The Pentagon's Black Hole

Did you ever wonder exactly how the Pentagon will spend the $670 billion that President Obama wants it to have this year? So does the Pentagon.

I am not being facetious. Quite literally, the Department of Defense (DOD) does not know what happens to the money the taxpayers give it. This has been true for decades. The money gets spent; it's gone (they're pretty sure), but the prices DOD paid, when -- if ever -- the purchases were delivered, where everything is now, and a lot more are all quite unknown to the Pentagon.

This incomprehensible condition has been documented in hundreds of reports over three decades from both the Government Accountability Office (GAO) and the Department's own Inspector General (DOD IG). The studies are routinely sent to Pentagon managers and Congress. Once or twice a year, there will be a hearing on Capitol Hill; both Republicans and Democrats will declare themselves oh-so shocked; the DOD witnesses will say they are getting close to fixing it; outraged press releases flurry over Washington DC; a few press articles are written, and on very rare occasion, a scapegoat might get fired. Then, everyone goes back to sleep, and nothing happens. This year is no exception.

On October 19, the DOD IG released a report with the innocuous title: "Summary of DOD Office of the Inspector General Audits of Financial Management." It is riveting reading -- a true horror story. (Find it here.)

Here are the report's essentials:

Between 2004 and 2008, the DOD IG wrote 255 reports about the Pentagon's financial management, or rather lack thereof.

The IG found 13 of what it euphemistically calls "material weaknesses," specifically:

1. Financial Management Systems: The systems DOD has put in place to control and monitor the money flow don't facilitate but actually "prevent DOD from collecting and reporting financial information ... that is accurate, reliable, and timely." (See p. 4.)

2. Fund Balance with Treasury: DOD managers do not know how much money is in their accounts at the Treasury, nor when they spend more than Congress appropriates to them. (See p. 5.)

3. Accounts Receivable: DOD does not "record, report, collect, and reconcile" funds received from other agencies or the public. (See p. 6.)

4. Inventory: Inventory records are not reviewed and adjusted; unreliable and inaccurate data are used to report inventories, and purchases are made based on those distorted inventory reports. (See p. 7.)

5. Operating Materials and Supplies: "In addition, DOD cannot accurately report the value of operating materials and supplies." (See p. 7.)

6. General Property, Plant, and Equipment: "The cost and depreciation of the DOD general property, plant, and equipment are not reliably reported ...." (See. p. 8.)

7. Government-Furnished Material and Contractor-Acquired Material: "...the value of DOD property and material in the possession of contractors is not reliably reported." (See p. 9.)

8. Accounts Payable: DOD does not know who owes it money, nor how much. (See p. 10.)

9. Environmental Liabilities: DOD does not accurately estimate or report the cost of cleaning up its facilities, does not track its environmental liabilities, and does not even have a complete record of its ranges and operational activities. (See p. 11.)

10. Statement of Net Costs: DOD's "systems do not always capture actual costs in a timely [or accurate] manner." (See p. 11.)

11. Intragovernmental Eliminations: DOD tracks neither buyer nor seller amounts when conducting transactions with other agencies. (See p. 12.)

12. Other Accounting Entries: DOD sometimes enters "unsupported" (i.e. imaginary) amounts in its books. (See p. 13.)

13. Reconciliation of Net Cost of Operations to Budget: DOD uses those imaginary figures to make the books balance. (See p. 14.)

Horrifying as all that is, it gets worse:

DOD management has acknowledged that all 13 "material weaknesses" continue to exist (because over the decades they have done nothing to fix them).

There are three additional "Issue Areas":

1. DOD's "audit trails" are not kept "in sufficient detail." Put simply, no one can track the money.

2. DOD's "Internal Controls," intended to track the money, are inoperative. Thus, DOD cost reports and financial statements are surely inaccurate, but the errors cannot be identified because the data cannot be verified.

3. "Compliance with Laws and Regulations:" DOD does not observe many of the laws that govern all this.

That last finding is perhaps the most appalling. Congress and the Pentagon perform annual Kabuki dances to pretend to do something about DOD's financial mismanagement; new laws get enacted, and nothing changes. Why? Because many of the new laws permit the Pentagon to ignore the previous ones; others are just eyewash.

The IG report gives a classic example of the former:

"The Chief Financial Officers Act of 1990 ... required ... [DOD] to prepare ... financial statements that were audited by either the Inspector General or an independent public accountant .... Beginning in 1991, DOD began preparing and submitting financial statements for audit. However, DOD OIG audits of those financial statements for FYs 1991 through 2001 identified pervasive and long-standing material weaknesses which caused those financial statements to be unauditable. [Emphasis added.] As a result, Congress passed the 'National Defense Authorization Act for Fiscal Year 2002,' on December 28, 2001, that limits the amount of audit work performed by the DOD OIG under the CFO Act based on management's representation regarding the [un-]reliability of the financial statements." (See p. 1.)

In other words, when you have a new law imposing competence, pretend to comply, and if you get caught, waive the law.

