Department of Defense First Agency-wide Financial Audit (FY2018): Background and Issues for Congress

Summary: The Chief Financial Officers Act of 1990 (CFO Act, P.L. 101-576 ) requires annual financial audits of federal agencies' financial statements to "assure the issuance of reliable financial information ... deter fraud, waste and abuse of Government resources ... [and assist] the executive branch ... and Congress in the financing, management, and evaluation of Federal programs." Agency inspectors general (IGs) are responsible for the audits and may contract with one or more external auditors. Congressional interest in the Department of Defense's (DOD's) audits is especially acute because DOD's expenditures represent about half of federal discretionary spending and about 15% of total spending by the federal government. Also, DOD's financial management has been on the Government Accountability Office's high-risk list since 1995. Those on the high-risk list are considered more vulnerable to fraud, waste, abuse, and mismanagement.

Summary: DOD completed its first-ever agency-wide financial audit in FY2018 and recently completed its FY2019 audit. As expected, DOD received an agency-wide disclaimer of o pinion from the DOD IG in both auditsâmeaning auditors could not express an opinion on the department's financial statements because the financial information was not sufficiently reliable. DOD has stated it could take up to 10 years to receive a clean audit opinion.

Summary: Some reasons for a disclaimer of opinion can include inadequate internal controls (i.e., a series of integrated actions that management uses to guide operations), financial statements not conforming to Generally Accepted Accounting Principles (GAAP), insufficient property and inventory records, and financial management systems that do not provide sufficient evidence for the auditor to express an opinion.

Summary: The FY2018 audit included 2,358 notices of findings and recommendations (NFRs), which capture issues that require corrective action. Approximately 94% of the NFRs were related to three critical areas: financial management systems and information technology; financial reporting and DOD's fund balance with Treasury; and property. These NFRs resulted in 20 agency-wide material weaknesses and 129 component-level material weaknesses. All material weaknesses were related to issues with internal control. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that management will not prevent, or detect and correct, a material financial misstatement. Comprehensive data from the FY2019 audit are not currently available. However, DOD has announced that auditors validated that DOD had resolved over 550 findings, more than 23%, from the department's FY2018 audit and that the audits have helped DOD "target and prioritize corrective actions as we strive to achieve an unmodified audit opinion."

Summary: After describing what a financial audit entails, this report examines the FY2018 audit in detail and addresses several issues for Congress, including the audit's cost (approximately $413 million in FY2018) and the challenges the material weaknesses identified in the FY2018 audit may create for congressional oversight of DOD.

The Chief Financial Officers Act of 1990 (CFO Act) requires annual financial audits of federal agencies' financial statements to "assure the issuance of reliable financial information ... deter fraud, waste and abuse of Government resources ... [and assist] the executive branch ... and Congress in the financing, management, and evaluation of Federal programs." Agency inspectors general (IGs) are responsible for the audits and may contract with one or more external auditors.

The Department of Defense (DOD) completed its first agency-wide financial audit in FY2018 and recently completed its FY2019 audit. Comprehensive data for the FY2019 audit are not currently available. Therefore, this report focuses on DOD's FY2018 audit. Congressional interest in DOD's audits is particularly acute because DOD accounts for about half of federal discretionary expenditures and 15% of total federal expenditures.

The Department of Defense Inspector General (DOD IG) contracted with nine Independent Public Accounting firms (IPAs) to conduct the FY2018 and FY2019 audit. The IPAs conducted 24 separate audits within DOD (see Table 1 for each of the component-level audit opinions).

In both FY2018 and FY2019 audits, the DOD IG issued the overall agency-wide opinion of disclaimer of o pinion âmeaning auditors could not express an opinion on the financial statements because the financial information was not sufficiently reliable. DOD components that received a disclaimer of opinion represent approximately 56% of the reported DOD assets and 90% of the reported DOD budgetary resources.

DOD expected to receive a disclaimer of opinion for FY2018 and FY2019. The department has stated it could take a decade to receive an u nmodified (clean) audit opinion. The federal government as a whole is unable to receive a clean opinion on its financial report because agencies with significant assets and budgetary costs, such as DOD, the Department of Housing and Urban Development, and the Railroad Retirement Board, have each received a disclaimer of opinion in recent years. The federal government as a whole potentially could receive a clean audit opinion without all government agencies receiving a clean audit opinion; however, the size of the DOD budgetâ$708 billion in FY2019âprevents an overall clean opinion without DOD receiving a clean audit opinion.

DOD employs 2.9 million military and civilian employees at approximately 4,800 DOD sites in 160 countries. DOD IG personnel and auditors from IPAs visited over 600 sites, sent over 40,000 requests for documentation, and tested over 90,000 sample items. DOD spent $413 million to conduct the FY2018 audit: $192 million on audit fees for the IPAs and $221 million on government costs to support the audit. DOD spent an additional $406 million on audit remediation and $153 million on financial system fixes.

Financial statements are the primary way for an entity to communicate its financial performance to its stakeholders. How each line item on a financial statement (e.g., property) should be valued and reported is based on Generally Accepted Accounting Principles (GAAP), an agreement among practitioners (i.e., accountants, auditors, and regulators).

In a financial audit, a private or public entity hires an independent auditor to provide reasonable assurance to all stakeholders that its financial statements are free of material misstatement, whether caused by error or fraud. Auditors form opinions by examining the types of risks an organization might face and the controls in place to mitigate those risks. Auditors give unbiased professional opinions on whether financial statements and related disclosures are fairly stated in all material respects for a given period of time in accordance with GAAP.

As mentioned previously, the CFO Act requires federal agencies' financial statements to be audited annually. The CFO Act assigns responsibility for audits to agency inspectors general (IGs), but an IG may contract with one or more external auditors to perform an audit. The annual audit can inform Congress and the agency about its business processes and areas for improvement.

An audit of DOD can provide benefits, such as (1) effective and efficient internal operations that can lead to reducing costs and improving operational readiness; (2) improved allocation of assets and financial resources that can enhance DOD's decisionmaking and ability to support the Armed Forces; and (3) improved compliance with statutes and financial regulations.

For each line item on a financial statement and notes to the financial statement, an auditor will examine a sample of the underlying economic events to determine the reported information's accuracy. The Federal Accounting Standards Advisory Board (FASAB) promulgates financial reporting and accounting standards for federal government entities, and GAO establishes federal auditing standards, including for federal grant recipients in state and local governments.

GAO issues the Generally Accepted Government Auditing Standards (GAGAS), also commonly known as the Yellow Book , to provide a framework for conducting federal government audits. The Yellow Book requires auditors to consider the visibility and sensitivity of government programs in determining the materiality threshold. Similar to requirements in the private sector, GAGAS requires federal financial reporting to disclose compliance with laws, regulations, contracts, and grant agreements that have a material effect on financial statements.

Before auditors examine an entity's financial statement, they first evaluate its Enterprise Resource Planning (ERP) systems' (information technology systems') access control and reliability, as well as internal controls. ERP refers to an enterprise-wide information system used to manage and coordinate all of an entity's resources, information, and functions from shared data stores, including financial information. Auditing ERP systems is a critical aspect of evaluating an entity's internal controls.

