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Pentagon says it's moving toward being 'audit-ready'

By Jen Rizzo, CNN
The U.S. Defense Department is big, with a military budget larger than most countries' entire economy.
The U.S. Defense Department is big, with a military budget larger than most countries' entire economy.
STORY HIGHLIGHTS
  • The Defense Department is trying to be audit-ready by 2017
  • The sheer size of its budget and its vast operations make it difficult to audit
  • Lack of accountability opens the department to losses, inefficiencies, expert says
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Washington (CNN) -- When some of the nation's largest banks were bailed out by the government in 2008 at the beginning of the global financial crisis, "too big to fail" was a phrase commonly heard as Washington argued why it had to help.

But the "too big" excuse wasn't invented on Wall Street -- the Department of Defense has been using it for years, claiming that it is just too big to ... audit.

The Defense Department is big, with a military budget larger than most countries' entire economy. Even the Pentagon, where the Defense Department is headquartered, has a "big" factor -- it's the largest office building in the world, with 6.5 million square feet of floor area.

The department says it's this enormous size that complicates its financial reporting.

"The DOD obligates an average of $2 billion to $3 billion every business day and handles hundreds of thousands of payment transactions, which take place in thousands of worldwide locations, including war zones," the Defense Department said in its latest financial report. "Because of DOD's size and mission requirements, it is not feasible to deploy a vast number of accountants to manually reconcile our books."

Last year, the Government Accountability Office, the investigating arm of Congress, concurred. In a statement explaining why it was unable to put forth an opinion on the consolidated financial statements of the federal government last year, it cited "serious financial management problems at the Department of Defense that made its financial statements unauditable."

The Department of Defense has been making the claim since the 1990s, when the Chief Financial Officers Act was imposed on all federal agencies and departments, requiring the Pentagon to pass annual audits at the simplest level.

It's been more than 20 years since that act was put on the books, but the requirement for federal government audits goes back to 1789; when it was written in the Constitution that "receipts and expenditures of all public money shall be published from time to time."

The lack of accountability on paper puts the department at a high risk for major losses in cash and inefficiencies, experts say.

"They are at a higher risk of waste, fraud and abuse ... the magnitude is virtually impossible to say," said David Walker, a former U.S. comptroller general.

"It's an R-rated movie," military expert Winslow Wheeler said. "They don't know if they've paid contractors once, twice or not at all. They don't know if they've spent more than they were appropriated."

Recent GAO reports list some of the losses:

-- $285 billion went to contractors engaged in fraudulent behavior over a three-year period, many of which were already suspended for misusing taxpayer funds.

-- Hundreds of millions of dollars was overspent in 2008 in the Pentagon's Military Personnel, Army fund, which pays benefits, incentives and allowances to Army service members. The Defense Department had to move $200 million to the account to keep it solvent.

-- The department has invested more than a trillion dollars to purchase weapons systems, the GAO says, but the department lacks the systems to be able to figure out the full cost of its investments in this military equipment, leaving Defense Department management and Congress in the dark on how to allocate funds and evaluate program performance.

-- The Pentagon is unable to manage and control operating and support costs for major weapons systems, including repair and maintenance costs. Billions of dollars are spent each year to sustain weapons systems without the department having complete data on the full life cost of these weapons systems, according to the GAO.

The problems have been detailed over the years in hundreds of reports. In 2003, the GAO found that the Defense Department's financial management issues caused the mispayment of mobilized National Guard troops, distracting the "soldiers from their missions," many of whom were fighting in Iraq and Afghanistan, and "imposing financial hardships on their families."

With a trillion-dollar deficit looming over the United States and federal budgets on the chopping block, lawmakers are fired up about what is seen as a lack of accountability.

"I go home to folks in west Texas, and when they find out the Department of Defense can't be audited, they are stunned," Rep. Mike Conaway, R-Texas, told Defense Secretary Robert Gates at a recent Defense Department budget hearing.

"We need to know where the money's going. We need to be able to have the ... 'Good Housekeeping Seal of Approval' so that the general public gains additional confidence in the one entity in government that the general public generally has great confidence in, and ... that's in the Department of Defense."

Gates and Defense Department Comptroller Robert Hale said they are working toward getting the Pentagon audit-ready by 2017, but noted that the department -- which has thousands of auditors reviewing programs -- isn't blind to how money is being spent.

"I'm committed to audits. I understand we need them for public confidence. But the fact that we can't pass commercial audit standards does not mean we have no idea where we're spending the money that you send us," Hale said. "We have several thousand auditors watching us. And I note, if we had no idea what we were doing with the money, we'd have rampant Anti-Deficiency Act violations. Over the last five years, about two-tenths of our budget has been associated with ADAs. That's more than I'd like, but it's pretty small."

An Anti-Deficiency Act violation occurs when a federal entity spends more than it has been appropriated.

The Defense Department has also noted that less than one-tenth of 1 percent of payments to employees and contractors are improper, a measure the Pentagon says shows its responsible use of funds.

"We are not out of control. We do know where the resources are going," said Mark Easton, the Defense Department's Deputy Chief Financial Officer. "But we need to continue to work to strengthen the business environment that is executing those dollars."

But Congress has heard this vow many times before. The Pentagon has said it's working to be audit-ready for decades. Former comptroller John Hamre set a 1996 deadline, according to Wheeler. Then one of his successors, Dov Zakheim, set a deadline for 2007.

"It almost makes you think the Pentagon prefers it to be that way. The other explanation would be that they are grossly incompetent," Wheeler says.

Congress, Wheeler adds, is not innocent in this regard. The main oversight function of the government is lodged in Congress, and Wheeler thinks it is no longer functioning.

"The oversight function in Congress has been killed off in large part because of the obsession with pork and a preoccupation on Capitol Hill as being perceived as pro-defense," which, Wheeler says, is defined in the U.S. political system as giving "money and favoring what the four-star general says he needs to make his program effective."

The Defense Department has a timeline in place to make its 2017 deadline, checking off certain benchmarks every few years. System modernization needed for more advanced computer accounting programs that can integrate across Defense Department units is a major component to the department being successful in its goal.

And there are some entities in the Defense Department that have been able to be audited, totaling about $100 billion in budgetary resources.

 
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