[Note: 'Bold' Emphasis in Original; at the time this was written, Sen Grassley was the Chairman of the Senate Finance Committee]

May 22, 2001

The Honorable Donald H. Rumsfeld
Secretary of Defense
The Pentagon, Room 3E880
Washington, D.C. 20301

Dear Mr. Secretary:

I am writing to inform you that I am conducting an oversight investigation of allegations that 12 to 15 officials in the Inspector General's (IG) office tampered with audit materials to alter the outcome of a Peer Review required by law. This is a major integrity violation.

The exposure of the scheme by a whistle blower has left the IG in an untenable position. The IG's office has lost its accreditation as a government audit authority. In view of its oversight responsibility for the government's largest contracting operation, this unfortunate situation must be corrected immediately. A new Peer Review must be conducted with the hope that the IG will earn a "clean" opinion. Until that happens, billions of tax dollars will be vulnerable to theft and fraud.

The Peer Review process is a critical, independent quality control check created by the 1988 amendments to the IG Act. It is designed to ensure that IG audits are reliable instruments for conducting oversight of important government programs and operations. Each IG is supposed to be subjected to a Peer Review every three years. This is a very important oversight function.

The Peer Review in question was conducted by the Inspector General for Tax Administration (TIGTA) at the Treasury Department. It began on March 28, 2000 and was completed on May 22, 2000. A total of eight audit reports were selected for Peer Review. Following a thorough examination of all pertinent documents, TIGTA issued an unqualified opinion on August 9, 2000. At the conclusion of the Peer Review, TIGTA believed that all the materials examined met or exceeded established audit standards.

A whistle blower visited my office on April 4, 2000 to alert me about problems in the Peer Review process. This person told me that the DOD IG had performed very poorly on its 1997 Peer Review and that there were serious unresolved mismatches between "work papers" and audit report findings. I contacted the General Accounting Office (GAO) the next day. On June 13, 2000, I made a formal, written request, asking the GAO to examine the results of both the 1997 and 2000 Peer Reviews. On October 17, 2000, the GAO reported back to me. The GAO told me that the IG passed with flying colors, earning a "clean" opinion on the new Peer Review.


Then on December 14, 2000, I received an anonymous letter with the heading "Peer Review Fraud at the DOD Inspector General." This letter was also addressed to Senator Warner, TIGTA, DOD IG, and others. The letter alleged that the DOD IG had presented TIGTA auditors with "at least one complete set of fraudulent work papers." The letter also alleged that Bob Lieberman, Assistant IG for Auditing, and one of his senior deputies, Jay Lane, "knew the fraud was being perpetrated, but looked the other way." I immediately forwarded this letter to the GAO and asked that the allegations be addressed as part of its ongoing review.

On April 5, 2001, the GAO provided a report that substantiated most of the allegations. The information provided by the GAO was drawn almost exclusively from an internal review. The internal review was conducted by a senior official within the IG's audit chain of command where the misconduct occurred.

To briefly summarize the facts, once TIGTA identified the eight audits selected for review, officials in the IG's office realized that one report would never measure up to "established audit standards." That was audit No. 99-033 - DOD Use of Pseudo Social Security Numbers - dated November 12, 1998. A preliminary review disclosed at least 47 known deficiencies. Instead of submitting it as and suffering the consequences, a decision was made to destroy all the original work papers and to re-create an entirely new set. Senior IG officials apparently ordered the staff to sign and backdate the new working papers as if they had been prepared at the time of the original audit. The auditor who prepared the original working papers was then directed to sign the re-created working papers even though the re-created work papers had been prepared by another auditor. In addition, a fictitious audit plan was apparently fabricated to match the fake work papers. The effort required extensive use of overtime and cost an estimated $63,000.00

After TIGTA discovered that the Peer Review was "tainted" by fabricated audit materials, it officially withdrew its "clean" or unqualified opinion on March 27, 2001. TIGTA is expected to issue a disclaimer shortly. The entire matter has been referred to the President's Council on Integrity and Efficiency (PCIE). The Vice Chairman of the PCIE, Mr. Gaston L. Gianni, Jr. who is also IG at the Federal Deposit Insurance Corporation, turned the matter over to the PCIE Audit Committee for further consideration.

The current situation is totally unacceptable.

Technically, the DOD IG is no longer an accredited government audit office. It must now issue a disclaimer with every one of its audit reports - until a "clean" opinion is rendered. Its work does not meet "established audit standards." The DOD IG must be subjected to another Peer Review as soon as possible -- and earn a passing grade.


In my mind, there are four areas that require further scrutiny as follows:

-Impartiality: The internal review conducted by Patricia Brannin, Deputy Assistant IG for Audit Policy and Oversight, is a commendable piece of work. It documents the basic facts bearing on this matter. However, it may have been unwise for the former Assistant IG for Auditing, Bob Lieberman, to have asked one of his senior deputies to investigate allegations in which he could be implicated. A more thorough investigation is now required, utilizing the skills of trained investigators.

-Motive: Why would the IG's audit department expose itself to such terrible risks in order to win a "clean" opinion in a Peer Review - especially when so many people had knowledge of the scheme? The risks seem to outweigh the gains by a wide margin. It defies understanding. Was someone attempting to conceal embarrassing information on phony DOD social security numbers exposed in audit material that was destroyed? Too many unanswered questions remain.

-Accountability: As I understand it, disciplinary action is now under consideration. However, all personnel actions are being directed toward lower ranking auditors and their immediate supervisors. There are no plans to discipline senior officials, including Mr. Jay Lane, Director of Finance and Accounting. They are being insulated from accountability. Mr. Lane has admitted he had full knowledge of the scheme and, in fact, endorsed it. Mr. Lane "believed the actions taken were in accordance with internal policies." Though the former head of the Audit Department, Bob Lieberman [now Deputy IG], continues to deny having knowledge of the scheme, to what extent is he responsible for what happened? In addition, we don't yet know who ordered the destruction of the original audit materials.

-Resolution: Serious questions remain about legal remedies for addressing this black mark on the entire IG community. The defense IG's conduct during the Peer Review has called into question the integrity of not only its own audits but those of all IG's. Moreover, the PCIE is not authorized to address the problem, and the law governing GAO audit standards does not presently contemplate remedial action for fraudulent work papers presented in a Peer Review. This is a matter that must now be considered. In the meantime, the IG must obtain an unqualified opinion as soon as possible. Until such time as it earns a "clean" opinion, its audits will lack credibility. It is not an accredited audit agency.


Mr. Secretary, it's a very sad day indeed when the watchdog gets caught cheating. If the IG can't be trusted, then we are in trouble. Who can we trust? This unfortunate episode puts a dark cloud over the entire IG community. What we need to do now is be certain we understand exactly what happened and make certain that those responsible are held accountable. In doing that, my hope is this will never happen again.

As I proceed with my oversight investigation, I would appreciate your cooperation and support.



Charles E. Grassley Chairman

Copies to: Armed Services Committee
Governmental Affairs Committee