Internal Control in the Federal Government

Internal control is a series of integrated actions that management uses to guide an entity's operations. Under GAO standards, effective internal controls should require management to use dynamic, integrated, and responsive judgment rather than rigidly adhering to past policies and procedures. The success or failure of an entity's internal controls depends on its personnel. Management is responsible for designing effective internal controls, but implementation depends on all personnel understanding, implementing, and operating an effective internal control system.

Federal agencies have been required to report to Congress on internal controls since the Federal Managers' Financial Integrity Act of 1982. In addition, the Federal Financial Management Improvement Act of 1996 requires agencies to report to Congress on the effectiveness of internal control over financial management systems.

GAO's Standards for Internal Control in the Federal Government (also known as the Green Book ) provides the overall framework for designing, implementing, and operating an effective internal control system. An audit of an entity's internal controls includes 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. Office of Management and Budget (OMB) Circular No. A123, Management's Responsibility for Enterprise Risk Management and Internal Control , provides additional guidance.

The federal government's internal control framework is based on the framework created by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is widely used in the private sector. The COSO framework is dedicated to improving organizational performance and governance through effective internal control, enterprise risk management, and fraud deterrence.

The COSO framework, depicted in Figure 1 , was created to help practitioners assess internal controls not as an isolated issue, but rather as an integrated framework for how internal controls work together across an organization to help achieve objectives as determined by management. It represents the integrated perspective recommended by COSO for practitioners who are creating and assessing internal controls. The cube may be best understood by examining each set of components separately:

Categories of objectives. Operations, Reporting, and Compliance are represented by the columns. The objectives are designed to help an organization focus on different aspects of internal controls to help management achieve its objectives.

Components of internal control. Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities are represented by the rows. The components represent what is required to achieve the three objectives.

Levels of organizational structure. Entity-Level, Division, Operating Unit, and Function are represented by the third dimension. For an organization to achieve its objectives, according to COSO, internal control must be effective and integrated across all organizational levels.

Internal controls can help DOD leadership achieve desired financial results through effective stewardship of public resources. Effective internal controls can increase the likelihood that DOD achieves its financial objectives, including getting a clean (i.e., unmodified) audit opinion. Properly designed internal controls can help reduce the amount of detail an auditor will examine, including the number of samples examined. Good internal controls could reduce the amount of time required to conduct an audit, thus reducing its cost.

At DOD, auditors identified 20 agency-wide internal control material weaknesses and 129 DOD component-level material weaknesses that range from issues with financial management systems to inventory management.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that management will not prevent, or detect and correct, a material misstatement in the financial statements in a timely manner.

Many of these material weaknesses are discussed later in this report under " Issues for Congress ." Properly designed internal controls can also serve as the first line of defense in safeguarding assets. Internal controls help private and public entities achieve objectives, such as enterprise risk management, fraud deterrence, and sustained and improved performance, by designing processes that control risk.

The DOD IG identified multiple DOD components that do not have sufficient entity-level internal controls . The lack of entity-level internal controls directly contributed to an increased risk of material misstatements on the components' financial statements and the agency-wide financial statements.

Until DOD resolves the many issues surrounding internal controls and establishes a better record-keeping system, it might be difficult for auditors to identify other material weaknesses that could prevent DOD from receiving a clean audit opinion. When the current set of internal control issues is resolved, and auditors are better able to analyze DOD records, they might discover additional issues, including new material weaknesses, that need to be resolvedâa cascading effectâbefore DOD receives a clean audit opinion. This cycle might repeat a few times.

The DOD auditors issued 2,377 notices of findings and recommendations (NFRs) that resulted in 20 agency-wide material weaknesses and 129 DOD component-level material weaknesses. Appendix A provides an overview of the 20 agency-wide material weaknesses. An auditor creates an NFR to capture issues that require corrective action. DOD then creates a corrective action plan (CAP) to address one or more NFRs. The NFR is later retested, and if the CAP sufficiently addresses the NFR, the auditor is to validate that the issue has been resolved.

As of June 2019, the majority of NFRs were related to three critical areas: approximately 48% were related to financial management systems and information technology; 30% were related to financial reporting and DOD's fund balance with Treasury; and 16% were related to property. Although the overall number of NFRs increased slightly between December 2018 and June 2019, the number has decreased significantly in certain categories (see Table 2 , Other column). The increase in NFRs in certain categories is an expected result of the audit process. As auditors learn more about DOD and how it functions, they may continue to identify new NFRs, while DOD continues to address some of the previously identified NFRs.

The Office of the Under Secretary of Defense (Comptroller) has established an audit NFR database. DOD uses the database to consolidate and track the status of all auditor-issued NFRs and prioritize and link them to CAPs. The NFR and CAP component-based metrics are reported and reviewed monthly in the National Defense Strategy meeting with the Deputy Secretary of Defense and Military Service financial management leadership teams.

The military service branchesâArmy, Navy, Marine Corps, and Air Forceâaccount for over 60% of NFRs identified in the FY2018 audit (see Table 3 ).

For DOD to receive a clean audit opinion, civilian leadership and uniformed Armed Forces personnel may need to improve collaboration. According to DOD, it is prioritizing CAPs that align with the National Defense Strategy and provide the greatest potential value to DOD operations and the warfighter. DOD has established actionable financial statement audit priorities at many levels within the department, including at the command level. Those FY2019 priorities include the following:

Real Property; Government Property in the Possession of Contractors; Inventory, and Operating Materials and supplies; and Access Controls for IT Systems.

Given the complexity of DOD operations, auditors began their work for the FY2019 financial audit in late 2018. Comprehensive data for the FY2019 audit are not currently available. However, the auditors issued an overall agency-wide disclaimer of opinion for FY2019. Most financial statement audits stop as soon as the auditor determines the reporting entity is not auditable. DOD, however, has asked the auditors to continue such audits to identify as many problems as possible, with the goals of identifying systemic issues and making faster progress toward business reform.

Although the CFO Act required annual audits of federal agencies' financial statements, DOD did not complete an agency-wide audit until 2018â28 years later. One of DOD's strategic goals is to reform its business practices for greater performance and affordability. According to DOD, the annual audit process helps it reform its business practices consistent with the National Defense Strategy (NDS):

The financial statement annual audit regimen is foundational to reforming the Department's business practices and consistent with the National Defense Strategy. Data from the audits is driving the Department's strategy, goals, and priorities and enabling leaders to focus on areas that yield the most value to the warfighter. The audits are already proving invaluable and have the potential to support long-term, sustainable reform that could lead to efficiencies, better buying power, and increased public confidence in DoD's stewardship of funds.

Continued congressional oversight of DOD's plan to achieve a clean audit opinion could help DOD achieve a clean audit opinion. As more components receive a clean audit opinion, audit costs might eventually decrease. For FY2018, DOD incurred nearly $1 billion in total audit costs, which was less than 0.25% of DOD's FY2018 budget.

Although the cost of an audit is a consideration, the more impactful benefits from an annual financial audit, arguably, are the changes in DOD business practices that directly impact the NDS while increasing transparency. The audits identified three critical areas of improvement that are consistent with the NDS: (1) financial management systems and information technology (IT), (2) financial reporting and fund balance with Treasury, and (3) property (real property, inventory, and supplies, and government property in the possession of contractors). Addressing the issues in these critical areas not only could help DOD improve its business practices, but it might also help resolve many of the NFRs, which could enable some audit components to receive clean audit opinions in the next few years instead of in another decade or more.

