look at what your records says—— 

Mr. SUOZZI. Yeah. 

Secretary NORQUIST [continuing]. And then they will see if that 

is what you really have in inventory. 

Mr. SUOZZI. Right. 

Secretary NORQUIST. And they will look at what you have in inventory and see if that is what your records say. That way they are 

checking it both directions to make sure that they both align. 

Mr. SUOZZI. This is a very exciting task that you are going to accomplish. Do you think that the audit of the inventory of equipment, of properties, of buildings, will be conducted by the end of 

the calendar year of 2018, or it will be some time off into the future 

after that? 

Secretary NORQUIST. So they will go through the audit this 

spring and summer. They will publish their reports starting about 

November 15, this being a first year audit, may take them a little 

bit of extra time. And they will do this every year. So they will do 

a sample. So they may pick certain pieces of equipment the first 

year, and then pick a different set the next year. But the findings 

they have on one are often the same for the other. So as soon as 

we see them, it gives the agency a clear idea of what they—— 

Mr. SUOZZI. Oh, so they only give you a sample inventory of what 

we own? 

Secretary NORQUIST. It is statistically significant. And the way 

they do their sample—— 

Mr. SUOZZI. Yeah, I know. 

Secretary NORQUIST [continuing]. Is use statistical sampling to 

be able to have a level of confidence in it. So that they will be on 

site, counting things, checking numbers. 

Mr. SUOZZI. Will we be able to find out from you, if I reach out 

to you afterwards, what you are going to be doing, what the sample 

size will be and what it will be of? 

Secretary NORQUIST. We should be able to have the information 

and the sample size. I do not know if it will tell us exactly what 

they counted, but it will tell us the sample sizes, yes. 
25 

Mr. SUOZZI. Okay. All right. Thank you very much. 

I yield back. 

The CHAIRMAN. Mr. Kelly. 

Mr. KELLY. Thank you, Mr. Chairman. And thank you, Mr. 

Norquist, for being here. I, again, want to echo a thank you to 

Chairman Conaway for his efforts in getting this to come. It is a 

massive undertaking, long overdue. It is going to be very, very difficult. 

I hope that we will focus on the things that improve the processes going forward. And some of those, number one, is OCO. 

There is a lot of room, even when people are trying to do that right, 

for abuses that are intentional and unintentional, and I am more 

concerned about the unintentional where people just do not know. 

How far back are you going to the start of the audit, like as far 

as OCO and those things? 

Secretary NORQUIST. So when you look at dollars in fiscal year 

2018, they will be auditing money received in fiscal year 2018. 

When you look at assets acquired, it does not matter when the 

asset was acquired. They will look for existence in completeness of 

those assets. 

Mr. KELLY. Okay. Very good. And then just from having served 

quite a long time, I understand the process, ‘‘at the end of the year, 

spend all the money or you lose it.’’ That needs to be a recommendation that you do not lose it so that we can spend that 

money wisely. Maybe not in operations or maintenance, but there 

is some things, acquisitions, that it is important to be able to carry 

that money forward as long as it is earmarked or allocated to a 

source, even though it is not spent yet, rather than having to rush 

and spend it on things that you do not need. Because you do not 

need to go buy all these pens to stack up somewhere for people to 

pilfer, because those little things add up. 

And I guess my final point is, I am sure you will look at things 

like OCIE [organizational clothing and individual equipment] turnin, where we turn in equipment and those kinds of things, and the 

write-offs and how you do that, and also like tool droppages. Those 

things that, you know, you come back from a field exercise in the 

Guard, and you do all these tool droppages to make sure that you 

get your equipment back, when maybe that is not the right way. 

So you will be looking at processes like that to make sure that 

people are adhering to the right way to do that and holding people 

accountable when they are accountable or service members as opposed to just saying, ‘‘Okay, it is within the dollars.’’ Is that correct? 

Secretary NORQUIST. It will hold people accountable because we 

will look at disposable equipment. It depends on the size of the 

equipment. The audit does not go down to very small items. But 

did you properly dispose of it? Did you record it? And, you know, 

and then we will start to be able to clearly see, did you get paid 

for the disposal, because some of this equipment we do get money 

for when we dispose of it. 

Mr. KELLY. I guess my final question goes as to, the GAO indicates that the DOD lacks a sufficient number of financial managers. And what are you doing or what areas has the Department 

done to take care of, or to acquire these? 
26 

Secretary NORQUIST. So this is a challenge. I mean, when you 

have an organization that most of it has never been under audit, 

and Federal employees do not, themselves, conduct financial statement audits the way commercial enterprises do. So you may have 

CPAs, but you often have CPAs who do not have exposure to some 

of those other practices. And so over time, we have been able to 

grow that a couple of ways. 

The first is, the agencies that went under audit first, like the 

Corps of Engineers, Corps of Engineers has a clean opinion. It had 

a number of people who have now been through an audit multiple 

times, know what it looks like, have been part of fixing things, they 

are now helping the Army get through the larger audits. So some 

of them we have grown by leading with certain examples. Some we 

have just gone out and hired, and then the third focus is training. 

We have a robust training program where we have been emphasizing audit standards, audit readiness, internal controls, all of 

those pieces, whereas in, you know, a decade or two ago, it all 

would have been budget type of topics and not accounting-related 

topics because that was the almost exclusive focus of a lot of the 

financial management community. 

Mr. KELLY. Mr. Chairman, I have no more questions. I yield back 

my time. 

The CHAIRMAN. Mr. Norquist, I want to interject on one point 

Mr. Kelly raised. I am also very concerned that we are going to be 

so late in the fiscal year with a final appropriation. And the needs 

are so great that there is going to be inevitable problems as a result. And I am thinking about the audit. You are going to find 

things and you may not have, there may not be enough time to fix 

the things you find by the time the money is—so I think my staff 

has reached out to yours to work together to see about some greater flexibility in spending money after the end of the fiscal year. 

