Audit the Pentagon: POGO Applauds New Bipartisan Initiative

By ANGELA CANTERBURY and SUZANNE DERSHOWITZ

Although the Pentagon budget has ballooned by billions in the past decade, it can’t even produce a basic financial statement. But last week, Sen. Tom Coburn (R-Okla.) and a bipartisan band of senators introduced a bill to fix this outrage and increase accountability at the Pentagon.

The “Audit the Pentagon Act” (S. 3487) would create critical new enforcement mechanisms coupled with new incentives for the Pentagon to meet its audit schedule (full audit readiness is targeted for all Department of Defense financial statements by 2017). The Project On Government Oversight applauds this crucial step towards more accountability and oversight.

Explaining why this bill matters, Sen. Coburn said, “By failing to pass an audit, the Pentagon has undermined our national security. This bill ends the culture of ‘don’t ask, don’t tell’ budgeting within the Pentagon that says, ‘don’t ask us how we’re spending money because we can’t tell you.’”

Other cosponsors of the bill include Sens. Kelly Ayotte (R-N.H.), Scott Brown (R-Mass.), John Cornyn (R-Texas), Chuck Grassley (R-Iowa), Ron Johnson (R-Wis.), Joe Manchin (D-W.V.), Claire McCaskill (D-Mo.), and Rand Paul (R-Ky.).

Unlike nearly all other government agencies, DoD has never produced an unqualified consolidated financial statement. It is ridiculous that an agency that was just authorized over $600 billion for FY 2013 cannot obtain a clean opinion on its financial statements. So, why does DoD need new incentives to clean up their financial statements? Because so far, no one has held them accountable.

But Sen. Coburn and the other senators are ready to stop asking and start demanding more accountability—with consequences if the Pentagon doesn’t comply. Under the Audit the Pentagon Act, major weapon systems would not be able to proceed past the R&D phase until the Department can successfully get an unqualified opinion on its books. POGO approves of this “stick” to ensure compliance. But there are also carrots: the bill also would grant the Pentagon more power to reprogram its funds without congressional approval if it meets its audit schedule, a pretty big incentive, with debatable advantages and disadvantages.

It’s great to see some members of Congress setting aside partisan politics and ignoring the Pentagon contractor industry lobbyists in order to bring a dose of good government to the Pentagon.

Angela Canterubry is the director of public policy at the Project On Government Oversight. Suzanne Dershowitz is a public policy fellow at the Project On Government Oversight.

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Comments

[Christopher Hanks]

The "basic financial statement" that makes sense for the DOD is the Statement of Budgetary Resources, which the current DOD Comptroller, Robert Hale, has been emphasizing for four years, from the beginning of his tenure. Mr. Hale understands that the achievement of audit-ready SBRs able to win unqualified opinions from auditors goes hand-in-hand with driving Anti-Deficiency Act violations (the subject of the first link cited in this story) to zero from their relatively small (but still non-zero) levels each year.

Pursuit of "clean" SBRs is different from pursuit of "clean" private-sector-style balance sheets and income statements, because budgetary accounting and financial accounting are two different kinds of accounting -- the latter makes sense for the private sector while the former makes sense for the public sector.

Two more links with further commentary on this point:

http://www.govexec.com/management/2012/08/pentagon-showing-only-modest-progress-toward-clean-books/57570/?oref=govexec_today_nl

and

http://www.asmconline.org/2012/08/senators-introduce-new-legislation-to-force-a-clean-dod-audit/#comments

[GovConMaven]

Dear Mr. Hanks -

Thank you for your kind comments. Would you be good enough to contact me at: [email protected]

I would like to continue this dialogue, and I am hoping that someone at POGO understands the limitations of the CFO Act Audit exercise. You are considered one of the foremost authorities on the subject, and I think your input would be very valuable.

[Christopher Hanks]

The comments by Jim and Govconmaven are among the most insightful of any that have appeared on this
topic anywhere on the web.

