Pentagon’s accounting shambles may cost an additional $1 billion

Introduction

UPDATED: 5:20 pm ET 10/13/2011

The Pentagon, which previously warned that reliable military spending figures could not be produced until 2017, has discovered that financial ledgers are in worse shape than expected and it may need to spend a billion dollars more to make DOD’s financial accounting credible, according to defense officials and congressional sources.

Experts say the Pentagon’s accounting has never been reliable. A lengthy effort by the military services to implement new financial systems at a cost so far of more than $6 billion has itself been plagued by overruns and delays, senior defense officials say. The Government Accountability Office said in a report last month that although the services can now fully track incoming appropriations, they still cannot demonstrate their funds are being spent as they should.

The issue of poor bookkeeping has taken on particular political salience as lawmakers more closely scrutinize the $671 billion annual military budget for waste, fraud and abuse amid soaring federal deficits. Secretary of Defense Leon Panetta, responding in part to bipartisan pressures, announced Tuesday that DOD does not intend to wait six more years — as agreed in 2009 — to put in place long-awaited accounting reforms that advocates say will increase efficiencies and reduce mismanagement.

“The ability to audit our books ought to be something we do on a faster track, and we will,” Panetta said in a speech at the Woodrow Wilson Center in Washington. At a House Armed Services Committee hearing Thursday, Panetta announced a new deadline of 2014 for one major financial audit, covering the status of the department’s funds at the end of the fiscal year. Three other major financial audits, covering its assets and liabilities, net costs and aspects of the financing of operations, still will not be ready before 2017, department officials said. The details of how the new target date is to be met will not be known for another 60 days.

Panetta’s acceleration of even a single deadline may nonetheless stoke new tensions with the military services, which by many accounts ignored accounting requirements for years and are only now moving unsteadily to fix their books, arguing that many accounting rules are inappropriate for warfighters. Some top service officials have said that even the 2017 deadline was too soon.

Rep. Mike Conaway (R-Texas), who chairs a House Armed Services Committee panel examining DOD’s financial management, said that Panetta’s pledge to meet an earlier deadline would be helpful in forcing others in the department to make “hard choices” about devoting time and resources to audit compliance.

“Forcing this deadline,” Conaway said, “will cause the system to police itself.”

But the new deadline will also increase expenditures, sources say. Above the $6 billion already committed, Pentagon officials say they were already budgeting $300 million a year for new accounting systems and other preparations for 2017, or a total of $1.5 billion in additional expenses. Several said that any aceleration in the deadlines would cause that spending to rise.

An essential fix

The debate is not an abstraction; senior defense officials and experts on Capitol Hill say that until the military’s books are fixed, the Pentagon — responsible for more than 43 percent of all discretionary spending— will remain unable to determine what its operations and weapons systems really cost; will be unaware of how many spare parts it has or needs and will be stymied in attempts to find savings from duplication and inefficiencies.

Panetta is not the first defense secretary to express frustration over the department’s attempts to modernize byzantine accounting systems, which still consists partly of hand-written ledger entries that independent experts contend are frequently fictional.

Then-Defense Secretary Robert Gates last May memorably described the Pentagon’s efforts to account for its expenditures as a “semi-feudal system” — “an amalgam of fiefdoms without centralized mechanisms to allocate resources, track expenditures and measure results.” Gates said that in nearly five years at the department’s helm it was “nearly impossible to get accurate information and answers to questions such as ‘how much did you spend’ and ‘how many people do you have.’ ”

A report to Congress by the Pentagon comptroller that same month documented remaining obstacles to DOD compliance with accounting requirements set by law for all federal agencies in 1994. Eleven internal deadlines for partial compliance by the military services – mid-points on the road to 2017 — had slipped over the previous year, the report said, while only three were accelerated. And more such deadlines have slipped since then.

The comptroller, undersecretary Robert Hale, told the House Armed Services committee in July that “we don’t really fully understand, in the Department of Defense, what you have to do to pass an audit for military service, because we’ve never done it.” He said in testimony last month that significant progress has been made, but that “once we, you know, jump into the pool, we discover there are things we didn’t know that were – we didn’t expect to have to fix.”

Trial and error

A trial audit last year of $4 billion in war spending by the Marine Corps ended badly. Although the corps’ leadership asserted that it was fully prepared, the Pentagon’s inspector general declared the audit results unreliable because nearly $2 billion in expenditures could not be authenticated and much of the rest were misreported.

The GAO separately complained in a report last month that the audit had demonstrated that Corps officials were often empowered both to authorize and approve expenses, a violation of federal guidelines that they said creates a high risk of errors and fraud. It said the Corps was not doing enough to repair the deficiencies.

