The Business Opportunity in the DOD’s Audit Challenges

In January 2024, the Department of Defense’s Office of the Inspector General (DOD OIG) published the results of its most recent audit. Titled “Audit of the DOD’s Plans to Address Longstanding Issues with Outdated Financial Management Systems,” the DOD OIG pointed to the complexity of the DOD’s information technology environment as a significant barrier to financial system modernization.

According to the DOD OIG, IT poses several challenges to successfully completing a clean audit. These barriers include the following:

• The DOD’s IT environment is immensely complex, consisting of more than 4,500 IT systems in the unclassified environment alone.
• Defense components continue to use financial systems that do not comply with the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA).
• The DOD continues to have “IT material weaknesses [that] are longstanding [and] scope-limiting … [which] prevent the DOD from establishing an efficient and effective financial management environment.”

In order to overcome these material weaknesses, the DOD OIG issued the following recommendations for financial authorities and the DOD Chief Information Officer:

• Identify a lead individual for financial system modernization. That lead should then develop an “ideal end-state document that identifies the financial management systems the DOD will have when it achieves compliance with the FFMIA.”
• Create a strategy for rendering all defense financial management systems FFMIA compliant. Aging systems should be retired or replaced in a timely manner.
• Require the owners still using outdated systems to justify the use of them.
• Identify the significant challenges preventing components from simplifying the system environment and implementing DOD-wide solutions to address any identified challenges.

The upshot of these recommendations is that the DOD will be developing a financial systems modernization strategy, and it could have far-reaching effects for industry partners.

First, companies maintaining aging or already outdated financial systems for the DOD could find the budgets for those projects cut (i.e., minimized) or eliminated entirely as the department shifts funds to modernization efforts. Similarly, the DOD manages hundreds, if not thousands, of contracts related to maintaining these systems. Those contracts could be consolidated and/or canceled as financial modernization efforts centralize across the DOD.

Second, any financial management strategy implemented will by necessity require more extensive use of cloud computing technology. This could be to the benefit of the companies holding Joint Warfighting Cloud Capability (JWCC) contracts, if the DOD elects to use those companies to host new cloud-based financial management systems. This modernization effort could easily become a significant part of the work required under the JWCC 2.0 construct that is currently being discussed, with the result that more companies will be brought onboard to perform the work.

Third, the migration to new, cloud-based systems is going to require significant engineering support from both large and small business partners. Engineering requirements are the overlooked part of the federal cloud market because the tasks involved have nothing to do with the delivery of as-a-Service capabilities. Yet, as Deltek’s Federal Market Analysis team regularly documents in its annual Federal Cloud Computing Market report, the DOD spends hundreds of millions of dollars every year on cloud engineering. Small businesses in particular can benefit from looking for work in this area.

Summing up, the array of challenges facing the DOD suggests that achieving a clean audit is years, if not decades, away. Business opportunity can be found in complexity. This is the primary message industry should take away from the DOD OIG’s latest audit report.