For a review of how the DOD (and the rest of the government) got into this mess, see the paper, "Financial Accountability at the DOD: Reviewing the Bidding," that appeared in the July 2009 issue of the Defense Acquisition Review Journal, available at:

http://www.dau.mil/pubscats/Pages/Defense%20ARJ.aspx

For more commentary reinforcing the points that Jim and Govconmaven have made, see the articles and comments at the following links:

http://www.govexec.com/management/management-matters/2008/05/business-sense/26954/

http://www.asmconline.org/2012/01/dod-has-momentum-to-achieve-audit-goals-by-2017-hale-tells-congress/

http://www.govexec.com/oversight/2012/03/governments-bookkeeping-improving-only-slowly-panel-told/41355/

http://www.asmconline.org/2012/04/hale-tells-skeptical-senators-dod-is-on-the-right-track-to-improving-its-financial-management/#comments

http://www.govexec.com/defense/2012/06/defense-officials-plead-need-agility/56472/?oref=govexec_today_nl

http://www.fiercegovernmentit.com/story/key-dod-erps-8-billion-over-budget-say-auditors/2012-07-18

http://fcw.com/articles/2012/06/04/gao-dod-business-systems-modernization-update.aspx

[Jim]

I would like to add one point to the comments I made yesterday. Having audited financial statements does not mean that an organziation is well run or that it does not have waste. GSA has audited financial statements and we have seen a number of examples over the last few years of waste at GSA. The Department of State has audited financial statements and the Commission on Wartime Contracting noted many examples of waste in wartime contracting by State. All the while with audited financial statements.

I understand the desire for better accountability. But there are numerous reports that are provided to OMB and Congress on spending and costs of programs. The IGs, GAO, and service auditors constantly audit the programs. It is not as though DOD has no audits. It is one of the most audited Departments in the Federal government.

The issue I have is the billions (not millions) that are being spent on audited financial statements when the sole reason appears to be for Congress. Not for better management, not for cutting waste, not for reducing improper payments. If it was not for billions being spent, I would not be as concerned. But this is billions that are not being used for research and development in areas that are really needed for DOD, especially to advance the capabilities of the warefighter. Billions that are not spent in areas that could help our country.

When there are over 40 million people in the USA that are on food stamps and over 20 million children living in proverty, I ask myself, could some of those billions be better spent on people in this country than just to satisfy Congress' desire for DOD to have audited financial statements (which most members of Congress will never read, let alone understand). I hope the readers of this blog understand my point. A billion here and a billion there really adds up and in the end, for what? If this country had endless money, perhaps we can afford billions on DOD's financial statements. But where's the line on waste. To me, billions on audited financial statements is waste.

I realize that Congress feels it is money well spent, but at a time when this country needs to make critical decisions about how it spends money, this does not seem the time to spend billions on audited financial statements. Perhaps if the statements were more useful, I might feel differently.

POGO, I understand you feel differently. But really, billions of taxpayer dollars spent on statements that managers do not use. Common sense needs to prevail.

[GovConMaven]

Bless you Jim. Perhaps someone at POGO will read this and possibly have a better understanding of the issue.

[Jim]

I am an accountant (and CPA) and have worked for the Government about 30 years. Most of my time has been with the CFO office of cabinet level departments, two with audited financial statements and most recently at DOD, where I work in the audit readiness branch working on obtaining audited financial statements. I can honestly say that audited financial statememts are a waste of money for a Federal government organziation.

To prove my point, I would like to play fact or fiction:

1. Financial statements (audited or unaudited) provide useful information to manage an organization. FICTION: The financial statement data is too high level to be of use in managing an organziation and there are many other reports that provide far more useful, relevent, and timely information.

2. Without financial statements, spending is out of control. FICTION: Financial statements are not about controling spending, it is merely data on the financial position of the organization. The auditors are not auditing for "wasteful" spending, only that the money was spent in the accounts that the organziation states that the money was spent. By the way, wasteful spending occurs everyday in organizations with clean audit opinions (even publically traded companies with clean opinions waste money - Lockheed, Boeing, etc.).

3. Program costs are better managed with financial statements. FICTION: the financial statements have nothing to do with managing a program such as the JSF. Forecasted data is far more relevent to managing programs than historical financial data. The financial statements do not contain program data and the auditors do not audit the costs by programs.

4. A clean opinion on audited financial statements equates to no improper payments and validates that money was spent properly. FICTION: A clean opinion means means that there is no material misstatement of the financial accounts. Key is "material misstatement." For DOD's consoldiated financial statements, "material" could be in the billions. Consequently, DOD's consolidated financial statements could be misstated by billions and may still get a clean opinion. The "clean opinion" is a false sense of security that the money was spent where it was suppose to be spent and was not wasted. The two do not equate.

5. A clean opinion results in greater credibility for the organziation. FACT: people that do not understand the false sense of security that a clean audit opinion provides feel that within the Federal government, the highest testiment of spending properly is audited financial statements, but yet, there is no correlation.