Sen. Claire McCaskill (D-Mo.), surveying the results at a Senate hearing, said the result was that Congress was misinformed by the Corps “about how funds were really, actually spent.” The Defense Department’s response, on behalf of the Corps, was that these problems are shared by all the services and efforts are being made to fix them.

Two other military service assertions of audit readiness last year — one by the Navy regarding its civilian pay records and another by the Air Force involving its military equipment — also proved unwarranted. The GAO reported last month that neither could find key financial documents and that stocks of many weapons parts — including satellites and some non-nuclear components of ICBMs – were not recorded correctly.

Service rivalries

The Pentagon’s effort to comply with the deadlines have also appeared to lack coordination. The Army, for example, has spent nearly $4 billion since 1997 on a new program called the Global Combat Support System, meant to replace more than a dozen major, outmoded, accounting programs. “Army ground force lethality and mobility will be maximized” when officials use the system to resolve logistics snafus and improve readiness, the service claims on its website.

But congressional officials who have examined the Army program said it remains plagued by problems that have prevented its widespread use. And the Marine Corps, which briefly considered adopting the same program, eventually decided to pursue its own nearly $1 billion modernization effort, also called the Global Combat Support System, the officials said.

“How do we end up buying $5 billion worth of systems to track the same [type of] equipment?” McCaskill asked at an armed services subcommittee hearing earlier this year. The department’s deputy chief management officer, Elizabeth McGrath, responded that “although they sound very similar in the capabilities they deliver,” the two systems are “embedded into very different…business processes.”

This, said a committee staff member later, “is the argument that every component in the department will tell you to perpetuate business as usual.”

Top priority

Under Gates, the department formally declared the task of fixing its fractured financial management — involving the melding or coordination of a total of more than 2,000 separate accounting systems overseen by more than 60,000 financial management officers — one of its top ten priorities.

Fulfilling that goal has been complicated by the department’s immense size and its global reach, plus its spending rate of $1.8 billion a day. But the May comptroller’s report said top officials firmly believe compliance will allow the department to use scarce resources more effectively, manage logistics and stockpiles more cheaply and reliably, and inhibit misuse, theft, and loss of key military assets.

The Army, for example, has predicted its new accounting system will allow it to shed $2 billion worth of extra inventory and save $8 billion over a ten-year period once it is fully deployed. “It’s kind of the amazon.com capability [to track orders] that we lack today in the Army,” Gen. Mitchell Stevenson, the deputy chief of staff for logistics, told a House Armed Services panel on Sept. 15.

Lawmakers also believe the new accounting systems will prevent improper payments like the $1.8 billion given by the Navy in recent years to Northrop Grumman for its work on the Global Hawk high-altitude surveillance plane. The Inspector General concluded those bills were paid without scrutiny, and faulted the Navy for failing to keep track of the equipment it had purchased. Northrop wound up refunding $206,000 in Navy funds that paid for corporate travel to air shows and golf outings in Paris, Singapore, and elsewhere.

The entire Defense Department reported making improper payments in 2010 of $1 billion, a figure its deputy inspector general said last month was likely incomplete. An effort by the Inspector General’s office to match specific Pentagon expenditures with withdrawals from an account kept by the Treasury last year could not find supporting information for $1.45 billion worth of transactions; it found that many defense agencies – unable to discern exactly how much money they have spent — simply resorted to using whatever figures Congress had appropriated as their accounting benchmarks. Another Inspector General report noted that sometimes, the department simply “writes-off” discrepancies it cannot resolve; one such write-off, for $79 million, occurred in Sept. 2007.

The department’s inability to meet requirements that other federal agencies have fulfilled for more than a decade has forced it to give roughly $40 million to private accounting firms such as KPMG and Grant Thornton, to examine whether the services are doing what they should. Reports from those firms have not been made public.

To lighten its burden, meanwhile, the department has said it wants to change the accounting rules for federal agencies to exempt some of its military equipment from existing requirements for auditable records of detailed transactions. It said in a May report that weapons — unlike other federal property — are often made with highly specialized materials supplied from government stocks; as a result, capturing all such costs would be impractical and require “significant process changes by the acquisition community.” The department said it will seek instead to track more closely how many items exist in its stocks.

Such an exemption would require approval from an independent group, the Federal Accounting Standards Advisory Board, which said yesterday it had asked the department to clarify what other means it plans to use to monitor transactions that would be exempt from audits.

“We have to keep in mind the ultimate goal here,” Air Force comptroller Jamie Morin told a Senate financial services subcommittee last month. “Our ultimate goal is not a clean financial statement audit. That’s a symptom. Our ultimate goal is financial improvement across the department so that we are better stewards of the taxpayers’ resources and we get that maximum amount of combat capability out of each dollar they entrust to us.”

But Morin testified there was a “moderate level of risk” that the 2017 deadline could not be met, because new accounting systems have proven so difficult to implement.