DOD: First Audit Of Military Service To Wrap Up This Calendar Year

By / June 3, 2010

Nearly two decades after Congress mandated all federal agencies undergo an audit of their finances, the Pentagon has said its first financial audit of a military service is slated to be completed by the end of the calendar year.

The audit of the Marine Corps' statement of budgetary resources would put the Pentagon almost 14 percent of the way through financially auditing its departments and agencies -- a figure that has led some critics clamoring for reform and one Republican senator proposing to freeze the defense budget until the department can get its books under control.

The Marine Corps is the first military department to be audit ready. A Pentagon official said the Navy is projecting audit readiness in 2014, and the Army and Air Force should be ready around 2016. The official noted that although both of these dates could change, the Pentagon is in line to be audit ready by its congressional deadline in September 2017.

The Pentagon official said the department views the audit process seriously because it will help tighten the business process and increase public confidence.

"We think that we're doing a good job of supporting the mission and of safeguarding the funds. If you look at some of the indicators, our metrics, I think that we can give you confidence that we are in fact doing that and doing that well," the official told Inside the Pentagon. "We cannot, however, subject ourselves to a financial audit standard across the department and that's what we need to be able to do and are committed to doing."

The source said the ultimate goal is across-the-board unqualified audits.

In a May status report to Congress, Pentagon Comptroller Robert Hale said lack of resources devoted to audit readiness was a significant hurdle in the department's financial improvement goals. Noting that "increasing resources for financial improvement will have the most impact on progress," Hale said Army and Air Force funding for this purpose has increased. Hale noted that the Navy and the Defense Logistics Agency had been more successful at budgeting money for the effort.

The May 2010 Financial Improvement and Audit Readiness Plan noted that in fiscal year 2010, the Army dedicated $9 million toward financial improvement activities. That amount jumped to $43 million for FY-11, and is projected to increase steadily. The Navy, by comparison, had budgeted $61 million in FY-10, and that amount is projected to increase by $2 million each year. The Navy's figure includes funds for audits.

Hale said that to correct the previous problems will take "an incremental and prioritized strategy and phased methodology with visibility of ongoing and planned actions."

Hale's status report notes that the Army's first assessable units for military equipment will be audit ready in FY-11. And "significant components of the Navy's military equipment (i.e. aircraft, ships, ICBMs and satellites)" should be audit-ready by the end of this fiscal year.

The current audit is of the Marine Corps' statement of budgetary resources, which outlines the amount of money appropriated by Congress for programs and the amount spent so far.

But DOD as a whole remains currently unauditable, which is causing some consternation.

Winslow Wheeler, the director of the Straus Military Reform Project at the Center for Defense Information and a former staffer on the Senate Budget Committee, said the Pentagon -- unlike a major company like Wal-Mart -- does not know what it is doing with its money.

"Passing an audit sounds like a green eyeshade, myopic concern," Wheeler said. "It's not. It's ensuring that you understand what's happening to the money and whether you paid a contractor for a commodity or a service once, twice or not at all."

"Right now, on a consistent basis, the Department of Defense does not know," Wheeler continued. He said such an audit is important because it is the "first line of defense against waste, fraud and abuse."

The goal is to bring the Marine Corps and other areas of the Pentagon into compliance with the Chief Financial Officers Act of 1990, which mandates that all federal agencies produce auditable financial statements. The Pentagon initially said it would be compliant by 1997, but that deadline was pushed back to 2007 and then 2016. In the 2010 National Defense Authorization Act, Congress imposed the 2017 deadline.

The Pentagon official said the new deadline is "a realistic target date," noting that the department has been working hard to change its business processes across the enterprise.

"We have been addressing the situation, by building in-house expertise at the same time as we have been contracting for private sector assistance from independent public accountants and qualified consultants to be able to help us do the knowledge transfer," the official said. "We've got senior leadership support and governance. And we have for the first time a not insignificant number of resources that we're investing and we have benefited from the previous experience in terms of really understanding what a financial audit entails."

The audit of the Marine Corps' statement of budgetary resources for fiscal year 2010 started last October and is expected to conclude this November or December. It is being conducted by DOD's inspector general's office in concert with an independent public accountant.