Financial Management Systems and Information Technology

According to DOD, its financial management systems and information technology provide a broad range of functionality to support agency financial management, supply chain management, logistics, and human resource management. Reliable systems are mission critical to DOD meeting its NDS and supporting the warfighter.

Also, DOD is required to comply with laws and regulations, such as the Federal Managers' Financial Integrity Act of 1982, the Federal Financial Management Improvement Act of 1996, and OMB Circular A-123. These laws and regulations collectively require DOD to maintain a system of internal controls that can produce reliable operational and financial information. The challenges DOD faces in financial management systems and information technology are twofold and compromise nearly half of all NFRs (see Table 2 or Table 3 ).

First, DOD's initiatives to address the issues related to access controls for IT systems are partially implemented. A fully implemented plan to address access control issues would potentially restrict access rights to appropriate personnel, monitor user activity, and safeguard sensitive data from unauthorized access and misuse. As part of its corrective action plan, DOD is requiring financial system owners and owners of business systems that contribute financial information to review and limit access only to those who need it and only to the specific areas within the systems that they need to access.

DOD has developed security controls and standardized test plans that align with the Federal Information Systems Control Audit Manual methodology used to test systems during an audit. Further, DOD management has directed components without a proper software maintenance policy to establish a baseline policy for those software systems and maintain a record of all software system changes. In addition to requiring components to develop reports on privileged users and transactions, including privileged user activities, the department has directed components to periodically review user access rights and remove unauthorized users.

Second, the number and variety of financial systems complicate DOD's financial statement audits. In 2016, DOD reported more than 400 separate information technology systems were used to process accounting information to support DOD's financial statements. Many of these legacy systems were designed and implemented to support a particular function, such as human resource management, property management, or logistics management, and were not designed for financial statement reporting. These systems include newer ERP systems and custom-built legacy systems, financial systems, and nonfinancial feeder systems. Also, aging systems and technology that predate modern data standards and laws, as well as nonaccounting feeder systems, affect data exchange with modern ERPs to facilitate auditable financial reports.

DOD's IT modernization program is investing in ERPs and aims to migrate 51 legacy systems to core modern ERPs by the end of 2023. How the remediation plans evolve and how they are implemented as DOD migrates to the new ERPs could be a significant determiner of DOD's ability to address nearly half of the NFRs.

Financial Reporting and Fund Balance with Treasury

According to DOD's auditors, its policies and procedures for compiling and reporting financial statements are not sufficient to identify, detect, and correct inaccurate and incomplete balances in the general ledger. Without an adequate process to identify and correct potential misstatements in the general ledger, balances reported on financial statements, accompanying footnotes, and related disclosures may not be reliable or useful for decisionmaking for Congress, including appropriating the DOD budget. The lack of accurate numbers, arguably, also presents challenges for DOD leadership in making agency financial decisions.

DOD's assets increased by nearly $200 billion in FY2018 over FY2017. Fund Balance with Treasury, one of the assets, increased by $78.6 billion. According to DOD, the increase in Fund Balance with Treasury resulted from additional appropriations received in FY2018. DOD is unable to effectively track and reconcile collection and disbursements activity from its financial systems, which resulted in DOD being unable to reconcile its general ledger and Treasury accounts.

The fund balance with the Treasury Department is an asset account reported on DOD's general ledger, which shows a DOD component's available budget authority. Similar to a personal checking account, the fund's balance increases and decreases with collections and disbursements of new appropriations and other funding sources. Each DOD component should be able to perform a detailed monthly reconciliation that identifies all the differences between its records and Treasury's records. The reconciliations are essential to supporting the budget authority and outlays reported on the financial statements.

The auditors identified several deficiencies in the design and operation of internal controls for fund balance with the Treasury that resulted in DOD-wide material weakness. DOD has undertaken business process improvements to streamline reporting, reduce differences to an insignificant amount, and support account reconciliations.

The auditors report that DOD faces challenges with properly recording, valuing, and identifying the physical location of real property, inventory, and government property that is in the possession of contractors. DOD's challenges with property and inventory complicate Congress's ability to perform effective oversight and budget appropriations. Without accurate real estate counts and values, DOD will continue to face challenges in meeting the National Strategy for Efficient Use of Real Property.

DOD faces similar issues with inventory. It is unable to provide assurance that inventory recorded in the financial statements exists and is valued properly. Without accurate inventory counts, DOD might not be able to support its missions without incurring additional costs. Some appropriated funds could be used to purchase extraneous inventory that DOD might already have on hand, or DOD might rely on inventory that appears in an inaccurate count but does not actually exist.

The auditors report that DOD is unable to accurately account for all of its buildings and structures. This includes houses, warehouses, vehicle maintenance shops, aircraft hangars, and medical treatment facilities, among others. As an example, during the FY2018 audit, the Air Force identified 478 buildings and structures at 12 installations that were not in the real property system. DOD faces issues with demonstrating the right of occupancy or ownership through supporting documentation and with incomplete or out-of-date systems of record. Accurate property records, valuation, and right of ownership could potentially help inform DOD leadership as it considers any future base realignment and closure.

According to DOD, military departments are executing real property physical inventories to reconcile with the systems of record. The Army has the largest real property portfolio in the department. All branches of the Armed Forces are facing challenges with obtaining source documents, establishing value for properties, and assessing and reporting expected maintenance costs.

The Air Force is focused on correcting its records for buildings, which account for more than 90% of its real property value, first addressing its building inventory at its most significant bases. The Navy has completed its physical inventory and corrected its records. Initial results showed a 99.7% accuracy rate. The Marine Corps has undertaken a process of accurately counting and recording its physical inventory. The Armed Forces will be unable to obtain a clean audit opinion without determining the value of their real property and other assets.

DOD manages inventory and other property at over 100,000 facilities located in more than 5,000 different locations. The military services and DOD components report inventory ownership on their financial statements, but this inventory can be in the custody of or managed by the military service or another DOD component. For example, as of FY2017 year end, the military services reported that the Defense Logistics Agency held approximately 46% of the Army's inventory, 39% of the Navy's inventory, and 45% of the Air Force's inventory, ranging from clothes to spare parts to engines.

Given the vast geographic dispersion of DOD resources and the complexity of how they are managed, the system of records and physical inventory must agree with each other for DOD leadership to have an accurate understanding of available resources. GAO highlighted a few examples in its latest high-risk series:

The Army found 39 Blackhawk helicopters that were not recorded in the property system; 107 Blackhawk rotor blades could not be used but were still in the inventory records; 20 fuel injector assemblies for Blackhawk helicopters did not have documentation to indicate ownership by any specific military service; and 24 gyro electronics for military aircraft that should not be used were still in the inventory records.

Accurate inventory, materials, and supplies help DOD avoid purchasing materials it does not need and help ensure that the right parts, supplies, and other inventory are available to support mission readiness. Ensuring that parts, supplies, and inventory are usable not only helps with mission readiness but also helps avoid unnecessary warehousing costs. Many of the parts, supplies, and inventory are unique to DOD and require long lead times to contract and manufacture. An accurate physical count and system of records could help shorten the time before items are available for the warfighter.

