A Case Study in Cost Savings

September 2012

A Project of Concerned Veterans for America

Hiding in Plain Sight: TIME FOR A PENTAGON AUDIT A CASE STUDY IN

Cost Savings Background

BY THE NUMBERS

Overview The Department of Defense (DoD) has never performed an independent audit of its finances, and with the dire financial situation of the United

DEPARTMENT OF DEFENSE

States, now is the time. With Overseas Contingency Operations completed

Departments: Army, Navy, Air Force

in Iraq and winding down in Afghanistan, we should seize the moment

Number of Defense Agencies: 16

to reassess weapons systems, update archaic processes, and clean out the

Number of Combatant Commands: 9

proverbial attic, with the aim of building a more financially accountable and

Number of Active Duty Armed Services Personnel

efficient DoD. Moreover, with the nation on the edge of a fiscal cliff, bringing

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(as of 3/31/12): 1,452,939

Number of Civilian personnel

greater discipline, transparency and accountability to the defense budget must be a critical priority.

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(as of 12/31/11) : 766,229

Base Budget FY2011: $528.2 Billion

The DoD is the last remaining federal agency with financial operations that

Overseas Contingency Operations

cannot pass an independent audit. Secretary of Defense Leon Panetta stated

Budget FY2011: $158.8 Billion5

that this is “unacceptable” in testimony to Congress.1 Panetta has also stated “auditable [financial] statements are needed to facilitate decision-making, to comply with the law, and to reassure the public that we are good stewards of their funds.”2 We agree, and this case study outlines the merits of an independent audit.

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Background (continued) The Chief Financial Officers (CFO) Act of 1990 requires the DoD 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 now, the DoD is slated to become audit-ready by 2017; yet, this deadline will likely be pushed back (again) if allowed. 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, serial fraud, and legendary inefficiency—is directly attributable to the lack of fiscal discipline that has arisen in the absence of a comprehensive audit. This state of affairs is unacceptable.

The problem is indisputable. According to a 2008 Government Accountability Office (GAO) report, cost overruns for the Pentagon’s 96 largest programs were 42 percent higher than initially estimated. These overruns added up to nearly $300 billion.8 Another GAO report in 2011 found that management failures of large weapons systems added $70 billion to projected costs over a two-year span. The auditors noted that many of the problems occurred because the Pentagon began building the systems before the designs were fully tested. 9 Previous audits within segments of the defense establishment have led to cost savings. A 2010 effort by the United States Marine Corps (USMC) to improve its financial controls and reduce payment inefficiencies resulted in a 3-for-1 return on its investment. At the time, this audit represented the first war-fighting enterprise to strive for an audit on financial statements. It was a breakthrough, albeit limited in scope.10 Nonetheless, it highlights how the audit process can be beneficial to both the American taxpayer and to our defenses.

Pentagon Audit = Not Easy To say that it is difficult to conduct a full-scale DoD audit is an understatement. As departmental financial reports have noted, “ The DOD obligates (spends) an average of $2 billion to $3 billion every business day and handles hundreds of thousands of payment transactions, which take place in thousands of worldwide locations, including war zones…. Because of DOD’s size and mission requirements, it is not feasible to deploy a vast number of accountants to manually reconcile our books.”11 In a 2010 Oversight Review of Audit Reporting by the DoD, the Office of Inspector General (OIG) noted that there was a central element affecting every facet of the OIG program: the DoD’s broken accounting system.12 The report noted that the financial data presented to OIG auditors by the DoD during the period reviewed would have been rated as poor to non-existent. Remarks also included that “having lost control of the money at the transaction level, DoD’s broken accounting system is incapable of generating accurate financial records.”

“Defense Department Audits Earn D- Grade”

Chuck Grassley (R-IA), Defense Department Audits Earn D- Grade, Improvements Needed (June 6, 2011)

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A CASE STUDY IN COST SAVINGS

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Previous Inspectors General at the DoD have noted the same thing—the weaknesses in the DoD financial system are affecting “the safeguarding of assets, proper use of funds, and impair the prevention and identification of fraud, waste, and abuse.”13 Other government reports also note failings with the DoD accounting system.

A 2011 GAO notes that

problem disbursements continue “ toDOD’s be a concern and are a contributing factor to the department’s funds control issues.

