09/12/2010 01:04 pm ET | Updated May 25, 2011

Earth to Pentagon: Follow the Freaking Money!

It's time to take another look at the wonderful, wacky world of government regulation of military contractors. By now it should be a no brainer that the marketplace for private military and security contractors (PMSC), as well as regular, conventional military industrial contractors only works as well as there is an adequate, experienced, knowledgeable, government acquisition work force capable of doing proper auditing.

And since so much of PMSC work --- billions and billions of dollars as Carl Sagan would have said, if he were still alive-- is done under a Pentagon contract it is only reasonable to ask how well the Pentagon does auditing.

The short answer is not very well, according to a report released Sep. 7 by Sen. Charles Grassley (R-Iowa), a long time DOD IG watchdog.

The report, OVERSIGHT REVIEW OF AUDIT REPORTING BY THE DEPARTMENT OF DEFENSE, OFFICE OF INSPECTOR GENERAL was initiated after Senator Grassley received a series of anonymous letters alleging mismanagement, low productivity, and misconduct within the Department of Defense (DOD) Inspector General's (OIG) Audit Office.

Actually, "not very well" is being kind to the IG. Here is how the report's introduction puts it:

Early-on in the review, the staff identified one all-important, central element that is adversely affecting every facet of the OIG audit program -- the DOD's broken accounting system. This dysfunctional system is driving the audit freight train. The success or failure of an audit turns on the quality of financial data available for audit by competent examiners. Unfortunately, the quality of the financial data presented to OIG auditors by DOD during the period reviewed by the staff should probably be rated as poor to non-existent. Having lost control of the money at the transaction level, DOD's broken accounting system is incapable of generating accurate financial records. The consequences are predictable. Most of the time, OIG auditors report: "no audit trail" found.

The OIG Audit Office has allowed the "no audit trail" scenario to hinder and, in some cases, to obstruct the completion of credible audits. The situation is so bad that OIG senior managers readily admit that existing audit teams are no longer able to conduct full-scope, end-to-end contract audits.

Auditors no longer verify payments at the primary source - the Defense Finance and Accounting Service (DFAS). . "It's impossible .... We can't do it," they say. If the OIG Audit Office is not checking payments and matching them with contracts and deliveries, it will never find much fraud and waste. OIG Audit needs to be on the "money trail" 24/7. That is where most fraud occurs. To get contract audit oversight back on track, OIG Audit needs to re-tool and create much larger audit teams - consisting of 25, 50, or 100 auditors -- to tackle DOD's most egregious contract problems. Today's small teams, consisting of 5 or 10 auditors, are slow to publish reports and are simply not up to the demanding "audit trail reconstruction" task encountered on most jobs.

Instead of searching for fraud on the "money trail," OIG auditors have strayed far from the core mission. Now, they frequently review DOD policies and procedures, which yields zero benefits to the taxpayers. They deserve the title: "DOD Policy Police." Discovering that the DOD IG no longer does genuine contract audits was a startling revelation but one that helps to explain why 765 OIG auditors could not document any measurable fraud in FY 2009.

Continuing the status quo is unacceptable.

It is nothing short of astonishing to read that a DOD auditor "needs to be on the "money trail" 24/7." As Homer Simpson would say, Duh! Or as legendary bank robber Willy Sutton said in his autobiography "Go where the money is...and go there often."

Now, admittedly much of what the DOD IG does is to audit weapons contracts, which is not what most PMSC contractors do. But it also looks at professional services contracts, which does include PMSC. For example:

In FY 2009, ACM [DOD IG's Acquisition and Contract Management Directorate] produced one report that probed the depths of potential fraud and almost qualifies as a credible IG Act core mission contract audit. It may be one of ACM's best pieces of work in FY 2009, but like all the others, it was incomplete and inconclusive. It failed to close the loop and nail down all the pertinent facts.

This audit is entitled "U.S. Air Forces Central War Reserve Material Contract" [report no. D-2009-108].

ACM personnel examined a cost-plus-award-fee contract awarded to DynCorp. The total contract value was $621 million and was in effect from April 2000 to September 2008. The contractor was responsible for managing pre-positioned war reserve materials (WRM) at storage sites in Southwest Asia.

