Fixing the Financial Systems

Debates over national defense tend to focus on the glamour issues:  What type of fighter? How many armored divisions?  Who should get promoted?  We trust that our readers will find these important subjects adequately covered on this site.  However, the life blood of any large organization, no matter what its mission, is funding.  Nothing will get developed, procured, maintained, staffed, moved, or operated without it and the prosaic job of accounting for it, and what it has bought, is as vital as any warfighting mission.

Without an accurate, auditable financial accounting system, for example, the Pentagon literally does not know what it owns.   Just to cite one category, supply, the GAO found that 58%, or $39 billion, of on-hand items exceed requirements — that is, the using service by its own calculations does not need them.  Yet, as is well documented on this site, critical needs in procurement, training, personnel, and other areas go unmet ($39 billion is over half the entire FY 2000 procurement budget, e.g.)

As the GAO testimony below notes, this situation is systemic — not the result of large scale malfeasance by the individuals who run it.  There are, by way of illustration, 22 named financial systems involved in DoD's contractor and vendor payment process.  If they worked together smoothly, this might be tolerable, although maintaining such a kluge would eventually prove difficult and expensive.  However, there are gaps in the process where accounting data must be manually keyed.  As anyone who has ever traveled on government orders knows, these "accounting citations" are often 60 - 70 character long alphanumeric strings (see the example on p. 46 of the GAO testimony).  Nobody "designed" the system to require such implausible accuracy on the part of the beleaguered humans who operate it.  But until it is fixed, it is easy to see why one in every three transactions just tries to correct an earlier entry in the system.  Keep in mind that this is only one of many hundreds of similar processes within DoD.

These anecdotes aside (as infuriating as they are to those who must deal with them), there are larger issues involved. Without reasonably accurate data on current costs (including investment) and inventory, it is impossible to make informed decisions regarding the future. How could we decide, for example, if we need to spend more on maintenance if we don't know where we are spending our maintenance budget today and what we are getting for it? So one would hope, and senior DoD leadership should insist, that fixing the DoD financial system would get the very highest priority in the new QDR.

Sen Charles Grassley's (R IA, then Ch. Sen Finance Comm.) letter to SECDEF Rumsfeld, May 22, 2001, outlining fraud and mismanagement in the DoD IG's office.  In the words of a congressional staffer with long experience in audit matters:

Forging workpapers (I cannot over-emphasize how bad this is) means that DoD IG reports can no longer meet GAGAS standards and are therefore unreliable until the DoD IG can demonstrate that no other workpapers were forged for any other report and that they have implemented procedures to ensure this will never happen again. Thus, the DoD IG has literally self-destructed itself.

"Statement by Franklin C. Spinney Staff Analyst, Department of Defense, Before THE SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS AFFAIRS AND INTERNATIONAL RELATIONS COMMITTEE ON GOVERNMENT REFORM, UNITED STATES HOUSE OF REPRESENTATIVES," June 4, 2002.  A succinct summary of why just throwing more money at the Pentagon won't solve its problems, and recommendations for what might. Why fixing the financial shambles is a necessary ingredient (besides being a Constitutional requirement.)

DoD Financial Management: Integrated Approach, Accountability, Transparency, and Incentives are Keys to Effective Reform.  Statement of Gregory D. Kutz, Director, Financial Management and Assurance, GAO, 22 March 2002.  In brief:  DoD's attempts at financial management reform are a bad joke on both taxpayers and soldiers and are unlikely to get better any time soon. GAO concludes that it is impossible to relate what we're spending (inputs) to what we're getting (outputs) in any reasonable way. 379 KB PDF file.

CANCELED DOD APPROPRIATIONS: $615 Million of Illegal or Otherwise Improper Adjustments, GAO-01-697, July 2001.  GAO has audited $2.2 billion of adjustments affecting closed appropriation accounts in FY 2000.  Of these, 28% were improper and should not have been made, and included in this figure were $146 million that violated specific provisions of appropriations law and were thus illegal.  Most likely, these problems were caused by a deficiency in the Contract Reconciliation System (CRS) "DOD had been aware of the system deficiency since at least 1996, but took no action to upgrade CRS until we brought this problem to its attention."

"Government at the Brink," Vol 1 (632 KB .pdf) and Vol 2 (651 KB .pdf). Report by Sen Fred Thompson (R TN), then-Chairman of the Senate Governmental Affairs Committee, June 2001.  Waste and even corruption are reaching levels generally associated with third world countries.  DoD section, including description of the financial management system, begins on p. 17 of Vol 2.