I think about our maintenance problems. They are enormous. 

And we do not want to waste money, but we also have got to get 

our ships and planes fixed. 

Secretary NORQUIST. Absolutely. 

The CHAIRMAN. And so I think this is an area—and there is a 

lot of concern in Congress about accountability for the money and, 

you know, I understand that. But I think this is an area where a 

number of us in Congress working with you and the Department 

can have a better—especially this year, because we are going to be 

so late. So I just want to mention that because you all were discussing it, even though it is a little different from the topic here. 

Mr. Panetta. 

Mr. PANETTA. Thank you, Mr. Chairman. 

Mr. Norquist, thank you very much for being here, taking the 

time, your testimony. But also thank you for helping us do our job 

and giving the people, providing them with accountability, providing the accountability to the American taxpayer. I appreciate 

that. Obviously, you have a tremendous amount of experience in 

doing what you are doing, 28 years. You actually were the CFO. 

You audited the DHS [Department of Homeland Security]. 

Secretary NORQUIST. Mm-hmm. 

Mr. PANETTA. That is correct. In the 6 months that you have 

been in this position, what has been the biggest lesson you have 
27 

learned so far? And do you foresee any other potential delays besides the worrying about budget stability and funding, as you mentioned in your last sentence, in your last paragraph of your statement. Is there any other delays that you foresee that will prevent 

you from doing your job? 

Secretary NORQUIST. Sir, I will tell you, the thing that surprised 

me the most was how many people who have been working this 

issue were eager for it to finally start. I have to tell you, for an accountant to be told to put together all these controls and all this 

stuff, and then say we are not doing the audit this year. And then 

each year you repeat that. You start to get to wondering, is it ever 

going to happen? So this built-up sense of ‘‘No, it is happening, it 

is happening this year, and everything that you have done up until 

now matters.’’ The reaction I would get in rooms from the folks who 

have been working on this was really reenergizing, right. The sense 

of excellent, right. There have been a lot of folks wondering if they 

have been working in vain, but now the realization, No, everything 

that you did to get ready to get these pieces in place will matter 

and pay off. So I think that was a very pleasant surprise on moving 

forward. 

I think the biggest concern in the long run is going to be the systems because they take the longest to fix. Policies, procedures, even 

cultural changes we can do more quickly, but some of the system 

interfaces may take some more time. And so one of the things I 

would encourage the committee, as you go through each year’s 

budget review, when somebody comes in and asks for money for a 

business system, make sure you understand, is it compliant? Have 

they prioritized the things related to the audit? Or have they sort 

of pushed those things down on their to-do list in place of something else? 

So often they do not give—I do not want to say they do not get 

much attention because I know there are staff who spend a tremendous amount of time on this, but they are not sexy or glamorous, but making sure that the funding for those and the things 

that are being done, the system is phased out, those are the ones 

that will take us some time. But I think they have some tremendous long-term improvements for the Department. 

Mr. PANETTA. Great. Once again, thank you, and good luck. 

Secretary NORQUIST. Well, thank, you sir. 

Mr. PANETTA. I yield back. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Lamborn. 

Mr. LAMBORN. Thank you, Mr. Chairman. Thank you for having 

this hearing. And Mr. Norquist, I apologize, I am probably going 

to be covering ground you have already covered. I was in another 

committee where we had a markup and I just got here now. But 

from the 30,000-foot level, I really like that the audit will result in 

more accountability and more transparency, but the other thing 

that I think would be accomplished, I think is real important, and 

I would like to get your thoughts, and that is, reform. Uncovering 

where maybe we do not have the best practices in place, where 

there might be waste or duplication. 

Can you reassure, not just the members of this committee, but 

by extension, the rest of our colleagues in Congress and the American taxpayers that you think that this audit will uncover where 
28 

we are not spending money in the best way possible, so we can either lower the budget and accomplish the same thing or invest in 

more lethal capability for the DOD. 

Secretary NORQUIST. I think it is very essential in its contribution to reform. And I am very excited about the possibility and how 

it is going to reinforce reform. So Deputy Secretary Shanahan has 

got the lead for bringing business process reform to the Department. He set up organizations within the Department that are 

working on this issue. I support them through the audit by helping 

to make sure that they have the business data they need to make 

those reform decisions. So as you look across organizations and you 

are comparing what do we pay in electrical rates across all of our 

different facilities? Why? What are the highest ones, why are they 

paying a higher rate, and what is the difference? What are the 

lower? So instead of somebody saying, everyone, cut your number 

by 10 percent, we focus on those places where the costs seem out 

of line with the rest of the enterprise. 

That type of financial data, the accuracy of that, being able to 

pull it from multiple systems and have confidence in it is what the 

audit gives you, and it is an enabler to reform. And so I am sure 

we will find within the financial processes by removing places 

where we have to rework data because the accuracy will allow it 

to go faster, savings. But I am more excited, in the long run, about 

what it allows the Department to do to function like a business. 

Mr. LAMBORN. Thank you. And I know that chairman and my 

colleague on my left here and many others have really been pushing for greater effectiveness and efficiency in how the dollars are 

spent. We have that trust to the American taxpayer. So will the 

outcome be not just that we find, hopefully, these efficiencies, but 

it is done in a way that the American people know that we are 

finding these, and the entire Congress knows that we are finding 

these efficiencies? 

Secretary NORQUIST. Yes. So we will make sure, I mean, the financial statement is public, so what the auditors find and what 

they then announce is closed, meaning what they fixed, will be 

known. But I will also make a point of letting the committee know, 

here is how the reform has changed things, and here is the way 

that our businesses run differently. 

