Lawmakers Seek to Penalize DoD if It Fails to Pass a Clean Audit

Why It Matters

The measures tie billions of defense dollars to financial accountability, pressuring the Pentagon to modernize its accounting systems and improve oversight of a $4.7 trillion asset portfolio.

Key Takeaways

• RECEIPTS Act forces DFAS transfer on audit failure.
• Clean audit grants Pentagon $10 billion reprogramming flexibility.
• New bill mandates CPA‑qualified comptrollers for DoD.
• Audit the Pentagon Act proposes 0.5‑1% budget cuts for failures.
• Marine Corps' AI system demonstrates path to clean audit.

Pulse Analysis

The Department of Defense’s chronic audit failures have long been a blind spot in federal financial oversight. Managing roughly $4.7 trillion in assets and an equal amount in liabilities, the Pentagon’s inability to produce a clean audit undermines confidence in how taxpayer dollars are allocated. Past attempts by Congress to impose penalties have stalled, leaving the agency without strong incentives to address material weaknesses identified by the Government Accountability Office, especially in IT controls and internal reporting.

The newly introduced RECEIPTS Act and the companion Audit the Pentagon Act of 2026 aim to change that calculus. By threatening to shift DFAS responsibilities to an external provider and imposing a 0.5%‑1% budget reduction for each failed audit, lawmakers are linking financial performance directly to operational flexibility. Success would unlock up to $10 billion for program reprogramming, while the legislation also tightens leadership standards, mandating that future DoD comptrollers hold CPA credentials and have audit‑clean experience. Additionally, the bills earmark $300 million for AI‑driven automation and legacy system replacement, signaling a push toward technology‑enabled accountability.

If enacted, these measures could reshape defense budgeting and procurement. A clean audit would not only free up reprogramming authority but also set a precedent for other federal agencies grappling with legacy financial systems. Industry players stand to benefit from increased demand for audit‑ready software, AI analytics, and cybersecurity solutions. Conversely, failure to meet the new standards could trigger automatic budget cuts, forcing the Pentagon to prioritize financial hygiene over discretionary spending, thereby influencing the strategic allocation of defense resources for years to come.

Lawmakers seek to penalize DoD if it fails to pass a clean audit

Anastasia Obis · February 13 2026 1:27 pm

The Defense Department has never passed a full audit since launching its first independent financial review in 2017. Now a new bill seeks to impose penalties if the Pentagon fails to achieve a clean full audit within the next three years — and grant greater budget flexibility if it succeeds.

The new legislation, the Reviewing Every Check and Each Invoice Purchasing Troops’ Supplies Act (the “RECEIPTS Act”), introduced by Sen. Joni Ernst (R‑Iowa), would require the Defense Department to transfer the Defense Finance and Accounting Service’s non‑defense payroll and finance functions to another financial provider if the Pentagon fails to achieve a clean audit by December 2028. While DFAS mainly supports DoD, it also provides financial services to other federal agencies, including the Department of Health and Human Services.

The bill would also require DoD financial leaders to meet additional qualifications — future Pentagon and service‑level comptroller nominees would all have to be certified public accountants (CPAs) with prior experience serving as chief financial officers of federal or state agencies that already passed a clean audit or of public companies that achieved a clean audit during their tenure.

Passing a clean audit by 2028 would give the department more freedom to shift funds between programs — the defense secretary would be able to transfer up to $10 billion or 1 % of DoD’s total budget in the following year. The military services and defense agencies would also get higher reprogramming limits.

The bill would also eliminate several longstanding audit‑related reporting requirements if the Pentagon achieves a clean financial audit.

It is unclear what strategy the Iowa senator plans to pursue to push the bill across the finish line — standalone bills often face political hurdles, and lawmakers frequently try to attach such proposals to larger legislative packages like the annual National Defense Authorization Act to increase their chances. Ernst’s office told Federal News Network that she is open to any path that would pass the bill into law.

Several bipartisan bills have been introduced in Congress to penalize the Defense Department for failing to pass an audit, but none have become law. Sen. Bernie Sanders (I‑VT) and Sen. Chuck Grassley (R‑IA), for instance, have repeatedly introduced the Audit the Pentagon Act, which would require DoD to return 1 % of its budget to the Treasury if it fails to pass an audit.

Now House lawmakers are renewing that push. Rep. Mark Pocan (D‑WI) and Rep. Andy Biggs (R‑AZ) on Thursday introduced the Audit the Pentagon Act of 2026 — lawmakers want the Pentagon to return 0.5 % of its budget after its first failed audit and forfeit 1 % in subsequent years. The proposal exempts personnel and healthcare funding from these automatic cuts.

“For years, the Pentagon has failed audit after audit while Congress continues to write blank checks. That’s unacceptable,” Biggs said in a statement.

The Defense Department oversees $4.7 trillion in assets and another $4.7 trillion in liabilities and receives hundreds of billions in federal funding annually, yet it remains the only federal agency that has never fully accounted for its assets and liabilities in a given year. The Pentagon is expected to receive its first $1 trillion budget in this current fiscal year, and President Donald Trump announced last month he would seek a $1.5 trillion defense budget for the next fiscal year.

In fiscal 2025, auditors found 26 material weaknesses and two significant deficiencies related to the DoD’s internal controls over financial reporting. A significant deficiency is less severe than a material weakness, which indicates a control failure that could result in a major misstatement in financial reports. The Government Accountability Office has issued dozens of recommendations over the years on how DoD can fix its material weaknesses, but many of those recommendations remain open or not fully implemented.

The Defense Department inspector general found that IT‑related material weaknesses continue to hinder the Pentagon’s audit progress, noting the lack of effective internal controls over financial management systems undermine the auditor’s ability to rely on the data produced by those systems and used to support the DoD agency‑wide financial statements.

As of this year, the Marine Corps remains the only service branch to achieve a clean audit opinion. The audit performed by an independent public accounting firm concluded that the service’s financial records are all materially accurate, complete and in compliance with federal regulations.

The service’s transition to the Defense Agencies Initiative (DAI) financial system in fiscal 2022 is one of the main reasons it was able to pass a clean audit for the third consecutive year.

“As we improve in that system and all the other systems that feed information to it for audit, one of our endeavors is to make it easier for Marines to be able to produce financial statements and to be able to have samples that are auditable, because there’s still a lot of manual effort involved. And ultimately, we want to be able to make that more reliable and more automated. With all the advances in artificial intelligence and additional system improvements, we continue to make strides there,” Edward Gardiner, assistant deputy commandant for programs and resources, told reporters this week.

Lt. Gen. James Adams, deputy commandant for programs and resources, said the service is testing commercial AI tools that can automatically review financial data and catch errors between disconnected systems.

Ernst said the Defense Department should use AI and automation — rather than more contractors — to finally achieve a clean audit by 2028. If passed, the bill would authorize $150 million for automation and AI to speed up audits and another $150 million to replace outdated business systems and improve accuracy.