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When will the Pentagon account for its finances?

A failed fourth audit for DOD in as many years might have some wondering whether its mantra should be ‘audits for thee, but not for me.’

Do you have a household budget? On a regular basis do you look at your income and your spending and saving habits? If you do, congratulations; you’re a responsible adult who knows the consequences of not reviewing your budget and making adjustments to get you through the year.

Now, imagine the inner workings of the federal department that receives the largest portion of the discretionary budget: the Pentagon. At well over $700 billion per year in spending, the Department of Defense moves the largest number of pieces across the fiscal checkerboard each year. And every one of those red or black checkers is funded by your tax dollars. You’d think such a huge and complicated budget would be closely tracked, accounted for, and double-checked.

But you’d be wrong.

Sure, the procurement abuses of the 1970s and 80s led to significant congressional oversight and reporting requirements on those portions of the Pentagon budget most prone to waste. But all that attention in one direction led to vast portions of the department’s responsibilities, notably personnel and operations and maintenance spending, to grow out of control and without significant oversight.

As the New York Times noted a few years ago, “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.”

In other words, audits for thee, but not for me. And the Pentagon was allowed to get away with it for decades.

My organization, Taxpayers for Common Sense, is a nonpartisan budget watchdog group. We pursue common sense solutions to wasteful spending legislation, outdated and overblown federal subsidies for certain industries, and regulatory regimes that keep Americans from realizing a fair return for the sale or lease of federal assets. For more than a decade we’ve been part of a group of like-minded organizations calling for the Pentagon to be subjected to a financial audit, just like other federal departments.

I never believed the audit was the be-all, end-all of financial management. Having an audit of the Pentagon won’t put an end to wasteful spending. But it will help us to understand the scope of the challenge as well as identify areas of greatest concern. The procedures and data management put in place to even be auditable is arguably more important than the audit. As TCS noted when the first Pentagon audit was completed in 2018, “They failed. And nobody is surprised.” In fact, the deputy secretary of defense at that time, Patrick Shanahan said, “We failed the audit. But we…never expected to pass it.”

To return to my checkers analogy, the first audit actually failed to uncover fundamental things like the number of pieces on the game board. The Pentagon then had $2.8 trillion in assets, but how many programs are funded by the Department of Defense? Even basic answers like this are still in limbo. The first audit did note the military services are able to account for major military equipment and military and civilian pay, so I guess that’s something. But a lot of unaccounted for pieces are still on the board, four years after that first completed audit.

Some subsets of the Pentagon have received “clean audit opinions” or a passing grade. But no military service has yet to reach that threshold — even after several mentions of the Marine Corps (the smallest service) being on the verge of a clean opinion.

Fast forward to mid-November this year when some scant details of the fourth consecutive financial statement audit were released for public review. First, and notably, the audit finds the Pentagon to have $3.2 trillion in assets — a $400 billion increase in four years. It’s not clear if those are actually new assets, or ones the first audit missed.

The results of the first audit gave five subsets of the Pentagon “clean” opinions: 1) the U.S. Army Corps of Engineers — Civil Works, 2) the Military Retirement Fund, 3) the Defense Health Agency — Contract Resource Management (which is a subset of DHA), 4) the Defense Contract Audit Agency, and 5) the Defense Finance and Accounting Services Working Capital Fund.

The most recent audit bestowed eight clean opinions, the original five plus: 1) the Defense Information System Agency’s Working Capital Fund, 2) the Defense Commissary Agency, and 3) the DoD Inspector General.

This means the five agencies that received a clean opinion four years ago continue to receive “passes.” And four years ago, the Defense Commissary Agency received a modified opinion, meaning its financial statements were fairly presented but didn’t comply with generally accepted accounting principles. Apparently, they do now. So, the only “new” agencies that have moved onto the list of clean opinions in the past four years are the DISA Working Capital Fund and the Inspector General.

But, interestingly, the Medicare-Eligible Retiree Health Care Fund also received a modified opinion four years ago and remains in the same position this year. Maybe they should head over to the commissary folks for some helpful hints. And the poor old Marine Corps, still hasn’t had a clean or modified opinion.

As I alluded to before, these annual audits shouldn’t be the final word on the subject of Pentagon finances. But they are tools to increase congressional oversight of the biggest, most expensive, and most byzantine portion of the federal discretionary budget.