Grassley Outlines Debacle Behind Marine Corps Audit Failure, Defense Department Office of Inspector General’s Pivotal Role
WASHINGTON – Sen. Chuck Grassley of Iowa today outlined in detail the failures of the Defense Department Office of Inspector General in issuing a clean bill of health on a Marine Corps financial audit. The clean opinion had to be withdrawn. The debacle is the subject of a new report from the Government Accountability Office (GAO). Grassley looked at the situation in detail as a long-time watchdog of the Defense Department’s inability to account for the more than $500 billion it spends every year.
“Broken bookkeeping has plagued the Pentagon for years,” Grassley said. “Under deadline pressure, the Marine Corps claimed to be ready for a clean audit. The Defense Department Office of Inspector General rushed to help and issued an opinion supporting a clean audit. Then work papers began to creep out, showing the clean opinion wasn’t worth the paper it was written on. The inspector general was forced to withdraw the opinion.
“Now, the Government Accountability Office report exposes the flimsy basis for the clean bill of health. The report is an instruction manual for how not to jump to bogus conclusions. As hard as the inspector general’s office tried, it couldn’t produce any paper to support its conclusions. The Defense Department needs to follow every GAO recommendation to the letter. We need to get things back on track and prevent an embarrassing setback like this from ever happening again. The taxpayers deserve to know where their money goes, for defense and for everything else out of the federal government.”
Grassley outlined his review of the audit failures in a speech on the Senate floor today. Video of his speech is available here. The text follows.
Floor Speech of Senator Chuck Grassley on the Marine Corps Audit
Delivered Tuesday, Aug. 4, 2015
Broken bookkeeping has plagued the Pentagon for years. Under deadline pressure, the Marine Corps claimed to be ready for a clean audit. An outside auditing firm produced work papers in support of an opinion on a clean audit that employees in the Defense Department inspector general’s office found lacking. However, a manager in the inspector general’s office overruled his lower level colleagues. That resulted in the inspector general’s release of a clean opinion on the audit of the Marine Corps.
Meanwhile, work papers began to creep out, showing the unsupported basis for a clean opinion. The inspector general was forced to withdraw the opinion. Now, the Government Accountability Office is releasing a report that exposes the whole house of cards. One senior employee with an apparent bias toward the outside auditing firm led his agency on the wrong path. We need to get things back on track and prevent an embarrassing setback like this from ever happening again. Now I’ll go into the details.
I come to the floor today to speak about the latest twist in the 25-year struggle to fix the Defense Department’s (DoD) broken bookkeeping system. Billions have been spent to fix it and achieve audit readiness, but those goals remain elusive. Defense dishes out over 500 billion dollars a year yet still can’t tell the people where all the money is going. And now the drive to be audit ready by 2017 has taken a bad turn and become a fight over the truth.
As overseers of the taxpayers’ money, we need to get the audit readiness initiative back on track, moving forward in the right direction.
I last spoke on this subject on December 8, 2011.
On that occasion, I commended the Secretary of Defense Leon Panetta for trying to get the ball rolling. He wanted to halt endless slippage in audit deadlines. He wanted to provide an accurate and regular accounting of money spent to comply with Constitutional requirements. He turned up the pressure and drew a line in the sand.
He directed the department to “achieve partial audit readiness” with limited statements by 2014, and “full audit readiness” with all-up statements by the statutory deadline of 2017.
Not one of the major DoD components, including the Army, Navy, Marine Corps, and Air Force, reached the 2014 milestone. None was or is audit ready.
That said, one component -- the Marine Corps -- stepped up to the plate and claimed to be ready for audit.
To test that claim, the accounting firm, Grant Thornton, was awarded a contract to audit five Marine Corps financial statements for 2010 to 2014. The first two – 2010 and 2011 -- were unsuccessful. The Marine Corps was not ready. The third one was the 2012 audit, which is finally finished.
The 2012 audit was put under a microscope and subjected to intense review by the Office of the Inspector General (OIG) along with two other independent watch-dogs. It was a disaster. First, it took an ugly turn. It got twisted out of shape and turned upside-down. And now, it is getting turned right side up.
