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As Trump seeks defense-spending boost, watchdogs cite faulty Pentagon accounting

[April 14, 2017] By Scot J. Paltrow

WASHINGTON (Reuters) - President Donald J. Trump is planning to increase U.S. defense spending by $54 billion next year. But a series of recent reports by the Defense Department Inspector General and the Government Accountability Office say that Pentagon accounting systems will struggle to track how the money is spent.

The reports found that the Pentagon remains unable to accurately track its $591 billion annual budget and experiences billions of dollars in accounting gaps and errors each year despite two decades of reform efforts. Taken together, the reports show that many of the endemic accounting problems exposed in a 2013 Reuters investigative series remain in place.

“These deficiencies not only affect (the Department of Defense's) ability to have auditable financial statements,” a Feb. 9 Government Accountability Office (GAO) report found, “they also affect its ability to make sound decisions on missions and operations.”

A spokesman for the White House's Office of Management Budget (OMB) said he was confident that Defense Secretary James Mattis would properly spend the additional funds.

“The need to replenish our military and bolster American security is unquestioned and an important priority of this president," OMB Communications Director John Czwartacki said in a statement. "We believe Secretary Mattis will deploy all of his resources in the most effective and efficient way possible.”

Critics of wasteful Pentagon spending say increasing the Defense Department budget is unwise when the department is unable to account for what it already has.

“It’s ludicrous,” said Mandy Smithberger, director of the Straus Military Reform Project in Washington. “Reform isn’t going to happen as long as the spigot is turned on.”

The Pentagon’s continued accounting problems are drawing particular scrutiny now because the Defense Department faces a congressionally mandated legal deadline of Sept. 30, 2017, to become ready for its first audit ever. Unlike every other U.S. government department, the Pentagon has never undergone an audit because its financial records are in such disarray.

A spokesman for the Defense Department comptroller’s office said he is confident it will meet the deadline.

“The Department is committed and on track to be ready to undergo a full financial statement audit in (fiscal year) 2018,” Lieutenant Colonel Eric D. Badger said in an email.

DEEP CUTS

At the same time Trump proposes to boost defense spending, he has called for deep cuts to other areas, a White House summary of his proposed 2018 budget shows. Whether Congress will accept or reject Trump's proposals is unclear.

Trump calls for cutting the State Department’s budget by $10.1 billion, or 28%. Among other things, U.S. payments to support the United Nations would be cut.

The Environmental Protection Agency (EPA) would take a particularly big hit. Trump would cut $2.6 billion, or 31%, of its budget. The White House document says the budget would eliminate more than 50 EPA programs, and cut EPA’s research and development budget by $233 million, or 52%. The budget for grants to states for lead clean-up would be cut by 30% to $9.8 million.

The recent watchdog reports on the Defense Department found that it lacks a unified, functioning accounting system. As Reuters reported in its 2013 series, the Pentagon has hundreds of independent systems, built ad hoc and some dating from the 1970s, that are riddled with errors and incapable of sharing accurate data.

Billions of dollars disappear from accounting records. The military has spent large sums building new systems meant to solve the problem, but so far they have not.

A March 16 Defense Department Inspector General report said the Navy could not find any records to back up how it had spent $866 million in the first quarter of 2016 in U.S. military operations in Afghanistan. The report said that as a result, there was no way to know what the money actually was used for.

A Navy spokeswoman, Lieutenant Kara YingLing, referred Reuters to the Navy’s official response to the report, which said the Navy agreed with the Inspector General’s conclusions but said its accounting problems will not be fixed until it begins using a new computer system in 2019. YingLing said the Navy is “on track” to help the Pentagon meet its Sept. 30 audit deadline.

The Feb. 9 GAO report said the Pentagon's continued bookkeeping errors affect the federal government as a whole. Defense spending makes up such a large part of the federal budget that the department's unreliable data skews accounting for the entire U.S. government, the GAO said.

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President Donald Trump tours the pre-commissioned U.S. Navy aircraft carrier Gerald R. Ford with Commanding Officer U.S. Navy Captain Rick McCormack (R) at Huntington Ingalls Newport News Shipbuilding facilities in Newport News, Virginia, Virginia, U.S. March 2, 2017. REUTERS/Jonathan Ernst

SYSTEMIC RISK

The report noted that the Defense Department has been on the GAO’s list of “High Risk” entities that represent threats to the federal government’s financial well-being since 1995. The report said the Pentagon has remained on the list because of “long-standing deficiencies with its financial management systems."

The GAO report noted that the Pentagon had hired large independent accounting firms for each of the military services to try to help them meet the Sept. 30 audit deadline. But the report said the firms have found so many problems that the ability of the Pentagon to meet the deadline remains in doubt.

A separate Defense Department Inspector General report issued on March 23, 2017, found that the Army continues to be unable to balance its checkbook. The report concluded that the problem for the Army grew worse in 2016.

The report said that for October 2015, the Army had 177,921 discrepancies. The monthly numbers rose steadily to 790,551 for June 2016. The report did not give dollar amounts for those months.

Army spokesman Wayne Hall said the number of discrepancies continued to increase in 2017 because planned fixes to computer systems have not yet been made. He said the Army is working on building more reliable systems.

The report said that because rules require that the Army’s numbers exactly match in monthly reports to the Treasury, the Army and the Defense Finance and Accounting Service must find a way to make them match. Their solution was to enter made-up numbers to make it appear falsely that the Army’s numbers do match.

The report said that for March 2016, there were $1.9 billion in such “forced balance entries.” Hall said the Army must make the numbers match under federal rules.

In separate reports, the Inspector General found that other military services have also had problems balancing their financial numbers with the Treasury’s. Accountants interviewed by Reuters said that such large discrepancies would be considered accounting fraud in the corporate world.

Badger, the spokesman for the Defense Department comptroller’s office, said any errors by the military services were unintentional.

“We strongly oppose any accusation of intentionally misrepresenting our books,” Badger said in an email. “Many manual accounting adjustments are often caused by the ineffective design of legacy business or financial systems.”

Trump has said the $54 billion in increased defense spending will send a “message to the world in these dangerous times of American strength, security and resolve.” Trump has also vowed to negotiate cheaper contracts with defense contractors, a problem also cited in recent watchdog reports.

In a March 2016 report, the Inspector General found that the Air Force had spent “billions” on a contract to maintain one type of jet engine, without first getting any idea of a fair price.

The open-ended contract, with a guaranteed profit margin regardless of cost, was awarded in 2011. The report said that before signing the contract the Air Force obtained no data on the actual cost of the repairs and how the costs compared to private-sector rates.

The exact amount of the contract was redacted from the report. The Inspector General has not ruled on a March 2016 Freedom of Information Act request filed by Reuters that asked for the redacted information to be made public.

(Editing by David Rohde.)

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