Senators Warn Pentagon To Be Ready for Full Audit in 2017

Five months before a deadline for achieving an auditable budgetary statement, Defense Department financial officials faced tough questioning on Tuesday from senators who said lawmakers and the public are out of patience with the Pentagon’s decades-long inability to clean up its books and get a handle on wasteful spending.

“This clearly is an unacceptable situation,” said Tom Carper, D-Del., chairman of the Homeland Security and Governmental Affairs Committee. “Federal agencies have been required to produce auditable financial statements since the mid-1990s. Unfortunately, nearly two decades later, the Department of Defense – which spends more than $2 billion every day -- has yet to meet this obligation.”

Though the current deadline for full auditability is the end of fiscal 2017, Defense components are under pressure to meet an earlier, Sept. 30, 2014, deadline set in 2011 by then-Secretary Leon Panetta for creating an auditable budgetary “activity” statement, which was scaled down so that it no longer requires significant prior-year numbers for comparison. Officials on Tuesday admitted the Statement of Budgetary Resources may not be fully executed this year despite having been reduced in scope.

“In part, this is due to pervasive management deficiencies that would never be tolerated in a private sector business and that are actively being addressed in other federal agencies,” said Carper, who warned Defense officials he planned to stay on their case. “It’s no surprise…that the department’s finances have been on the Government Accountability Office’s high-risk list since 1995,” he said.

Pentagon Comptroller and Undersecretary Robert Hale, who will be retiring when his successor is confirmed, responded that the “great majority” of his department’s units will meet this September’s deadline. “But candidly, a few may not be” ready, he added. The books for the military services and retirement trust funds are in better shape than those for inter-Defense agencies, he said.

Though only about 10 percent of the Defense budget is ready for the deadline as of today, Hale predicted 80 percent of the budget will meet the deadline. “We don’t push them out if they’re not ready, and will move to fix them,” Hale said. “We badly want to get to the top of the hill, but we don’t want to waste taxpayer money” by rushing statements out.

“I do believe we’ve made substantial progress,” Hale said, but auditability “has been more of a challenge than I expected when I came in five years ago.”

Progress requires “major changes” in business systems, practices and procedures, he noted, and “shutdowns, continuing resolutions, sequestration and furloughs have usurped some of the time that could have been spent on auditability.”

Robert Speer, acting assistant Army secretary for financial management, said, “we all remain committed to meeting the 2017 deadline” while taking corrective actions recommended by outside firms in time for the fiscal 2015 budget cycle. Noting that the Army has 53,000 financial system users in 200 locations around the world, “the current fiscal environment presents challenges, but it is also an opportunity to improve overall business processes.”

Jamie Morin, assistant Air Force secretary for financial management, said commanders have integrated auditability into their priorities and dramatically increased resources in both management attention and funds. The Air Force has also boosted compliance by borrowing some best practices from the Navy, such as monthly system checks.

Susan J. Rabern, assistant secretary of the Navy for financial management, said pursuing auditability “is difficult and complex with a large organization, but that steady progress toward goals is crucial in an environment of uncertainty.” She highlighted automatic data feeds as a way both of saving costs and boosting accuracy.

But Ranking Member Sen. Tom Coburn, R-Okla., displayed a chart of descriptions of the Pentagon audit problem written in 2001. It diagnosed a list of such weaknesses as a lack of an overarching systems approach and a “cultural trend toward the status quo.” GAO recently marked all as unchanged. “Auditability of books is of paramount importance because we in Congress we can’t do our job without it,” Coburn said, “a failure that rests squarely with us for accepting failure.”

Sen. Ron Johnson, R-Wis., asked how the Defense Department differs from the private sector, noting that “Walmart makes $450 billion a year, and its managers risk fines and jail if they’re not auditable.”

Hale rejected the common suggestion that his department’s size is an obstacle. “We’re divided into sections,” he noted. “But I would like to get back the 15 years after passage” of the 1993 Government Performance and Results Act, because “then we had no strategy or attention from senior leaders.” The progress that is being made, he said, is being documented by independent outside accounting firms. “It’s like 900 people drawing from the same bank account, and we’re trying to find the 10 that did not report,” Hale said. “The goal is not just a clean audit but accurate information.”

Johnson pressed him on why Defense doesn’t simply combine auditing with good management and begin its audit now rather than focusing on readiness. “What you’d get is management pressure to correct deficiencies,” Johnson said. But Hale and witnesses from the services said it makes no sense to audit if managers know things are not ready because the department won’t derive the benefits and improvement.

“Getting an auditor’s eye on the processes definitely helps,” Morin said. “The journey is as important as the outcome.”

Sen. Kelly Ayotte, R-N.H., asked whether Defense was satisfied with its improper payment rate of 1 percent, which is below the governmentwide average of 3 percent. “Our goal is zero, but this is a success area for the department,” Hale replied.

“One percent of $700 billion is $7 billion,” scoffed Coburn. “In Oklahoma that’s real money.”

Navy Comptroller Rabern, despite her own department’s successes in auditable books, said, “Never dance in the end zone and never underestimate the difficulty of the work.”

Carper, who had announced that “this would not be a pleasant hearing,” replied, “You can’t dance in the end zone until you get into the red zone.” He asked Defense to pay attention to GAO, the inspector general and the Homeland Security Department, which recently showed progress toward a clean audit. “We plan to keep on you about this.”