Grant Thornton was required to produce a conclusion memorandum. This is a quasi-opinion. Work was to be finished by December 2012. But it took an extra year. Right off the bat it ran into trouble. The scaled down financial statement did not meet contract specifications. This was a show stopper that got glossed over. The contract was modified to accept a make-shift compilation that was cobbled together. It’s called a schedule of budgetary activity. It covers only current-year appropriations and not vast sums of prior-year appropriations that are still lost in the money pipe. That is a far cry from a standard financial statement.
Reducing the scope of the audit wasn’t enough to overcome all the other problems.
The OIG audit team was responsible for issuing the final opinion. After completing a review of Grant Thornton’s work papers in early 2013, the team determined that the evidence presented did not meet audit standards. It concluded that an adverse opinion or disclaimer was warranted.
The team’s rejection of Grant Thornton’s conclusions embroiled the opinion in controversy and foul play. The trouble began when the Deputy IG for Audit, Mr. Dan Blair, intervened and reportedly overruled his team’s conclusions. He issued an unqualified or clean opinion that was not supported by evidence in the work papers.
Despite mounting controversy about the validity of the opinion, Secretary of Defense Hagel rolled it out on December 20, 2013 - with trumpet blasts. At a ceremony in the Pentagon’s Hall of Heroes, he gave the Marine Corps an award for being the first military service to earn a clean opinion. The Assistant Commandant of the Marine Corps, General John Paxton, accepted the award. According to a press report, he did so with “reluctance … He mumbled something, then bolted from the stage at flank speed.” Why would General Paxton take off like a scalded dog? Was it because he sniffed a bad odor?
At that point, the word was already seeping out. The opinion was allegedly rigged. I heard rumblings about it and began asking IG Rymer questions. Because of all the controversy, he asked his independent audit quality watch-dog, Deputy Assistant IG Ashton Coleman, to review the audit.
Mr. Coleman sent IG Rymer reports in October 2014 and May 2015. They ripped the fig leaf clean off Mr. Blair’s charade. They reinforced the audit team’s disclaimer. After recommending “the OIG rescind and reissue the audit report with a disclaimer of opinion,” Mr. Coleman zeroed right in on the root cause problem -- impaired independence.
He concluded that Mr. Blair “had a potential impairment to independence.” He and a Grant Thornton partner, Ms. Tracy Porter Greene, had a long-standing but undisclosed professional relationship going back to their service together at the Government Accountability Office in the early 1990’s. According to Coleman, that relationship by itself did not pose a problem. However, once it began to interfere with the team’s ability to make critical decisions, he said, it created an appearance of undue influence.
Coleman identified several actions that led him in this direction.
The appearance problem was framed by a 4-page email on August 2, 2013 from Ms. Greene to Mr. Blair but seen by the team and others, including me. It was a stern warning. If a disclaimer was coming -- and she knew it was -- she wanted “some advanced notice.”
She needed time to prepare the firm’s leadership for the bad news. A disclaimer, she said, would pose “a risk to our reputation.” At message’s end, she opened the door to private discussions to resolve the matter.
The record clearly indicates that both Blair and Greene began holding private meetings -- without inviting Contracting Officer’s Representative (COR) Ball and the OIG team to participate. Both believed that the COR and the team were “biased toward a disclaimer rather than considering all the facts.” Those are Mr. Blair’s words.
To put these actions in perspective, I remind my colleagues that the IG was exercising oversight of the company’s work. The IG needed to keep top company officials like Ms. Greene at arm’s length. And holding private meetings with Greene wasn’t the way to do it. These meetings may have violated the contract.
So why would the top IG audit official prefer to hold private meetings with Ms. Greene? Why would he seem so willing and eager to favor the firm over his team – even when the evidence appeared to support the team’s position? Why would he favor the firm over evidence and truth? Why would he admit on the record that “OIG auditors were not independent of Grant Thornton”?
Why would he order the team to give the work papers to the firm so they could be “updated to reflect the truth?” The firm was not even supposed to have those documents.
