Department of Defense’s Unending Nightmare: Pass an Audit by 2017?

Don't count on it. The Department of Defense (DoD) still holds out hope that they will be able to pass a financial audit by 2017, but the Government Accountability Office's (GAO) testimony to Congress last Friday doesn't hold out much hope. In testimony entitled “Improved Controls, Processes, and Systems Are Needed for Accurate and Reliable Financial Information,” the GAO paints a grim picture of the DoD's efforts to put in financial reporting systems to pass an audit and know where its money is going.

All the other large federal departments have passed this audit since it became a requirement in the late 1990s. But the DoD, with its parochial three services, has not been able to put in a standardized system to know how much money it has and where it is going.

The GAO comments on how this affects all aspects of the DoD's work and that they find the lack of accountability around weapons systems and their logistics exceptionally frustrating. From the testimony:

Long-standing and pervasive weaknesses in DoD's financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the financial status and cost of DoD activities to Congress and DoD decision makers; (2) adversely impacted its operational efficiency and mission performance in areas of major weapons system support and logistics; and (3) left the department vulnerable to fraud, waste, and abuse….

DoD invests billions of dollars to acquire weapon systems, but it lacks the financial management processes and capabilities it needs to track and report on the cost of weapon systems in a reliable manner. We reported on this issue over 20 years ago, but the problems continue to persist. In July 2010, we reported that although DoD and the military departments have efforts underway to begin addressing these financial management weaknesses, problems continue to exist and remediation and improvement efforts would require the support of other business areas beyond the financial community before they could be fully addressed. [Emphasis added.]

DoD also requests billions of dollars each year to maintain its weapon systems, but it has limited ability to identify, aggregate, and use financial management information for managing and controlling operating and support costs. Operating and support costs can account for a significant portion of a weapon system's total life-cycle costs, including costs for repair parts, maintenance, and contract services. In July 2010, we reported that the department lacked key information needed to manage and reduce operating and support costs for most of the weapon systems we reviewed – including cost estimates and historical data on actual operating and support costs. For acquiring and maintaining weapon systems, the lack of complete and reliable financial information hampers DoD officials in analyzing the rate of cost growth, identifying cost drivers, and developing plans for managing and controlling these costs. Without timely, reliable, and useful financial information on cost, DoD management lacks information needed to accurately report on acquisition costs, allocate resources to programs, or evaluate program performance.

Notice that the GAO mentioned that they wrote a report about this 20 years ago. This testimony is festooned with footnotes where the GAO cites report after report they have issued over the past 20 years in monitoring the problem. These reports have a similar, bizarrely optimistic theme: The DoD has screwed up or made little effort to fix this problem, but we are hopeful that they now may have their act together and finally put in an accounting system that works, and we hope that the leadership will make sure that it is done.

The reports usually end with a prediction that the DoD won't make its deadline to pass a financial audit unless there is much diligence by the civilian leadership of the DoD. And the deadline is missed.

This problem has been with us for decades, and in the late '90s and early 2000s, there was an effort to do something about it. There was an effort late in the Clinton administration to start reconciling transactions with documentation in the DoD. They audited $7 trillion in transactions over the years and found that they could not justify $2.3 trillion spent. The Congress took an interest in this and started having hearings. Rep. Christopher Shays took a special look at this and began to pressure the DoD in hearings to get control of their finances. His efforts were smashed when his chairmanship was taken from him by then Majority Leader Tom “the Hammer” Delay, because Shays was also looking at campaign finance reform. I remember thinking at the time that Shays' tough look at missing DoD money would also have had something to do with the loss of his chairmanship and its oversight function.

In 2001, while I was also looking at DoD finances, I was approached by a Defense Finance and Accounting Services (DFAS) accountant, Jim Minnery, who was troubled by what he was seeing and was in trouble for trying to reconcile the money paper trail. Minnery was in a key position to see how the lack of internal controls and the lack of a paper trail cause millions of dollars to be written off without knowing where the money went. He was a CPA who had a 20 year career in the private accounting sector and a former Marine. He joined DFAS and was in its working capital fund group. He found that DFAS was writing off DISA's (Defense Systems Information Agency) cross disbursements (disbursements between agencies) and not matching it with the Treasury books and doing it without documentation.

Minnery was unable to get DFAS to show him the documentation (vouchers) for these write-offs and he was told that the paperwork was “inadvertently” discarded. Minnery went on a two-year mission from 1997 to 1999 to find the vouchers himself. He found that over $400 million was unmatched and that at least $180 million could not be reconciled. This meant that the money was spent and taken off DISA's liabilities without any paper trail on what the money was spent.

His thanks by his DFAS bosses was to be harassed and reassigned. After he had tracked down some of the money, the DFAS office in Pensacola responsible for the documentation of the write-off “solved” the problem by creating a bogus journal entry. Minnery was taken off as team leader, and the problem, according to the bureaucracy, is “solved.”

Minnery, out of total frustration, went to the DoD inspector general's hotline to file a complaint. After losing his first letter, they finally investigated and found that he was right about the loss of money, but that it wasn't intentional and there wasn't a cover-up. He also filed a separate complaint when $2 billion showed up on DISA's books from nowhere, and his bosses didn't care. The inspector general's response was that they could not investigate his complaint because the financial tracking systems were too messed up to follow the paper trail – it was unauditable.

I helped Jim to put his information together and get it out to the press. He had many stories, including a piece on the CBS “Evening News,” but the Pentagon just shrugged its shoulders, and the Congress wasn't interested in following up a report while we were marching toward war in Afghanistan and later Iraq.

