Pentagon remains stubbornly unable to account for its billions

Introduction

Defense Department officials celebrated after their auditor certified that the Marine Corps had successfully accounted for all the money it received and spent in 2012. They said it was a key milestone in the Pentagon’s long, troubled quest to earn that certification for all its billions of dollars in annual spending.

Then-Defense Secretary Chuck Hagel and the comptroller at the time, Robert Hale, who oversaw the Corps’s work, marked the occasion at a February 2014 event in the building’s Hall of Heroes, where they presented a framed copy of the certification to the Corps’s assistant commandant. Hagel boasted that “we don’t spend a lot of time using big megaphones to tout our great accomplishments… We get the job done. This is another example of, we’re getting the job done.”

The self-congratulations turned to embarrassment this March, however, when the Pentagon’s auditor suddenly reversed itself and withdrew its endorsement, saying newly discovered facts called into question “the completeness of the information on which we based our opinion,” according to a memorandum sent by a senior auditor to the Pentagon’s Comptroller and other top Pentagon officials.

No one said so at the time, but the Corps had not properly accounted for roughly $800 million worth of transactions on its books, insiders say. That amount represents the sum of misstated and improperly documented transactions by the Corps, according to a report by the independent Government Accountability Office released on Aug. 4.

The GAO report further said these shortcomings in the Marine Corps’s accounting are typical, not rare. The same undocumented transactions and unreliable methods of financial record-keeping plague the Defense Department’s entire accounting apparatus, and threaten its ability to meet a congressionally imposed deadline for becoming fully auditable in two years, according to the report.

If that deadline is missed, it will be the latest in a long series of unkept Pentagon promises about a requirement met years ago by every other federal agency – namely, that it should be able to track its revenues, its assets, and its spending according to standard business practices.

“Defense dishes out over $500 billion a year yet still can’t tell the people where all the money is going,” complained Sen. Charles Grassley (R-Ia.), who reviewed the GAO report before its release. “We can’t effectively identify areas to reduce spending if we don’t know how much, and where, we’re spending that money in the first place,” complained Sen. Tom Carper (D-Del.), the senior Democrat on the Homeland Security and Governmental Affairs Committee. “This is more than just a disagreement among accountants; it raises questions about the Department’s basic financial practices.”

Provocatively, the GAO report also said that senior managers from the Pentagon’s auditor’s office, which withdrew the certification of credibility for the Marine Corps’ accounting, had improperly certified the Corps’s financial report in the first place, over the objections of lower-ranking specialists who oversaw the work.

The Defense Department has in fact been straining for years to reorganize its fiscal management in time to meet a legal requirement that its income and spending records adhere to modern accounting standards. The aim is relatively simple: To ensure that the department knows when its funds go astray, or can prove they were spent as intended.

A law passed in 1994 initially set the deadline for 1997, but the Pentagon’s books were in such disarray that it blew past that date. Then, in 2010, Congress told the Pentagon to comply by 2017. The next year, Defense Secretary Leon Panetta pledged that the department would by 2014 be ready for a partial account of its finances – a much less detailed accounting than requested of the military services — but the department missed that deadline too.

Hale, who retired in 2014, said in an interview that implementing any large-scale reform at the Pentagon, such as improving the reliability of its accounting software, “is like trying to push a block across sandpaper” because coordination is required between dozens of agencies, combatant commands, field activities, and military services. Other financial concerns, such as financing wars abroad while complying with legislated spending caps, were considered more urgent tasks, he said.

But Hale said he does not question the need to reform the way the department keeps track of its spending, because electronic logs of Defense Department transactions are often old and supporting documentation is poorly organized.

That means the department is unable to accurately account for its debts and credits at the end of each financial cycle, according to multiple reports from Hale’s office and the Pentagon’s Office of Inspector General. Sen. John McCain (R-Az.), chairman of the Senate’s armed services committee and one of the GAO report;s requesters, described this shortcoming as “shameful” at a discussion about budget reform and defense spending at the Heritage Foundation on July 15.

“Shouldn’t the taxpayers of America know where their dollars are being spent on national defense?” McCain asked.