Mr. Coleman cited other indicators of impaired independence.
COR Ball had rejected the firm’s 2012 deliverables, because they were “deficient.” They did not meet quality and timeliness standards. The deliverables in question were the company’s final work product, including the all-important quasi opinion called a conclusion memorandum.
This posed a real dilemma. Until she accepted the 2012 deliverables, the follow-on 2013 contract could not be awarded, and Blair wanted it done yesterday.
The impasse was broken with a crooked bureaucratic maneuver. A senior official, Assistant IG Loren Venable, provided a certification that there were no major performance problems and GT had met all contract requirements. With the stroke of a pen, that deceptive document cleared the way for accepting the disputed materials, paying the firm, and awarding the follow-on contract. Yet the record shows that Mr. Blair admitted that “we accepted deficient deliverables.”
Why would senior OIG officials attempt to cover-up a major audit failure by Grant Thornton in order to reward the poorly performing company with more money and work? For a series of audit failures, the firm got paid $32 million.
These actions appear to show how undue influence and bias trumped objectivity and independence.
Alleged tampering with the opinion may be the most flagrant example of impaired independence.
While the team identified major shortcomings with Grant Thornton’s work and disagreed with its conclusions, the team was blocked from exercising its authority to issue a disclaimer. Instead, it was forced to do additional work in a futile attempt to find evidence to match the firm’s conclusion. But there was none!
Two weeks after Ms. Greene’s email warning that a disclaimer could destroy the company’ reputation, the front office resorted to direct action. With the team’s disclaimer staring him in the face and with complete disregard for evidence and standards, Mr. Blair gave the OIG team a truly stunning set of instructions. They were:
• The Marine Corps earned a clean opinion;
• Grant Thornton has supported a clean opinion;
• Do what it takes to reach the same conclusions as Grant Thornton;
In the simplest of terms, this August 14th edict says: There will be a clean opinion. Disregard the evidence. Figure out how to do it and make it happen.
These instructions provoked an internal brawl.
The team manager, Ms. Cecelia Ball, balked. She stated flat-out: “I cannot do that . Our audit evidence does not support an unqualified [clean] opinion. We are at a disclaimer.” She wanted justification for Mr. Blair’s decision to overturn the team’s opinion. She asked: “show me where my work is substandard and where my conclusions are incorrect.” And I want to know what standards Mr. Blair used to reach “his conclusions.” She never got a straight answer.
From that point on, it was all downhill. When the team ignored coaxing, they got steamrolled.
Mr. Blair attacked their competence, professionalism, and independence. He repeatedly accused them of being “biased.” The team’s top manager, Ms. Cecilia Ball, reacted to the abusive treatment. “I don’t appreciate the accusations to my professionalism and my team’s,” she said. “I don’t think we are the right fit as our integrity is being questioned.” She later quit the team in disgust.
In early December, just as the clean opinion was about to be wheeled out, Ms. Ball made one final request for explanation. Why was “the team’s disclaimer of opinion not the correct opinion,” she asked. We repeatedly documented and explained why Grant Thornton’s conclusion was unsupportable. “The vast knowledge of the Front Office could have provided us insight as to where the team’s logic was flawed.” The Front Office, she said, was unwilling to consider anything other than a clean opinion.
Those words are from the horse’s mouth. The clean opinion was handed down from on high. The front office was Mr. Blair’s domain.
All these actions, when taken together, appear to show a lack of independence and flagrant disregard for audit ethics, standards, evidence, and accepted practices.
In his oversight role, Blair had a responsibility to be independent, objective, and professionally skeptical. If the firm’s work failed to meet standards – as it did, then he had a responsibility to face the truth and tell it like it is. He needed to be a junk-yard dog and issue the disclaimer. Maybe he lost sight of his core mission and turned into a Grant Thornton lapdog. It sure looks that way.
Mr. Blair’s words, deeds, and prior association with the Grant Thornton partner, Ms. Greene – when coupled with their many emails that were widely distributed -- gave the appearance of undue influence by the Grant Thornton partner. The tone and substance of the Blair-Greene emails suggest a professional relationship that was far too cozy – a relationship that might have been wise to disclose according to audit standards.