Government Property in the Possession of Contractors

At times, DOD might provide contractors with property for use on a contract, such as tooling, test equipment, items to be repaired, and spare parts held as inventory. The government-provided property and contractor-acquired property should be recorded in DOD's property system, and at the end of the contract, it might be disposed of, consumed, modified, or returned to DOD. The auditors report that the DOD property system should be able to accurately distinguish DOD property ownership and possession between DOD and the contractor.

For DOD to receive a clean audit opinion, it should consider requiring its contractors to maintain and provide auditors with accurate records. Transferring property from DOD to contractors, and from contractors to DOD, requires an accurate real-time system of record keeping.

Total DOD audit-related costs for FY2018, including the cost of remediating audit findings, supporting the audits and responding to auditor requests, and achieving an auditable systems environment, were $973 million (see Table 4 ). DOD predicts that audit-related costs will remain relatively consistent for a few more years until more components begin to achieve unmodified opinions. In addition to the issues previously discussed, there are three agency-level issues or approaches that contribute to DOD audit costs remaining relatively constant in the near term: more substantive testing, completion of audit procedures even for those components that are likely to receive a disclaimer of opinion, and expansion of DOD service provider examinations.

While DOD's annual audit costs (i.e., excluding remediation costs) might remain close to FY2018 costs (nearly $413 million) or increase in the near term, the cost is expected to decrease after the first few years, as more components achieve a clean audit opinion. Eventually, DOD audit costs might increase as costs for travel and accounting increase with economic growth.

To reduce the risk of potential material misstatement without reliable internal controls, auditors seek other ways of validating financial information. Reliance on internal controls is not a pass-or-fail approach; rather, it is incremental. DOD received 20 agency-wide material weaknesses and 129 component-level material weaknesses in internal controls in the FY2018 audit; until those are resolved, DOD auditors must rely on substantive testing, which will keep audit costs relatively high. There are two categories of substantive testing:

Analytical P rocedures . Substantive testing through analytical procedures might include comparing current-year information with the prior year, examining trend lines, or reviewing various financial ratios. Because FY2018 was the first full financial audit of DOD and many systems of records are not reliable, auditors may have difficulty performing analytical procedures and must rely more on tests of details. Tests of Details. An auditor selects individual items for testing and applies detail procedures, such as verifying that invoiced items from a vendor match payments made by DOD, physically locating an inventory item that is recorded in DOD's financial systems, and verifying mathematical accuracy by recalculating certain records.

To gain a detailed understanding of the underlying issues that prevent DOD components from receiving clean audit opinions, the department has requested comprehensive completion of audit procedures even after auditors have determined components will receive disclaimers of opinion. While this approach might initially incur higher audit costs, in the long run it might enable DOD to resolve the component-specific issues more quickly and to gain a holistic perspective of system-wide issues. These benefits might help DOD lower its financial audit costs in the long run.

Some DOD organizations provide common information technology services to other organizations within DOD, such as the Defense Information Systems Agency's (DISA's) Automated Time Attendance and Production System. For FY2018, auditors completed 20 DOD service provider examinations; 14 resulted in unmodified opinions and 6 resulted in qualified opinions. See Table B-1 for more information, including auditors' opinions and the number of FY2018 NFRs issued. Service provider examinations assess whether information technology control activities were designed, implemented, and operated effectively to provide management reasonable assurance that control objectives function as designed or intended in all material respects. The procedures performed by the auditors for examinations are not meant to provide the same level of assurance as a full audit.

These examinations' results can be used to reduce redundant testing of control by component-level auditors, saving time and money; see Table 1 for the list of audited DOD components. For FY2019, DOD expects to complete 23 common service provider examinations, compared to 20 in FY2018. The expanded service provider examinations for FY2019 might incrementally increase DOD audit costs over FY2018.

Financial Audit Limitations and Benefits

Since passing the CFO Act of 1990, Congress has continued to express interest in DOD completing an annual financial audit. Financial audits can help DOD increase transparency and accountability, improve business processes, and improve the visibility of assets and financial resources, but by design, audits are meant to accomplish a specific purpose, and therefore there are some inherent limitations on the benefits they can provide. Financial audits' limitations and benefits are discussed below.

A financial audit is a tool to help improve business processes and readiness on an annual basis. It does not address program effectiveness or efficiency, but it does consider whether an entity's assets, including its budget authority, are used to accomplish its programmatic purpose. To communicate the annual audit's benefits to Congress and other stakeholders, DOD may attempt to measure cost savings or business process improvements, but it may struggle to fully quantify the benefits, as many of the daily operational improvements are likely to be organic and informal.

Only the most significant issues will be identified in auditors' reports. DOD will likely benefit from auditors' NFRs, as well as ongoing informal dialogue between auditors and DOD personnel. When an auditor identifies an issue, DOD could seek to address the issue immediately rather than wait for a written report. It is inefficient for auditors or DOD to capture and write a report on all issues, large and small. In the private sector, generally, only critical audit matters that involve especially challenging or complex auditor judgments are included in audit reports. Many other issues are addressed in the normal course of business. Reporting or recording every instance of savings or process improvement based on auditors' informal feedback arguably detracts from the audit's purpose. Allowing a degree of flexibility to identify and report the cost savings and process improvements that DOD determines are the most significant may help the department focus effectively on responding to audit findings.

Independent audit opinions do not fully guarantee that financial statements are presented fairly in all material respects, but provide reasonable assurance for the following reasons:

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 all economic events. Some line items on financial statements involve subjective decisions or a degree of uncertainty as a result of using estimates. Audit procedures cannot eliminate potential fraud, though an auditor may identify fraud. Financial audits are not specifically designed to detect fraud, but an auditor assesses the potential for fraud, including evaluating internal controls designed by management to prevent and identify potential fraud, waste, and abuse. Auditors are required to consider whether financial statements could be misstated as a result of fraud. Effective internal controls could prevent or mitigate risks for fraudulent financial reporting, misappropriation of assets, bribery, and other illegal acts. Fraud risk factors do not necessarily indicate fraud exists, but risk factors often exist when fraud occurs. In a few years, if DOD has improved its current business practices, future improvements might be less significant and more incremental. Even so, annual audits could potentially be a valuable tool to help DOD continue to improve its business processes.

The annual audit gives Congress an independent opinion on DOD's financial systems and business processes. It provides a way for DOD to continue to improve its performance and highlights areas that need to be fixed. DOD has identified four categories of how the annual audit improves its operations, along with some examples:

Increases Transparency and Accountability. Holds DOD accountable to Congress and the taxpayers that DOD takes spending taxpayer dollars seriously through efficient practices. Auditing DOD helps improve public confidence in DOD operations, similar to other Cabinet-level agencies that conduct an annual financial audit. Streamlines Business Processes. Audits help reduce component silos and help leadership better understand interdependencies within DOD. The department might be able to improve its buying power and reduce costs, as well as improve operational efficiencies. Improves Visibility of Assets and Financial Resources. More accurate data could enhance DOD readiness and decisionmaking. Getting the appropriate supplies to warfighters helps improve their fighting posture. If a service does not know whether it has enough spare parts to ensure that aircraft are able to fly, it may spend significant amounts of money to get spare parts quickly to meet operational requirements. Accurate cost information related to assets, such as inventory and property, can help DOD make more informed decisions on repair costs and future purchases. Strengthens Internal Controls. Strengthened internal controls help minimize fraud, waste, and abuse. In addition, they help improve DOD's cybersecurity and enhance national security.

