Chuck Grassley

United States Senator from Iowa

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Grassley: Pentagon's Audit Readiness Remains an Elusive Goal

Jul 07, 2016

Floor Speech of Senator Chuck Grassley
Keeping Track of the People’s Money May Not be in the Pentagon’s DNA?
Delivered Thursday, July 7, 2016

I come to the floor today to send a message to Secretary of Defense Carter.  I wish to alert him to a problem that needs high-level attention. It is standing in the way of one of his top priority goals: auditing the books.

The need for annual financial audits was originally established by the Chief Financial Officers (CFO) Act of 1990. By March 1992, each agency was supposed to present a financial statement to an inspector general for audit in accordance with prescribed standards. To date, all have earned unqualified or clean opinions. There is one glaring exception, however. That’s the Defense Department (DoD). It has the dubious distinction of earning an unblemished string of failing opinions known as disclaimers.

In the face of endless slipping and stumbling, Congress finally cracked down. A new line in the sand was drawn. It was placed in Section 1003 of the National Defense Authorization Act in 2009. The department was given a charitable 7-year reprieve -- until September 30, 2017. 

Those seven bonus years did not buy much. All the slipping and sliding and stumbling have continued undiminished.  

The 25-year push to audit the books is stuck at a roadblock. Billions of dollars have been spent trying to solve the root cause problem, but the fix is nowhere in sight. And until it is, auditing the books will remain an elusive goal. 

What I am talking about, Mr. President, is the department’s broken accounting system. This problem has been a festering sore for years. It is adversely affecting every facet of the audit effort. It is driving the audit freight train.

How could the mighty Defense Department be buffaloed for so long by something so simple? 

The Pentagon develops and produces the most advanced weapons the world has ever known and does it with relative ease. Yet it can’t seem to acquire the tools it needs to keep track of the money it spends. 

With little or no fiscal accountability, Congress cannot exercise effective oversight of defense spending. And if Congress can’t do that, then adding money to the defense budget – and borrowing to do it – is foolish in my book. And that is precisely why I opposed a recent amendment to add 18 billion to the defense bill.

So, I want to take a moment to put my spotlight on the issue. My hope is to stimulate creative problem-solving and innovative solutions.

A recent press report pinpointed the cause for all the stumbling going on. 

It drew on testimony by the government’s preeminent authority on accounting, Comptroller General Gene Dodaro. His testimony before the Senate Budget Committee had a razor-sharp edge. It zeroed right in on the old stumbling block: Underlying accounting problems. 

While the Pentagon is spending in excess of 10 billion dollars a year to modernize its vast accounting systems, Mr. Dodaro said, these investments “have not yielded positive results.” And since DoD officials “continue to make system investments that don’t produce better systems,” he said, those responsible “need to be held accountable.” They are wasting money.

As a clear, unambiguous indicator of the continuing accounting mess, he cited in excess of $1 billion in Anti-Deficiency Act (ADA) violations incurred by the department. ADA violations, according to the Comptroller General, mean the department is “spending money that it should not be spending.” That’s what I call unlawful spending.

A good accounting system – one with effective internal controls - should be able to detect and stop illegal spending, fraud, and theft. What’s in place today doesn’t do it. Unauthorized spending is usually discovered by chance long after the fact.

When asked how much of DoD’s $600 billion in yearly expenditures is actually accounted for, Mr. Dodaro stated bluntly: “Very little.”

The Comptroller General’s assessment is a bruising indictment of how the taxpayers’ precious money is mishandled at the Pentagon. 

The Secretary of Defense has a fiduciary responsibility under the Constitution – and the law -- to account for every penny spent. None has honored that responsibility. One, however, made a good faith effort. Secretary Leon Panetta formally launched the audit readiness initiative in October 2011. While giving it a big boost with visibility, this effort sputtered to a standstill like all the others. 

During Secretary Carter’s nomination hearing, Senator Manchin questioned him about him the faltering efforts to audit the Defense Department. The Secretary replied: “I am committed on the audit front.” In response to a follow-up question, he stated:  I will hold the Chief Financial Officer (CFO) “responsible and accountable for making auditability one of my top business reform priorities.” During a meeting in my office, he provided similar assurances.

These solemn vows don’t give me a whole lot of confidence. His predecessors spoke those same words. But all I see is a trail of broken promises. 

To win this war, it will take perseverance and guts. It will take top-notch, hands-on leadership skills, and a Chief Financial Officer who grasps the root cause problem and is committed to solving it.

In watch-dogging the audit process for years, I have come to know the underlying problem all too well. I have been down in the trenches and seen it up close with my own eyes. 

I was introduced to the problem when it just popped up in my face. It came in the form of unusual notations in audit reports published by the Inspector General. They read: “no audit trail found.” That red flag prompted me to dig deeper. So I asked: How do you perform financial audits with no money trail to follow? Answer: You don’t – except with great difficulty, risk, and expense. 

One question led to another and eventually to my first in-depth audit oversight report. It was published in September 2010. It zeroed right in on the root cause problem. I call it the audit-accounting mismatch. 
                                  
My observations were derived mainly from reviews of Corps of Engineers audits for fiscal years 2008-10. These were some of the department’s earliest attempts to comply with the Chief Financial Officers Act. The results were mixed.

This work provided a startling introduction to the problem.

During extensive interviews, senior managers readily admitted that auditors had to do “manual work-arounds that are prone to errors.” They could not connect the dots between contracts and payments and accounting records and make the necessary match-ups.  Transactions were not properly posted to accounts and supporting documentation had “gone missing.”
  