The department’s weak controls over payments increase the risk of inaccurate cost information and improper payments. 14

”

We fully acknowledge there are inherent difficulties in developing audit-ready documents at DoD. Listing the intricacies of each systematic impediment to fiscal responsibility would take hundreds of pages. Yet, after over 20 years of attempted compliance, it remains embarrassing that DoD has not been able to accomplish an audit—the time is now right for the DoD to comply.

This would not be an audit for audit’s sake, but an overdue attempt to shine light on dark corners of the DoD budget in order to find savings that will cut costs and strengthen core defense capabilities.

“Department of Defense Audibility Challenges”

Benefits of an Audit The most obvious benefit of an independent audit would be to bring a measure of accountability to the department’s spending. With a fiscal debt crisis facing our country, any savings garnered through improved fiscal responsibility are welcome. As Admiral Mike Mullen and others have noted, our national debt is the greatest threat to our prosperity— and ongoing waste, inefficiency, and fraud in the DoD contributes to that debt.

So how much would a defense audit actually save the taxpayer? According to Sen. Tom Coburn’s recent deficit reduction plan “Back in Black,” an audit would save an estimated $250 billion dollars over a ten-year period.

However, if a DoD audit were to prove similar to the cost savings of other government audits, savings could be even greater—closer to a 10-to-1 return on investment, as noted in Sen. Coburn’s proposal.15 That’s real money that can be returned to taxpayers, reinvested in core defense capabilities or dedicated to debt reduction.

As noted above, the benefits of an audit would accrue not only to taxpayers, but also to the Pentagon itself. Streamlining and standardizing information technology inside the Pentagon contributes to belt tightening, but also makes DoD leaner and more effective by bringing together services and platforms to share resources, thereby further integrating operations. If an audit induces DoD to focus on achieving a single, enterprise network approach that links the entire military together, spurring increased cooperation and helping security in cyberspace,16 then everybody wins. An audit would likely encourage such salutary developments by ascribing a firm cost savings to the action.

House Armed Services Committee, Subcommittee on Oversight and Investigations “Department of Defense Audibility Challenges” (September 14, 2012)

A PROJECT OF CONCERNED VETERANS FOR AMERICA

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Audit the Pentagon Act 2012 The idea of a Pentagon audit is gaining steam among members of both parties and recent legislative efforts have sought to expedite the audit process.

In August 2012, Senators Tom Coburn (R-Okla.) and Joe Manchin (D-W.V.) introduced the bi-partisan “Audit the Pentagon Act” (S. 3487), which creates new incentives and enforcement mechanisms to expedite the DoD audit process. It was co-sponsored by seven additional senators from both sides of the aisle.

Incentives include more independent authority to reprogram funds and ending certain reporting requirements, while barring the acquisition of any new major weapons systems until an audit takes place. The legislation would also create a Chief Management Officer position to oversee the audit and transfer of the Defense Finance and Accounting Service to the U.S. Treasury. 17

Sen. Kelly Ayotte (R-NH) Urges Pentagon Officials to Reach Full Audit by 2014 (April 2012)

Reasons to Support a Pentagon Audit A Precursor to Reform. An “Audit the Pentagon Act” is not a cost-savings silver bullet, but instead a logical precursor to larger, holistic reform. An audit makes massive budget numbers and potential cost savings tangible and underscores the need for accountability in federal spending. Especially in light of the fiscal crisis facing our nation, American taxpayers deserve to know exactly how their tax dollars are being spent.

Dual Benefit. A full accounting of costs and capabilities allows the department to reallocate resources to initiatives that work, close down failing or faulty programs, and prioritize funding towards core, strategic capabilities. It will also induce more consolidation and standardization amongst a historically fragmented department.

Like any good housekeeping project, the process is painful, but the outcome liberating.

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A CASE STUDY IN COST SAVINGS

It’s the Law. Two decades of non-compliance with federal law is unacceptable. Pentagon leadership, including the Secretary Panetta, agrees that completing an audit is good fiscal policy, a strategic necessity, and in keeping with federal law.

The Time is Now. If not now, then when? As we draw down from overseas commitments and refit our forces to meet the challenges of today’s environment, now is an ideal time to deal with complicated and systemic DoD financial difficulties. Continuing to kick the “fiscal responsibility” can because there are ongoing national security threats (which there will always be) ultimately undermines our readiness in the long term. Audits are tough, but necessary.

