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IG's Report Highlights 'Material Weaknesses,' Financial Mismanagement at the Pentagon

By Walter Pincus
Monday, December 15, 2008

Most critiques of the Defense Department's spending focus on macroeconomic issues that are so large, readers can only groan and move on.

Last week provided yet another example: The Pentagon's deputy inspector general for auditing released a 140-page independent auditor's report on the department's financial statements for fiscal 2007 and 2008. Adding all components, the Pentagon had more than $1 trillion to spend last year, and $835.4 billion of it was obligated.

A 1990 law requires the inspector general to carry out the audit, and management at the Defense Department is responsible for implementing internal controls and producing annual financial statements.

Yet the inspector general, in a Nov. 12 memo to the department's chief financial officer, said that "the financial statements may be unreliable." Assistant Inspector General Patricia A. Marsh also noted that prior audits -- and the agency's management itself -- acknowledged that amounts on the statements could not be "adequately" supported because of "long-standing material internal control weaknesses."

Among the "material weaknesses" cited for fiscal 2008 was the inability of the department to account for government-owned property, plants and equipment and materials supplied to contractors. Another weakness, according to the report, is that the department cannot account for money owed in its "accounts receivable" category because "it is unable to accurately record, report, collect and reconcile" payments from public entities or intergovernmental transfers.

According to the IG's report, the financial management is so bad that it prevents the department from providing the data needed "to support operating, budgeting and policy decisions." The report goes on to say that the problems also affect "safeguarding of assets and proper use of funds and impair the prevention and identification of fraud, waste and abuse."

The department also files a report outlining the "improper payments" it makes each year. As that report notes, "eliminating improper payments ensures that taxpayer dollars are spent wisely and efficiently." As the inspector general's report highlights, however, the Office of Management and Budget will consider a program "at risk" only if it has "erroneous payments exceeding both $10 million and 2.5 percent of program payments."

Thus the military pay program, which had an estimated $434.6 million in improper payments last year, was not considered at risk because total payroll was $72 billion. The wrong payments were tracked to "inaccurate or untimely reporting" of entitlement for pay data sent to the automated pay system.

The highest percentage of improper pay was found in the military's health benefits program, with $178 million paid out incorrectly. The military health system covers 9.2 million eligible beneficiaries, according to the report. In 2008, the Pentagon budget for health care was about $42 billion, a 35 percent increase from three years earlier.

"Combating fraud," the report says, in the midst of "increased frequency and duration of military deployments" stresses the system in the active as well as reserve services. "Health care fraud is among the top five categories of criminal investigations," according to the report.

The report also questions the Defense Department's increasing use of contracts, a key interest of Congress. Some of the jobs being outsourced have "bordered on inherently government functions," the report notes, indicating that these contracted positions are "so intimately related to the public interest as to mandate performance by Government employees." In short, contracting out these services could be against regulations. The report's list includes "strategic planning within programs and organizations; acquisition planning for specific acquisitions; source selection assistance and source selection decision-making." The final one listed as a possible government function: "contract administration and surveillance."

National security and intelligence reporter Walter Pincus pores over the speeches, reports, transcripts and other documents that flood Washington and uncovers the fine print that rarely makes headlines -- but should. If you have any items that fit the bill, please send them to fineprint@washpost.com.

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