Defense Primer: FY2025 Department of Defense Audit Results

Updated April 28, 2026

Defense Primer: FY2025 Department of Defense Audit Results

The Chief Financial Officers Act of 1990 (P.L. 101-576)

requires annual audits of financial statements for federal

executive agencies, among other requirements. Under the

act, audits of federal agencies are the responsibility of each

agency’s inspector general (IG), but the IG may contract

with one or more external auditors to perform the audit.

The Department of Defense (DOD)—which is “using a

secondary Department of War designation” under

Executive Order 14347 dated September 5, 2025—released

the results of its eighth annual audit, for FY2025, on

December 18, 2025. DOD received a disclaimer of opinion

for the eighth time, meaning auditors could not express

overall opinions on the financial statements because the

financial information was not sufficiently reliable.

DOD’s IG coordinated the agency-wide financial audit,

covering $4.65 trillion in reported assets and $4.73 trillion

in reported liabilities. The agency-wide audit was

conducted by independent public accounting (IPA) firms

contracted by DOD IG. The IPAs conducted 26 separate

entity-level audits within the DOD. The entities receiving

disclaimers of opinion combined accounted for 43% of

DOD’s total assets and at least 64% of DOD’s total

budgetary resources.

Additional statutory requirements related to DOD’s audited

financial statements are contained in Title 10 of the U.S.

Code, Chapter 9A.

Generally, the process and standards used to audit DOD are

the same as those used to audit other federal agencies.

Understanding why and how the DOD audit was conducted

may help Congress evaluate the audit results and usefulness

of the audit.

Why an Audit?

Government entities, including the U.S. government as a

unitary entity, issue annual reports that present their current

financial position and condition and discuss key financial

topics and trends. An audit of the government’s financial

information provides accountability over government

agencies’ use of public resources to Congress, oversight

bodies, and the public.

Financial audits aim to provide reasonable assurance that

the audited entities’ financial statements are free of material

misstatements whether caused by error or fraud. DOD

audits can provide critical insight into (1) the reliability of

the agency’s financial data, (2) the efficiency and

effectiveness of its internal operations, and (3) its

compliance with statutes and financial regulations. With

such information, Congress conducts oversight, and DOD

could take steps to improve DOD’s performance in these

areas.

DOD’s financial management has been on the Government

Accountability Office’s (GAO’s) High-Risk List (HRL)

since 1995. The HRL identifies areas that might be subject

to fraud, waste, abuse, and mismanagement. In addition to

financial management, GAO’s February 2025 HRL

includes other aspects of DOD’s operations that could

affect financial management.

How Are Audits Done?

For each line item on a financial statement and notes to the

financial statement, an auditor examines a sample of

underlying economic events to determine the accuracy of

the information reported. The auditor is expected to give an

unbiased opinion on whether the financial statements and

related disclosures are fairly stated in all material respects

for a given period of time in accordance with generally

accepted accounting principles (GAAP). While the Federal

Accounting Standards Advisory Board sets the financial

reporting and accounting standards for the federal

government, GAO is responsible for establishing auditing

standards for federal agencies, including for federal grant

recipients in state and local governments.

Material misstatement in financial reporting can be

defined as information on a financial statement that

could potentially affect the reader’s decision or the

conclusions drawn by a reader about the financial

status of an agency.

Auditing Standards

GAO issues the generally accepted government auditing

standards (GAGAS), also commonly known as the “Yellow

Book,” which provides a framework for conducting federal

government audits. Similar to the requirements in the

private sector, GAGAS requires federal financial reports to

disclose compliance with laws, regulations, contracts, and

grant agreements that have a material effect on the entities’

financial statements. GAGAS requires auditors to consider

the visibility and sensitivity of government programs in

determining the materiality threshold.

Some organizations within the federal government use both

external and internal auditors. Whether external or internal

auditors perform the function, they are required to adhere to

the standards established under GAGAS.

In addition to examining financial information, an audit

evaluates management’s assertion of internal control over

financial reporting. Audit of internal control includes audit

of computer systems at the entity-wide, system, and

application levels. GAGAS recommends using specific

frameworks for internal control policies and procedures,

including certain evaluation tools created specifically for

federal government entities.