Financial records were so bad, in fact, it took hundreds of highly paid certified public accountants doing manual labor, characterized as “audit trail reconstruction work” or “pick-and-shovel work,” to finish the job.

Such labor intensive accounting procedures are very costly -- $50 million for the Corps of Engineers alone -- and leave gaping holes in audit evidence. Such unorthodox procedures place outcomes on very shaky ground. 

Now, true, these observations were made five years ago. But I keep running into the same old problem. 

For example, I am seeing it again today in my ongoing inquiry into the department’s Task Force for Business and Stability Operations (TFBSO) in Afghanistan. 

I see it everywhere I go.

The recently concluded Marine Corps audit is a perfect example of the same old problem. The broken accounting system is still driving the audit freight train.

The Marine Corps, which is the smallest of the military services, had been claiming for several years that it was audit ready. However, when the time came, the Marine Corps flunked the test.

Oversight audits by the Inspector General and the Government Accountability Office concluded that there was not sufficient, appropriate audit evidence to support a clean opinion. The transaction data was largely incomplete, unreliable, unverifiable, and unsupported. In the opinion of the experts, the final call “was not even close.” 

When I spoke about the results of the Marine Corps audit on the floor on August 4, 2015, I underscored the need for reliable transaction data. Transactions are the life-blood of financial statements, and the lack of it doomed the Marine Corps audit from the get-go. 

I ask Secretary Carter to pause and reflect on why the Marine Corps audit was unsuccessful. I urge him to explore the question with Chief Financial Officer (CFO) Mike McCord. He might be surprised by what he hears. Maybe Mr. McCord does not understand the problem.

If he did, why would he continue throwing money at solutions that don’t produce what is needed most, that is, RELIABLE TRANSACTION DATA? Why doesn’t he know that the same old garbage is still coming out the other end of the sausage machine? 

How come Comptroller General Dodaro knows it?

Why do I see it plain as day?

It is written all over the Marine Corps audit – and a bunch of other audits -- in big bold print.

So why can’t Mr. McCord see it?

He does not seem to have a handle on the core problem - the so-called “feeder” systems. Though ridiculed recently on Federal News Radio as being “museum-ready,” they remain the heart and soul – the foundation -- of the accounting system.  

In most business operations, transactions are transmitted instantaneously from the cash register -- or other points of origin -- to finance and accounting. 

At the Pentagon, they take a roundabout route. 

From their points of origin, transactions must first pass through a series of gates -- literally thousands of feeder and other “business systems.”  The trip through this bureaucratic maze is neither smooth nor certain. Somewhere along the way, vital linkages are broken. 

And when ledgers and account balances are no longer hooked up to transactions, forget about auditing the books. It is nothing more than a pipe dream.  

So in a nutshell, Mr. President, this is the root cause problem that still has the mighty Pentagon buffaloed … And it’s lying in wait for the next go around.

According to Comptroller General Dodaro, Mr. McCord is making the wrong choices, wasting billions of dollars on systems that don’t work.  CFO McCord wants us to believe that staying the course offers the best chance for success. I disagree.  More of the same won’t cut it. He needs to re-focus on doable solutions. Maybe it’s time for some new ideas -- a new approach. 

The audit strategy needs to be re-balanced. It is out of whack. The roadblock needs to be bypassed.

Other agencies seem to be taking care of business by pooling accounting resources to save money. So, why not draw on those skills and capabilities and use them to leverage a potential solution?

For example, why not allow a service provider at the Department of Agriculture to handle a slice of the Defense Department’s bookkeeping pie, like civilian pay? Run a test and see if it works. If it works, build on it. For the next go-around, tear off a bigger chunk. Farm it out and see what happens. Try alternative solutions. Keep experimenting until the answer is found.

CFO McCord needs some direction. Secretary Carter needs to challenge him to do the impossible. As difficult as it may be in the Pentagon bureaucracy, the Secretary needs to encourage him to think outside the box. 

Maybe Comptroller General Dodaro and CFO McCord could put their heads together. Maybe if they team up, they could figure out how to simplify the whole system and make it play like a symphony orchestra. 

Mr. McCord seems to be having trouble shaking mistaken notions. Here’s a new one.

He thinks the whole department is poised for a major breakthrough … that the looming Congressionally-mandated September 2017 deadline is within reach. The military services – the Army, Navy, and Air Force – echo this assessment. They claim to be “on track to be ready for audit” by the deadline. 

I suspect they are about as ready as the Marine Corps was. The experts think the other services are in far worse shape than the Marine Corps. If true, the probability of earning a department-wide “clean” opinion is slim to none. 

And now suddenly, to my amazement, Mr. McCord appears to backing away from his predictions about meeting the deadline.

On June 15th, he told the House Armed Services Committee that the department is “many years” away from a clean opinion. How can the department be audit ready and meet the deadline if it’s still years away from a clean opinion? His messages are downright confusing and maybe contradictory. If he knows DoD is years away from a clean opinion, then he must also know that it is not audit ready – or even close to it.
Mr. McCord needs to explain this apparent inconsistency. 

Clearly, the impending deadline remains an elusive goal. However, of one thing I am certain. 

The next round is being touted as “the largest audit ever undertaken.” If Mr. McCord fails to come up with some workable solutions that get a firm handle on transactions, there won’t be enough auditors in the universe to tackle this job. This job is just too big for the “pick and shovel” routine, and the cost could be astronomical – 100 to 200 million dollars or more.

I want Secretary Carter to succeed. I am counting on him to get the faltering audit readiness initiative back on track and moving in the right direction. 

The taxpayers deserve nothing less.

 

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