I saw a reprint of an article done by Reuters the other day entitled “Special Report: The Pentagon’s doctored ledgers conceal epic waste” and even though it’s almost a year old, I think it still applies. 
In just a few days, all the big accounting firms that do business with DoD will be submitting proposals to conduct audits of the the Army, Navy and Air Force Statements of Budgetary Activity (SBA)……that’s a high level balance sheet that has little applicability to the actual management of anything. Experience in auditing the Marine Corps proved that trying to do anything else was futile. One just has to read the Reuters article on “Plugs” to see just how daunting a task auditing any of the services really is. Inventing phantom ledger entries or “plugs” to explain away imbalances in the “goes-intas” and the “goes-outtas” is apparently the norm at the Defense Finance and Accounting Service. What’s a little disturbing about this whole audit thing, is that many of these sins will go unexamined because they do not necessarily impact the SBA. See my article “DoD Audit: Is the cure worse than the disease?” for the details about just what the SBA is all about.
In fairness, I think the article’s title is misleading in that I doubt if the motivation behind plugging in numbers is a desire to conceal waste, but rather it’s the normal way of balancing the books in order to satisfy the Treasury Department. The real motivation is to keep the heat off oneself ……does that sound familiar? Think about recent VA scandal…..I doubt if the real motivation was to make sure deserving veterans didn’t get appointments, but it was done to keep the front office happy. Never mind that the green eye shades at Treasury are apparently more interested in balancing the numbers as opposed to the reliability of the numbers used to balance (a la VA!). It’s been going on for years, so that’s a good indication that nobody cares. Unlike the VA however, the DFAS guys were caught and still nobody cares!
But we do care these days about getting the DoD auditable. And the Pentagon’s efforts to get to auditability have been extensive and expensive, with some modest results. Take a look at the USMC……their SBA has passed audit scrutiny for two years running now. Some months ago I wrote an article on the USMC audit, “Hall of Heroes and Auditors“, which is worth reviewing for context for what follows.
I support the efforts of DoD to get auditable, but only in so far as those efforts are done for the right reasons….not to keep the front office happy, but to make sure DoD is properly accounting for dollars….When they say “We don’t have money for pay raises”, or “Retiree health care is costing us too much,” or “We have to furlough employees,” are they using data from the system that “plugs” in nonexistent dollars to satisfy the front office? Who knows if the numbers they are quoting are accurate, given the evidence that the numbers are inherently inaccurate! My point is DoD audits are only interesting science projects for green eyeshades if we are only auditing things that don’t matter. SBA audits are interesting, but not compelling. We must follow on and audit all the other aspects of DoD financial accounting and property, plant and equipment inventories. That’s the plan (I think), but after DoD has spent collectively over $200 Million just to get to SBA audit, will they have the fortitude to go further into the things that really matter? Will Congress let them? Will the operational pressures in an very unstable, terrorist filled world trump mundane administrative exercises like audits? 
Stay tuned, but I think with sequestration about to raise its head once again, the President under pressure to mount military responses to multiple spots around the globe, and political stalemate in the Congress, betting on continued funding for DoD audits is at best like wagering on red or black at the roulette wheel at Trump Towers in Atlantic City (ooppppsss, it’s out of business, so how about The Nugget in Las Vegas?).
So don’t get too worked up and break out the champagne if it turns out the the service SBA’s pass audit ( they are likely to do so because of the limited scope and usefulness). Instead remember:
- It’s only the SBA, a very limited look into DoD finances.
- No one uses the SBA to manage anything.
- It only looks at one year…Past sins are ignored.
- DFAS is still using plugs to balance the books.
- It may be done by the cheapest bidder (As a stockholder, would you want the firm you have your life savings in to use the cheapest auditor?).
- Because all the audits are being done at the same time, chances are all the firms will be battling for manpower and may not be hiring the most competent auditors (assuming they hire auditors). We may even have to open up an auditor refugee camp to handle the influx of auditors to the Beltway.
So to sum it all up, I wholeheartedly support ensuring the DoD manages it funds effectively, efficiently and accurately. I’m not sure an audit of the SBA does any of those things. Victory is not a clean opinion on the SBA, it’s a clean opinion on the whole enchilada.
PS: Please do not reverse the order of this article’s title, no matter how applicable it may seem 😉