"Congressional Aide Finds Spending On 'Core Readiness' In Decline" by Elaine M. Grossman, Inside the Pentagon, June 28, 2001.  Succinct coverage of the "Spartacus Report," detailing how spending on core readiness has declined despite huge increases in defense spending, much of which was justified on the need to improve readiness.

Testimony of the Deputy DoD Inspector General, Robert J. Lieberman to the House Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations, May 8, 2001.  Candid statement of the problems still facing anyone trying to understand how DoD spends its money and what the taxpayers get in return.  Examples:  Although the FY 2000 DoD budget was "only" around $290 billion, there were over $4 TRILLION in accounting adjustment entries (roughly $ 1 trillion unsupported); only 7 of DoD 167 major financial management systems met adequate standards (cost to fix = at least $2.3 billion).

"Information on the Use of Spare Parts Funding is Lacking," GAO 01-472, June 1002 (182 KB .pdf).   For FY 1999, Congress gave the Pentagon an extra $1.1 billion in emergency supplemental funds specifically earmarked for spare parts.  We know that $87 million actually did go into an account for Navy aircraft spares; the rest disappeared into general operations and maintenance accounts and could have been used for most anything.

Everyone concerned with defense issues should at least study this one-page summary of the latest DoD IG report:

"Department-Level Accounting Entries for FY 1999 (08/18/00)" — Complete at Report No. D-2000-179 (PDF), Date: August 8, 2000.  The executive summary of the latest DoD Inspector General's report on DoD's attempt to produce an auditable financial statement (as required by the Chief Financial Officer's Act of 1990).  The report concludes that:

As a result, the DoD financial statements for FY 1999 were subject to a high risk of material misstatement. The sheer magnitude of department-level accounting entries required for FY 1999 highlights the significant problems that DoD encountered in attempting to produce more accurate and reliable financial information using existing systems and processes.  

Senator Fred Thompson, R-Tenn., Chairman of the Senate Governmental Affairs Committee, commented that, "Last year, the Defense Department corrected errors in its bookkeeping that totaled $2.3 trillion — more than the entire federal budget,"  calling them "changes made to plug holes for things they couldn't explain."  The Albuquerque Journal observed that the Pentagon "owns $119.3 billion in ships, trucks and other equipment, but that couldn't be verified because records lacked supporting documentation," and that "Muddled books are more fertile ground for fraud and corruption, too."

"Major Management Challenges and Program Risks: Department of Defense" (GAO-01-244, January 2001) In this important and well researched report, the General Accounting Office (GAO) found that DoD's business practices fail to approach the standards of excellence demanded of troops in the field. In particular, "power games" such as front loading (basing program decisions on unrealistic assumptions) waste money that could be used to improve readiness and support modernization.  The report reiterates the importance of fixing DoD's unauditable financial systems as the basis for reasonable decisions.

"Progress in Financial Management Reform,"  (714 KB .pdf file) Testimony of the Acting Assistant Comptroller General, Accounting and Financial Management, May 9, 2000. Despite its bland title, this should be required reading for anyone wanting to debate defense issues.  The good news is that it is actually pretty understandable, even for non-financial types (and to make it even easier, we've highlighted some important areas).   Simply put, DoD management needs reliable cost information for four reasons:  1) evaluate programs to compare predicted with actual effects; 2) make choices regarding outsourcing and technology; 3) control costs for its activities; and 4) measure performance (see p. 34). Unfortunately the current DoD system fails on all four counts, making the rest of its decision process suspect at best.

Future Years Defense Program: Funding Increase and Planned Savings in Fiscal Year 2000 Program Are at Risk, GAO report (904 KB .pdf file).  For the years they have in common, 2000 - 2003, the 2000 FYDP requested $50.8 BN more than the FY 1999.  Where will the money come from?  The Pentagon identified several sources, but the GAO found them subject to a variety of risks. These risks include optimistic assumptions on federal budget surpluses (and the fraction that might actually go to DoD), fuel costs, inflation, and operating efficiencies and the as yet unfounded assumption that Congress will authorize further base closings.

Future Years Defense Program: Risks in Operations & Maintenance and Procurement Programs.  October 2000.  GAO Report (.364 KB .pdf file)  The latest GAO report reiterates that DoD is at risk of failing to carry out its O&M plan, although the 2001 FYDP top line is roughly $16 billion over the 2000 FYDP for the years 2001 - 2005.  The GAO found that DoD had understated peacekeeping costs by 2/3, the backlog of real property maintenance is expected to grow to $26 billion by 2005, savings from reforms will likely be less than anticipated, and the defense healthcare system is underfunded by $6 billion.  The likely result will be more shifting of funds from modernization to support O&M.

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