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Defense Primer: FY2025 Department of Defense Audit Results

Types of Audit Opinions

Limitation of Audits

Auditors form opinions by examining the types of risks an

organization might face and the types of controls that exist

to mitigate those risks. Once the risks and controls to

mitigate those risks have been determined, the auditors will

examine supporting evidence to determine if management

is presenting the financial statements fairly in all material

respects. Although many entities in the federal government

usually receive unmodified opinions, auditors may express

other types of opinions based on the circumstances. There

are four types of audit opinions:

Unmodified opinion. An unmodified (or “clean”) opinion

notes that the financial statements present fairly, in all

material respects, the consolidated balance sheets, related

consolidated statements of net cost and changes in net

position, combined statements of budgetary resources, and

related notes to the consolidated financial statements in

accordance with GAAP. This opinion is expressed in a

standard report. In certain circumstances, explanatory

language might be added to the auditor’s standard report,

but this does not affect the unmodified opinion.

Modified (or qualified) opinion. A modified opinion states

that, except for the effects of the matter(s) identified in the

opinion, the financial statements present fairly in all

material respects in conformity with GAAP.

Adverse opinion. An adverse opinion states that the

financial statement(s) do not present fairly in accordance

with GAAP.

Disclaimer of opinion. A disclaimer of opinion states that

the auditor does not express an opinion on the financial

statements. The auditor’s report may be expected to give all

of the substantive reasons for the disclaimer. Reasons for a

disclaimer of opinion include financial statements not

conforming to GAAP and financial management systems

being unable to provide sufficient evidence for the auditor

to express an opinion.

Independent audit opinions provide reasonable assurance—

but for the following reasons do not fully guarantee—that

financial statements present fairly in all material respects:

Financial and Operation Benefits

GAO reports over the last two years highlight a number of

financial and operational benefits obtained through DOD

financial audits.

Financial benefits. The Navy identified 14 legacy systems

that it plans to retire, with an estimated $103 million cost

avoidance. “[T]he Air Force reported using machine

learning to identify $653 million in obligations that may be

applied in ways that preserve future buying power.”

Operational benefits. Navy audits identified $4.3 billion in

previously untracked equipment and supplies, making these

working capital fund items available for requisition and

operational use. Army process automations continue to save

labor hours required for audit reporting; in FY2023 alone,

the Army reportedly saved 5,600 labor hours through 79

process automations by reconciling fund balances with

Treasury.

According to GAO, DOD needs to continue addressing its

material weaknesses. DOD IG reported that if these

material weaknesses are not resolved, they could continue

to impede DOD and its components from achieving a clean

audit opinion.

• Auditors use statistical methods for random sampling

and look at only a fraction of economic events or

documents during an audit. It is cost and time

prohibitive to recreate or examine them all.

• Audit procedures cannot eliminate potential fraud,

though it is possible that an auditor may find fraud

during the audit process.

Considerations for Congress

Clean audit by 2028. Section 1005 of the National Defense

Authorization Act for Fiscal Year 2024 (P.L. 118-31)

required DOD to obtain an unmodified audit opinion by

December 31, 2028. Section 1004 required that each DOD

component be subject to an independent audit or face

cancellation of 1.5% certain unobligated funding. Section

920 required DOD to develop and implement metrics to

operationalize audit readiness by April 2025.

Use of artificial intelligence (AI) in DOD audits. Section

1007 of the Servicemember Quality of Life Improvement

and National Defense Authorization Act for Fiscal Year

2025 (P.L. 118-159) required senior DOD officials to

“encourage, to the greatest extent practicable,” the use of

AI and machine learning (ML) to facilitate DOD financial

statement audits. Congress may assess the role of AI and

ML in DOD audits and consider legislative approaches to

address benefits and challenges.

Funding for corrective action plans. Paths to an

unmodified audit opinion require allocating resources

toward corrective action plans that respond to auditors’

notifications of findings and recommendations. Section

1002 of the National Defense Authorization Act for Fiscal

Year 2026 (P.L. 119-60) amended Title 10 of the U.S.

Code, Section 240b, to require DOD annually to provide “a

detailed estimate of the funding required for the next fiscal

year to procure, obtain, or otherwise implement each

process, system, and technology identified to address the

corrective action plan or plans of each department, agency,

component, or element of [DOD].” Congress may assess

the completeness and adequacy of these detailed estimates,

comparing identified funding requirements with DOD’s

budget request for FY2027 and future years.

CRS Resources

CRS In Focus IF10701, Introduction to Financial Services:

Accounting and Auditing Regulatory Structure, U.S. and

International, by Raj Gnanarajah

Other Resources

Office of the Under Secretary of Defense (Comptroller)/Chief

Financial Officer, Department of Defense Agency Financial Report

Fiscal Year 2025, December 2025

Raj Gnanarajah, Analyst in Financial Economics

Cameron M. Keys, Analyst in Defense Logistics and

Resource Management Policy

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Defense Primer: FY2025 Department of Defense Audit Results

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