The Pentagon Doesn’t Know Where Its Money Goes

The military finally submits to an audit, and the results are por

By The Editorial Board

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CreditCreditJames Yang

After decades of ducking the legal requirement that it undergo a thorough financial audit, the Pentagon finally opened up its books to 1,200 outside accountants and analysts. The report was recently completed, and here’s the good news: The Army Corps of Engineers (most of it, anyway) and the Military Retirement Fund passed the audit.

The bad news: The Army, Navy, Air Force and Marines and most other divisions failed, which means they were unable to show that they were properly keeping track of their finances and assets.

The Pentagon has long prided itself on being a “can do” organization, firmly committed to protecting the nation. But when it comes to husbanding the billions of taxpayer dollars that pay for the vast military establishment, defense leaders have had less exacting standards.

“We failed the audit,” Deputy Defense Secretary Patrick Shanahan told reporters with a curiously nonchalant air. “We never expected to pass it.” 
The Pentagon failed the audit largely because there are serious gaps in the financial controls that guide it, the world’s largest military organization. It has $2.7 trillion in assets (weapons, bases and such) and $2.6 trillion in liabilities (mostly the costs of military personnel and retirees). Basically, the auditors couldn’t account for where all the money went because of flaws in information technology systems.

That laxity — and the prospect of tax dollars flowing to boondoggles — would be concerning at any time. But it is especially worrisome when the federal budget deficit has skyrocketed to $779 billion — and the military is insisting it needs more money.

In a way, Mr. Shanahan’s attitude is understandable. The Pentagon is an enormous bureaucracy — three million people, 15,700 aircraft, 280 ships, 585,000 facilities at 4,700 sites worldwide, an annual budget of $700 plus billion — and some experts say that expecting a clean bill of health on the first audit was never realistic.

Yet the Pentagon had nearly three decades to prepare for this accounting Judgment Day. While federal agencies were mandated by Congress in 1990 to begin performing annual financial audits, the Pentagon resisted for so long that it became the last one to comply with the law. Private companies, accountable to shareholders, couldn’t get away with that.

But audits are hard work; most defense officials aren’t business experts; and to some, bookkeeping and other management operations just aren’t a priority in wartime, which since Sept. 11, 2001, has been a permanent state.
Most important, the Pentagon is skilled at bucking Congress, which is what it did all those years. This, even though the Government Accountability Office, a government watchdog, put the Defense Department on its list of agencies vulnerable to fraud, waste and abuse in 2015.
The Pentagon was granted a virtual blank check to fight terrorism, and it still gets most of what it wants. It accounts for more than half of the federal discretionary spending, with a budget greater than the military spending of the next seven countries combined, including China and Russia.

So what did the audit — which cost some $413 million and covered every military asset, from buildings, fences, storage tanks, planes, computers, spare parts, invoices, purchase orders and contracts — find?

There are major flaws in how the Pentagon handles its information technology. The flaws include failing to revoke the credentials of former employees and using systems that can be hacked.

Officials said the auditors accounted for all major military equipment, even discovering $53 million worth of uninstalled missile motors at Hill Air Force Base in Utah that were cataloged erroneously as “not in working condition.” That’s an improvement from January, when defense officials acknowledged that they had lost track of 39 Black Hawk helicopters.

But the Pentagon was found to lack the systems and controls needed to “provide assurance over the existence, completeness and the valuation of inventory and related property recorded in the financial statements.” In all, the audit identified 20 “material weaknesses” that “could adversely affect DoD’s financial operations.”

They discovered ineffective payment systems, outdated financial management information technology systems, and an inability to substantiate that Pentagon real estate assets were properly cataloged and valued, among other complaints. 
The auditors estimated that the Pentagon made “improper payments” — which lacked sufficient or appropriate documentation or approvals — of $957 million in 2017 and $1.2 billion in 2018. While even that larger amount is a fraction of the overall Pentagon spending, such payments grew by 25 percent over those two years, a worrying trend that needs to be reversed.

Anyone expecting the discovery of pilfered funds will be disappointed. The audit wasn’t looking for fraud — which generally refers to malicious illegal activities — and Defense Department officials said it found none. (Different audits examine different aspects of an organization.)

Its purpose was to determine whether accounts could be reconciled, making the results less sexy, perhaps, but still important. The inability to accurately track how money is spent makes it impossible to know whether precious resources are going to the right places, undermining the Pentagon’s ability to be successful in its far-flung missions around the globe.

But it would be misleading to imply that such an immense bureaucracy is not also experiencing actual fraud, abuse or waste. Cost overruns and performance issues with such major weapons as the F-35 fighter jet and missile defense systems have been well documented in the past, raising doubts about the Pentagon’s ability to responsibly manage taxpayer dollars.

And the Special Inspector General for Afghanistan Reconstruction has spent six years documenting more than $400 million in questionable costs, unfinished projects and poorly executed programs, and pursuing 132 criminal convictions, in Afghanistan, the site of America’s longest-running war.

Last month, for example, a former recruiter of language interpreters for the American military was charged in an alleged scheme to recruit unqualified interpreters to work with American combat forces in Afghanistan. And in September, the former owner of a now defunct marble mining company in Afghanistan was found guilty in federal court for his role in defrauding the Overseas Private Investment Corporation and defaulting on a $15.8 million loan.

The unfavorable audit results come at an awkward time. A recent congressionally mandated study reached the alarming conclusion that despite all the money spent on defense, the United States today is so weakened that it “might struggle to win, or perhaps lose, a war against China or Russia.” The study also found that America’s military superiority and technological edge over those two major adversaries has eroded. 
The Pentagon, defense hawks in Congress and defense contractors relentlessly push for bigger military budgets and will continue to do so. The commission that did the study recommended future annual increases of 3 percent to 5 percent above inflation, which could give the Pentagon a budget of $972 billion per year by 2024, a cumulative increase of 44 percent over the current budget, according to Taxpayers for Common Sense. But throwing more money at the Pentagon doesn’t automatically make it more effective. Nor does it translate into better national security, as America’s “forever wars” in Afghanistan and elsewhere demonstrate.

The nation needs to be more honest about the choices it is making (investing trillions more dollars in the nuclear arsenal is especially foolhardy) and realize that other investments — in diplomacy and development overseas, in job training and infrastructure projects at home — are also crucial to national security.

Defense Secretary Jim Mattis and his leadership team deserve credit for finally opening the books for an audit, thus providing a baseline against which the management of future spending can be measured.

Before rushing to push Pentagon spending even higher, however, Congress, which has shirked its vital oversight role, would be well advised to make sure that critical reforms are undertaken by a stubbornly change-resistant bureaucracy, so Americans can be certain their tax dollars are being spent effectively.

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