For some of them, like the working capital funds, they bill for 

their services so we can look at the rates they charge. Are they 

able to reduce their cost of operating because those are set up closer to a business-type function, and we will be able to use that there 

as well. 

Mr. LAMBORN. Well, thank you for that. And I really appreciate 

it. The military of our country is held in the highest esteem by the 

American people. The only criticism that I will sometimes hear is, 

are we spending the dollars the most effective way. And people are 

concerned about that. So thank you so much for what you are 

doing. 

Mr. Chairman, I yield back. 

The CHAIRMAN. Mr. Veasey. 

Mr. VEASEY. Thank you, Mr. Chairman. Mr. Norquist, I wanted 

to specifically ask you about just some of the issues that the outside auditors have that were brought in. Someone had asked the 
29 

question a little bit earlier, but one of the reports that I read said 

that they, I guess, that they were having some challenges being 

able to make final conclusions. Can you talk about some of the 

issues that the outside auditors that were brought in had? 

Secretary NORQUIST. Okay. So is there a particular one that you 

are thinking about or you just want me to walk through the challenges they face in general? 

Mr. VEASEY. Yes, just in general. 

Secretary NORQUIST. Okay. So the first challenge an auditor 

faces in general is—and this is true for government and commercial—they are required to be independent, which means the people 

showing up did not used to work for you, so they have got to understand your business processes. And, so, we have put together, in 

our different organizations, guides that welcome them and say, 

here is how we are structured. Here is what we do. When we spend 

money, the document looks like this, so they can start to recognize 

them, that they know what they are testing for the adequacy of. 

We have been doing the security clearances because a lot of them 

require security clearances to be able to do their work and get 

them through. A number of them are out doing site visits to get 

to understand what is going on at the different places. The Air 

Force auditor is at Tinker Air Force Base this week. The Navy 

auditor is at Naval Air Station Jacksonville and others in the fall 

to just see what the operations look like. 

So there is an orientation that they go through before they plan 

the audit to make sure that their audit is consistent, and then 

there are security clearances that we have been getting them 

through so they can start in a timely manner. Those are all some 

of the key pieces. There will be a challenge on the volume. You 

know, this is not just a large audit for us, it is a large audit for 

them, but they have all scaled up for that challenge. 

Mr. VEASEY. What about training and sustaining a workforce to 

be able to work specifically on financial management, and what 

have you, within DOD? Like, what are some of challenges around 

that? Because I would think just being able to have a full-time 

staff, you know, work solely on this, because this is obviously a big 

issue, must be a challenge in and of itself. 

Secretary NORQUIST. It is. And we have had to realign folks internally to be able to provide the time and attention on this to support them. You know, these are some of the functions that over 

time when people took cuts, they sort of said, Well, I can reduce 

this, because it is not an audit and accountability. Some of those 

functions are being restored. 

When we are doing internal tradeoffs on that, we are basically 

operating underneath the reduction accounts that the legislation 

has put in place. But those are realigning forces within it. I will 

tell you that over time, what I likely come back to you with is shifting some of the work where we hired an outside firm as a consultant to something run by a Federal employee by trading off contracting dollars for Federal employer dollars, because we are going 

to need those capabilities in house. 

So in some cases, we hired the expertise and we may change the 

balance of that over time as we realize this function is going to 
30 

stay, and we want to make sure a Federal employee is able to do 

that on a sustained basis. 

There still is always a use for skilled experts on the outside on 

particular topics, but you want to change that dependency over 

time. 

Mr. VEASEY. Thank you. Mr. Chairman, I yield back. 

The CHAIRMAN. Mr. Conaway. 

Mr. CONAWAY. Thank you. Two other things real quick. The Department is constantly facing funding challenges, et cetera, et 

cetera. David, do you think you have got the right position or 

strength in position to be able to maintain and protect the funding 

to get all of this done? Because it is going to be setting priorities 

and trading these dollars that are going to be needed to get this 

done over time versus spending them somewhere else of importance within the Department. 

Do you think you have the right support from the Secretary and 

others to be able to make a cogent argument that you need these 

funds to continue the audits and continue the fixes? 

Secretary NORQUIST. I do. I have the full support of the Secretary 

and the Deputy Secretary. I will tell you at the President’s budget 

level or the committee level, I am very comfortable. If you start 

talking about a CR that runs through the year, we are in a very 

different place, and that just creates challenges because of very 

tough tradeoffs across the Department. I will fight to protect this, 

but we have readiness issues and others that I would have to be 

paying attention to as well. 

Mr. CONAWAY. And at the BCA [Budget Control Act] levels would 

be disaster. 

Secretary NORQUIST. That would be a disaster. 

Mr. CONAWAY. Okay. And on the database of findings, there will 

be some findings that are more important than others. 

Secretary NORQUIST. Hmm-hmm. 

Mr. CONAWAY. So when it first comes out, just the scope of the 

number of findings will probably be startling. Will the CPA firms 

grade those findings as to ones that are, for lack of a better phrase, 

really critical or systemic versus ones that are easily fixed that 

should go away shortly? Is there going to be some sort of a grade 

there that would help bifurcate it into places so we could better understand just the sheer number? 

Secretary NORQUIST. So they will score it and weight it with 

terms like material deficiencies and others that relate to its size 

compared to the financial statement. That is not necessarily its importance to the Department in terms of fixing. They may decide 

that there is a cyber vulnerability that has very little dollar value 

that we think is a security issue that makes it one of the first 

things we fix, or we may see a change where the savings are there, 

and we want to do that fix first. 

So we will have their scores in terms of how they categorize it, 

but then we will need to prioritize, within the Department, which 

of these reforms are most important to get done to support the 

chief management officer to save the taxpayers money. And some 

of the later ones, even if they are large dollar values, like valuation 

of old military equipment, if we do not think that is data that peo-
31 

ple are going to use right away, we may wait on some of those reforms to prioritize the other things first. 

