The Pentagon Flunks Another Audit

The military-industrial complex is in high alert. They can't really believe that the Obama administration will keep its word and veto any Congressional action that would try and get the Pentagon out from the sequestration problem of cutting over a half a trillion from the Department of Defense (DoD) budget over the next ten years. If they are confident it won't happen, they are doing a good job of panicking over the cuts for public consumption and to protect their turf.

News articles and columns are popping up with various lists of what could be cut to come up with the money, and the DoD is maneuvering to offer up cuts on military pensions and health care, readiness and training budgets to save the required amount of money without touching their holy grail, the overpriced and ineffective weapons systems.

Although the DoD acts like Armageddon is just around the corner with these looming proposed cuts, it is really still looking at the low-hanging fruit. There is more than enough money left to fund national security if the Pentagon would change its ways.

Winslow Wheeler, the director of the Straus Military Reform Project, points out what a realistic cut this is when put in context:

If the so-called “Doomsday Mechanism” that Leon Panetta has been so verbose about is actually brought into play in January 2013 – which is now scheduled to occur in the aftermath of the so-called Super Committee's failure – DoD spending would be returned to the same approximate level of spending as in 2007. In its time, 2007 was a post-World War II high for DOD spending, not a valley, using inflation adjusted dollars. It was also $38 billion dollars above average annual DOD spending during the Cold War, an era when we faced over 200 Warsaw Pact and Soviet Divisions in Europe, an existential nuclear threat and a hostile and dogmatically communist China. To call such a level of spending a “catastrophe” (or “Doomsday”) is a failure of management and intellect every bit as complete as the political failure of the hapless Democrats and Republicans on the so-called Super Committee.

People have lost count that the DoD budget has doubled since September 11, 2001. And when you add in the high costs of the wars, there is a very large pool of money left even if these cuts would take place.

Mike Lofgren, who served as a staffer in the Congress for 28 years, with 16 of those years on the House and Senate Budget committees, recently retired and is “committing truth” about the real state of DoD budget. Lofgren puts the budget in its proper context:

Over the last five years, we've spent money on the military–in real, inflation adjusted dollars–at a higher rate than at any other time since World War II. That includes the late 1960s, when the United States simultaneously faced a competitor with 10,000 nuclear weapons and sent a half million troops to Vietnam. The Pentagon is spending recklessly at a time of fiscal crisis when America's debt has been downgraded for the first time since formal credit ratings began in 1917.

Despite what Secretaries Gates and Panetta have claimed, the DOD budget has been, next to the Bush tax cuts, the single greatest contributor to the drastic swing from surplus to deficit since 2001. Including debt service costs, the wars have cost about $1.7 trillion. Additionally, the Pentagon has spent about $1 trillion above inflation on its non-war budget. Adding debt service makes that about $1.3 trillion, for a grand total of roughly $3 trillion added to the debt, courtesy of DOD.

As for the military's doom-saying, such rhetoric has been standard procedure for service chiefs testifying to Congress for at least the past three decades that I served as a congressional staff member. Deliberate threat inflation, such as the hyperbolic overestimation of Soviet military capabilities in the 1980s, was the genesis of serious intelligence failures and billions wasted on weapons designed for imaginary threats.

The U.S. spends about as much on its military as all other countries in the world combined. It could shave a trillion off a projected $6.1 trillion in spending over the next decade and still be miles ahead of the next power or any conceivable combination of powers.

(If you haven't read Lofgren's spectacular Truthout article, “Goodbye to All That,” about leaving the “cult” of the Republican Party, you are missing one of the great truthteller revelations of all time. It is a must-read.)

The DoD could come up with the necessary money if they would dramatically change the systems they use for buying weapons and keeping track of their costs. I have already written about how to change weapons pricing in recent columns, but there is an even more fundamental problem which has to be fixed now, not years from now, to make this dysfunctional department of government work – you have to get control of the money and know where it is going.

It sounds so obvious and so laughable to even say it because it is still an absurd truth that the DoD cannot pass a fiscal audit. Even as the fierce lobbying to save all of DoD's funding is raging on the Hill, Danny Werfel, controller of the Office of Federal Financial Management in the Office of Management and Budget (OMB), came out last week with his most recent report on how all government agencies are doing to pass a financial audit as required by law since 1999. The scorecard now shows that 23 out of 24 federal departments have passed an audit. The failure? Easy to guess: the DoD. From the OMB report:

As careful stewards of the taxpayers' dollars, the Federal Government has a responsibility to ensure that it is spending money responsibly and keeping its books in order for all to see. Just like companies in the private sector, our Federal agencies must undergo thorough audits each year to ensure that we are practicing sound financial management. And today, I am pleased to announce that – for the first time since the passage of the Chief Financial Officers (CFO) Act over twenty years ago – twenty-three of the twenty-four applicable agencies obtained an opinion from the independent auditors on their financial statements. 

