Why the D.O.D. Can’t Balance Its Books
Business + Economy

Why the D.O.D. Can’t Balance Its Books

REUTERS/Andrew Burton

Secretary of Defense Leon Panetta last week pleaded with lawmakers to delay upcoming sequestration cuts, telling Congress that the spending decrease represent “one of the greatest security risks we are now facing.”

“This budget uncertainty could prompt the most significant…military crisis in more than a decade,” Panetta said, referring to the March 1 cuts and the $482 billion set to be eliminated from the Pentagon’s budget in the next five years.

Yet as Panetta repeatedly sounds the alarm on the spending cuts, the Pentagon’s finances are in disarray. According to a recent GAO report, the Pentagon’s $800 billion budget is simply unable to be accurately audited. What’s worse, the Pentagon has not been accurately audited in nearly two decades.

“DOD has been unable to get audits of the financial statements since the first year agency were required to prepare audited finance statements was for the fiscal year 1996,” said Gary Engel, Director in the Financial Management and Assurance Team at GAO. “They’ve been getting a disclaimer.”

The lack of spending oversight and management could account for an eye-opening report by NBC News on February 8, which accused the Air Force of wasting $1 billion on a computer program that was supposed to combine hundreds of existing programs into one massive system.  It took seven years for the geniuses in charge of overseeing the contractor to determine that it was a failure. 

When reporter Lisa Myers asked Senator John McCain about the misspent tax dollars and reminded him of the $600 the Pentagon spent on a toilet, McCain said, “I don't mean to make a joke, but at least they got a toilet seat. Out of this, they got nothing. We got nothing.”

It should be no surprise, then, that the Department of Defense is plagued by a litany of accounting problems, from inaccurate reporting to a series of computer systems that cannot communicate with one another. It will be forced to take dramatic steps if it’s going to meet a 2017 deadline to pass an audit. But the problems are so complex and so ingrained in the Pentagon’s culture that meeting this deadline is likely to be a steep challenge.

You would think that an organization built on discipline and performance would have no trouble adding and subtracting.  But the Pentagon’s primary problem is simple: they cannot accurately match up transactions with records.

“They have records. We don’t know if they’re accurate or not,” said Robert Dacey, chief accountant at GAO.

Take this hypothetical example. Let’s say the 2012 budget gave the Pentagon $1 million to buy a new tank. The Pentagon gets the money, contacts General Dynamics, the tank’s manufacturer, and orders it. Six months later, General Dynamics delivers the tank, and the Pentagon puts it into service. So the tank was ordered, built and shipped off to war. The problem is there are no accurate records to indicate this transaction actually occurred.

“There needs to be a way to go from the budget number to the financial statements and track back to a transaction, then find support for those transactions,” Dacey said.

Another major problem are computer systems. Different branches of the military and the various agencies that fall under DOD’s authority have different computer systems that can’t communicate with one another. So each agency within the department, along with the military branches, keeps track of their money and their records in different ways, then submit their records to the auditor. According to Engel, this creates an accounting mess that’s nearly impossible to sort out.

“They’ve got a lot of systems that are non-integrated and can’t speak to the other systems,” he said.

The Pentagon is currently implementing a system it calls FIAR, an acronym for Financial Improvement and Audit Readiness. The plan is now in its eighth year. Three years ago, Congress mandated that this plan must produce a Pentagon that can pass an audit by 2017. Panetta wants the Pentagon to be able to pass an audit by next year.

Under the plan, the Defense Department is working to keep better records of transaction, create a system in which different computer systems can communicate, and develop metrics to determine whether accounting standards are being met. But the basic goal of the plan is to be able to track money to specific purchases, said Engel.

“Did they build a tank? Did they buy cars? What did they do with that money?” Engel asked. “They need to make sure their financial statements properly document assets purchased.

Reading this list of basic accounting failures is perplexing to the average business person or head of household.  How could the so-called greatest military on earth be so incompetent about basic accounting?  They know how to get sensitive communications systems to talk to one another; they invented the Internet; they oversee the most advanced robotics technology in the world.  But they can’t balance their books.  One might assume that they simply don’t want to be placed under the same scrutiny as other agencies, especially since the DOD budget is nearly 20 percent of total annual U.S. spending.

Nevertheless, some progress has been made. According to GAO, some small agencies have been able to get their books in order. An official with the Marines, the smallest branch of the military, recently told a Congressional panel that she was “cautiously optimistic” that the Marines would be able to pass an audit soon.

But Gordon Adams, an American University Professor and defense-spending expert, said he was doubtful that the Pentagon would be able to meet the 2017 deadline.

“You have a very complicated ball of wax over there moving a lot of money all the time,” he said. “Even in the days of computerization, you can't assure every dollar is going down the right chute.”

“It’s just too hard and … it's extraordinarily complicated,” Adams added. “Once they wade into the big muddy, they find out how complicated it is and how resistant DOD is to change.”