In addition to the previously described identification of Blackhawk helicopters and parts, DOD is starting to see gains by eliminating recurring annual costs. For example, strengthening internal controls to improve operations at the U.S. Pacific Fleet has freed up purchasing power to fund $4.4 million in additional ship repair costs. Also, the Army has implemented a materiality-based physical inventory best practice to count assets at Army depots. The Army estimates this process improvement could help avoid approximately $10 million in future costs.

Since passing the CFO Act of 1990, which required 24 agencies to conduct an agency-wide annual financial audit, Congress has continued to express interest in DOD completing an annual audit. DOD completed its first agency-wide audit in FY2018 and a subsequent audit in FY2019. Both audits resulted in a disclaimer of o pinion .

The ongoing independent assessment of DOD's financial systems, arguably, provides Congress and DOD leadership with an independent third-party assessment of DOD's financial and business operations. Reliable systems that produce auditable financial information, including an accurate count and valuation of real estate and inventory, could help Congress provide better oversight and ultimately determine how funds appropriated for DOD should be spent in support of the NDS.

Further, the annual financial audit of DOD by independent auditors might provide DOD with a competitive advantage when compared to other countries' defense agencies. In many other countries, financial informationâincluding a financial audit of defense agenciesâis nonexistent or opaque at best and not readily available to legislators or citizens.

Many of DOD's financial management systems are also used for operational purposes. Testing of the financial management systems and other systems that interface with each other as part of the annual audit process can help identify and improve cybersecurity vulnerabilities and the conduct of military operations. DOD's efforts to fix its vulnerabilities and reduce wasteful practices, arguably, could enable it to respond to future threats more effectively.

The implementation of new ERP systems and the complexity of auditing DOD might result in DOD not achieving a clean audit opinion within the next decade. Without each of the Armed Forces receiving a clean audit opinion, DOD will not be able to receive an agency-wide clean audit opinion even if all other DOD components receive a clean audit opinion.

Appendix A. DOD Agency-Wide Material Weaknesses

Weaknesses and inefficiencies in internal controls are classified based on severity. Auditors identified 20 material weaknesses at DOD (see Table A-1 ) related to internal controls that range from issues with financial management systems to inventory management.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that management will not prevent, or detect and correct, a material misstatement in the financial statements in a timely manner.

In addition to material weaknesses, the auditors issue two types of deficienciesâa significant deficiency or a control deficiency â that are less severe than a material weakness, but a combination or multiple instances of either deficiency can result in material weaknesses.

A significant deficiency is a deficiency or a combination of deficiencies that are less severe than a material weakness, but important enough to merit management's attention. A control deficiency is a noted weakness or deficiency that auditors typically bring to management's attention, but that does not have an impact on the financial statement unless a combination of them results in a material weakness. Improvements in either type of deficiency could improve the business process and help prevent waste, abuse, and fraud.

Some organizations within DOD provide common information technology services to other organizations at DOD. These organizations report to higher-level organizations. For FY2018, auditors completed 20 DOD service provider examinationsâ14 resulted in unmodified opinions and 6 resulted in qualified opinions. See Table B-1 for more information, including auditors' opinions and the number of FY2018 NFRs issued. Service provider examinations provide a positive assurance as to whether information technology control activities were designed, implemented, and operate effectively to provide management reasonable assurance that control objectives function as designed or intended in all material respects. Examination procedures are limited in scope as compared to a financial audit. Component-level auditors can use these examinations' results to reduce redundant testing, saving time and money; see Table 1 for the list of audited DOD components. For FY2019, DOD expects to complete 23 common service provider examinations.


The Diversity Immigrant Visa Program

Summary: The purpose of the diversity immigrant visa program (DV program, sometimes called "the green card lottery" or "the visa lottery") is, as the name suggests, to foster legal immigration from countries other than the major sending countries of current immigrants to the United States. Current law weights the allocation of immigrant visas primarily toward individuals with close family in the United States and, to a lesser extent, toward those who meet particular employment needs. The diversity immigrant category was added to the Immigration and Nationality Act (INA) by the Immigration Act of 1990 ( P.L. 101-649 ) to stimulate "new seed" immigration (i.e., to foster new, more varied migration from other parts of the world).

Summary: The DV program currently makes 50,000 visas available annually to natives of countries from which immigrant admissions were less than 50,000 over the preceding five years combined. The formula for allocating these visas is specified in statute: visas are divided among six global geographic regions, and each region and country is identified as either high-admission or low-admission based on how many immigrant visas were given to foreign nationals from each region and country over the previous five-year period. Higher proportions of diversity visas are allocated to low-admission regions and countries. The INA limits each country to 7% (3,500, currently) of the total and provides that Northern Ireland be treated as a separate foreign state.

Summary: Because demand for diversity visas greatly exceeds supply, a lottery system is used to select individuals who may apply for them. Those selected by lottery ("lottery winners"), like all other foreign nationals wishing to come to the United States, must undergo reviews performed by Department of State consular officers abroad and Department of Homeland Security immigration officers upon entry to the United States. These reviews are intended to ensure that the foreign nationals are not ineligible for visas or admission to the United States under the grounds for inadmissibility spelled out in the INA. To be eligible for a diversity visa, the INA requires that a foreign national have at least a high school education or the equivalent, or two years' experience in an occupation that requires at least two years of training or experience. The foreign national or the foreign national's spouse must be a native of one of the countries listed as a foreign state qualified for the diversity visa program.

Summary: The distribution of diversity visas by global region of origin has shifted over time, with higher shares coming from Africa and Asia in recent years compared to earlier years when Europe accounted for a higher proportion. Of all those admitted through the program from FY1995 (the first year it was in full effect) through FY2017 (the most recent year for which data are available), individuals from Africa accounted for 40% of diversity immigrants, while Europeans accounted for 31% and Asians for 25%.

Summary: Some argue that the DV program should be eliminated and its visas re-allocated for employment-based visas or backlog reduction in various visa categories. Critics of the DV program warn that it is vulnerable to fraud and misuse and is potentially an avenue for terrorists to enter the United States, citing the difficulties of performing background checks in many of the countries whose citizens are eligible for a diversity visa. Critics also argue that admitting immigrants on the basis of their nationality is discriminatory and that the reasons for establishing the DV program are no longer germane. Supporters of the program argue that it provides "new seed" immigrants for a system weighted disproportionately to family-based immigrants from a handful of countries. Supporters contend that fraud and abuse have declined following measures put in place by the State Department, and that the system relies on background checks for criminal and national security matters that are performed on all prospective immigrants seeking to come to the United States, including those applying for diversity visas. Supporters also contend that the DV program promotes equity of opportunity and serves important foreign policy goals.

Family reunification and the admission of immigrants with needed skills are two of the major principles underlying U.S. immigration policy. As a result, current law weights the allocation of immigrant visas heavily toward individuals with close family in the United States and, to a lesser extent, toward individuals who meet particular employment needs. The diversity immigrant category was added to the Immigration and Nationality Act (INA) by the Immigration Act of 1990 ( P.L. 101-649 ) to stimulate "new seed" immigration (i.e., to foster new, more varied migration from other parts of the world). Diversity visas are allocated to natives of countries from which the combination of immediate relatives, family preference, and employment preference immigrant admissions were lower than a total of 50,000 over the preceding five years combined.

