The black hole of improper payments

Introduction

Going strictly by the numbers, the DOD appears to be a model agency when it comes to avoiding what the government calls “improper payments” — those that should never have been made, or amount to more than was agreed in a contract. Despite their $687 billion budget, DOD has reported contributing relatively little to the government’s estimated $100 billion in improper payments in each of the last three years.

Government watchdogs have concluded that DOD’s reputation is undeserved, however. That’s because while other agencies count their entire budget when doing an assessment of improper payments, DOD has traditionally only counted internal expenditures, such as military salaries and benefits, and not external contract payments — a part of their budget that has skyrocketed in the post 9-11 world.

Although legislation in 2010 ordered the Pentagon to give a more accurate tally, it hasn’t done so yet, and appears unlikely to do so soon, according to testimony at a Senate hearing March 28. As a result, the Pentagon’s ongoing accounting challenges — rather than its sterling reputation — were a key topic at the hearing, held by the Homeland Security and Government Affairs subcommittee on Federal Financial Management.

The hearing was a rare bi-partisan effort on the Hill, with lawmakers from both parties expressing concern about the military’s audit problems.

Every agency, as it turns out, estimates its improper payments using a statistical sample, and reports the results at the end of the year. Some agencies show regular improvement in cutting down on their improper payments, a trend seen as evidence of improved accounting practices; others, not so much.

DOD has been considered an outlier, in a good way. In 2011, when the improper payments total was estimated at $115 billion, DOD says they made “only” $1.1 billion in improper payments — a large sum to many, but a surprisingly small amount, given the size of their budget.

According to past reports by both the GAO and the DOD inspector general, however, that number does not reflect payments to contractors, involving around half of the department’s budget. Additionally, their statistical methods have been flawed, with a methodology that both watchdog agencies found was unreliable and could not be explained.

With the passage of 2010’s Improper Payments Elimination and Recovery Act (IPERA), the DOD was required to factor in their entire budget when estimating improper payments. They did not do so in 2011, and meeting the requirement in 2012 also looks unlikely, according to testimony by Daniel Werfel, Comptroller from the Office of Federal Financial Management.

The department still has not developed “a statistically significant estimate,” said Werfel. “I think the issue is about setting interim, accountable milestones for DOD that are helping to drive the department to success.”

A 2011 DOD IG’s report found that in some cases auditors were simply checking with the military branches and asking if their books were in order without looking into the numbers themselves. That practice could easily miss millions of misplaced funds. “There are pockets within DOD that there is a sense they are not doing enough robust measurement,” said Werfel. “We have to figure that out.”