Congress has been growing increasingly impatient and threatening to turn the screws. Since 2012, lawmakers have introduced an “Audit the Pentagon” bill that would punish the department if it fails to produce a modern accounting of its transactions, but the bills have not made it to the House or Senate floor. The latest version, introduced in February by Sen. Joe Manchin III (D-W.Va.) and eight co-sponsors, states that if the department misses the 2017 deadline, it will not be able to buy certain weapons or shift funds from one account to another.

To help modernize its bookkeeping, the department has invested in accounting software improvements over the past several years, which themselves cost more than $15 billion through 2017, according to a 2012 report by the department’s auditor. It has further spent tens of millions of dollars hiring accounting firms to help the military services meet their requirements.

Grant Thornton, for example, collected $32 million from 2010 until 2014 to audit the Marine Corps’s report of how it had spent its budget each year and determine whether it had correctly recorded its financial intakes and expenditures, according to Grassley. The firm’s favorable verdict, seconded by the inspector general, was the basis for the public celebration.

Michele Mazur, a spokesperson for Grant Thornton, when asked if the firm would return its fee since its initial endorsement was in the end rejected by the Pentagon, stated by email that “We are confident that our work complied with all professional standards.”

Grant Thornton and other big accounting firms, such as KPMG and Ernst and Young, who check the books of the military services, are supposed to work hand-in-hand with the Pentagon’s Office of Inspector General, run by Jon T. Rymer, who worked as a Director of KPMG and audited federal financial agencies before taking his current job in 2013.

Each year for nearly two decades, teams of specialists in the inspector general’s office have examined the accounting firms’ work and judgments and announced whether they found their judgments credible. They are, in effect, watchdogs on the arduous process of bringing the department’s bookkeeping into the twenty-first century, and bear ultimate responsibility for auditing the department’s accounts.

In the Marine Corps audits for fiscal years 2010 and 2011, the inspector general’s teams and Grant Thornton agreed that the Marine Corps had not kept a passable record of its budgetary activity. But in the 2012 audit, Grant Thornton’s accountants recommended a passing grade but their overseers from the Pentagon inspector general’s office initially disagreed.

In the lists of orders that the Corps reported placing in 2012, for example, the oversight team found $399 million in erroneously recorded transactions. That exceeded the level of error the overseers were willing to accept for the placed-orders category of accounts — $275.3 million — and thus rendered the team unable to sign off on the entire category.

Because the payments category constituted more than 90 percent of the Corps’s total budget statement, the inspector general’s team said that only 8.1 percent—at most—of the Corps’s accounting could credibly be described as “materially correct,” according to an email that the inspector general’s team leader, Cecelia Ball, wrote her supervisor on May 22, 2013. The email was given to the Center for Public Integrity by a source who had access to evidence used by the GAO to review the audit.

The GAO’s investigators said however that the extent of the misreporting might have been even worse than what the inspector general’s team reported; they found, for example, $35.8 million in additional errors or unreliable transactions beyond the $773 million that auditors also found. The investigators also spotted $231.5 million in shipping transactions that the auditors accepted as reliable without sufficient evidence, according to the report. It said that “management” in the inspector general’s office nonetheless told Ball’s team to certify that the Marine Corps’s accounts were in order.

Although the GAO had access to internal Pentagon documents, its report did not name who applied the improper pressure. But an Oct. 8, 2014 internal review at the inspector general’s office, by Ashton Coleman, Jr., seen by the Center, stated that the deputy inspector general for auditing’s close ties to a partner at the accounting firm “would lead a third party to perceive that undue influence” could have been exercised by the auditing firm on the team’s conclusions at three points in its deliberations. The holder of the deputy’s post was then Daniel R. Blair, who previously led financial audits at the GAO and worked as a public accountant.

Ball, in an Aug. 14, 2013 message to colleagues about feedback she had received from her supervisor at one point said Blair, in particular, believed the team had “to do what it takes” to reach the same positive conclusion as Grant Thornton, according to a copy of her email. Reached by phone at her home in Kansas City, Ball declined comment.

Ten days before the inspector general endorsed the audit in December 2013, Ball’s supervisor Edward Blair — no relation to Daniel — wrote to Daniel Blair, reminding him of the “many occasions” on which the team had found Grant Thornton’s conclusions about the accuracy of the Corps’s financial records unreliable. He also presciently warned that the “GAO may hone in on” flaws in the accounting if it conducted a review.

