The Washington PostDemocracy Dies in Darkness

First full Pentagon financial audit details bureaucratic noncompliance but no fraud

FILE PHOTO: Aerial view of the United States military headquarters, the Pentagon, September 28, 2008. REUTERS/Jason Reed/File Photo (Jason Reed/Reuters)

The Pentagon has released the results of its first full financial audit, and it received a failing grade. Only a handful of the Pentagon’s numerous agencies received a passing grade from auditors, and most of them were asked to fix various financial irregularities.

But the auditors’ report mainly drew attention to the sheer scale of the U.S. military’s massive bureaucracy and its sprawling collection of military assets, an arsenal the audit valued at $2.7 trillion. Just counting those assets employed an army of 1,200 accountants who visited more than 600 locations, the Defense Department disclosed last week.

Congressional defense spending watchdogs were unsurprised by the department’s compliance issues, noting that any organization’s first full evaluation should be expected to return some irregularities. Instead, oversight-minded lawmakers seemed disappointed the report didn’t yield more results. They criticized the Pentagon’s apparent failure to develop a workable financial accounting system that can accurately keep track of its assets and liabilities.

The effort ate up more than $400 million. Auditors found that numerous back-office functions are insufficiently tracked, making it hard to monitor the flow of U.S. tax dollars in and out of the organization or to assess all government assets held by private-sector contractors.

“It’s unacceptable that [the Pentagon] has spent over $400 million on an audit it knew would come back flawed,” Sen. Charles E. Grassley (R-Iowa) said in a statement. “Without an accounting system that can provide usable data, an audit is useless and a waste of resources. How is it possible that the Pentagon is able to develop the most advanced weapons in the world but can’t produce a workable, reliable accounting system?”

Agencies that did pass the audit include: the U.S. Army Corps of Engineers, Civil Works; the Military Retirement Fund; the Defense Health Agency — contract resources management; the Defense Contract Audit Agency; and the Defense Finance and Accounting Service.

While the audit report did not call out specific instances of fraud, it did point to “significant information technology systems security issues” caused by very basic, nontechnical oversights like leaving departed employees’ IT permissions in place. The findings added to concerns raised last month by the Government Accountability Office (GAO) which noted that nearly every U.S. weapons system suffers from a “critical” cybersecurity vulnerability.

The audit identified 20 “material weaknesses” or deficiencies in the department’s internal controls. Most of them did not point to particular instances of fraud or mismanagement. Rather, they found that in many cases the department is simply not tracking payments filtering in and out of its myriad agencies, leading auditors to question whether its financial statements are accurate.

Without going into specifics, the audit noted that the Defense Department had multiple material financial management systems that did not comply with federal requirements, and that its agencies did not implement internal controls over their information technology environment that adequately deter waste, fraud and abuse.

“These systemic deficiencies in financial management systems prevent the DoD from collecting and reporting financial and performance information that is accurate, reliable and timely,” auditors reported.

The report noted that not all transactions are properly recorded, making it hard to detect errors in financial statements. The department also was found to not have tracking systems in place to maintain historical cost data, something that auditors warned could lead to misstated financial statements. And the report noted that the Department had not established policies or procedures to manage or account for inventory held by related entities and government contractors, something that would again lead to misstatement on government financial documents.

“Multiple DoD components do not have sufficient entity level controls to establish an internal control system that will produce reliable financial reporting,” the report noted.

Rep. Mac Thornberry (R-Tex.), the outgoing head of the House Armed Services Committee argued against using the audit as an excuse for defense spending cuts. As committee chairman, Thornberry has pushed to cut the Pentagon’s back-office functions while looking for ways to make acquisitions run more smoothly. He has also been an advocate for increased defense spending.

“We must take advantage of this opportunity to continue our reform efforts and make the Pentagon more efficient and agile,” Thornberry said in a statement. “It should not be used as an excuse for arbitrary cuts that reverse the progress we have begun on rebuilding our strength and readiness.”

Rep. Adam Smith (D-Wash.), who is Thornberry’s likely replacement as House Armed Services Committee chairman, also highlighted the need for a better accounting system. Smith has been vocal about the need for “aggressive oversight” of the Pentagon’s budget and weapons systems.

“If we want to reduce defense waste, have greater transparency over defense dollars, and eliminate mismanagement, it is essential that we get the Defense Department to a position where Congress, taxpayers, and DOD itself can track and account for the money that is being used,” Smith said in a statement.

Clarification: An earlier version of this article mis-characterized one of the Defense Department agencies that passed the audit. The Defense Health Agency - contract resources management passed its audit, not the Defense Health Agency. This article has been updated.