A disillusioned Minnery wrote in a letter to the Federal Times:

Year after year the Department of Defense financial managers have told Congress that they are not there yet but they are getting better. I caught on to the broken record fairly quickly within a couple of years of going to work for the Defense Finance and Accounting Service. It was around 1997 when we were talking about getting a clean audit opinion in 1999 per President Clinton's directive. It was a joke to most of us who knew the status of the Defense Department's finances. It will take at least the length of time mentioned in the June 10 [2001] article, “Pentagon Finance Reform Is 8-Year Effort.”

… I came to the Defense Finance and Accounting Service with 20 years experience, a CPA license and two masters degrees. I took a proprietary interest in my customer and tried to analyze and reconcile accounts as I had in the private sector in order to produce accurate financial statements. I was rewarded for my efforts with a demotion and no opportunity for advancement. The customer and the Defense Finance and Accounting Service apparently did not appreciate my efforts. Oops, they did not want me to reconcile those accounts. And I thought they would appreciate my expertise!

In 2006, Jim was still fighting the good fight to try to explain why the system didn't work to a McClatchy Newspaper reporter:

Even basic accounting procedures fail. Minnery said some systems make it impossible to match checks that have been written to the bills that were being paid. “Their systems can't keep track of who they've sold stuff to, who owes them, who they owe,” he said.

Another factor that has evolved over the decades is a decentralized system that records the same part with a multitude of different multi-character codes, and difficulties ensue with any cross-service transaction because their ordering codes differ as well. “The Navy has a set (of codes), the Army has a set, the Air Force has a set,” Minnery said. “They don't have the same number of digits and they can't match each other.”

In the same 2006 article, longtime defense watcher Winslow Wheeler had realistic take on the problem:

“We don't know how badly managed it is,” said Winslow T. Wheeler, director of a military reform project at the Center for Defense Information. “It's not that DoD flunks audits, it's that DoD's books cannot be audited. DoD aspires for the position where it flunks an audit. If this were a public company, it would have gone belly up before World War II.”

Time warp up to last Friday when the GAO told the Congress the rest of the bad news:

Without adequate financial management processes, systems, and controls, DoD components are at risk of reporting inaccurate, inconsistent, and unreliable data for financial reporting and management decision making and potentially exceeding authorized spending limits. The lack of effective internal controls hinders management's ability to have reasonable assurance that their allocated resources are used effectively, properly, and in compliance with budget and appropriations law.

… However, DoD has made significant improvements to the FIAR [Financial Improvement and Audit Readiness] Plan that, if implemented effectively, could result in significant improvement in DoD's financial management and progress toward auditability, but progress in taking corrective actions and resolving deficiencies remains slow. While none of the military services has obtained an unqualified (clean) audit opinion, some DoD organizations, such as the Army Corps of Engineers, DFAS, the Defense Contract Audit Agency, and the DoD Office of Inspector General, have achieved this goal. [Since the 1990s, only the DoD's own auditors and investigators have made this goal!]

Improving the department's financial management operations and thereby providing DoD management and the Congress more accurate and reliable information on the results of its business operations will not be an easy task. It is critical that the current initiatives being led by the DoD DCMO [deputy chief management officer] and the DoD comptroller be continued and provided with sufficient resources and ongoing monitoring in the future. Absent continued momentum and necessary future investments, the current initiatives may falter, similar to previous efforts.

Because of the Department's complexity and magnitude, developing and implementing a comprehensive plan that identifies DoD's internal control weaknesses will not be an easy task. But it is a task that is critical to resolving the long-standing weaknesses and will require consistent management oversight and monitoring for it to be successful.

To the degree that these business systems do not provide the intended capabilities, DoD's goal of departmentwide audit readiness by the end of fiscal year 2017 could be jeopardized.

Minnery has since retired and left the DoD. I have, on occasion, asked him for advice and if he would like to do a Solutions column based on his knowledge. He just throws up his hands in disgust and futility because he is not sure the problem can ever be fixed. After all the threats and harassment he had to endure to do the right thing, I don't blame him.

Pass a financial audit in 2017 – 20 years after Minnery and his colleagues wondered if they could fix the system by 1999, and Shays tried to find the missing $2.3 trillion in lost transactions. The GAO states that there must be a continuity in the DoD leadership until then to push the recalcitrant military services to find their money. After looking at this for over 30 years, I wonder if there should be a priesthood developed, similar to an idea to protect nuclear waste over the ages, to see if this bureaucracy can ever right itself, in 2017 or beyond, and find its money.

The solution? Minnery had it right. He told me from the very beginning that fixing the accounting systems at the top won't work because it was the lower-level transactions, checks and balances, such as weapons contracts and contractor logistics that needed to be accurate and accounted for. “Garbage in, garbage out,” he told me, because he had to just accept the numbers given to him by each agency even when he knew that there was not an accurate check of costs and payments at this basic level.

So, in order to pass the higher financial level audits, we need to look at how the procurement contracts are priced, executed and reported. And that is where the real bait and switch goes on by the contractors and their fellow travelers in the DoD bureaucracy and the Congress.

I will be doing a series of columns in the next few weeks on this basic lower-level problem – how we price our weapons and know how much they should cost, will cost or did cost. It is an issue that will take you deep in the weeds of military procurement, but it is the building block of whether we will ever get control of the Pentagon's money. It is especially important because there will be a push to cut somewhere in the DoD budget this fall and the true pricing of contracts could save billions of dollars. Obviously, this administration thinks it is important – they just created a director of defense pricing in the DoD.