SEPTEMBER 2013
defending freedom by advancing reform A Project of Concerned Veterans for America
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At Concerned Veterans for America (CVA), we believe it is a central responsibility of our leaders to protect our nation while accounting for every taxpayer dollar spent.
We believe it is both possible, and
advisable, for policymakers to be both defense and deficit hawks—committed equally to national security and fiscal responsibility.
Those two stances are not mutually exclusive; in fact they complement each other. A concern with our national defense does not mean a willingness to mortgage our futures in the pursuit of perfect security, nor does a concern with the debt mean a willingness to compromise our nation’s security through mindless cost cutting.
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The Series will demonstrate, through analysis and examples, why we believe auditing the Pentagon is a critical component of keeping America strong—both military and financially. Future installments of the “Audit the Pentagon” series will demonstrate how an audit can help address the problems of duplication and overlap, wasted opportunities and the cost of resources, internal control, and compliance with prospective analysis. The Pentagon has been experiencing problems in all of those areas, be it from imprecise cost estimates of weapons programs, duplicative efforts in producing new equipment, or the lack of compliance to the budget caps. These are some of the issues plaguing DOD and cut across the different areas that could be addressed through an audit. This document and this series will shed light on these different aspects of Pentagon operations that could be improved through an audit.
The Department of Defense (DOD) has a responsibility to the taxpayer to create maximum value for every defense dollar spent, and a moral responsibility to the warfighter to spend wisely and effectively support combat capabilities.
In this regard, veterans can offer unique insight into decision-making at DOD, and how those decisions affect our men and women in the field. Having been exposed to these prevailing attitudes, veterans have a unique background to contribute to the conversation regarding fiscal responsibility at the Pentagon. Today’s fiscal challenges bring a new sense of urgency to the need for an audit of the DOD, which would be inherently valuable for identifying opportunities for savings and efficiencies.1 A Pentagon audit would be a useful tool to illuminate management failures, budget waste, misaligned priorities and outright fraud.
SEPTEMBER 2013
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A CASE FOR AUDITING THE PENTAGON
Why Is A Pentagon Audit Needed? At a recent hearing regarding civilian contracting costs , DOD C omptroller Robert Hale offered a surprising admission about the department’s financial reporting: “I’m hiring a lot of contractors because they know how to do audits…We don’t [know] yet.”2
Hale stated that the Pentagon still lacks capability to perform financial audits on its own, despite rampant criticism for over two decades. This lack of capability makes one question how committed the Pentagon is to putting its financial house in order. Deadline after deadline has been set for compliance, yet Congress and the American public have yet to see results.
Every audit starts with an objective and in the case of the Pentagon it should be to create an environment of proper financial management while strengthening national security. This objective has been clearly expressed by Senator Tom Coburn of Oklahoma, who noted, “a thorough financial audit, done correctly, will free up existing resources for national security.”5 The idea behind the audit needs to be closely connected to making better use of the resources currently available to the department and not a reduction in the resources available.
Former Secretary of Defense Leon Panetta agrees that the Pentagon is overdue for an audit, saying, “auditable (financial) statements are needed to facilitate decisionmaking, to comply with the law, and to reassure the public that we are good stewards of their funds.”3 By the Pentagon’s leadership own admission, they have not been fully able to account to how money is actually spent and it is a desired capability. Additionally, an audit is a legal requirement for the department that would put it in better financial footing to navigate through budgetary uncertainties.
Audits are generally thought of as being an accounting mechanism to assess if the organization is allocating its resources properly, and if the authorized amount of money went to the places it was supposed to go. This is a very important aspect of an audit, but it is not the entire auditing process. Within the general concept of an audit, there are four important elements that go beyond the simple financial control of the institution: assessing program effectiveness, internal controls, compliance and prospective analysis.
Former Secretary of Defense Leon Panetta agrees that the Pentagon is overdue for an audit …
These areas are related to a performance audit and go beyond checking the adequacy of the financial expenditures of the department. This type of focus would enable the leadership at the department and in Congress to better identify what is truly wasteful, what needs tweaking and what is functioning well. Think of an audit as an x-ray. The audit, like an x-ray, will provide a better picture of how the department is working internally and it will make it easier to identify what is broken and needs to be fixed.
