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Commentary

The Government Needs to Get Its Own Accounting House in Order


     
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President Bush has been lashing out at corporate accounting shenanigans. “Corporate America has got to understand,” he declares, “there's a higher calling than trying to fudge the numbers, trying to slip a billion here or a billion there and maybe hope nobody notices.” In the wake of scandals at Enron, WorldCom, Xerox, and other big companies, the president warns that the Justice Department will prosecute corporations that play fast and loose with their accounts.

The Democrats, smelling blood in the water, are trying to tie the Bush administration to the accounting miscreants. Senate leader Tom Daschle blames “a deregulatory, permissive atmosphere that has relied too much on corporate America to police itself,” and he points specifically to problems at Halliburton, which vice president Dick Cheney headed not long ago. The Republicans’ “laissez-faire attitude,” Daschle claims, has encouraged the corporate titans to lie, cheat, and steal.

What nobody seems to notice is that while Enron, WorldCom, and the other corporate bad boys are getting their comeuppance in the stock market and sink into bankruptcy, the biggest accounting scofflaw of all continues merrily along its irresponsible way. I refer to none other than the organization with which both Bush and Daschle are connected, the federal government. Whereas Enron and WorldCom have misbehaved with billions of dollars in bad accounts, the federal government has misbehaved--and continues to misbehave, contrary to a number of federal statutes—with trillions of dollars in bad accounts.

Although by no means the only guilty agency, the Department of Defense is by far the worst offender. Since 1994, federal law has required government departments to make financial audits. Seems reasonable, given the trillions of dollars of taxpayer money that pass through the bureaucrats’ hands each year. The Defense Department, however, has never been able to comply with the auditing requirement, because its records are such a mess that they cannot even be audited.

A memorandum of February 15, 2001, signed by David K. Steensma, deputy assistant inspector general for auditing, states that “DoD could not provide sufficient or reliable information for us to evaluate management’s assertions or verify amounts on the FY 2000 DoD Agency-wide Financial Statements.”

Moreover, “We identified $1.1 trillion in department-level accounting entries to financial data used to prepare DoD component financial statements that were not supported by adequate audit trails or by sufficient evidence to determine their validity. In addition, we also identified $107 billion in department-level accounting entries to financial data used to prepare DoD component financial statements that were improper because the entries were illogical or did not follow accounting principles.”

The preceding assessment applies only to department-wide accounting problems. The auditors also found the accounts for the individual military services to be a complete mess.

The Department of Defense has broken the law year after year. According to the Steensma memorandum, “DoD did not fully comply with the laws and regulations that had a direct and material effect on its ability to determine financial statement amounts. DoD financial management systems were not in substantial compliance with Federal financial management system requirements; applicable Federal accounting standards; and the U.S. Government Standard General Ledger at the transaction level, as required by the Federal Financial Management Improvement Act of 1996.”

Last year, Defense Secretary Donald Rumsfeld told Congress, “We have an obligation to taxpayers to spend their money wisely. Today, we’re not doing that.”

Talk about an understatement. Not only is the Department of Defense wasting money by the shipload, but it hasn’t the foggiest idea of how many trillions of dollars it has squandered, and how it has done so, over the past decade. Yet department officials also have testified that no compliance with the law is in sight. The Pentagon lawbreakers simply expect to go on breaking the law, and to get away with it, as they have been getting away with it for years.

In a letter to Rumsfeld dated April 27, 2001, congressmen Christopher Shays and Dennis Kucinich stated, “The Department of Defense Inspector General testified before Congress in 1995 that a turnaround in the Pentagon’s budgeting practices might be expected by the year 2000. Hundreds of auditors and tens of billions of dollars in recommended adjustments later, DoD's books remain in shambles. To date, no major part of the Department of Defense has been able to pass the test of an independent audit” (emphasis in original).

When Enron or WorldCom can’t present a proper audit statement, they are ruined. When the Department of Defense cannot put its financial records in shape even to be audited, the department is rewarded with the biggest increase in its budget since Ronald Reagan's first term as president.


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

Full Biography and Recent Publications

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CRISIS AND LEVIATHAN (25TH ANNIVERSARY EDITION): Critical Episodes in the Growth of American Government

The size and scope of government power has grown in response to crises of war and economic upheavals. Such increased power remains long after each crisis passes, threatening both civil and economic liberties, all at the behest of special interest groups. Learn More »»






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