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The first in a series of audits of the Defense Department's Fiscal Year 1999 financial statements by the Pentagon's own Inspector General (IG) shows that none of the services is as yet capable of completing a financial audit, even though Congress enacted legislation in 1994 and 1996 setting new financial reporting requirements for the Pentagon. The report, released last week, found that of $6.9 trillion in accounting entries, only $2.6 trillion could be fully documented and $2.3 trillion in accounting entries "[were] not supported by adequate audit trails or sufficient evidence to determine their validity." Information on the remaining $2 trillion in entries arrived too late and could not be examined, but it is reasonable to assume that the $2.3 trillion in undocumented entries -- representing one-third of all entries -- is a conservative figure. That a federal agency as large and diverse as the Department of Defense cannot account for each and every transaction is no surprise. What is disturbing is the magnitude and the duration of the problem. The Federal Financial Management Act of 1994 and additional laws passed in 1996 require the Defense Department to submit audited financial statements each year. Neither the Defense Department nor any of the individual services have done so as of yet. And as the IG report notes, "DoD does not expect to have systems necessary to meet these new requirements before the year 2003." As part of the financial review, the IG was also required to look at whether DoD followed existing laws which would eventually enable the agency to complete an audit. The IG found that "DoD did not fully comply with laws and regulations that had a direct and material affect on its ability to determine financial statement amounts." During the period that the Defense Department is implementing new accounting practices and coordinating computer tracking of accounting entries, it is looking at interim measures to improve the current system. As part of this effort, the IG reports that "DoD has undertaken an interim track that includes the use of contractors to address many of the existing deficiencies." Sound a little like letting the fox guard the chicken coop? In actuality, it makes a fair degree of sense, as private corporations are required to use standard accounting practices and are in many ways held to a more rigorous standard than their government counterparts. Failure to submit auditable financial records can result in criminal prosecutions. Not so for the government. In fact, a 1994 General Accounting Office (GAO) study looking at Defense Department "problem disbursements" -- payments made by the Pentagon for which there was insufficient supporting documentation -- found that over a six month period, $751 million in checks had been returned to the Defense Department by contractors. Three quarters of the returned checks represented overpayments by the government. An additional GAO study found that the Columbus, Ohio, Defense Finance and Accounting (DFAS) Center, DoD's largest contract payment center, receives on average $1 billion in returned checks from defense contractors each year. At a time when the chiefs of the military services are requesting $15 billion for Fiscal Year 2001 to meet "unfunded requirements" which they say cannot be paid for by the Pentagon's proposed $305 billion spending package, one is forced to ask the obvious question: how do they know? For additional information, see "GAO Sees Reductions in Pentagon Mispayments," Weekly Defense Monitor, November 6, 1997, at http://www.cdi.org/weekly/1997/issue17/index.html#3 The Inspector General's report #D-2000-91 is available on the internet at: http://www.dodig.osd.mil/audit/reports/00-091.pdf
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