Mr. CONAWAY. So on the assignment of responsibility to fix, it 

will come with a timeframe that is rational and expected to be 

met? 

Secretary NORQUIST. Generally, I would expect the timeframe to 

come from the corrective action plan, where we will check, is this 

a reasonable timeframe? But some of these will take some period 

of time, but you can see the reductions and the conditions within 

it that will show you they are making progress. 

Mr. CONAWAY. Thank you. Mr. Chairman, I yield back. 

The CHAIRMAN. Mr. Langevin. 

Mr. LANGEVIN. Thank you, Mr. Chairman. 

Mr. Norquist, thank you for your testimony and for the work 

that you are doing, and will continue to do. I think it is vitally important for the Department, and ultimately for the taxpayer, to 

make sure that we are spending dollars the way they should be 

spent, and we are getting the most for them. And this auditing 

function is something that I have had a longstanding interest in. 

And I remember years ago serving on the Intelligence Committee, 

and we had somebody from DOD there. And I asked the question, 

‘‘well, you know, what about the auditing function to make sure 

that we are spending dollars wisely?’’ And it was then that I became aware that we do not do the auditing function. 

So, long overdue, and I’m glad we are finally getting to this 

point. So many of the questions I had have, for the most part, been 

addressed, but I did have one area I just wanted to delve into just 

a little deeper. 

And so while conducting an audit of this magnitude, I guess I 

want to know how you plan to deal with the significant complexities that it may present dealing with, for example, old contracts, 

or contracts for systems not designed with an audit in mind, or auditing, particularly, the classified portion of the budget. This is a 

particular area of interest that I would have, and where there is, 

you know, by design, there is not much transparency into black 

projects and programs for security reasons. 

How do you deal with those issues, and does guidance for new 

contracts provide for the eventuality of an audit? So if you can take 

those on. 

Secretary NORQUIST. Sure. So there are a couple of pieces. So the 

first one you bring up is in contracts. And there are some issues 

where in order to, for example, property value, military equipment, 

we need the contractor to give us their invoices set up a certain 

way so we can see the pieces that are included. Older contracts do 

not have that. So you look at which ones do you modify, which ones 

do you build on, and are there some places where you do an alternate way of valuing that equipment. There is different methodologies you can do to do valuation. And you try and decide from an 

accuracy and a taxpayer point of view, what is the best use of taxpayer money, how do we do that most efficiently? 

Some equipment, if you think it is going to go out of inventory, 

you might decide I am not going to spend a lot of energy on it over 

the next couple of years. It will not be here anymore. So that is 

not as essential, it is not a highest priority. 
32 

With regard to systems, I think you have to look at each system 

and ask the question, Can I fix it to do what we need it to do 

through a software patch or upgrade? Can I replace it by moving 

its work to something else? Or do I have to work around it in some 

sort of manual form until that system is eventually retired and a 

follow-on? Each of the services, each of the organizations is going 

through that. 

Defense DAI [Defense Agencies Initiative] is the name of an accounting system that has been implemented across 20 defense-wide 

organizations. So in that case, the answer was just turn them all 

off. We are just going across the defense-wide entities and we are 

just turning off and replacing those. In the services, there is a lot 

more of consolidating. They are going from several accounting systems down to fewer that are compliant and support an opinion. 

With regard to the classified, I may need to talk to you offline 

about how we handle that. I would just assure you a couple things: 

One is, classified programs are included in the audit. We have 

cleared auditors and cleared IGs and others who can do this. And 

as you mentioned, from the intelligence community, they always 

see standalone opinions, and so they actually have been under 

audit for 3 years now. And I have been meeting with them, getting 

an update on their lessons learned and their issues and how they 

have been progressing. But those are published on a classified 

form, and the Members of Congress are entitled to look at those. 

Mr. LANGEVIN. And for the classified programs going forward, 

will those all be in-house auditors, and not outside contractors? 

Secretary NORQUIST. Can I address all of those in a different format? At a certain point, I am going to run into classification concerns, so let me just assure you that they are included, and then 

we can talk about the mechanics of it in a different way. 

Mr. LANGEVIN. Sure. I would like to do that. Very good. Well, 

thank you very much for the work you are doing. 

With that, Mr. Chairman, I yield back. 

The CHAIRMAN. Mr. McEachin. 

Mr. MCEACHIN. Thank you, Mr. Chairman, and thank you, Mr. 

Norquist, for being here. 

It is my understanding that the Army, Navy, Air Force, Defense 

Health Programs, Defense Logistics Agency, U.S. Special Operations Command, and Transportation Command still have not received a clean audit opinion from the DOD IG. Can you talk about 

how you approach auditing these divisions of DOD over the course 

of fiscal year 2018 in doing the audit process? 

Secretary NORQUIST. Sure. As you pointed out, there are some 

that have and then there is a series that have not. Some of those 

like DLA [Defense Logistics Agency] have begun the audit. So DLA 

was under audit this previous year in fiscal year 2017, as was— 

DISA [Defense Information Systems Agency] was under audit in 

2016, and the U.S. Marine Corps went under audit this year for 

the first time in 2017. 

So some of them have a year or two of experience. The Army, 

Navy, and Air Force, what they are doing is they are splitting their 

audits into two parts. They basically have a section of the Army 

that is funded through what are called general funds, meaning appropriations directly from Congress. And another that is what is 
33 

called working capital fund, meaning it bills for its services so it 

looks more like a company. 

These have different accounting systems. And so while the same 

auditor does both, they have split the opinion into two parts, because the way they function is different. But that will also allow 

us to see the progress within each of those organizations. So that 

split occurs in the Army, the Navy, and the Air Force. The other 

ones, most of them get standalones. If they are too small, they will 

be covered by the IG rather than get a standalone opinion. They 

will all be rolled together by the IG to give an opinion on the Department as a whole. 

