Unauditable? A discussion about defense department bookkeeping with a former Pentagon auditor

October 17, 2017

Jack Armstrong worked for the Defense Inspector General’s office and its predecessor organization for 34 years and knows firsthand about the financial irregularities and lack of transparency inside the largest organization in the world. The U.S. Department of Defense has three million employees and an annual operating budget of $419.3 billion (not counting war spending). Yet this behemoth has never passed an audit, despite a $10 billion investment in accounting technology. Truth in Accounting sat down with Mr. Armstrong to get his perspective from inside the government. Responses have been edited for brevity.

Q: You worked with the Defense Inspector General (DIG). What’s the purpose of that office?  

The official line is that the DIG office provides ‘independent, relevant, timely oversight of the Department of Defense that supports the warfighter, promotes accountability, integrity and efficiency, advises the Secretary of Defense and Congress, and informs the public.’ Essentially, that means auditing and investigating fraud, waste, and abuse.

The head of the office is the Inspector General, a congressionally confirmed position that is supposedly independent from DOD management. So that’s the intent, but my personal feeling and belief is that over the years even the Defense Inspector General has gotten political.

Q: Taking a step back - why do Pentagon finances require an independent watchdog?

The financial problems at the Pentagon go back a long way. Believe it or not but the Department of Defense only started to actual compile and report financial accounting information in 1991, following the Chief Financial Officers Act of 1990. 

Before that, the DOD simply didn’t have accounting systems, they didn’t record values for assets like military bases, equipment, etc. The system didn’t provide the audit trails or a solid means of verification that accountants rely on to do their job. So when the DOD tried to implement the CFO Act, they couldn’t come close to meeting transparency requirements because the historical information isn’t there.

Q: If all those sources of information are faulty, how can modern auditors balance the ledgers?

They don’t! A former colleague of mine - probably the most knowledgeable auditor in charge of compiling DOD financial statements - referred it as the grand plug. There are all these adjustments that are made to the Department of Defense financial report in order to make it line up with budget reports, the two don’t actually match on their own.

The Army and Defense Agencies, the two largest problem areas, has systems that take in data and uses it to populate budgetary data, budgetary reports and stuff like that. At the same time, it’s also populating the DOD accounting ledger and they take the information from the budgetary and force the general ledger data against it without ever knowing if either one is correct.

They call it a “reconciliation process.” But, calling it a reconciliation process implies that you go out and you determine which source of data is correct. Since there aren’t any audit trails for us, we couldn’t certify whether either side of the comparison was accurate.

Q: Can you give an example of how this historically flawed record keeping hinders present day accounting?

We have this category of assets called PP&E, which is Plant, Property, and Equipment. Basically, that means – military bases, tanks, and everything in between. Well, back in the day the DOD didn’t track this stuff. How much did they pay years ago for various pieces of real estate or other capital assets? We have no idea. The only thing that they do know is what a contractor would charge us today. This unknown creates a huge problem for defense accounting.

Q: Do you think that there are some hidden incentives in place that are dissuading DOD from taking on these accounting issues? Does it help protect their budget?

Yes, it does. In the world of Congressional appropriations there’s a thing called the “expired appropriation.” And once the appropriation hits that date funds can’t be obligated or spent. The caveat to this is when their accountants can find an old error, or a cost that was not recorded properly. In those cases, they can bill current expenses against the old expired appropriation act. They’ll go back years and say “hey, this charge from 2012 never went out, that means we can use the money now.” Essentially, the dysfunctional accounting status quo allows them to squeeze more money out of the system.

Q: In addition to the Pentagon’s internal challenges with financial record keeping, it’s pretty easy to see why DOD financials is a political third-rail on Capitol Hill. Do you know if any politicians have championed this issue?

Senator Chuck Grassley [R-IA] has addressed Pentagon accounting in repeated hearings on the Hill, and he’s dragged DOD top brass and their comptroller in front of the cameras to explain the situation. They come up and testify what they’re trying to do to fix the problem and get a clean accounting opinion. I know that during Secretary of Defense Mattis’ confirmation hearings, Grassley said that he would like to see progress on fixing these accounting systems and getting the problems solved.

Mattis essentially said “well, I’ll check into it”. But I don’t know if in the military, those that wear the green and blue suits, if they’re as interested in it as some of the others.

Q: It doesn’t sound like the Pentagon is taking this as seriously as they should be. How does this all play out?

Well, it’s taxpayers’ money and it would be nice to know that we have good stewardship and that we’re able to see where it’s been spent. That simple ask can’t be accomplished without a tremendous amount of work. You could probably go in and do an audit of DOD, I just don’t know if there’s that many professional auditors in the US to do it. And so, that’s why we’ve got to get the audit trails in. We have to get transactions that are in compliance with US standards and the general ledger, and to the point where we can start somewhere at the top and work down.

I think in the audit community it’s kind of a joke because it seems like things are never going to be fixed or get a clean opinion. And that’s the objective of accounting: having auditable systems and getting a clean opinion.

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