The Immigration Amendments of 1965 replaced the national origins quota system, which prioritized European source countries, with equally distributed per-country ceilings. In the 1980s, some Members of Congress began expressing concern that U.S. legal immigration admissions were skewed in favor of immigrants from Asia and Latin America because of the 1965 amendments. The first legislative response to this concern occurred in Section 314 of the Immigration Reform and Control Act of 1986 (IRCA), which allowed an extra 5,000 immigrant visas per year for FY1987 and FY1988 to be distributed to natives of 36 countries that had been adversely affected by the 1965 changes to the INA. Over 1 million people applied for what was then called the NP-5 program, and visas were made available according to the chronological order in which qualified applications were mailed to the State Department (DOS). Natives of Ireland received the largest proportion (31%) of the NP-5 visas, followed by natives of Canada (21%) and Great Britain (11%). In 1988, Congress extended the NP-5 program for two more years and made 15,000 additional immigrant visas available each year in FY1989 and FY1990.

What is now known as the diversity immigrant category was added to the INA by P.L. 101-649 and went fully into effect in FY1995. Section 132 of P.L. 101-649 provided 40,000 visas per year for a transitional program during FY1992-FY1994 for certain natives of foreign states that were adversely affected by the 1965 changes to the INA. At least 40% of these visas were earmarked for natives of Ireland. The current diversity visa category had an annual allocation of 55,000 visas when it went into effect in FY1995.

While the diversity visa category has not been directly amended since its enactment, P.L. 105-100 , the Nicaraguan Adjustment and Central American Relief Act of 1997 (NACARA), temporarily decreased the 55,000 annual ceiling to 50,000. Beginning in FY2000, the 55,000 ceiling has been reduced by 5,000 annually to offset immigrant visas made available to certain unsuccessful asylum seekers from El Salvador, Guatemala, and formerly communist countries in Europe who are being granted immigrant status under special rules established by NACARA. The 5,000 offset is temporary, but it is not clear how many years it will be in effect to handle these adjustments of status.

Eligibility Criteria and Application Process

To be eligible for a diversity visa, the INA requires that a foreign national must have at least a high school education or the equivalent, or two years of experience in an occupation that requires at least two years of training or experience. The applicant or the applicant's spouse must be a native of one of the countries listed as a foreign state qualified for the DV program. Minor children of the qualifying diversity immigrant, as well as the spouse, may accompany as lawful permanent residents (LPRs) and are counted toward the 50,000 annual limit.

Because the demand for diversity visas is much higher than the supply, a lottery is used to randomly select who may apply for one of the 50,000 diversity visas available annually. (See Figure 1 for an illustration of the process). There is no fee to enter the diversity lottery. Registration for the FY2020 diversity lottery began on October 3, 2018, and closed on November 6, 2018. Beginning on May 7, 2019, and continuing through September 30, 2020, those who registered can use an online system to find out if they had been selected. The FY2018 lottery had 14.7 million entries, representing over 23 million people (including family members). From the millions of entries, approximately 100,000 selectees are randomly chosen. Being chosen as a selectee ("lottery winner") does not guarantee receipt of a diversity visa; rather, it identifies those who are eligible to apply for one. To receive a visa, selectees must successfully complete the application process (including security and medical screenings and in-person interviews) by the end of the fiscal year for which they registered for the lottery or they lose their eligibility.

DV applicants, like all other foreign nationals applying to come to the United States, must pay applicable fees and undergo reviews and biometric background checks performed by DOS consular officers abroad and Department of Homeland Security (DHS) immigration officers upon entry to the United States. Individuals selected for a diversity visa who are residing in the United States as nonimmigrants must undergo reviews by U.S. Citizenship and Immigration Services (USCIS) prior to adjusting to LPR status. These reviews, which include an in-person interview, are intended to ensure that the applicants are not inadmissible under the grounds spelled out in Section 212(a) of the INA. Grounds for inadmissibility include health, criminal history, security and terrorist concerns, public charge, illegal entry, and previous removal.

The diversity immigrant visa program currently makes 50,000 visas available annually to natives of countries from which immigrant admissions were lower than a total of 50,000 over the preceding five years. USCIS implements a formula for allocating visas according to statutory specifications: visas are divided among six global geographic regions, and each region and country is identified as either high admission or low admission based on how many immigrant visas each received over the previous five-year period. Higher proportions of diversity visas are allocated to low-admission regions and low-admission countries. Each country is limited to 7%, or 3,500, of the total, and the INA provides that Northern Ireland be treated as a separate foreign state.

The distribution of diversity visas by global region of origin has shifted over time (see Figure 2 ). From FY1995 through FY2001, foreign nationals from Europe garnered a plurality of diversity visas, ranging from 38% to 47% of the total. In the early 2000s, the share of DV recipients from Africa was on par with those from Europe. Europe's share dropped by nine percentage points from FY2005 to FY2006 as the shares from African and Asian countries continued to increase. Since FY2008, Europe has accounted for smaller shares than Africa or Asia. Latin America (which includes South America, Mexico, Central America, and the Caribbean), Oceania, and North America accounted for less than 8% each year. In total, from FY1995 through FY2017 immigrants from Africa accounted for 40% of diversity immigrants, while Europeans accounted for 31% and Asians for 25%. These trends are consistent with the statutory formula Congress outlined to allocate diversity visas.

Figure 3 presents the countries from which at least 1,000 DV immigrants were admitted in the first five years that the program was in full effect (FY1995-FY1999) and the most recent five years for which data are available (FY2013-FY2017). Early in the program, most of the top countries were in Europe (particularly Eastern Europe) and Africa. In more recent years, there has been a shift toward Africa and Asia. Certain countriesâsuch as Ethiopia, Ukraine, and Egyptârank high across many years of the program, while othersâsuch as Ireland, Poland, and Venezuelaâare limited to particular periods of time. From FY1995-FY2017, natives of six countries received at least 40,000 diversity visas in total: Ethiopia (67,832), Nigeria (58,563), Egypt (56,862), Ukraine (52,654), Albania (47,136), and Bangladesh (40,847).

As one would expect, diversity immigrants come from different parts of the world that differ from the leading immigrant-sending regions. Department of Homeland Security data ( Figure 4 ) reveal that Africa accounted for 43% of diversity immigrants admitted in FY2017, but 11% of all LPRs admitted that fiscal year. Europeans made up 7% of all LPRs admitted in FY2017, but 22% of diversity immigrants. In contrast, Latin America (Mexico, Central America, the Caribbean, and South America) was the sending region for 43% of all LPRs admitted in FY2017, but provided 4% of the diversity immigrants during that fiscal year. North America (excluding Mexico) and Oceania account for a small percentage of LPRs admitted by any means.

The distribution of LPR admissions and DV admissions from Asia illustrates the impact of the two-step visa allocation formula, which considers both regional and national admissions levels. Asia includes many top-sending countriesâsuch as China, India, and the Philippinesâfor family- and employment-based LPRs, making it a high-admission region. Yet it also includes low-admission countriesâsuch as Nepal, Iran, and Uzbekistanâthat rank high for their number of diversity visas. As a result, as Figure 4 illustrates, in FY2017 foreign nationals from Asia represented a somewhat more equivalent share of the 1.1 million LPRs (38%) in relation to their share (30%) of diversity LPRs in contrast to the other world regions.