Although the above example would make you think that parts of the critically important Chief Financial Officers (CFO) Act of 1990 was not waived until the George W. Bush administration, it is notable that exemptions from the CFO Act were also sought, and obtained, during the Clinton administration. It helps to understand the continuing nature of the problem to recognize that the Clinton Pentagon official who sought those waivers, William J. Lynn III, has now been promoted to Deputy Secretary of Defense, the most powerful individual in the Pentagon, second only to Robert Gates.

All this is a big snore in Congress, as its most recent hearing on the subject matter illustrates. In September, the Senate Homeland Security and Government Affairs Committee heard GAO identify a long list of serious problems at the Defense Contract Audit Agency (DCAA), which is tasked to audit DOD contracts. Apparently, the agency busied itself reversing findings the audited contractors did not want, punishing auditors for coming to the negative findings, and promoting the managers responsible for that and more. The senators woke up long enough to declare themselves horrified and call for reforms and even firings. Of course, they got neither.

Also testifying at the hearing was the Pentagon's CFO, Comptroller Robert Hale (another previous Clinton era manager who oversaw Air Force finances, without requiring a successful audit of its books, and who busied himself trying to get rid of at least one whistle blower). At the September hearing, Hale opposed every serious reform proposed for DCAA and, later, responded to the calls for firings by reassigning the Director of DCAA to his own office -- which continues to oppose any serious reforms.

The Senate Armed Services Committee has taken the eyewash approach. Completely ignoring the DCAA scandal in its newly enacted National Defense Authorization Act for 2010 which was just signed into law, the committee purports to address the overall problem. The new law's Section 1003 ("Audit Readiness of Financial Statements of the Department of Defense") instructs DOD management to produce a plan "ensuring the financial statements of the Department of Defense are validated as ready for audit..." The plan is not to be effected until September 30, 2017.

Should anyone think that prescription is anything but a bad joke, consider the Pentagon's previous performance on meeting deadlines for financial management competence. Aside from blowing off the requirements of the CFO Act of 1990, the Pentagon also established and promptly ignored past deadlines, set by Comptroller Hale's predecessors: for 1997 (from Comptroller John Hamre, who now campaigns to succeed Robert Gates), 2007 (from Comptroller Dov Zakheim now with Pentagon contractor Booz Allen Hamilton), and most recently 2016 (from former Hill staffer Tina Jonas, now with Sikorsky). With 2017 as the new goal, it would appear the 2016 deadline loomed dangerously close.

It's not that DOD is flunking audits. You flunk an audit when you track the money and find it was not spent as intended. DOD cannot track the money; the Department of Defense is unauditable. It would be a vast improvement if DOD were able to flunk an audit. Pentagon management has done nothing to fix the decades-long mess, while making endless promises to do so. Congress, the erstwhile supervisor, dozes at the wheel and nods its heavy-eyed approval.

Perhaps the level of the firings should be escalated -- running up the chain of command until someone gets the message. But I am in error; there have been no firings, nothing to escalate. Sorry for that error.

 

Follow Winslow T. Wheeler on Twitter: www.twitter.com/Winslow T. Whee

Comments

[EbonBear]

In terms of transparent accounting, the DOD makes Enron look like George Washington. It has been well known for years that overspends, false accounting and corruption are endemic in the military appropriations system.

[realitytrumpsbull]

Soooo....have a 'defense' budget of $10.00 Here's your ten-spot, don't spend it all in one place, and see ya later. Yeah. That'll happen. LOL

[duxguts]

Sounds like the Pentagon have been getting TARP money. No One knows where that goes either.

[mbaty]

Sounds like a pretty effective way to hide money if, for example, you wanted to spend money on things you didn't want people knowing about.

[mommadona]

Not a surprise

As a supply clerk during Viet Nam era - just before end of fiscal yr 'surplus' not accounted for = lightbulbs­/fixtures/­yadayada..­...big hole dug at end of runways and 'surplus' dumped = there! THAT was 'easy'!

[Rmath]

Where are the teabaggers on this issue?

You want to scream about big government run amok, then here's your chance.

Unless of course certain parts of the budget are off-limits..

[mcmutter]

The Pentagon budget is out of control. It needs to be cut by $10 Billion everry year until they figure out where the money goes.

[Givethemhellharry]

You have to be kidding! It needs to be cut by $100 billion a year, before there will be improvement.

[jmpurser]

Okay, but the jist of the article is that not only would the Pentagon not know if they actually cut their spending by $10 billion but we wouldn't know either.

[greyhound2]

Other countries in the world have a higher standard of living because they are not being sucked dry by their military. $700 billion is more money than the rest of the world spends combined. The Soviet Union went bankrupt due to the high cost of its military. $700 billion would go a long way in raising the standard of living in the US. The two wars we are currently involved in are wars of choice, we invaded for no reason and occupy with no goal or exit stragety. Slash the DOD budget to $75 billion.

[Givethemhellharry]

Amen, Amen and Amen again!

[jmpurser]

Agreed!

[valkyrie607]

It's a feature, not a bug.

[DocTwain]

Let's slash the DOD budget by 50%.

Maybe then they will start paying attention to how they spend the money.

