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Commentary

The Pentagon’s Black Hole


     
 Print 

Did you ever wonder exactly how the Pentagon will spend the $670 billion that President Obama wants it to have this year? So does the Pentagon.

I am not being facetious. Quite literally, the Department of Defense (DOD) does not know what happens to the money the taxpayers give it. This has been true for decades. The money gets spent; it’s gone (they’re pretty sure), but the prices DOD paid, when—if ever—the purchases were delivered, where everything is now, and a lot more are all quite unknown to the Pentagon.

This incomprehensible condition has been documented in hundreds of reports over three decades from both the Government Accountability Office (GAO) and the Department’s own Inspector General (DOD IG). The studies are routinely sent to Pentagon managers and Congress. Once or twice a year, there will be a hearing on Capitol Hill; both Republicans and Democrats will declare themselves oh-so shocked; the DOD witnesses will say they are getting close to fixing it; outraged press releases flurry over Washington DC; a few press articles are written, and on very rare occasion, a scapegoat might get fired. Then, everyone goes back to sleep, and nothing happens. This year is no exception.

On October 19, the DOD IG released a report with the innocuous title: “Summary of DOD Office of the Inspector General Audits of Financial Management.” It is riveting reading—a true horror story. (Find it here.)

Here are the report’s essentials:

Between 2004 and 2008, the DOD IG wrote 255 reports about the Pentagon’s financial management, or rather lack thereof.

The IG found 13 of what it euphemistically calls “material weaknesses,” specifically:

  1. Financial Management Systems: The systems DOD has put in place to control and monitor the money flow don’t facilitate but actually “prevent DOD from collecting and reporting financial information . . . that is accurate, reliable, and timely.” (See p. 4.)
  2. Fund Balance with Treasury: DOD managers do not know how much money is in their accounts at the Treasury, nor when they spend more than Congress appropriates to them. (See p. 5.)
  3. Accounts Receivable: DOD does not “record, report, collect, and reconcile” funds received from other agencies or the public. (See p. 6.)
  4. Inventory: Inventory records are not reviewed and adjusted; unreliable and inaccurate data are used to report inventories, and purchases are made based on those distorted inventory reports. (See p. 7.)
  5. Operating Materials and Supplies: “In addition, DOD cannot accurately report the value of operating materials and supplies.” (See p. 7.)
  6. General Property, Plant, and Equipment: “The cost and depreciation of the DOD general property, plant, and equipment are not reliably reported. . . .” (See. p. 8.)
  7. Government-Furnished Material and Contractor-Acquired Material: “ . . . the value of DOD property and material in the possession of contractors is not reliably reported.” (See p. 9.)
  8. Accounts Payable: DOD does not know who owes it money, nor how much. (See p. 10.)
  9. Environmental Liabilities: DOD does not accurately estimate or report the cost of cleaning up its facilities, does not track its environmental liabilities, and does not even have a complete record of its ranges and operational activities. (See p. 11.)
  10. Statement of Net Costs: DOD’s “systems do not always capture actual costs in a timely [or accurate] manner.” (See p. 11.)
  11. Intragovernmental Eliminations: DOD tracks neither buyer nor seller amounts when conducting transactions with other agencies. (See p. 12.)
  12. Other Accounting Entries: DOD sometimes enters “unsupported” (i.e. imaginary) amounts in its books. (See p. 13.)
  13. Reconciliation of Net Cost of Operations to Budget: DOD uses those imaginary figures to make the books balance. (See p. 14.)

Horrifying as all that is, it gets worse:

DOD management has acknowledged that all 13 “material weaknesses” continue to exist (because over the decades they have done nothing to fix them).

There are three additional “Issue Areas”:

  1. DOD’s “audit trails” are not kept “in sufficient detail.” Put simply, no one can track the money.
  2. DOD’s “Internal Controls,” intended to track the money, are inoperative. Thus, DOD cost reports and financial statements are surely inaccurate, but the errors cannot be identified because the data cannot be verified.
  3. “Compliance with Laws and Regulations:” DOD does not observe many of the laws that govern all this.

That last finding is perhaps the most appalling. Congress and the Pentagon perform annual Kabuki dances to pretend to do something about DOD’s financial mismanagement; new laws get enacted, and nothing changes. Why? Because many of the new laws permit the Pentagon to ignore the previous ones; others are just eyewash.