Diversity immigrants are, on average, younger than other LPRs. Department of Homeland Security data (see Figure 5 ) reveal that DV immigrants are more likely to be working-age adults and their children, and less likely to be over the age of 40 than LPRs overall. Also, the foreign-born population of the United States is more likely to be in the prime working-age group (i.e., ages 25 to 64) than the native-born population, and diversity immigrants have a younger age distribution than the foreign-born population as a whole. In addition, 56% of diversity immigrants in FY2017 were male compared to 46% of all LPRs.

Diversity immigrants were less likely to be married than LPRs generally (47% versus 58%) in FY2017, perhaps a function of their relative youth. Over half (52%) of diversity immigrants were single, in contrast to 36% of LPRs overall. Few of either group were likely to be widowed, divorced, or separated.

Educational Attainment and Labor Market Characteristics

Recent critics of the diversity immigrant visa have argued against the program on the grounds that individuals do not need high levels of education or work experience to qualify for the DV program and that the U.S. admissions system should prioritize "high-skilled" immigrants. Neither DHS nor DOS publish data on the educational attainment of DV immigrants, but other sources provide some information. According to now-dated data from the New Immigrant Survey, a widely cited, nationally representative, longitudinal study of individuals who obtained LPR status in 2003, those who entered as principals via the diversity visa category had, on average, 14.5 years of schooling when they entered the United States, which was higher than those who were admitted on family-based visas as spouses or siblings of U.S. citizens (13.0 and 11.5 years, respectively), but lower than those who were admitted as principal employment-based immigrants (15.6 years). Similarly, DV immigrants were more likely to be fluent in English than most family-based immigrants (except for immigrant spouses of native-born U.S. citizens), but less likely than employment-based immigrants to be fluent in English. Using the same data source, the Migration Policy Institute found that 50% of DV immigrants who entered in 2003 had a college degree (32% with a bachelor's and 18% with a graduate degree). It is likely that the educational attainment of recent DV immigrants is higher than it was for those represented in the New Immigrant Survey, given that more recently arrived immigrants have higher levels of education overall than their predecessors.

Government data on other labor market characteristics of DV immigrants are also limited. According to the New Immigrant Survey, DV immigrants who entered in 2003 had higher initial unemployment rates than employment-based immigrants and those who immigrated as spouses of U.S. citizens, but lower unemployment rates than those who immigrated as siblings of U.S. citizens. Four to six years after U.S. entry, however, DV immigrants' unemployment rates had dropped significantly and were similar to those of all other groups except employment-based principals (who had the lowest rates at both initial entry and four to six years later). DV immigrants' hourly earnings were similarly situated between that of employment-based immigrant category (which had the highest earnings) and that of the sibling category (which had the lowest). Among male immigrants earning wages, those who entered on diversity visas had the highest percentage growth in real hourly wages between initial entry and re-sampling four to six years later.

Given its name and the discourse about "new seed" immigrants that preceded the creation of the diversity visa, the question arises whether the DV program has led to an increase in the diversity of immigrant flows to the United States. Leading up to and since its enactment, some observers have noted that, regardless of its name, the DV program was intended to benefit Irish and Italian constituents who had been negatively affected by the Immigration Act of 1965 that resulted in an increase in immigration from Asia and Latin America. During the transition period after the program was created (FY1992-FY1994), at least 40% of diversity visas were earmarked for Irish immigrants, and 92% of diversity visas in FY1994 went to Europeans. Since its full implementation in FY1995, however, immigrants from a wider range of countries and regions have entered via the program (see " Regions of Birth " above).

The DV program's small size relative to total annual immigrant admissions (DV admissions make up about 5% of annual LPR admissions) limits its impact on the make-up of the immigrant population. Former Representative Bruce Morrison, who helped create the program, stated in a 2005 hearing that it was not Congress's intent to diversify the immigrant flow as a whole ("It could not have possibly done so at the 50,000 number"), but rather to add a new pathway for those who would not be able to enter under the family- or employment-based systems. By that standard, the program arguably fulfills its objectives, having admitted more than 1 million immigrants from under-represented countries since FY1995 (see Figure 3 ).

Another way to assess the program's impact is to analyze the diversity of annual LPR flows before and after the DV program was established. Using a measure of diversity called the entropy index, CRS found that in FY1990, before the DV program was in effect, the diversity of LPR admissions was 0.52. In every year from FY1995 (when the DV program went into full effect) through FY2017 (the most recent data available), the diversity of annual LPR admissions was higher than in 1990, ranging from 0.67 to 0.72. In each of those years, the diversity of LPR admissions not including the DV admissions was lower than it was with DV admissions included (see the Appendix ), indicating that the admission of DV immigrants does increase the diversity of annual LPR admissions.

A full analysis of the impacts of the DV program on admission numbers would also take into account individuals whom DV immigrants subsequently sponsor through the family-based admissions system. Because administrative data on immigrant admissions do not specify these linkages, this type of direct analysis is not currently possible. However, admissions data suggest that, at least for Africans, the DV has led to an increase in immigration via the family-based system (particularly immediate relatives). From 1992 to 2007, admissions of Africans based on family sponsorship grew faster than other categories of admissions for Africans, including diversity, which remained fairly stable over the time period. The DV seems to have diversified the African flow itself by boosting emigration from non-English speaking African countries (whereas English-speaking African countries have longer histories of U.S. immigration and are therefore more likely to be the source of sponsoring immigrant family members).

Legislation related to the Diversity Immigrant Visa has focused largely on eliminating the program. Bills to eliminate the diversity visa category have been introduced in nearly every Congress since the program was created and have passed one chamber on more than one occasion. Most recently, S. 744 in the 113 th Congress, a comprehensive immigration reform bill that the Senate passed in 2013 by a vote of 68 to 32, would have eliminated the program. Other bills introduced in the past would have raised the annual limit of diversity visas or temporarily re-allocated diversity visas for other purposes. In the 116 th Congress, several bills to eliminate the DV program have been introduced, including H.R. 479 , H.R. 2278 , S. 1103 , and S. 1632 . In contrast, H.R. 3799 would raise the annual diversity visa allocation to 80,000.

As Congress weighs whether to eliminate or revise the diversity visa category, it may want to consider various policy questions pertinent to this discussion.

Is it fair to have the diversity visa category when there are family members and prospective employees who have been waiting for years for visas to become available?

Given the 3.7 million approved family-based and employment-based petitions waiting for a visa to become available at the close of FY2018, some argue that the 50,000 diversity visas should be used for backlog reduction in these visa categories. Others might observe that the family-based, employment-based, and diversity visa categories are statutorily designed as independent pathways to LPR status and that the problems of the family-based and employment-based backlogs should be addressed separately. Some also argue that the DV program increases fairness in the immigration system by making visas available to individuals who would not otherwise have a chance of obtaining one and by discouraging illegal immigration through expanding access to the legal immigration system.

Should the United States base admissions decisions on nationality?

Some argue that the diversity visa program reverts to discriminatory national origin quotas, which Congress eliminated through the 1965 amendments to the Immigration and Nationality Act. However, there are other examples of admissions policies that effectively discriminate based on nationality (e.g., H-2A, H-2B, E, and TN nonimmigrant visas, the Visa Waiver Program, and the per country caps on family- and employment-based LPR admissions, all of which limit admissions by nationality). Some also argue that admissions decisions should be based on higher levels of education, job experience, and language skills, or family ties to U.S. residents, rather than country of origin and being selected at random via a lottery.