Mr. MCEACHIN. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. Mr. Norquist, you referenced this earlier but I 

want to ask again. In these efforts, do you have the support of the 

Secretary of Defense and the Deputy Secretary? Because what you 

have talked about is cultural change, it is prioritizing dollars, it involves a number of things that, if they are not supported by the 

top leadership, are not going to happen. 

Secretary NORQUIST. Absolutely. The tone from the top is excellent. 

The CHAIRMAN. Well, the first conversation I had with the Secretary after he was nominated to be Secretary, he brought this up 

on his own. So my experience with him is that he believes this is 

very important, and I just think it is, you have got to have that 

support from him to make this successful, I think. 

You good? Mr. Conaway. 

Mr. CONAWAY. I just want to brag on the chairman for having 

the very first hearing of calendar 2018 on this issue, and highlight 

that. And I appreciate your keen continued support for getting this 

done. And that tone from the top that you set is much appreciated. 

So I yield back. 

The CHAIRMAN. Well, I appreciate it, but I think all members, as 

I said at the beginning, this has been a bipartisan priority for 

years, and we are going to stand there right with you, Mr. 

Norquist, to make sure it actually occurs. 

Secretary NORQUIST. Thank you, Mr. Chairman. 

The CHAIRMAN. With that, the hearing is adjourned. 

[Whereupon, at 11:34 a.m., the committee was adjourned.] 

A P P E N D I X 

JANUARY 10, 2018 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

JANUARY 10, 2018 

(39) 

Statement of Chairman William M. "Mac" Thornberry 

House Armed Services Committee Hearing: 

"Department of Defense Update on the Financial Improvement and 

Audit Readiness Plan" 

January 10, 2018 

The Committee welcomes Mr. David Norquist, the Under Secretary of 

Defense (Comptroller) and Chief Financial Officer, as our witness today. The 

topic is the audit ofthe Department of Defense, which by law begins this 

fiscal year. 

Requiring that the Department conduct an audit has been a bipartisan 

priority of this Committee for some time. The Chief Financial Officers Act of 

1990 required that all federal departments conduct an annual financial audit 

and partly out offi·ustration with a lack of progress toward that end, the 2010 

NDAA required that the financial statements of the Department be ready for 

audit by September 30, 2017 and codified the plan for doing so. This 

Committee's Panel on Defense Financial Management and Auditability 

Retom1 put close scrutiny on the Department's efforts and issued a number of 

recommendations that have enabled us to arrive at this point. The FY 2014 

NDAA again required a full audit be conducted ofthe Department's FY 2018 

financial statements, the results of which are to be delivered next year. 

I want to commend Chaimmn Conaway for his expertise and his 

persistence on this issue, as well as Mr. Courtney, who was also a member of 

the Audit Panel. They will both be glad to know that we have had additional 

Members join this Committee in recent years who can also contribute their 

background and expertise to this issue as it moves ahead. 

This issue is important. Members of this Committee hear evidence every 

week that we are not providing our military with the funding they need to 

carry out the missions they have been assigned. We must spend more. At the 

same time, we have a responsibility to the American people to see that each of 

their tax dollars being spent to protect them is being spent in a transparent 

way with appropriate accountability. 

We should never assume that an audit will solve the problems of waste and 

inefficiency. But it seems to me that an essential requirement of spending 

money smarter is knowing with certainty how it is being spent. 

It is likely that the result of the first audit will not be pretty, but those 

results will help direct us all - Congress and the Department on where we 

need to apply our efforts to improve. This is important, and this Committee 

will continue to pursue it. 
40 

Statement of Ranking Member Adam Smith 

House Armed Services Committee Hearing: 

"Department of Defense Update on the Financial Improvement and 

Audit Readiness Plan" 

January 10, 2018 

I thank the Chairman for holding this important and timely hearing, and 

I appreciate Mr. David Norquist, the Comptroller and Chief Financial Officer 

for the Department of Defense for appearing before this Committee to discuss 

this important issue. Your knowledge of the Financial Improvement and 

Audit Readiness effort is essential as we work to develop the National 

Defense Authorization Act (NOAA) for FY 2019. 

We can all agree the Department of Defense's development and 

execution of an enterprise-wide audit will have a valuable impact on the 

Department and its internal operations. Creating sound financial management 

systems and controls will benefit the Department's ability to control costs and 

anticipate future costs, thereby shaping the Department's strategic and 

budgetary planning process. Improved financial management systems and 

controls will also help ensure accountability, measure performance, and 

enhance the Department's ability to prevent and detect fraud, waste, and 

abuse. 

Congress has moved this effort forward by requiring DOD to develop 

and maintain a plan to ensure all DOD financial statements are validated as 

audit-ready by September 30, 2017, as part of the National Defense 

Authorization Act for FY 2010. In 2011, the House Armed Services 

Committee formed a panel on Defense Financial Management and 

Auditability Reform and conducted a six-month review to examine the 

progress and impediments to reaching this goal. In FY2014, Congress also 

required a full audit of the Department's FY 2018 financial statements. 

While the Department of Defense has certified its audit readiness and is 

taking the necessary steps to begin the audit, it could, and probably, will be, 

years before we see a clean audit of the Pentagon. 