“Auditable (financial) statements are needed to facilitate decisionmaking, to comply with the law, and to reassure the public that we are good stewards of their funds.”
Value of an Audit The purpose of an audit is to check if the financial statements and the procedures that an organization is employing are being conducted in a manner that is within generally acceptable norms. According to the U.S. Government Accountability Office, “Audits and attestation engagements provide an independent, objective, nonpartisan assessment of the stewardship, performance, or cost of government policies, programs, or operations, depending upon the type and scope of the audit.”4
Every audit starts with an objective and in the case of the Pentagon it should be to create an environment of proper financial management while strengthening national security.
A PROJECT OF CONCERNED VETERANS FOR AMERICA
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defending freedom by advancing reform
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Background of the Pentagon Audit The initial effort to audit the Pentagon began over two decades ago, as the Chief Financial Officers (CFO) Act of 1990 required DOD and other government agencies to produce private sector-style financial statements that result in opinions from auditors. The concept behind the legislation, as well as similar legislation passed later in the decade, is that if federal agencies adopt private sector financial accounting and reporting systems, they will become more efficient, effective and accountable.6 As of today, the DOD is slated to become audit-ready by 2017, yet this deadline could be pushed back again if allowed, which stresses the importance of consequences for non-compliance. Thus, after 20 years of effort and investment on behalf of the DOD to attain audit readiness, it has still not been achieved.7 It is fair to suggest that the Pentagon’s infamous financial dysfunction – a massive bureaucracy, wasteful procurement processes, fraud, and legendary inefficiency – is directly attributable to the lack of fiscal discipline that has arisen in the absence of an audit. This state of affairs is unacceptable. Dates for compliance with this law have come and gone over the years as well as many comptrollers, all making the same sort of promises when it comes to financial accountability. For example, in the early 1990s, DOD comptroller John Hamre promised Congress the books would be auditable around 1997; alas, that did not occur and the current deadline is 20 years later from that previous deadline.8 Perhaps the most disheartening aspect to this process is that lawmakers have been willing to give the department time necessarily for compliance and these deadlines were often chosen by the Pentagon’s leadership and not forced upon them. This attitude stresses the importance of establishing legislative consequences for non-compliance with their deadlines. Thus, the idea of a successful independent audit at the DOD has always been somewhat of a pipe dream, the El Dorado of defense policy circles, being out of the reach due to so many extenuating factors. Yet, with our nation facing an almost $17 trillion debt problem and a stalled economy, the United States is not in a position of luxury to continue delaying this needed oversight.
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A CASE FOR AUDITING THE PENTAGON
The efforts of FIAR point in the right direction and the different milestones spread through time to reach the goal in 2017 are a laudable initiative. Nonetheless, a 2011 GAO Report points to the problems that have emerged from the development of the process, specifically in the Financial Improvement Plans (FIPs). In this sense, “the lack of adequate oversight results in an inefficient FIP process and can impact the ability of components to meet established milestones”.11 These findings emphasize the necessity of closer Congressional oversight, an element that would be strengthened through legislative action.
The fact that it took so long just for FIAR to be established, almost 15 years after the CFO Act was passed in 1990, speaks volumes. However, attempts and efforts such as these are better late than never. When compared to other federal agencies, the DOD’s failure to present an audit becomes more troubling. Of 24 major federal agencies, 21 received clean audit opinions for 2012, with the Department of Homeland Security (DHS) and the Department of State receiving “qualified” audit opinions. Perhaps the biggest surprise is that DHS has only been in existence for just over a decade, and yet is more advanced than the Pentagon in terms of fiscal reporting.