The most troublesome findings were buried deep in the body of the report. These are as follows:

• The contract arrangement with DynCorp was prohibited by 10USC2306[a];
• Once Operation Enduring Freedom caused a major surge in WRM requirements far beyond the scope of the existing contract, that contract should have been terminated in FY 2002-03 and recompeted;
• Missing documentation resulted in either no audit trail or one so complex that accountability was questionable; The lack of internal controls created an environment with "high risk" for fraud;
• DynCorp was authorized to submit vouchers directly to DFAS under the Direct Billing program; DCAA was required to test and sample those transactions periodically but failed to do so;
• $161.1 million was obligated without a written, binding agreement in violation of 31USC1501

ACM auditors appear to have made a good faith attempt to match payments and deliveries with contract requirements. Unfortunately, the procedure used was flawed. The auditors needed payment data, but the contracting officer (CO) did not keep copies of DynCorp' "interim public vouchers" that were submitted for payment. So instead of going to the primary payment source - the Defense Finance and Accounting Service Centers -- to verify payment data, the audit team opted for a shortcut. The auditors chose to rely on the data provided by DynCorp, the target of the audit. How did ACM know that the information provided by DynCorp was accurate and complete? How could such a procedure meet accepted government auditing standards?

The report appears to imply that the vouchers, for the most part, could not be matched with the contract modification documents because the language in those documents did not specify what goods and services had to be delivered. If a payment/contract match-up was not feasible, this could be a violation of 31 USC § 1501. That law requires that a financial obligation be supported by a written, binding agreement (contractual document) that specifies what goods and services are to be delivered. Without that kind of specificity, a contract would be the equivalent of a blank check. The report stated: the "government did not know what it was paying for ... The government may have paid for services DynCorp did not perform. ... It may have overpaid for services."

In other words, the government did not know what it had ordered, what was delivered, or what it was actually buying or paying for.

The report cited an email from the contracting officer (CO) to DynCorp that seems to say that the valve on the big DOD money spigot was wide open. In this email, the CO told the contractor:

"Go ahead and send me a 'draft P00034' bid schedule and I will get it [the modification] done. One question, I hope you can move money in CLIN 0302 to cover as we don't need to get any more FY 02 money. We have so far secured additional $29M for FY 03 so don't worry about money at this point, keep spending [emphasis added], just have to put in right place."

The CO never questioned any of the contractor's costs or cost overruns.

All of this taken together appears to suggest that DynCorp may have received $161.1 million in unauthorized and/or improper or even fraudulent payments. But the report's findings are inconclusive.

The OIG recommended that DCAA go back and examine this DynCorp contract. However, bucking this audit back to DCAA made no sense whatsoever. To begin with, the report gave DCAA very poor grades for failing to watchdog DynCorp on this contract from the get-go. The DOD IG should finish the audit that it started.

The OIG Audit Office should be responsible for conducting comprehensive, end-to-end audits of the 2000-2008 WRM contract as well as the new WRM contract awarded to DynCorp in June 2008, after the original 2000-08 contract was put under the audit microscope. To the extent possible, this work should attempt to determine the potential magnitude of unauthorized and/or potentially fraudulent payments to DynCorp. DOD should be asked to recover all unauthorized payments as well as proceeds from the sale of government property that have not been credited to the WRM contract.

That was not the only example of problems auditing a PMC.

Report No. D-2009-078 examined medical care provided to the over 225,000 contractors working in Southwest Asia. The audit revealed the health care contracts between the DOD and contractors were often vague and subject to interpretation. Thus, it was difficult to determine what medical health care could be given to injured or ill contractors. A second, more alarming finding was that the Military Treatment Facilities (MTF) in Southwest Asia did not bill and collect payments from contractors who received care at these DOD facilities. Additionally, each military component had different billing and collection processes. It was found that MTFs may have provided millions of dollars of free medical care to contractors. In short, the report indicates the DOD was losing millions of dollars in reimbursable costs. This audit should have examined a sample of cases and quantified the dollar value of those losses with precision. The DOD components concurred with the OIGs recommendations to establish a uniform billing program. A working group was created to address this issue. U.S. Central Command indicated it would need additional personnel in theatre to perform the billing functions.

Again, this report probed a high-risk area that Congress and taxpayers expect the OIG to examine. DOD personnel and contractors have been in Southwest Asia since 2003. It is inexcusable that after six years of this war, in which DOD is heavily dependent on contractor support, the U.S. Central Command still does not have a procedure to deal with this billing and reimbursement issue.