Don’t Fear the Audit! Calculated Risk and Agile Accountability in the Sea Services
At the end of May 1942, the ships of Task Force 17 and Task Force 16 steamed toward their rendezvous near the remote island of Midway. Rallying the U.S. Navy’s last remaining aircraft carriers, Hornet, Enterprise, and Yorktown, Adm. Chester Nimitz sent his unforgettable orders, instructing Rear Adm. Raymond A. Spruance and Rear Adm. Frank Jack Fletcher:
…you will be governed by the principle of calculated risk … the avoidance of exposure of your force to attack by superior enemy forces without good prospect of inflicting, as a result of such exposure, greater damage to the enemy.
As we all know, Fletcher and Spruance executed their orders brilliantly, and won the battle that we look back upon as the turning point of World War II in the Pacific. At the same time, the principle of “calculated risk” famously became a fundamental description of how naval leaders operate in an uncertain and dangerous world. Nimitz effectively demonstrated the inestimable value of earned trust, both up and down the chain of command. That trust is even more critical today as the U.S. Navy enters a far more complex and multi-faceted security environment. This environment is compelling us to build a maritime strategy with agility and accountability as its defining characteristics. Our leaders who will be relied upon to “govern by the principle of calculated risk” in time and distance compressed circumstances.
We therefore need to enable our maritime leaders with access to reliable and time-sensitive information that fully informs their situational awareness, and without the gaps in data fidelity that they experience today. This is why our audit efforts go far beyond a financial exercise to assure the Congress we know how we are spending the taxpayers’ money. Rather, it is a vital enterprise tool to enable our naval forces to execute America’s maritime strategy in this century and beyond.
When You Hear ‘Audit,’ Think Agility and Accountability
When most Americans think of the word “audit,” they envision green eyeshades and calculators, as accountants laboriously work through financial documents and columns of numbers. But counting the numbers makes up only one part of this review, and only a small part of what makes it valuable. The audit efforts now underway in the Department of the Navy will encompass every aspect of its business operations, including acquisition, manpower, real and personal property, and financial reporting. More than merely a list of what goes where, or a test of how well we follow our own procedures, this audit will help us deliver a business enterprise in which the Navy spends less time agreeing on the facts and more time making informed decisions based on what those facts tell us. If we use the lessons of the audit properly, we will increase financial, materiel, and human capital transparency in a way that fosters confidence, collaboration, innovation, and faster decision speed. It will put accurate data in the hands of those who need it, when they need it, and allow them to make better decisions based on calculated risk.
We ask our fleet to operate on the principles of calculated risk every day. It is critical element of our naval heritage and ethos. Therefore, our man, train, and equip functions should employ the type of thorough, unblinking, and intensive review of risk which a full external audit will enable and enrich, top to bottom, year after year. It should be an integral part of what we do, not merely another block to check on a checklist. At its most basic level, our audit will give us the ability to evaluate how effective we are, not just in how precisely we state our financial condition, but in how we understand and improve our end-to-end processes — and ultimately the overall agility and accountability of our entire enterprise.
The return of great power competition, and the continued need to prepare for both the perils of war and competition and international conflict during peace, demands that we have the ability to accurately assess our strategic position and adapt quickly as conditions change. Many of us in the military are long used to preparing for examinations and inspections where one major defect means failure. In the world of audit, however, finding nothing to improve would be a failure in and of itself. We expect this auditing process to expose important deficiencies so we have the opportunity to correct them before they have unintended consequences. The deficiencies that this audit will illuminate will give us the opportunity to focus on the root causes that today inhibit our ability to base decisions on verifiable data. We will use this knowledge to design repeatable, dependable processes that empower the fleet to make more informed risk calculations — at a far more rapid rate.
Audit Results Are Opportunities
As our current financial audit proceeds, we are finding areas where focused improvements will yield significant advantages. For example, initial findings are confirming what we suspected about our current financial and business system environment: It is made up of too many legacy systems and interfaces that are not compliant, not only with overarching requirements, but even their local needs. Our people in the fleet likely have experienced the end result of this deficiency many times: working with reporting or ordering systems that do not speak to one another or integrate information accurately. We simply must fix this problem, not because the audit demands it, but because of the flexibility, speed, and efficiency that a more integrated system will provide to the fleet.