These results are not just about numbers on a ledger. They are about this Administration's commitment to watching every dollar that goes out the door and making sure that we have the proper controls, practices, and safeguards in place on those dollars. And although this effort is an ongoing challenge, we are excited that we continue to make progress on improving financial reporting and internal controls. This year's audit results are evidence of this progress, showing twenty-one “clean” opinions, two qualified opinions, and only one remaining disclaimer. 

One agency, the Department of Defense (DOD), still faces several challenges in obtaining an audit opinion largely due to the size and complexity of the agency. But they are committed to getting there. Last month, Secretary Panetta went up to Congress and committed to achieving an audit by 2014 – three years sooner than previously planned. To achieve this goal, DOD has established a path forward that focuses on improving the information the agency uses most in order to manage mission critical assets. In addition, DOD has increased its resources that are dedicated to obtaining auditable financial statements and has established a strong, visible governance structure – key steps that will enable success for the agency.

The report is trying to pretty up the reason why the DoD didn't pass an audit – “still faces several challenges in obtaining an audit opinion largely due to the size and complexity of the agency.” The DoD is huge, but an equally huge department, Health and Human Services (HHS), with budget outlays of $879 billion in 2011, has passed this fiscal audit. HHS, along with managing numerous government programs, processes an enormous amount of Medicare and Medicaid checks and manages all the programs that go with that huge endeavor. They also deal with contracts for many private outside entities, such as doctors, hospitals and nursing homes. This government agency isn't perfect, but they are able to run a single-payer health care plan (Medicare) with smaller overhead costs than private health insurers.

After working on many qui tam whistleblower DoD lawsuits to return contractors' ill-gotten gains to the federal government, I have learned that defense contractors and the DoD actually benefit from fiscal chaos because it makes it very hard to prove fraud when you can't even follow the money. Being “unauditable,” as the DoD calls it, has its benefits, because it creates an inherent lack of accountability. The Congress just hands over the money each year to the DoD while tepidly asking for the DoD to get its fiscal house in order. The DoD and the military services have spent billions and billions of dollars on accounting programs that don't even talk to each other.

Each administration claims that they will solve the problem, but they are working the problem from the top down. The new DoD civilian administrators have now claimed that they can get a clean audit by 2014 instead of 2017. As long as they try to fix this problem by looking at the top numbers, they are doomed to fail. They may eventually pass an audit on paper, but it will be meaningless until they get control of the contract transactions at the very base of their spending.

If the DoD can't track spending at its lowest transactional level, of each individual contract and other transactions, the reporting of costs up the line to the top fiscal reporting will be worthless because it will be garbage in, garbage out. Reform at this base level will be very hard because of bureaucratic turf, cronyism and the sloppiness of the bureaucracy and the largest contractors because they have gotten away with it for years.

I have joked to reporters and DoD oversight people that perhaps we should “task” Walmart to use its accounting and logistics system to find out where the DoD money is going and what they got for it. I don't like Walmart, but they sure as hell know where their money is and how many of the items they have left. They deal with over 2 million employees and millions of transactions all over the world. My fear is that even though Walmart has a great accountability system, they would, eventually, like other contractors, rip off the DoD for their product while offering generals jobs (maybe as greeters?) when they retire.

If you read this column regularly, you may get a feeling of deja vu all over again. I addressed this issue in September when the Government Accountability Office (GAO) issued a report on all the weaknesses in the DoD attempt to pass the audit. Here is what I said in September:

The solution? Minnery [my DoD financial whistleblower] 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.

So, you may wonder why I am writing about this again, so soon after my other recent column. It is because it is so fundamental and important that this is done right and that the DoD fixes the problem at the very base level. Thanks to the pressure of the deficit and federal spending, maybe there is a crack of opportunity to really find out – finally, for the first time in decades – where the DoD's money is going, and then find ways to rein in this fanatic spending. There is so much that needs to be changed in the DoD, including the incentives, the cronyism and the revolving door, but the fraud cannot be cleaned up without knowing where the money is. Time to really “follow the money” this time.