The Government Accountability Office (GAO) has published its assessment of the Pentagon’s effort to achieve a clean financial audit. The GAO echoed the critics who believe that the Department of War (DOW), the most financially complex enterprise in history, should be able to properly account for and report on assets and liabilities on its financial balance sheet. “For the seventh consecutive year since the Department of Defense (DOD) was required to undergo full-scope audits…” the GAO observed. When it comes to clean financial audits of US federal government agencies, the War Department is a frequent target of criticism.
As a good steward of what will soon be a trillion-dollar annual budget, Secretary of War Pete Hegseth seeks War Department funding that makes sense. To achieve this end, it’s crucial to have a clear understanding of the department’s assets and liabilities. That knowledge comes from attaining a clean financial audit. However, several factors combine to bring greater clarity to the War Department’s challenge to achieve a clean audit by December 31, 2028, as mandated by the National Defense Authorization Act for Fiscal Year 2024. Working toward a clean audit for the War Department is not a trivial undertaking. To appreciate what the Pentagon is being asked to do with its financial bookkeeping, it is helpful to grasp the magnitude of the effort and understand what has been accomplished. An article in Just the News provided a broad brush look at the challenge, explaining:
“The defense budget could reach $1 trillion after an additional increase for fiscal 2026, based on President Donald Trump’s budget request. The Defense Department’s Office of Inspector General identified 28 agency-wide ‘material weaknesses’ in fiscal 2024 that have hindered ‘sustainable business processes and a functioning internal control environment’ for its financial management operations.”
Those who criticize the War Department for failing to pass an audit seldom consider the magnitude of the War Department enterprise in context. From the 30,000-foot level, the DOW financial balance sheet reflects $4.1 trillion in assets and $4.3 trillion in liabilities. Explaining liabilities is a bit tricky, as that number reflects approximately 72% of military retirement benefits, including pensions and healthcare, amounting to $3.1 trillion. The remaining 28% or $1.2 trillion represents environmental cleanup, outstanding contracts, and debt. By way of comparison, the War Department’s FY2025 $850 billion budget request supports nearly 800 military installations in 80 countries. The DOW workforce, comprising active-duty, reserve, and civilian employees, exceeds three million. Comparing budget figures, the DOW dwarfs Apple’s revenue. It exceeds that of Walmart and Amazon, the world’s largest companies in sales revenue, making it the world’s largest organization when viewed as a single enterprise. Now consider that much of the DOW’s funding is invested in classified or “black budgets” – consider the intelligence budget alone, which is $100 billion. Some have compared the challenge of auditing the DOW budget to reconciling the largest Fortune 500 company ledger with half the entries redacted.
Examining the War Department’s workforce, it is notable that over three million personnel are not office workers, store clerks, or assembly line workers. The War Department’s personnel are distributed across combat zones, shipyards, and research and development facilities, developing hypersonic missiles as an example of the latest weapon systems. The assets the DOW manages range from irreplaceable aircraft carriers, valued at $13 billion each, to 5,000 nuclear warheads, which hold more than just a dollar value, but are priceless in terms of deterring adversaries from engaging the US in a nuclear confrontation. Amazon, Apple, or Walmart cannot claim a similar responsibility.
Reading the criticisms of the War Department’s failure to meet its responsibility for achieving a clean financial audit, one could get the idea that the DOW was not working diligently to fulfill that obligation. That would not be true. In November 2024, a briefing to the press by then-Defense Department Comptroller Mike McCord explained that the Pentagon had been working steadily to achieve a clean audit and had made demonstrable progress. McCord explained, “…In addition to the reporting entities that already had favorable audit opinions, $703 billion or 82 percent of our DOD-wide $856 billion balance is now free of material weaknesses.” A material weakness is an audit term that describes a significant deficiency in an organization’s internal controls over financial reporting that could result in a financial misstatement. Eleven War Department components out of 67 have achieved unqualified or clean audits on their individual financial statements, demonstrating focused success and an incremental roadmap to achieving a department-wide clean audit by the FY2028 deadline.
To that end, Secretary Hegseth, in his first message to the force, emphasized, “We will rebuild our military by matching threats to capabilities. This means reviving our defense industrial base, reforming our acquisition process, passing a financial audit, and rapidly fielding emerging technologies.” Hegseth has made “passing a financial audit” a leadership and management emphasis item. That’s what is needed if the War Department is to meet the clean audit milestone. Though the DOW is perhaps the most complex and largest of any single enterprise in the world, progress is being made – and the scope of the task at hand magnifies even the most modest of successes.
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