Current Proposed Legislation to Audit the Pentagon
Current Fiscal Efforts in DOD Despite all the negative attention on DOD, there have been efforts within the department to get a handle on where the money is going. In 2005, the DOD created the Financial Improvement and Audit Readiness (FIAR) Plan. According to their initial plan from December 2005, the FIAR is the “roadmap to fix internal controls, correct processes, and obtain an unqualified audit opinion”.9 The concept behind FIAR is to fulfill the United States Code requirement that every
established priorities of the initiative: general fund statement of budgetary resources validated as audit ready by September 30, 2014; existence and completeness audit readiness of mission critical assets; and full audit readiness achieved for all financial statements by September 30, 2017.9 These three goals fit with the structure of increased powers and responsibilities described in the Audit Pentagon Bill that was proposed in the Senate.
federal agency “present auditable financial statements beginning not later than March 1, 1997.”10 Eight years after the legal deadline had expired, the department finally set up an initiative aimed at bringing its books into compliance. Notwithstanding initial missed deadlines, the FIAR represents a considerable step forward for the department. In its May 2013 FIAR Plan Status Report, there is the stress of the three
Since 2012, there have been a couple of legislative proposals aimed at giving the Pentagon more incentives for meeting the established audit deadlines and consequences should DOD fail to meet deadlines. Throughout the FIAR process, there are two major deadlines: 2014 and 2017. In 2014, the department is scheduled to provide a general fund statement and in 2017, it needs to achieve full audit readiness. Both legislative efforts work around the department’s own schedule for an audit; their importance resides in creating incentives for the people responsible for the audit to actually meet the deadlines. None of these legislative proposals would require new actions from the DOD, but rather would create more incentives for complying with the legislation.
A PROJECT OF CONCERNED VETERANS FOR AMERICA
defending freedom by advancing reform
The Road Ahead
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Proposed Legislation HR 559
S 3487
On February 6, 2013, Representative Barbara Lee (D-Calif.) introduced HR 559, known as the “Audit the Pentagon Act of 2013.” The main provision of the bill is to automatically reduce the budget authority by 5 percent of any federal agency that has not received an independent external auditor opinion. That reduction would be applied proportionally to every account, similar to the sequestration provision in the Budget Control Act of 2011.
On August 2, 2012, Senator Coburn introduced S. 3487, known as “Audit the Pentagon Act of 2012.” The main provisions of the bill deal with a package of incentives and consequences on two different deadlines, one after the end of fiscal year 2013 and the other one at the end of fiscal year 2017.
The provision would be scheduled to come into effect on March 2, 2014. Nonetheless, the same provision that establishes the teeth of the bill takes it away. Personnel and Health Program accounts would be excluded from the reductions; and the President can waive the reduction to any account that would harm national security and members of the armed forces in combat. This effectively creates the possibility of dodging the punishment for non-compliance. The bill points in the right direction of establishing real costs for ignoring the requirements for an independent audit, but imposing yet another sequestration process on the DOD is not the way to do it. With the sequestration caps already set in place and not likely to be altered in the current political environment, further financial penalties and reductions are not called for. However, Rep. Lee ought to be lauded for her efforts in realizing the importance of the situation and urging greater fiscal responsibility from the Pentagon.
If the Pentagon achieves an audit with unqualified opinion statement, it will acquire more authority for reprogramming its budget without previously consulting Congress, including the possibility of distributing bonuses for department leadership. On the other hand, if the department fails to achieve an unqualified opinion, the assistant secretaries of each branch of the armed forces will be required to provide more detailed qualifications and responsibilities closely related to the process of auditing. The same principle would apply to the comptroller. After fiscal year 2017, the failure to obtain audits with unqualified opinion of its financial statements, the department would be stripped of its authorities to reprogram funds. Additionally, the office of the DOD’s Chief Management Officer would be re-organized and receive further auditing responsibilities and increased powers. Coburn’s bill has a strong conceptual foundation, as it would empower people who are responsible for making sure an audit takes place while creating possibilities of reward for the DOD if it meets the audit goals.