The IG report gives a classic example of the former:

“The Chief Financial Officers Act of 1990 . . . required . . . [DOD] to prepare . . . financial statements that were audited by either the Inspector General or an independent public accountant. . . . Beginning in 1991, DOD began preparing and submitting financial statements for audit. However, DOD OIG audits of those financial statements for FYs 1991 through 2001 identified pervasive and long-standing material weaknesses which caused those financial statements to be unauditable. [Emphasis added.] As a result, Congress passed the ‘National Defense Authorization Act for Fiscal Year 2002,’ on December 28, 2001, that limits the amount of audit work performed by the DOD OIG under the CFO Act based on management’s representation regarding the [un-]reliability of the financial statements.” (See p. 1.)

In other words, when you have a new law imposing competence, pretend to comply, and if you get caught, waive the law.

Although the above example would make you think that parts of the critically important Chief Financial Officers (CFO) Act of 1990 was not waived until the George W. Bush administration, it is notable that exemptions from the CFO Act were also sought, and obtained, during the Clinton administration. It helps to understand the continuing nature of the problem to recognize that the Clinton Pentagon official who sought those waivers, William J. Lynn III, has now been promoted to Deputy Secretary of Defense, the most powerful individual in the Pentagon, second only to Robert Gates.

All this is a big snore in Congress, as its most recent hearing on the subject matter illustrates. In September, the Senate Homeland Security and Government Affairs Committee heard GAO identify a long list of serious problems at the Defense Contract Audit Agency (DCAA), which is tasked to audit DOD contracts. Apparently, the agency busied itself reversing findings the audited contractors did not want, punishing auditors for coming to the negative findings, and promoting the managers responsible for that and more. The senators woke up long enough to declare themselves horrified and call for reforms and even firings. Of course, they got neither.

Also testifying at the hearing was the Pentagon’s CFO, Comptroller Robert Hale (another previous Clinton era manager who oversaw Air Force finances, without requiring a successful audit of its books, and who busied himself trying to get rid of at least one whistle blower). At the September hearing, Hale opposed every serious reform proposed for DCAA and, later, responded to the calls for firings by reassigning the Director of DCAA to his own office—which continues to oppose any serious reforms.

The Senate Armed Services Committee has taken the eyewash approach. Completely ignoring the DCAA scandal in its newly enacted National Defense Authorization Act for 2010 which was just signed into law, the committee purports to address the overall problem. The new law’s Section 1003 (“Audit Readiness of Financial Statements of the Department of Defense”) instructs DOD management to produce a plan “ensuring the financial statements of the Department of Defense are validated as ready for audit . . .” The plan is not to be effected until September 30, 2017.

Should anyone think that prescription is anything but a bad joke, consider the Pentagon’s previous performance on meeting deadlines for financial management competence. Aside from blowing off the requirements of the CFO Act of 1990, the Pentagon also established and promptly ignored past deadlines, set by Comptroller Hale’s predecessors: for 1997 (from Comptroller John Hamre, who now campaigns to succeed Robert Gates), 2007 (from Comptroller Dov Zakheim now with Pentagon contractor Booz Allen Hamilton), and most recently 2016 (from former Hill staffer Tina Jonas, now with Sikorsky). With 2017 as the new goal, it would appear the 2016 deadline loomed dangerously close.

It’s not that DOD is flunking audits. You flunk an audit when you track the money and find it was not spent as intended. DOD cannot track the money; the Department of Defense is unauditable. It would be a vast improvement if DOD were able to flunk an audit. Pentagon management has done nothing to fix the decades-long mess, while making endless promises to do so. Congress, the erstwhile supervisor, dozes at the wheel and nods its heavy-eyed approval.

Perhaps the level of the firings should be escalated—running up the chain of command until someone gets the message. But I am in error; there have been no firings, nothing to escalate. Sorry for that error.


Winslow T. Wheeler is Director of the Straus Military Reform Project at the Center for Defense Information, Former Research Fellow at the Independent Institute, and author of the Independent Policy Report, Congress, the Defense Budget, and Pork: A Snout-to-Tail Description of Congress’ Foremost Concern in National Security Legislation.






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