WASHINGTON — For decades, the Pentagon has tried to keep financial records that can stand up to an audit. For not quite as long, it has tried to figure out just how many contractors it employs.
Officials send periodic reports of generally meager progress to Congress, where they are generally met with expressions of dismay.
But this year, the U.S. Department of Defense (DoD) appears to be putting in more effort, if only because the specter of budget cuts sharpens the need for accurate information, and Congress appears to be paying more attention.
The Pentagon’s latest status report on its Financial Improvement and Audit Readiness Plan — the effort to make the DoD auditable by 2017 — said the vast majority of the department remains unauditable, although some small agencies are ready, and the Marine Corps, by far the smallest and least complex of the military services, is likely to become the first major branch to join them.
But the report said leaders are pushing the effort, clearer milestones have been set, the Pentagon’s business and financial systems are being modernized and money — $300 million a year — is being thrown at the problem.
In a letter attached to the report, Pentagon Comptroller Robert Hale says the size and complexity of the Pentagon have kept the audit goal elusive. But he added that “it is important for the American public to understand that — although the Department does not yet meet commercial audit standards — their tax dollars are being managed responsibly.”
That is not good enough for one bipartisan group of senators, who released a joint statement May 16 asking the Government Accountability Office to investigate the Pentagon’s current plan and to report back by July.
So why can the Pentagon not handle a full financial audit? Why does it not know how many contractors are working under DoD contracts? And what are the consequences for the U.S. military and taxpayers?
Experts say Hale is right: The Defense Department is an enormous and complicated organization and therefore incredibly difficult to audit. But more importantly, the federal government does not spend money or operate the way a private company or even most governments do, according to defense experts.
If the Pentagon were a private company, it would be one of the biggest in the world based on its annual budget, said Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments.
To get all of DoD’s assets onto the books, it would need to count and then give a market value to every piece of equipment, every house, every lease, every building and everything else on every military installation around the world.
“That is a Herculean task,” a former Army budget official said.
Complicating matters, there are basic differences between how the government keeps its books and the way normal bookkeeping is done. Unlike private companies, which seek to put their money to most profitable use, the Pentagon strives merely to comply with the legislation that governs appropriations, Loren Thompson of the Lexington Institute in Arlington, Va., said.
“We actually do a pretty good job of making sure that nobody spends any money that hasn’t been appropriated by Congress,” said David Berteau, a senior adviser at the Center for Strategic and International Studies located here.
But switching over to regular bookkeeping would be very complicated.
“The big reason why it is so difficult to do that is the federal government, with the exception of a few Third World countries, is the only entity on the planet that has no capital budget,” Berteau said. “The real issue is until we have a capital budget for the federal government, and especially for DoD, which owns a lot of capital assets, they can’t amortize them; they can’t depreciate them; they can’t build in replacement value as part of normal bookkeeping, unlike every other government in the Western world.”
But creating such a fund would reduce lawmakers’ power.
“You can’t solve this problem without the congressional appropriations process being part of the solution,” Berteau said.
Despite the complexity, defense analysts agree that completing a financial audit is useful, particularly amid defense budget cuts. Yet it might be only a first step toward real fiscal efficiency.
“We don’t always go back and say, ‘Did we spend the money on what we thought we were going to spend it on when we built the budget, and did we get for it what we thought we would get for it?’” Berteau said. “Now, that’s ultimately what you’d like the defense financial system to be able to tell you, and by the way, complying with financial audits might not necessarily answer those questions. You could be in complete compliance from a financial audit point of view and still not be able to answer the real important question, which is, what did you get for your money?”
The 2008 defense authorization bill required the Pentagon to create an annual inventory of the number of contractor employees working under service contracts.
Last September, Sen. Carl Levin (D-Mich.) asked Deputy Defense Secretary William Lynn when DoD might comply.
“It would make the task that we’re undertaking easier if we had better data, and we’re endeavoring to — to develop that,” Lynn told the Senate Armed Services Committee during a Sept. 28 hearing.
So far, the Pentagon has only been able to estimate the numbers. Each service uses different tools, and the Pentagon changed its own estimation formulas between 2008 and 2009, making the annual numbers incomparable.