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As one can see by the two aforementioned legislative proposals, there is bipartisan support for the idea of creating more incentives for the Pentagon to go through the audit process. An audit would not serve to address all the budgetary concerns that plague the department, but it would bring a higher level of accountability and transparency to the working of the department. The process would make it easier for the department to adapt to any future change in budgetary circumstances since it will have a better sense of how it allocates its resources. It is the duty of the legislative branch to hold the executive branch accountable for performance. The Pentagon audit legislation that has been proposed in Congress would not impose any new demands on the department since it uses the Pentagon’s self-established deadlines as its basis. The importance of legislative action in the audit process is primarily creating more incentives for the department to follow through on its promises, as well as presenting consequences should Pentagon leaders fall short in their responsibilities. This type of carrot and stick approach is necessary because of the Pentagon’s track record of missed deadlines and broken promises. Our nation’s current fiscal situation demands that DOD exercise more careful stewardship of the resources that the American people have allocated to them. Simply put, the Department should be able to account for how it is spending taxpayer dollars, a concern that should unity deficit and defense hawks. An audit would be an important step toward increasing taxpayers’ confidence in the proper stewardship of our tax dollars, shedding light on areas in which there is fat to be eliminated and freeing up resources to be invested in defense muscle.
Sources 1. Sen. John McCain (AZ). “DoD Reform.”Congressional Record S-455-58. http://www.gpo.gov/fdsys/pkg/CREC-2013-0204/pdf/CREC-2013-02-04-pt1-PgS455.pdf#page=1 2 Spinney, Chuck. “When Will the Contractors Contract?” TIME June 13, 2013. http://nation.time.com/2013/06/13/when-will-the-contractors-contract/ 3. Source: http://washingtonexaminer.com/why-we-must-audit-the-pentagon/article/2505230. Same as footnote 4 4. U.S. Government Accountability Office.“Government Auditing Standards”, July 2007. http://www.gao.gov/govaud/govaudhtml/d07731g-3.html#pgfId-1036552 5. Senator Tom Coburn. “Why we must audit the Pentagon”, August 20, 2012. The Washington Examiner. http://www.coburn. senate.gov/public/index.cfm/2012/8/why-we-must-audit-the-pentagon 6. Christopher Hanks, “Financial Accountability At The DoD: Reviewing the Bidding,” page 183. July 2009. http://www.dau. mil/pubscats/PubsCats/ Hanks.pdf 7. ibid, 183. 8. Spinney, Chuck. “When Will the Contractors Contract?” TIME June 13, 2013. http://nation.time.com/2013/06/13/when-will-the-contractors-contract/ 8. U.S. Department of Defense. “Defense Financial Improvement and Audit Readiness Plan”. December 2005. http://comptroller. defense.gov/fiar/documents/FIAR_Plan_Dec_2005Complete.pdf 9. U.S. Department of Defense. “Defense Financial Improvement and Audit Readiness Plan”. December 2005. http://comptroller. defense.gov/fiar/documents/FIAR_Plan_Dec_2005Complete.pdf 10. U.S. Department of Defense. “Financial Improvement and Audit Readiness (FIAR) Plan Status Report”. May 2013. http:// comptroller.defense.gov/fiar/documents/FIAR_Plan_May_2013.pdf 11. U.S. Government Accountability Office. GAO-11-851 “DOD Financial Management: Improvement Needed in DOD Components’ Implementation of Audit Readiness Effort”. September 2011. http://www.gao.gov/assets/330/323172.pdf
SEPTEMBER 2013
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A CASE FOR AUDITING THE PENTAGON
A PROJECT OF CONCERNED VETERANS FOR AMERICA
defending freedom by advancing reform
defending freedom by advancing reform A Project of Concerned Veterans for America Concerned Veterans for America’s (CVA) mission is to advocate for policies
the freedom and liberty we and our families so proudly fought and sacrificed to defend. that will preserve
Our goal is to translate the experience, concerns, and hopes of
a common vision of liberty and freedom. We will our fellow veterans and their families into
provide a new and unique perspective on the issues that threaten to
spirit of opportunity and liberty that we fought to defend and all Americans cherish. cripple not only our economic and national security, but the
Our task will be to bring that
fresh perspective to the
American people and our leaders.
Concerned Veterans for America is a bipartisan, non-profit, 501(c)(4) organization that advocates for policies that will preserve the freedom and liberty we and our families so proudly fought and sacrificed to defend. For more information visit ConcernedVeteransForAmerica.org