Ultimately, one of Daniel Blair’s colleagues — Lorin T. Venable, assistant inspector general for financial management and reporting — signed an 8-page report stating that the Corps had “fairly” reported its budgetary activity for the year. But the GAO in its report said this report ignored evidence that “should have raised significant doubts” about the reliability of the audited information, such as transactions for which the Marine Corps had no documentation and discrepancies between accounts that should have had the same balance.

“These actions appear to show how undue influence and bias trumped objectivity and independence,” Grassley said. He said emails sent between one of Grant Thornton’s partners and Daniel Blair “suggest a professional relationship that was far too cozy.”

Venable, through Pentagon spokesperson Bridget Serchak, declined to comment. Serchak said Grant Thornton itself discovered the Marine Corps records that formed the basis of its endorsement were incomplete, when the firm audited the Corps’s accounts for 2014. She declined to comment on the emails making clear that staff had identified the shortcomings in 2013.

Reuters first reported on May 20 that Blair had overruled his own oversight team after they found the Corps financial records faulty. Three weeks later, the Pentagon’s inspector general demoted him to the position of deputy chief of staff at the agency.

“Dan made major and lasting contributions as the DIG for Audit,” inspector general Rymer wrote in a June 10 email addressed to his staff. As deputy chief of staff, he added, Blair will focus on financial management and information technology, but not oversee accounting reports.

Asked whether the reassignment was related to Blair’s handling of the Marine Corps audit, Serchak sent a statement from Rymer that Blair had said he was “ready for a career change” and Rymer thought he would help add “more management depth to our internal OIG financial management.” In written comments included in the GAO report, Ann-Cecile McDermott, the Corps’s fiscal director, contested that the Corps could not provide support for certain transactions and disputed that “significant” weaknesses impair the Corps’s ability to produce reliable financial information. But she also acknowledged “much work remains.” Mark Easton, the Pentagon’s deputy chief financial officer, did not contest any specific statements by the GAO but chastised the report’s authors for not recognizing “many of the corrections and improvements already made” by the Marine Corps, and for not “constructively” describing the value of the audit to the Marine Corps.

Jack Armstrong, a former audit program director for the inspector general, says that Blair’s reported intervention was unsurprising because he had previously “killed” an unfavorable audit report from a Pentagon inspector general team.

Armstrong said he managed a similar audit of the Defense Finance and Accounting Service (DFAS) — the Pentagon’s internal accounting agency — five years ago. His team found enough holes in the audit of that agency — including a discrepancy of $71.2 million between two of its accounts — to recommend a “non-endorsement” of it.

But Urbach Kahn & Werlin Advisors, Inc., the accounting firm hired to assist the agency, said it was okay to adjust the balance of one of the accounts so they matched, according to a copy of an internal memo Armstrong wrote “for the record” on February 16, 2010.

To Armstrong, the discrepancy signified bigger flaws. “If your systems are working perfectly, you shouldn’t have to force one account to agree with the other,” he said.

Shortly after winning the contract to carry out the DFAS audit, Urbach Kahn & Werlin Advisors, Inc. sold its federal audit practice to a firm that has since become part of CliftonLarsonAllen LLP. Jackie Kruger, a spokesperson for CliftonLarsonAllen LLP, told the Center by email that “professional obligations of client confidentiality” preclude the firm from any discussion of the audit work at issue.

Blair, then principal assistant inspector general for auditing, first tried to convince Armstrong’s oversight team to pass the audit, then refused to issue any report about the agency’s finances when the team refused to change their findings, Armstrong said.

A report that Grassley’s office issued in November 2013 about that particular audit stated that the top Pentagon auditor directly involved in the matter should be held to account for the report never being issued. In the version of the report available online, that official’s name is redacted. The report notes, however, that as of March, 2010, the responsible official had “just been promoted to Principal Assistant IG for Auditing” — a job which Blair’s official biography states he started on February 14, 2010.

“The biggest thing that outrages me personally is that I used to think we were the greatest agency on earth,” said Armstrong, who started working at the Pentagon’s inspector general’s office in 1982, the year it opened, and retired at the end of 2010.

“To see what happened on the DFAS audit, and then what went on with the Marine Corps audit — it just completely disheartens me,” he said.

After being told about the allegations concerning his role in the two audits, Blair declined, through Serchak, to comment.