The Office of Management and Budget is asking a simple question of agencies: How effective are your financial audits?
In a new memo from OMB Director Russ Vought, the Trump administration is kicking off an initiative to answer that question, and ultimately strengthen financial oversight and accountability.
“Audits were once a tool for accountability and improvement. Now they have become, in many places, rote exercises that do not ensure sound financial management and instead contribute to the $36 trillion of debt the federal government currently carries. While some agencies use audit findings to strengthen internal controls, others receive clean audit opinions for years despite squandering hundreds of millions of dollars in wasted, improper payments,” Vought wrote in the memo issued internally on Monday. “In short, audits are not working as intended. Independent reviews and oversight bodies have highlighted that we are spending heavily on audits, but still failing to prevent large-scale fraud, waste and abuse.”
Over the next year, OMB will lead a “strategic reset” of the government’s approach to audits with a goal of making them more valuable and help create a better government.
The tipping point for changing the financial audit approach seems to be agency struggles in fiscal 2024 to achieve clean financial audits. OMB says for the first time in nearly 20 years, only 18 CFO Act agencies received an unqualified opinion, while six had either a disclaimer or qualified opinion. Additionally, the administration and Congress have turned up their focus on the Defense Department’s inability to earn a clean audit.
“Part of this decision was, do we want to put our time and effort into failures of last administration?” said a senior administration official. “We want to put taxpayer resources to track dollars and cents under our programs and our oversight, and make sure we are doing it right going forward.”
OMB plans for the reset is a multi-step process. First, the administration will update Circular A-136, which sets expectations for financial audits. It was last updated in May 2023.
The senior administration official said this single-year format is just for fiscal 2025 and OMB is working on updating A-136.
“What we do going forward after 2025 hasn’t been decided yet,” the official said. “We want to dig in and see all the audits that happen, see what makes sense, and how we can make the audit process more meaningful and protect taxpayer dollars.”
Vought said agencies also will move to a single-year audit approach, which A-136 will outline. This includes focusing on current-year activity and balances, streamlining the scope of audits, and helping agencies address high-risk programs and control weaknesses in real time.
Finally, over the long term, OMB says it will build a broader accountability strategy that includes four focus areas:
- Auditing the auditors to ensure agencies are receiving value and aligning their reviews with outcomes and mission delivery
- Identifying audit activities that drive real risk reduction, accountability and financial integrity, and consolidating those that don’t
- Integrating audit results with program oversight, performance management and root-cause analysis to ensure findings lead to reforms
- Addressing the underlying causes of improper payments and waste
“Audits matter greatly, but not all audits lead to better government. We owe the public much more than multiple disclaimers, super-late financial reports, and ever-more spending that only furthers federal deficits and debt,” Vought wrote.
Previous attempts to change unsuccessful
Former OMB controllers say the administration’s initiative makes a lot of sense as the value of audits has long come into question.
Danny Werfel, a former OMB controller and former IRS commissioner, now executive in residence at the School of Government and Public Policy at the Johns Hopkins University, said he gave a speech before the Government Accountability Office when he was controller from 2011 to 2013 suggesting changes to the audit and financial oversight processes.
“It was not well-received. We pushed for this type of thing, and the people who sat in Office of Federal Financial Management controller’s chair know the DNA of federal financial statements misses mark of what taxpayers appear to want,” he said. “We floated the idea of shifting more toward the USASpending.gov model. It would be more toward cash and budget execution vs. accruals. It was something the Federal Accounting Standards Advisory Board and GAO leadership were not in favor of, so we were unable to convince them this was right direction to go in.”
Dave Mader, who was OMB controller from 2014 to 2017 and served in several other federal and industry executive positions, said he also looked into revamping the audit processes to ensure agencies were getting more value out of the audit efforts. But he, too, struggled to get traction with GAO.
