Pentagon ready for first audit after years of delays

The Pentagon says most of its primary budget accounts are ready for their first full financial audits, a long-promised project.

"Over 90 percent of our general fund dollars will be under" audit by an independent accounting firm during the fiscal year that began yesterday, Navy Commander William Urban, a Pentagon spokesman, said.

That means the Defense Department will mostly meet a deadline set in 2011 by then-Defense Secretary Leon Panetta to have the most relevant information used to craft annual budgets ready for review. The Pentagon's goal is for the rest of its funds to be ready in two years, by fiscal 2017.

The department, dependent on different sets of books kept by the military services and scores of specialized agencies that together were authorized to spend more than $581 billion in fiscal 2014, has struggled to meet a 1990 law requiring federal agencies to be capable of passing annual audits.

The Pentagon "should have to meet the same general principles of audit as every American taxpayer" who "must give the IRS numbers you stand behind, have receipts and face immediate financial consequences if you fail to meet the deadline," said Rafael DeGennaro, director of the "Audit The Pentagon Coalition," a group that says on its website it has bipartisan backing from lawmakers and advocates including Ralph Nader and Grover Norquist.

Marines' Audit

The Pentagon's inspector general last year gave the Marine Corps a "clean" audit opinion for its fiscal 2012 budget snapshot, and a number of agencies "have had a substantial amount of funds" already in audit, Urban said.

"This year we will transition most of the department from preparation and practice to audit execution and will dramatically increase the percentage of the department's funding subject to audit," Urban said.

DeGennaro dismissed that in an e-mail as "more of the same old broken promises, missed deadlines, moved goal posts and fuzzy math that have resulted in DoD being 20 years past the deadline in law."

Lawmakers have increased their criticism of the Pentagon's inability to prepare for an audit, much less receive a clean audit opinion, even as the basic defense budget grew 40 percent in real terms from fiscal 2001 to fiscal 2011 and war operations spending increased 71 percent.

Half of Spending

The U.S. Government Accountability Office, the watchdog agency for Congress, has criticized the department for its inability to account properly for an inventory that's 33 percent of the federal government and includes $1.3 trillion in property, plants and equipment. The Pentagon budget accounts for almost half the discretionary spending that Congress approves annually.

Democratic Senator Tom Carper of Delaware, chairman of the Homeland Security Committee, said in an e-mail that the military services and some Pentagon organizations "have made commendable progress toward audit-readiness. It is time for the remaining parts of the Pentagon to catch up. I intend to continue working with the department and my colleagues" to "ensure that happens in a timely manner."

"You can't manage what you can't measure" and "nowhere is that statement more true than at the Department of Defense," Carper said.

Representative Mike Conaway, a Texas Republican who's been one of the strongest critics of the Pentagon's accounting, said he also saw progress.

Better Understanding

"Today's accomplishment indicates that the department better understands its strengths, weaknesses and the right path forward," Conaway said in e-mail. "This understanding is essential to making the DoD auditable."

Being ready for an audit is only the first step, said Asif Khan, the GAO's director of financial management.

"Asserting audit readiness does not necessarily mean the entity will be able to pass an audit and obtain an audit opinion that year," Khan said in an e-mail.

Khan is leading an investigation into whether the clean audit opinion for the Marine Corps issued by the inspector general was justified.

"Our recent work shows that DOD faces continuing challenges in establishing sound financial management processes and operations that can routinely generate timely, complete and reliable financial and other business information for day-to-day decision making," Khan said.

Although Pentagon actions are under way "to address long- standing weaknesses," they are "not expected to be completed for several more years," Khan said.

'Building Blocks'

Urban said that although the Pentagon has backed off Panetta's more ambitious goal of having a "Statement of Budgetary Resources" audit-ready by now, "we are using a phased building-block approach."

"We will audit" more narrow statements "for several successive years," leading toward more comprehensive assessments, Urban said.

The Pentagon plans to award the auditing work in December to an independent public accounting firm, with the Office of Inspector General monitoring the work, Urban said.

"We are in the process of evaluating technical proposals," Urban said. "Once awarded, the planning process for the audits themselves will begin immediately, with actual audit work likely beginning" by March at the latest, he said.

The winner will audit financial statements valued at about $883 billion, according to a Pentagon chart. This includes $266.5 billion for the Army, $187.8 billion for the Air Force and $181.9 billion for the Navy.

To contact the reporter on this story: Tony Capaccio in Washington at acapacciobloomberg.net To contact the editors responsible for this story: John Walcott at jwalcott9bloomberg.net Larry Liebert