[Aaror]

But I'm not done, there are also "colors," of money, you can't spend R&D money on spare parts, and you can't spend construction money on payroll, doing so is against the law, literally. At the unit level your budget is allocated in a similar way, and while it is not illegal to overspend in one line item and underspend in another, it is an audit hit if you do so. You have to "reprogram the funds," to match your needs or you get in trouble.
Then there are fiscal years, which are not always a year (ship construction "years," are 5 years long). If you don't spend all your money by the end of the fiscal year, you get in trouble, if you spend too much (even a penny) you get in trouble. Again, this is by unit.
You tell me how many audit hits this leads to...

[Aaror]

When congress tells the military it can spend money, it appropriates the money (I will keep all this simple as I can, know that there is a lot more involved). Those appropriations flow down to the unit level (one ship, one squadron, etc.). That squadron decides what to spend the money on, and sends a document with the ESTIMATED, cost to the budget office. The budget office 'Encumbers,' those funds, and makes sure someone else doesn't spend that money.
Once the purchase goes through, you need to match the encumberance to the actual expenditure. If you fail to do so you will show an unauthorized expenditure, and an unclosed encumberance. Even when you match them, the estimate may not match the actual cost. Now you have thousands of small differences (some higher, some lower) to deal with. And you need to spend every penny, but not over spend by one penny!
All of this is at the unit level, there are thousands (tens of thousands, maybe hundreds of thousands) of units in the military. Each unit needs to balance to the penny or there is an audit hit.

[Aaror]

Of course you are ignoring the elephant in the room.
Corporations and businesses operate on the theory of "materiality," which means that if a financial statement is within 1% of accurate, it is good enough. No CPA or other accountant outside the government would ever spend $500 tracking down a $3 error.
In the military (or postal service, DEA, etc.) it is different. If there is a one cent error, you can spend as much money as you need to in order to track it down. If you can't find that PENNY, you are in violation.
So the report you quote may mean that we can't find umpteen billions, or it could be a penny, I don't know which.
I do know how the government handles money, which is that we use encumberances, obligations, and, well, fund accounting. If you want I will give you enough info about fund accounting to send you to the medicine cabinet for asprin...

[Bobotheclown]

Government has a defacto structure and all decision makers inside the government work within that structure. The Pentagon situation is not unique, there are other departments which display the same behavior that you call an "error". The CIA has never been audited as well and there is no hue and cry. The core situation is this: since WWII our government has been reorganized into a national security state. Agencies such as the CIA and the Pentagon are now branches of government which are legally independent of Congress and the White House. They are not elected branches of government so you might say that they are dictatorships and you would be right. They represent the largest budgets in the government but that is, as you say, an estimate. In reality they ARE the government and they allow a certain percentage of revenues to flow to public uses that are controlled by Congress. It is naive to complain about accountability from the Pentagon when they have no obligation to provide accountability. The Congress exists at the pleasure of the Pentagon and our leaders are well aware of that. Measures such as the CFO act of 1990 are not "eyewash", they are window dressing to placate constituants such as yourself who do not understand who is really in charge of Washington.

[Aaror]

The "Pentagon," consists of people who have sworn to uphold and defend the constitution, and to obey all orders of those appointed over them. The chain of command runs from and newest raw recruit to the president, and through him the people of the United States. The military is more integrated than most other governmental organizations, and represents every corner of our nation, including possessions (Puerto Rico, US Virgin Islands, etc.). Some folks in the US military have mistaken political ideals, but most of them will put their opinions where they belong and lay down their lives for whatever cause whoever is in office tells them to. The military follows orders, whatever orders the congress and the president give.
By the way, officers' commissions and promotions are still approved by congress, so ignoring congress can mean never getting promoted again.

[Bobotheclown]

Irregardless of their oaths, military leaders have a long history of opposing Democratic Presidents. Whether the Army is integrated or not does not change the fact that the military sees itself as a conservative and recently religious organization that does not regard Democratic Presidents as legitimate leaders. Think Truman and MacArther, JFK and Walker, JFK and LeMay, Carter and Singlaub, Clinton and all the general staff after the gays in the military decision. There is a long line of recalled Generals who have violated their oaths when dealing with Democratic Presidents. It is not hard to find cases of outright mutiny in the ranks on the order of MacArthers disobediance to direct orders. The Army's odd decision not to provide security for JFK while in Dallas is another key case in point. We have recently been subjected to numerous instances of uniformed officers speaking at political rallies opposing the policies of the commander-in-chief to which they have sworn an oath. That is all that is needed to know what a modern military commander's oath is worth.
By the way, officer's commisions and promotions are largely rubber stamped by the Congress who grant them as favors to political friends. One can regularly ignore Congress as long as you kiss up to the chain of command.

[ThePeacemakers]

Since the passage of the Nat'l Sec Act of 1947 - the representatives of gov't have been ruled by the military industrial complex.

Quite frankly, you've been lied to. I've been lied to - but know that I've been lied to.

ALL occupations and phony wars and invasions into Latin America have been for puposes of private industry interests. Everybody in the military might as well tie the flag around their eyes...because if they think they're fighting for "freedom" - they're blind.