Other areas of DOD that have gone through the audit process already are the Military Retirement Fund, the Medicare-eligible Retiree Healthcare Fund, the Defense Commissary Agency, the Defense Finance and Accounting Service, the Defense Contract Audit Agency, the DOD inspector general's office, the U.S. Army Corps of Engineers-Civil Works and the TRICARE Management Activity-CRM. Added up, the subtotal under audit, including the Marines, is $161.7 billion, or 13.73 percent of the DOD's budgetary resources.

"This $161 billion, which is really only 13 to 14 percent our total DOD resources, is bigger than a large number of federal agencies that are already receiving clean opinions," the Pentagon official noted. "It's not an excuse. We know we need to do all of or the material portions of the department, but it's a reflection. Our size is actually one of the impediments."

The Pentagon official said in addition to auditing the statement of budgetary resources, DOD also is prioritizing an audit of property, such as equipment and ammunition, operating materials and supplies. Although there is no current time table, the Marine Corps is expected to be ready to have its property audited shortly after finishing its current audit, the official said. That audit would examine what property the department has, where it is located, what it is valued at and what condition it is in.

DOD laid out its current plan in a May Financial Improvement and Audit Readiness Plan, which was initially greeted hopefully by several members of Congress.

In a joint press release with two other senators, Sen. John McCain (R-AZ) said he applauded DOD "for finally taking an important first step forward to achieve financial accountability by developing a coherent plan to clean up its books so that American taxpayer dollars aren't being wasted."

Although Sen. Tom Coburn (R-OK) joined McCain's press release, in a May 18 letter to the National Commission on Fiscal Responsibility and Reform he proposed freezing the base Pentagon budget at the FY-11 level "to provide a necessary incentive for a financial audit." That freeze would remain until the inspector general or an independent public accountant provide an unqualified audit for all the major components and defense acquisition programs, Coburn proposed.

"The Pentagon doesn't know how it spends its money," Coburn wrote. "In a strict financial accountability sense, it doesn't even know if the money is spent."

"If we do not have a system that does not accurately know what its spending history is, and does not know what it is now, how can we make a competent, honest estimate of future costs?" Coburn asked. "No failed system can be fixed if it cannot be accurately measured."

Coburn fretted in his letter that there is "no sense of urgency in the Pentagon to do anything about it." His spokesman, John Hart, said the senator received a "very enthusiastic and positive response" to his memo.

When asked about Coburn's proposal, the defense official told ITP the Pentagon is "absolutely committed. We don't need additional incentives to do what we know is the right thing to do. I appreciate his interest in a financial audit, but I think that our strategy will produce results."

Wheeler charged the Pentagon's failure to be audit ready stems from a desire to avoid the tight oversight that would require more concrete details at the start of acquisition programs for the cost, schedule and performance of different items.

He supports freezing the budget or firing people until the problem is fixed. When asked if he thinks the Marine Corps audit is a good step forward, Wheeler said, "I think its another phony promise to keep the dogs off of Capitol Hill and in the press."

"It's nice that the Marine Corps is ahead of the other services on this, but they have a long, long ways to go to convince the adult world that they understand what they need to do," Wheeler said.

Wheeler cited an inspector's general's report that came out in October 2009, that summarized financial management related audit reports from FY-04 through FY-08. The report noted the Government Accountability Office has "identified DOD financial management as an area of high-risk for fraud, waste, abuse and mismanagement."

"According to GAO, DOD's pervasive financial and related business management and system deficiencies continue to adversely affect its ability to control costs; ensure basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent and detect fraud, waste and abuse; and address pressing management issues," the report states.

Some central problems laid out in the report include DOD's inability to record, report and collect accounts receivable and inventory property.

The Pentagon source acknowledged that it was a "reasonable concern" that the Pentagon is currently unauditable. But the source noted the department is working hard to change that.

"In previous attempts, I don't know that we had a good understanding. We did not have a clear focus and path forward," the official said. "That's what changed, and that's why this time will be different." -- Jordana Mishory