In contrast, others argue that the program bolsters equity of opportunityâa quintessential American valueâby providing a pathway for individualsâparticularly those from Africa, Eastern Europe, and the former Soviet Unionâwho do not have family or employer connections in the United States. Some also argue that the more than one million immigrants who have moved to the United States as a result of the program have enriched the United States culturally and economically, and strengthened the nation's global connections. Some also argue that efforts to end it are racially motivated or point out that for most of U.S. history, Africans in particular had little opportunity to come to the United States other than as slaves.

Is a lottery the best way to choose applicants for diversity visas?

Some equate the use of a lottery system in the DV program to awarding "green cards" at random and argue that luck should not come into play in U.S. admissions decisions. Others argue that, given the millions of interested applicants every year, a lottery is a fair method of reducing the applicant pool because it gives all entrants who meet the program's qualifications an equal chance to apply for a diversity visa. They also cite the use of a lottery in other over-subscribed visa categories such as the H-1B and H-2B temporary worker classifications to illustrate that U.S. immigration policy considers it a reasonable tool.

Is the diversity visa lottery more vulnerable to fraud and misuse than other immigration pathways?

Some observers concerned about immigration fraud surrounding the DV program reference a 2003 State Department Office of Inspector General report and a 2007 GAO report which found fraud vulnerabilities in the DV program. They may also cite the 2017 and 2018 complaints filed by the Department of Justice (DOJ) in two cases seeking the denaturalization of individuals who had gained admission (in 1997 and 2001) to the United States through the DV program. In the first case, DOJ filed a complaint to denaturalize four Somali-born diversity visa recipients who falsely claimed to be a family. In the second case, DOJ filed a complaint to denaturalize a diversity visa recipient who obtained naturalization without having disclosed two prior orders of removal.

Those defending the fraud protections of the DV program counter that DOS has since revised the diversity lottery procedures to address fraud vulnerabilities, including a requirement to submit a recent photograph, the addition of biographic and facial recognition checks to reduce duplicate entries, a policy requiring the disqualification of entrants who fail to list their spouse and children on their entries, and technical improvements to limit manipulation of entries by automated bots. They also argue that the risk of fraud is not unique to the DV program and refer to the numerous fraud investigations and arrests of immigrants who entered the United States via other visa categories and the significant resources that DOS commits to fraud prevention for all immigrant and nonimmigrant visa applications through its Fraud Prevention Units at posts overseas. In addition, on June 5, 2019, DOS published an interim final rule to require diversity visa entrants to provide certain information from a valid, unexpired passport on the electronic entry form. This rule is intended to make it more difficult for third parties to submit unauthorized entries, because third parties are less likely to have individuals' passport numbers.

Are there national security reasons to eliminate the diversity visa?

Some assert that the difficulties of performing background checks in many of the countries whose natives currently qualify for the DV program, as well as broader concerns about terrorism, justify the elimination of the category. Some cite the 2004 warning of the DOS Deputy Inspector General that the diversity visa lottery "contains significant vulnerabilities to national security" from state sponsors of terrorism. They argue that DV immigrants, by definition, are not required to have employer or family ties in the United States and thus may be more likely to have nefarious intent. They cite the case of a New Jersey resident responsible for killing eight people with his rental truck in lower Manhattan in 2017, who had immigrated to the United States from Uzbekistan on a diversity visa. In response to that event, the Trump Administration called on Congress to immediately terminate the diversity visa lottery program.

Others respond that immigrants coming to the United States in other immigrant visa categories are not restricted if they come from these same countries, and further argue that background checks for national security risks are performed on all prospective immigrants seeking to come to the United States. They also point to the 2005 DOS Inspector General's testimony that DOS's Bureau of Consular Affairs strengthened the DV program by complying with most of the recommendations in the OIG's 2003 report. They similarly note the testimony of one of the creators of the DV Program who contended that "it is absurd to think that a lottery would be the vehicle of choice for terrorists" and that attention should instead be focused on greater security risks. They also point out that since the creation of the Visa Security Program in 2003, DHS has aided consular officers in extensively vetting individuals applying for visas. They also reference a 2007 GAO report stating: "We found no documented evidence that DV immigrants from these, or other, countries posed a terrorist or other threat. However, experts familiar with immigration fraud believe that some individuals, including terrorists and criminals, could use fraudulent means to enter or remain in the United States."

Are there foreign policy reasons to continue the diversity visa program?

Citing the millions of diversity visa lottery entries every year from around the world, some argue that the DV program is an efficient means of boosting American goodwill and "soft power" abroad, and that a diversity of immigrant origins helps the United States better respond to the challenges of globalization. Some also cite the value of remittances sent by diversity immigrants to their countries of origin as international development assistance without U.S. government expense. Others argue that the DV program encourages "brain drain" from developing countries, a concern which acknowledges that many DV immigrantsâparticularly from Africaâpossess education and skills beyond the minimum requirements for program eligibility.

Are the reasons that led to establishment of the diversity visa (e.g., to stimulate "new seed" immigration) still germane?

Supporters of the DV program argue that it honors the United States' history as a destination for enterprising immigrantsâthe "self-selected strivers" âwho arrive without family ties but with a desire to work hard for a better life. Some point to the present-day preponderance of immigrants from a handful of countries and argue that the diversity visa fosters new and more varied migration to counterbalance an admissions system weighted disproportionately to family-based immigration, which tends to perpetuate the dominance of certain countries. They also point to wide support for legislation that would remove or raise the 7% per-country limits on family- and employment-based immigrant admissions, which would likely result in further concentration of immigrant flows from the top sending countries. Even with the per-country limits and DV program in place, the total foreign-born population has become more concentrated in the top ten source countries compared to 1990 (see " Impact of the DV Program on Immigrant Diversity "). Others argue that, after almost 30 years, the diversity visa category has run its course. They might cite the countriesâsuch as Pakistan, Brazil, Nigeria, and Bangladeshâthat formerly qualified for the DV program and no longer do due to their increase in admissions, or the growth in immigration from Africa, Eastern Europe, and parts of Asia as an indication that the need for "new seed" immigration has been met. Others counter that these trends indicate that the program is meeting its goals and should be continued. They further argue that in many countries around the world, the diversity visa remains the only accessible avenue for immigrating to the United States.

Appendix. Entropy Index Methodology and Results

The entropy index (also called the Shannon index) is a measure of the diversity of a population. Diversity can be defined as the "relative heterogeneity of a population." It is at its maximum when all subpopulations are present in equal proportions (for the purposes of this report, when each country of birth receives an equal number of LPR admissions). The formula for the entropy index is

where H is the entropy index, k is the country-of-origin group, and P is the proportion of the total from each country-of-origin group. The index can be standardized by dividing by its maximum, log K. Doing so results in a range of 0 (for the case where all of the population is in one subpopulation) to 1.0 (for the case where all subpopulations are present in equal proportions).

For this report, the standardized entropy index was calculated by year for country of birth of total LPR admissions, LPR admissions minus DV admissions, and DV admissions. This was calculated after creating a standardized list of countries across all years so that K was held constant. As shown in Figure A-1 , between FY1995 and FY2017, the entropy index varied, but in all years the index was higher when DV LPRs were included.