To quote GAO, "without accurate, timely, and useful financial 

information, the Department is severely hampered in making sound decisions 

affecting the department's operations." To say you have your work cut out for 

you is an understatement, but we appreciate DOD's continued commitment to 

this challenging task. The Department of Defense has the largest budget and 

this audit will give taxpayers more confidence in knowing their dollars are 

being spent wisely. Our service members and the taxpayers deserve to have 

trust not only in DOD's superior mission capabilities but also in its financial 

management. 
41 

Embargoed Until Release By The 

House Armed Services Committee 

Testimony 

Before the 

House Armed Services Committee 

Department of Defense Update on the 

Financial Improvement and Audit Remediation (FIAR) Plan 

By 

The Honorable David L. Norquist, 

Under Secretary of Defense (Comptroller) and Chief Financial Officer 

Department of Defense 

January 10,2018 

1 
42 

Introduction 

Chairman Thornberry, Ranking Member Smith, and members of the Committee, thank 

you for the opportunity to provide an overview of the Department's financial statement audit 

progress and plans. I appreciate your Committee's long and unwavering support for this effort. 

also want to thank Congressman Conaway for his leadership over the years related to this audit. 

His direction of the Committee's 20 II panel on Financial Management and Auditability helped 

the Depmiment maintain its focus on audit. 

When the President made a promise to the American people to rebuild the U.S. Armed 

Forces, he also made a commitment to start the audit. Inside DoD, Secretary Mattis and Deputy 

Secretary Shanahan have set the tone from the top that embraces the audit as pmi of their vision 

to bring business reform to the Department of Defense. 

I know you have had many hearings where witnesses have told you that they support the 

start of an audit eventually. This hearing is diiTerent. We have started the audit. But we are 

only able to have today's hearing with DoD under its first full financial statement audit because 

of this Committee's continued support. 

Audits arc not new to the Department of Defense. Numerous audits covering program 

performance and contract costs are completed each year by the Government Accountability 

Office (GAO), the Defense Contract Audit Agency (DCAA), the Department of Defense Of1ice 

of the Inspector General (DoD OIG), and the services' audit agencies. For example, the DCAA 

employs over 4,000 auditors to perform contract audits that are focused on identifYing 

inappropriate charges by contractors to the Government. However, this is the first time that the 

Department is undergoing a full financial statement audit. A financial statement audit is 

comprehensive. It occurs annually and it covers more than financial management. For 

example, financial statement audits include: 

2 
43 

• Verifying count, location and condition of our military equipment, real property 

and inventory 

• Testing security vulnerabilities in our business systems 

• Validating accuracy of personnel records and actions such as promotions and 

separations 

The DoD anticipates having approximately 1,200 financial statement auditors assessing 

whether our books and records present a true and accurate picture of our financial condition and 

results of our operations in accordance with accounting standards. These financial statement 

audits complement but are distinct from audits of program performance or contract costs. 

Based on my experience at the Department of Homeland Security, it will take time to 

implement all the process and system changes necessary to pass the audit. It took the 

Department of Homeland Security, a relatively new and much smaller enterprise, about ten years 

to get to its first clean opinion. But we don't have to wait for a clean opinion to see the 

benefits of the audit. The financial statement audit helps drive enterprise-wide improvements to 

standardize our business processes and improve the quality of our data. 

Why DoD Must Be Audited and What That Means 

1 ust like private sector companies and other federal agencies, the DoD prepares financial 

statements every year to report its assets, liabilities, revenues, and expenses. Though not a 

corporation, DoD owes accountability to the American people. The taxpayers deserve the 

same level of confidence as a shareholder that DoD's financial statements present a true and 

accurate picture of its financial condition and operations. Transparency, accountability and 

business process reform are some ofthe benefits from the financial statement audit: 

1) T ransparcncy: the audit improves the quality of our financial statements and 

underlying data available to the public, including a reliable picture of our assets, 

liabilities and spending. DoD's progress towards a positive audit opinion will also 

3 
44 

directly contribute to an audit opinion on the entire federal government's assets and 

liabilities. 

2) Accountability: the audit will highlight areas where we need to improve our 

accountability over assets and resources. For example, during an initial audit, the 

Army found 39 Blackhawk helicopters that had not been recorded in the property 

system. Also, the Air Force identified 4 78 buildings and structures at twelve 

installations that were not in its real property system. By fixing the property records, 

we can demonstrate full accountability of our assets. In other cases, as the 

Department invests in new business systems, we will be able to obtain independent 

auditor feedback on the system's compliance so we can better hold vendors 

accountable for their solutions. 

3) Business Process Reform: the combination of better data, business processes 

reengineering and the use of modern data analytics directly supports Congress' vision 

of the Chief Management Officer position and DoD's efforts to bring business reform 

to its operations. These reforms will lead to business operations savings that can be 

reinvested in lethality. 

The cost of performing the audit will be $367 million in FY 2018. This amount covers 

the audit fees to the Independent Public Accounting (IPA) firms ($181 million) and 

infrastructure to support the audits ($186 million). The $181 million in audit contract costs is 

approximately !/30th of 1% of DoD's budget and, as a percentage of revenue, is equal to or less 

than what Fortune 100 companies such as General Electric, Proctor & Gamble and International 

Business Machines Corporation (IBM) pay their auditors. In addition, we anticipate spending 

about $551 million in FY 2018 fixing problems identified by the auditors. 

4 
45 

How We Got Here? 

The financial statement audit requirement was initially established in 1990 when 

Congress passed the Chief Financial Officer Act, which, as amended, required the 24 largest 

federal agencies to complete independent annual financial statement audits. As you are aware, 

until this year DoD was the only large federal agency not under full financial statement audit. 

The size and complexity of our enterprise, combined with the pace of our military operations, 

made meeting this requirement challenging. 

In a move that helped keep the Department on course, the National Defense 

Authorization Act for FY 2014 mandated that DoD conduct an audit in Fiscal Year 2018. 

Consistent with this requirement, we provided notification to Congress, in September 2017, that 

the Department was starting a lull financial statement audit for FY 2018. Consequently, the 

DoD OIG announced the start of the FY 2018 financial statement audit in December 2017. 