Former OMB deputy controller “Mark Reger and I toyed with idea of changing the audit progress. Back then, everyone but DoD and the Department of Housing and Urban Development were getting clean opinions. I was monitoring the overall opinion but also looking trend-wise at material weaknesses, which can be an indicator of potential trouble areas,” Mader said. “I told the CFOs that while we were concerned about the overall opinion, we also wanted to know how you are addressing material weaknesses that go on year after year. Some agencies had unmodified opinions for four or five years in a row and zero material weaknesses. We were suggesting to GAO that maybe we would skip a year and do a sampling for those agencies that were consistently doing well. It wouldn’t be a full audit. This is what OMB seems to be saying now.”
Single-year audits not unheard of
Mader said the high-level approach OMB is seeking to use seems reasonable and there is no reason to be worried about transparency or impeding IG or GAO oversight.
“I read it that OMB is saying to both the audit and financial management communities, are you paying attention to how you set up the audit and how it’s being done? Are you clear with expectations?” he said. “Agencies need to pay more attention to the annual audit and who their provider is. They need to establish a clear set of expectations on what they expect the audit to include and how you do due diligence of your financial statements.”
The senior administration official said several agencies, including the Marines Corps in 2023, have used single-year audits in the past. The official said that while single-year audits are not the norm, they are not unheard of across the federal sector.
Werfel said there are several questions that OMB still needs to answer, including whether they are moving away from generally accepted accounting principles (GAAP). He said this benchmark standard is used around the country and world to evaluate financial management statements.
“How do we make sure that the robustness of the financial statement audits will not be lost and we take a step back? I think it’s important to make sure it’s just as challenging to get clean audits in the future with investments, internal controls, disciplines and automation so we aren’t sliding backwards and letting controls slip,” Werfel said. “The big question is, are they lowering the bar by doing this, or keeping it the same but challenging different and more relevant muscles?”
Werfel said he would’ve liked OMB to have worked with stakeholders, including the IGs, GAO and other financial management authorities and experts, before making any significant changes. He said the review wouldn’t have had to take months; even just a few weeks of discussion and input would have ensured a more cohesive initiative.
The senior administration official said OMB did talk to stakeholders and took in a lot of different views before issuing the policy.
Memo raises questions
One federal financial management official, who requested anonymity because they didn’t get permission to speak to the press, said OMB changing the approach so late in the year likely will cause a lot of problems for agencies.
The official said auditors will have to change their audit approaches, and agencies will need not only the financial management teams, but the human resources, technology and procurement offices will have to change their statements.
“I don’t think anyone would disagree the financial statement process is sorely in need of reform. But not having a controller for so long and the lack of GAO engagement doesn’t help,” the official said. “Each year OMB puts out an A-136 update and it’s notoriously late, but that’s not a big deal because it’s mostly technical updates. But the memo reads as if this is coming in 2025. I’m not sure OMB has the technical expertise to update the document as everyone with this type of background has left. I don’t see how they are going to do it when agencies have to get A-136 and then have to work on their systems to produce the statements.”
Another concern the official raised is the exodus of back-office employees working in HR, IT and procurement who contribute to this financial statement effort.
The federal financial official said with so many people gone and with members of the U.S. Department of Government Efficiency service taking over systems, it’s unclear what they are doing with the data and how they will be able to explain it to independent auditors.
“OMB has an opportunity to do something significant to improve financial statements. It’s just the way they are going about it in the memo leaves a lot of unanswered questions,” the official said.
The senior administration official said by statute these audits are not due until March, so OMB believes agencies will have time to adjust to the changes.
“Now is the time when agencies are really getting into their full stride of the audit process,” the official said. “We took feedback from agencies and they are able to make decisions to move forward. We believe agencies are in a position to do what they need to do for 2025. This didn’t happen without engagement with agencies. The single-year presentation is providing them to put more time and attention into accounting for the dollars under the current president and reducing some of the effort and work that would have had to go into explaining some of the mishaps from the last administration.”
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