6. The CFO Act and the requirement for audited financial statements costs billions. FACT: DOD alone has spent billions obtaining audited financial statements. Contractors are making billions as a result and by contractors, I mean CPA firms and consulting firms. Many employ ex-Feds that helped implement the requirement for audited financial statements. For example, a well known retired GAO executive drafted some of the rules on audited financial statements and he now works for a large consulting firm "asssiting" DOD in obtaining audit ready financial statements. The revolving door is alive and well among retired accountants. Talk about contractors getting rich off the Government!

I could go on and on. Bottom line is that "taxpayers are bend-over" as stated by Romnobamiatca due to wasting billion obtained audited financial statements that are not used, do not contain useful information, provide a false sense of security on improper spending, and have nothing to do with demonstrating that a program or organziation is well managed.

By the way, there is no income statement in the Federal government and Congress gets reports on a routine basis on where the money was spent. Has anyone at POGO actually read a financial statements of a cabinet level department. If yes, what did it tell you? Have audited financial statements stopped improper payments - NO!!!!!!

POGO, please stop this nonsense. Billions are being wasted on financial statements. Think of all the good that could have been done with the billions - perhaps we could be closer to finding a cure for cancer. But yet it has created hundreds (perhaps thousands) of jobs for accountants in the governemnt, CPA firms, and consulting firms. Hurray to the CFO Act, perhaps the Act of Congress that has created the most jobs! I should know, I am one of them!!!

[GovConMaven]

Romnobamiatca -

Please tell me how the current statement of budgetary resources (along with the status of funds report) fails to provide the information you are seeking?

I have no idea what you mean by "income statment" in the context of an appropriated funds account.

Unfortunately, much like the POGOites, I fear you have no idea what a financial statement entails, and how it is used in business. I see no value in any federal agency financial statement as it will not be used to manage anything, since it cannot be used to manage in an appropriated funds context.

gcm

[Romnobamiatca]

Maven: you protesteth too much. Take a deep breath. I share your skepticism that the bill is a panacea; critics of DoD are guilty of almost the same degree of hype, stretching, padding, equilibrating, sleep-walking, obscuring, winking, and nodding as The Beast itself. However, a real financial statement would be of some help in understanding the situation. The pentagon's program and agency-level budgeting is so complex and convoluted, full of nooks and crannies, for a reason: so that the people and Congress cannot understand or penetrate it. A real "income statement" in the pack of financial statements would force the agency to make reasonable adjustments of income and outgo. Between different budget "years" and different kinds of money (e.g., mil construction vs O&M vs acquisition), it is hard to get a grip on reality. It would take some special designing and presentation, but one could actually see, if all such variables were normalized or homogenized, whether the DoD is, for instance, spending more this year than last, spending more than it has taken in, spending more than it has budgeted. DoD has had special initiatives back at least 20 years to fix this (deliberate) hole in management tools, but, not surprisingly each such effort fails.
(contractors go home happy, employees are happy, politicals dodge bullets when it fails).
Meanwhile, the taxpayer is bent over, and the war fighters get short-changed by the unmitigated slothfulness and perfidy of the Pentagon budgeteers.

[GovConMaven]

POGO people:

Please explain the following statements to me as I am unclear as to how these relate to better financial management or taxpayer accountability at the Pentagon or any other federal agency.

1. “… a bipartisan band of senators introduced a bill to fix this outrage and increase accountability at the Pentagon.”

Please describe with specificity how production of a financial statement increases accountability for taxpayer funds at the Pentagon.

2. The Project On Government Oversight applauds this crucial step towards more accountability and oversight.

How does production of a financial statement increase oversight? What items do you believe a financial statement would reveal that are not currently in the public domain and reflected in DOD’s budget?

3. This bill ends the culture of ‘don’t ask, don’t tell’ budgeting within the Pentagon that says, ‘don’t ask us how we’re spending money because we can’t tell you.’”

What aspect of the Pentagon’s budget and/or budgeting process will be improved by production of a financial statement? What expenditures (other than those that are classified) will be revealed by production of a financial statement that are not currently disclosed in the Treasury Departments Status of Funds Report?

4. It is ridiculous that an agency that was just authorized over $600 billion for FY 2013 cannot obtain a clean opinion on its financial statements.

Please explain how the the federal budget authorization and/or appropriation process relates to federal agency financial statements? What is the specific linkage between an appropriation and financial statement?

I look forward to your answers.

Thank you,

GovConMaven