How the Audit Will be Conducted 

The DoD consolidated audit will likely be one of the largest audits ever undertaken 

and comprises more than 24 stand-alone audits and an overarching consolidated audit. DoD is 

currently sustaining clean opinions for nine stand-alone audits. Audits will be conducted by the 

TPA firms with the DoD OIG performing the consolidated audit. All audit contracts have been 

awarded and auditors have begun to arrive. 

5 
46 

Fiscal Year 2018 Timeline 

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During an audit, the auditors will select line items on the financial statements based on 

materiality and risk, such as Property, and they will ask for a listing of items or transactions that 

make up the total amount on the financial statements. For example, tor Property, the listing 

should have all the buildings, equipment, and software that equal the total amount of property. 

The auditors will then pick samples from the listing tor testing. Testing will include 

physically verifying that the property exists and is accurately recorded in the property system. 

Once the auditors have completed testing, they will evaluate the results to determine if 

the financial statements are presented fairly in all material respects in accordance with 

accounting standards. The auditors will report any problems they find at the end of the audit 

cycle and will reevaluate the status of corrective actions annually. 

The pictorial he low depicts the focus areas for financial statement auditors. 

6 
47 

What Is a Financial Statement Auditor Looking for? 

Measuring Progress 

For years, the Department received a disclaimer of opinion on the DoD-wide financial 

statements from the DoD OIG. This means the Department could not adequately support the 

accuracy of our financial information or fully account for our assets, spare parts and other 

inventory items. These disclaimers were based on management's assertions, and not based on 

independent audit testing. Beginning this year, audit opinions will be based on comprehensive 

auditor testing and will result in actionable feedback. 

In order to track progress, the Department has established a tool and a process to capture, 

prioritize, assign responsibility for, and develop corrective actions to address audit findings. 

Each year, the auditors will assess and report on whether the Department has successfully 

addressed the findings. Going forward, we will measure and report progress toward 

achieving a positive audit opinion using the number of audit findings resolved. 

7 
48 

Annual Financial Statement Audit Feedback Cycle 

Closing 

In closing, I want to thank this Committee for its continuous focus on the importance of a 

DoD audit. Your oversight through the years has been a catalyst, and we appreciate the 

partnership we enjoy with you and with the Committee staff on this important process. With 

your oversight and under this Administration's leadership we are now and will continue to be a 

department that is not only under audit, but also improving, year after year. 

As we move forward, your continued support for budget stability, information 

technology and funding to remediate audit findings remains critical in moving the 

Department towards achieving a positive opinion. 

8 
49 

I look forward to providing you with an update as we progress with our first full financial 

statement audit. I'll be ready to discuss what we've learned and where our focus will be in the 

second year of our annual audit cycle. 

I look forward to your questions. 

9 
50 

David L. Norquist 

Under Secretary of Defense (Comptroller) Chief Financial Officer 

David L. Norquist was sworn in as the Under Secretary of Defense (Comptroller)/Chief 

Financial Officer on June 2, 2017 and serves as the principal advisor to the Secretary of 

Defense on all budgetary and financial matters, including the development and execution 

of the Department's annual budget of more than $600 billion. Mr. Norquist has over 28 

years of experience in federal financial management and is a Certified Government 

Financial Manager (CGFM). 

Prior to his current role in the Department of Defense he was a Partner with Kearney and 

Company, a CPA firm that provides audit, accounting and consulting services to the 

Federal government. His career as a federal employee included providing financial 

management leadership at virtually every level at which the Federal government spends or 

oversees the expenditure of money. This includes eight years with the Department of the 

Army working at Army Headquarters, at a Major Command and at a field site; five years 

as professional staff on the House Appropriations Committee, Subcommittee on Defense; 

and four years as Deputy Under Secretary of Defense in the office of the Comptroller. 

From 2006 to the end of 2008, Mr. Norquist served as the first Senate confirmed Chief 

Financial Officer for the Department of Homeland Security. As CFO, he established a 

formal process to eliminate pervasive weaknesses in DHS's financial statement and put 

DHS on its path to a clean audit opinion. From FY 2006 to FY 2008, DHS reduced the 

number of material weaknesses by 40% and the number of department-wide audit 

disclaimer conditions by 70%. 

Mr. Norquist holds both a BA in Political Science and a Master of Public Policy from the 

University of Michigan and an MAin National Security Studies from Georgetown 

University. He co-authored DHS: The Road to a 'Clean' Opinion, Journal of Government 

Financial Management (Summer 2014) and is author of The Defense Budget: Is it 

Transfonnational? Joint Force Quarterly (Summer 2002). 

He and his wife Stephanie reside in Virginia with their three children. 
QUESTIONS SUBMITTED BY MEMBERS POST HEARING 

JANUARY 10, 2018 

(53) 

QUESTIONS SUBMITTED BY MR. LANGEVIN 

Mr. LANGEVIN. While conducting an audit of this magnitude, how do you plan to 

deal with the significant complexities it may present—for example, contracts and 

systems not designed with an audit in mind, or auditing the classified portion of 

the budget? Does guidance for new contracts provide for the eventuality of an audit? 