IG Rymer disagrees with Mr. Coleman’s findings of impaired independence. However, his evidence does not square with evidence presented by Mr. Coleman. For these reasons, Senator Johnson and I will be asking the Comptroller General – the guardian of government auditing standards – to review all relevant evidence. Since independence is the cornerstone of audit integrity, we must be certain it has not been compromised.
Now, another blockbuster report has been rolled out.
The Government Accountability Office (GAO) has just issued a highly critical report. It was prepared at the request of Senators Johnson, McCaskill, and Carper. The GAO report is thorough and competent and tells the story as it happened.
Over the last two years, the GAO team held endless meetings with the office of the IG, including Jon Rymer and Dan Blair. So the IG has known for some time what was coming down the pike. They knew early-on the GAO concluded that the evidence in the work papers did not support the clean opinion.
Echoing Ms. Ball’s unanswered pleas, GAO states: The OIG management’s decision to “overturn” the disclaimer is “undocumented, unexplained, and unjustified by evidence in the work papers as required by professional standards.” This is the evidentiary gap identified by the GAO. There is no legitimate explanation for how the auditors got from point A – the disclaimer -- to point B – the clean opinion. There is no cross-walk between the two poles. It was a bridge too far.
Despite mounting questions about the opinion, the IG turned a blind eye to Blair’s charade. He allowed it to go on … and on … and on. Countless man-hours and millions of dollars were wasted on cooking the books and vicious in-fighting instead of productive problem solving to right the ship.
Mr. Coleman and the GAO got that job done.
On March 23rd, the day before the IG’s final exit briefing with the GAO, came a bolt from the blue. The IG stepped forward with a brave, bold announcement. The clean opinion was formally withdrawn. It was like a rush of fresh air in a stuffy room. The inescapable truth finally dawned on IG Rymer. I thank you, Jon Rymer, for having the courage to do the right thing.
An audit failure of this magnitude should have consequences. This one is especially egregious. It leaves at least one former Secretary of Defense with egg all over his face. Mr. Blair was removed as head of the Audit Office on June 10th but is still serving in OIG as Deputy Chief of Staff. He is the chief architect of the now discredited clean opinion. He is the one who planted the seeds of destruction when he allegedly quashed the audit team’s disclaimer. Those responsible for what happened must be held accountable.
Mr. Blair wants us to believe that the muffed opinion was the result of a routine dispute between opposing auditor judgments over evidence -- a mere difference of opinion among auditors. True, it reflects an unresolved dispute between the audit team and management. And yes, that happens. However, there is a right way and wrong way to resolve such conflicts.
According to audit standards cited in the GAO report, the dispute should have been addressed, resolved, and documented in the work papers before the report was issued. It was not, because the two opinions were irreconcilable.
The team’s disclaimer was based on evidence measured against standards documented in the work papers. Blair’s so-called “professional preference,” by comparison, is none of these things. As the GAO’s evidence gap suggests, his opinion was hooked up to nothing. It was unsupported and improper.
Common sense should have caused senior managers to realize that issuing the report with the opinion hanging fire was a senseless blunder. Doing it had one inevitable result: The opinion had no credibility and had to go.
True, the integrity of the OIG audit process may be damaged. But the final outcome of this tangled mess may help to clear the way for recovery.
The Marine Corps audit was the first big one out of the box. If IG Rymer had not embraced the truth, we might be staring at a bunch of worthless opinions awarded to the Army, Navy, and Air Force. The Department of Defense could have declared victory and buried the broken bookkeeping system for another 100 years.
Hopefully, the Defense Department will begin anew with fresh respect for the truth, audit standards, and the need for reliable transaction data -- the life-blood of credible financial statements. Unreliable transaction data doomed the Marine Corps audit to failure from the get-go. Without reliable transaction data, the probability of conducting a successful audit of a major component is near zero.
With the right leadership and guidance, a plan with achievable deadlines can and should be developed. In the meantime, us watchdogs must remain vigilant. My gut tells me we are not yet out of the woods.