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Reasons to Support a Pentagon Audit (continued) The Debt Crisis Looms. With the U.S. national debt now at more than $16 trillion, and annual budget deficits exceeding $1 trillion, we can’t afford to delay spending reform, even when it might be difficult. If the DoD doesn’t do this now—and our debt crisis grows even larger—future politicians will likely thrust even more burdensome requirements on the DoD, with dangerous consequences. Demonstrating a commitment to financial responsibility, such as a completing an independent audit and revamping the weapons procurement process, must be accelerated, before the current (and loose) deadline of 2017.

Induce Reform Elsewhere. By cleaning its own house, the DoD is proactively contributing to overall belt-tighten efforts in Washington. This would forestall future efforts to indiscriminately cut Pentagon funding, and gives more ammunition to policy makers seeking to reform the true drivers of U.S. debt and deficit spending: bloated and unwieldy entitlement programs like Medicare, Medicaid, and Social Security. An audit of the Pentagon would bring renewed focus to the need for cost savings elsewhere.

Sources 1. Kris Maccubbin, “Army mobilizes for first financial audit in its history,” Fort Gordon Signal Aug 31, 2012. http://www.fortgordonsignal.com/news/2012-08-31/News_Update/ Army_mobilizes_for_first_financial_audit_in_its_hi.html 2. Tom Coburn, “Why we must audit the Pentagon,” Washington Examiner, August 18, 2012. http://washingtonexaminer.com/why-we-must-audit-the-pentagon/article/ 2505230#.UE1GF79VQoY 3. Department of Defense Active Duty Military Strength Report for March 31, 2012 http://siadapp.dmdc.osd.mil/personnel/MILITARY/ms1.pdf 4. Department of Defense Civilian Personnel Reports December 2011 http://siadapp.dmdc.osd.mil/personnel/CIVILIAN/fy2012/december2011/ consolid.pdf 5. United States Department of Defense Fiscal Year 2013 Budget Request http://comptroller.defense.gov/defbudget/fy2013/FY2013_Budget_Request_ Overview_Book.pdf 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. Nathaniel H. Sledge Jr., “Pentagon Procurement Reforms Face Slim Chance of Success,” National Defense Magazine Sept. 2012 http://www.nationaldefensemagazine.org/archive/2012/september/Pages/ PentagonProcurementReformsFaceSlimChanceofSuccess.aspx

10. John Knubel,“The Department of Defense Financial Audit Journey,” Winter 2010. http://www.asmconline.org/wp-content/uploads/2010/04/AFC-Mag-Winter10-DoD-Finacial-Audit-Journey1.pdf 11. Jen Rizzo, “Pentagon says it’s moving towards being ‘audit-ready’”, CNN Feb 25, 2011. http://articles.cnn.com/2011-02-25/politics/defense.department. audit_1_dod-annual-audits-government-accountability-office?_s=PM:POLITICS 12. Sen. Charles Grassley, “Oversight Review of Audit Reporting by the Department of Defense, Office of Inspector General” pg. 5 Sept 7, 2010. http://www.grassley.senate.gov/about/upload/Defense-09-15-10-OversightReview-of-OIG-Audit.pdf 13. Inspector General of the Department of Defense, Agency Financial Report for Fiscal Year 2009: Addendum B (Washington DC: DoD, 16 November 2009), p.1.

14. Government Accountability Office, “Weaknesses in Controls over the Use of Public Funds and Related Improper Payments,” Sept 22, 2011. http://www.gao.gov/products/GAO-11-950T?source=ra 15. Sen. Tom Coburn,“Back in Black: A Deficit Reduction Plan,” July 18, 2011. Pg.131 http://www.coburn.senate.gov/public//index.cfm?a=Files.

Serve&File_id=bc1e2d45-ff24-4ff3-8a11-64e3dfbe94e1 16. Amber Corrin, “The bright side of budget cuts,” Federal Computer Week.

Aug 29, 2012 http://fcw.com/articles/2012/08/29/warfighter-it-budget-cutsbenefit-enterprise.aspx 17. Hope Hodge, “Amid military budget fight, legislators call for Pentagon audit,” Human Events Aug 2, 2012. http://www.humanevents.com/2012/08/02/ amid-military-budget-fight-legislators-call-for-pentagon-audit/

9. Christopher Drew, “Audit of Pentagon Spending Finds $70 Billion in Waste,” New York Times, Mar 29, 2011. http://www.nytimes.com/2011/03/30/business/30military.html

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A Project of Concerned Veterans for America

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Our task will be to bring that

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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