Secretary NORQUIST. The consolidated Department of Defense (DOD or Department) audit will likely be one of the largest audits ever undertaken. The Department has been working for many years to appropriately plan for this audit. To prepare for the significant complexities that come with an audit of this size, DOD has 

specifically focused on: 

a) Breaking the audit down into manageable pieces: To help manage the audit of 

a large-scale organization with operations around the world, the Department’s audit 

will be divided into more than 24 stand-alone audits of major components, and an 

overarching consolidated audit. This structure will allow larger DOD components to 

directly manage their individual stand-alone audits, and will allow the DOD’s consolidated auditor to rely on the work performed by stand-alone auditors. Given the 

large number of audit requests and the complexities and findings expected during 

the initial audits, distributing and tracking the responsibility to respond to all of 

these items across the individual stand-alone audits are critical to success. Utilizing 

a pool of qualified independent public accounting firms to perform the various 

stand-alone audits also fosters competition, driving down audit costs for the Department and preserving auditor independence restrictions. 

b) Establishing an infrastructure to support the audit: The Department has put 

people, processes, and systems in place to directly support the audit. Furthermore, 

this infrastructure includes protocols for ensuring classified programs are also subject to audit, while maintaining appropriate safeguards over our classified information. My staff will reach out to yours to arrange a secure meeting to discuss the 

details on how our classified programs will be audited. In recent years, the Military 

Services and select defense agencies have undergone limited-scope financial audits 

or examinations that tested this infrastructure and provided feedback on areas for 

improvement. DOD will only be able to take full advantage of the audit by having 

adequate audit infrastructure in place. 

c) Leveraging audit results to drive necessary changes to our contracts, systems 

and processes: To take full advantage of the independent auditor feedback, the Department has established a tool and a process to capture, prioritize, assign responsibility for, and develop corrective actions to address audit findings. This tool and 

process will allow leaders to track and demonstrate progress implementing fixes 

that respond to auditor findings while improving management and data for the Department. For example, the Department is using auditor feedback to explore methods for standardizing the structure of future contracts to facilitate greater accountability over equipment in the possession of contractors and accounting for the value 

of our property and inventory. 

QUESTIONS SUBMITTED BY MR. CONAWAY 

Mr. CONAWAY. Section 803 of the fiscal year 2018 NDAA authorizes the Secretary 

of Defense to use qualified private audit companies, as opposed to the Defense Contract Audit Agency, for performance of certain incurred cost audits. a) Do you see 

value to this approach? b) How does leveraging qualified private entities to conduct 

the incurred cost audits of defense contractors support the Department of Defense’s 

vision of an audit? c) Please provide an update on how the Department is implementing section 803 of the fiscal year 2018 NDAA. 

Secretary NORQUIST. a) Do you see value to this approach? I do see value in the 

Congressional approach and DCAA is committed to executing the Congressional intent to establish private sector audit capacity for the performance of incurred cost 

audits. Although DCAA already had processes in place to eliminate the incurred 

cost backlog, this provision will also allow DCAA to draw on this private audit capacity if they experience a surge in audit requirements to avoid future backlogs. 

DCAA will be able to accomplish its high risk more complex effort supporting the 
54 

contracting community. The Department will monitor its cost/benefit to ensure the 

expected value is received. 

b) How does leveraging qualified private entities to conduct the incurred cost audits of defense contractors support the Department of Defense’s vision of an audit? 

The objectives are different between the DOD financial audits and the DCAA contract audits. In addition to evaluating the DOD financial statements, the financial 

audits look at DOD systems and processes to ensure that we have reliable financial 

information to use for decision-making. Contract audits evaluate DOD contractor 

books and records to ensure the Department is paying fair and reasonable prices 

for its goods and services. The DOD incurred cost audit does indirectly support the 

financial audit as it facilitates more timely and effective contract closeout that supports the Department’s financial statement audit. As stated above, by leveraging the 

qualified private auditors, DCAA will maintain currency on its incurred cost audit 

requirements facilitating more timely contract close-out and reduce expiring funds. 

c) Please provide an update on how the Department is implementing section 803 

of the fiscal year 2018 NDAA. The Department is currently developing a plan to include qualified private auditors in the incurred cost audit process to maintain an 

appropriate mix of Government and private sector capacity to eliminate any backlog 

of incurred cost audits and remain current. The plan to implement Section 803 also 

includes DCAA coordinating with DCMA and the services to develop a comprehensive plan for executing the Section 803 requirements and the identification of additional resources needed for the development of an infrastructure to support the use 

of qualified private auditors. DCAA has already provided initial guidance to its staff 

on the one-year requirement for completing its incurred cost audits and the 60-day 

requirement for completing its adequacy review of the incurred cost proposals 

Mr. CONAWAY. The fiscal year 2017 House Armed Services Committee NDAA Report called on the Department of Defense to ‘‘leverage greater certified public accountant experience and Federal financial management experience’’ for follow-on 

contract awards supporting ‘‘implementation, operation, and full utilization’’ of Enterprise Resource Planning (‘‘ERP’’) systems with the Army, Navy, and Air Force. 

This remains an important area of focus with the emphasis on audit reform. a) Can 

you comment on this approach and on the advantages of the federal government 

leveraging contractors who are certified public accountants? b) Are there particular 

advantages in using auditors with federal financial management experience? 

Secretary NORQUIST. a) Leveraging greater certified public accountant experience 

and federal financial management experience to support the success of ERP implementation and operations is important to the Department of Defense. Because sustainable audit success depends, to a great extent, on compliant auditable business 

feeder and financial systems, having experienced contractor support versed in federal accounting and audit standards will enable the Department to have better insight into ERP performance, gaps in compliance, and root-cause analysis. This, combined with independent auditor feedback on the systems’ compliance, means that 

the Department can respond to audit findings that much more quickly and adroitly. 

b) There are advantages in using auditors with federal financial management experience to perform the Department’s financial statement audit. Federal agencies 

must follow accounting standards, promulgated by the Federal Accounting Standards Advisory Board, that are specific to the federal government. Additionally, the 

Office of Management and Budget prescribes the form and content of federal financial statements, which are different from both commercial and state and local reporting formats. Also, auditors performing federal financial statement audits must 

comply with Generally Accepted Government Auditing Standards issued by the Government Accountability Office. Experience with these federal-specific requirements 

allows auditors to better identify findings and to provide best-practice based recommendations based on their prior experience working with federal agencies. 

Æ