Second, the audit will provide important insight as to how we should streamline our funds distribution, execution, and reporting processes. This is critical to determining the precise cost of warfighting requirements and to ensure that we are actually paying the right money to buy the right ships, aircraft, submarines, and equipment. It is also critical to our ability to calculate precisely if we are spending the taxpayer’s money as it was intended, and to build confidence with those who provide us with capital. In this sense, this confidence is no different than the value a public company receives from its independent audit. Without financial information that is audited and confirmed to be accurate, a company would have limited ability to raise money from private investors and/or the capital markets. As a 21st century maritime force, the U.S. Navy and Marine Corps should understand better what we have purchased and why, and do a better job of tracking cash balances with regularity. Without this understanding, we should not expect Congress to continue fund our requests with ever-increasing scrutiny and skepticism.
Third, the audit will help us identify weaknesses in our internal controls systems and processes. A modernized business systems environment will not solve a single problem unless the enterprise adopts a more robust internal controls program. In this regard the audit will point us in the right direction with respect to the design of the system, and will regularly test our ability to maintain compliance. This effort will be done with the overarching principle in mind of enabling a more responsive enterprise, not bogging it down in cumbersome rules that don’t contribute to greater agility and accountability.
Finally, our current audit will identify what we must do to improve how we account for our property and equipment. This current deficiency has profound impacts on our ability to track things like spare parts and military equipment from the moment it is procured to the point it is installed in an aircraft or on a ship, as well as any upgrades and repairs required along the way. Inventory discrepancies can never appear to be normal, a cultural norm unfortunately accepted over time that can have a negative impact on parts availability and the backorder of supplies, to use just two examples familiar to everyone in the fleet. Without better, more accurate, visibility into this information, we cannot properly plan and pay for operations. In short, until we get better in this area, we risk ships not getting underway and airplanes not flying.
These initial findings will offer us an important view of how we can learn from audit, and how to take advantage of the auditor’s conclusions to immediately move the Department of the Navy forward. As successful business leaders know, and unsuccessful ones have learned, it is not enough merely to produce metrics. To lead and win, an enterprise needs to understand what those metrics mean, translate the analysis of those metrics into management focus that matters, continuously measure and verify the metrics, and evaluate how well those metrics align with their business goals and the operating environment. It is absolutely no different — and surely, the stakes are far higher — for us in the Department of the Navy. The results of our audit will be tough, but they will provide invaluable insight into what we need to reform how we do business in a way that the strategic context will require.
Taking Calculated Risks
As the renowned strategist and historian Alfred Thayer Mahan once wrote, “Failure to dare is often to run the greatest of risks.” We are daring to conduct the hardest and most thorough audit the United States military has ever seen. In order to do this, however, we need the cooperation of every element of the Navy and Marine Corps – as Secretary Mattis has said, audit is not about numbers, “Audit is about leadership.”
We must all embrace the improvement opportunities the audit will uncover and convert them into the kind of strategic flexibility and speed vital to success in an era of ever increasing unpredictability. It is about transforming the culture of how we do business to better serve the sailors and marines who need their spare parts, ammunition, fuel, and supplies at the right time and place to get the job done. This is true both in ensuring the readiness for war and the lethality of our forces and in maintaining the peace and deterring crisis from happening at all.
On May 28, 1942, as Nimitz sent his secret orders to Fletcher and Spruance, he had confidence that his commanders had a firm accounting of what ships were in their battle force, what aircraft were available, what ammunition was stockpiled, and what their various support resources were. The commanders at Midway based their decisions on hard, verifiable data, and placed immense trust in the platforms, people, and processes necessary for victory. The challenges that the Navy and Marine Corps face today are no different: we must build an enterprise in which data has veracity, processes are clean and understood, and controls enable faster, more informed decisions. The audit will reinforce this construction so that agility and accountability define us and prepare us best for victory.
Thomas B. Modly is the under secretary of the navy.