The Pentagon’s Broken Book-keeping
Defense reform critics like Chuck Spinney, and government organizations like the GAO, have complained for years that the Pentagon’s accounting system is broken. Considerable amounts of money are still being spent trying to improve the services’ systems in order to realize a “clean audit,” but the DoD’s books are such a mess that its accountants aren’t wasting any money by trying to run comprehensive audits. Last year, Managing Director Gregory D. Kutz of the Government Accountability Office told Congress that these accounting problems would cost taxpayers approximately $13 billion in 2005. Indeed, the GAO has classified the Pentagon’s accounting systems as “high risk” since the 1990s.
Now the Raleigh-Durham News & Observer has a report that details the extent of the problem, and the troubles these systems are causing for some troops in the field. But why do the problems persist, even after all of these years?
In a word, scale.
The News & Observer notes that the Pentagon has 4,150 different systems, including 713 different human resources systems. Rep. Todd Platts [R-PA] was quoted as saying that
“The [US Department of Defense] for more than five decades has just kind of layered system on top of system on top of system, and not been serious until recent years that this is not an efficient way to protect against waste, fraud and abuse or in assuring the most effective and efficient systems are in place for those serving in harm’s way.”
Almost all large firms also suffer from this “spaghetti systems” problem. In response, many have attempted to standardize on huge ERP (Enterprise Resource Planning) software implementations. Even with pre-built software behind them, these attempts to centralize tracking and standardize data formats and codes can cost hundreds of millions of dollars and take years. Yet even some of these implementations have been known to fail, sometimes after 7-figure or even 8-figure sums have been spent. Or they are successfully installed, but prove irrationally expensive to customize for the unique needs of that enterprise in ways that affect its functioning. Without naming names, the author is personally aware of one case where a chemical firm’s new ERP system had to go live without environmental reporting; and another in which a university had to abolish course pre-requisites after installing a new ERP system (and putting the project manager on long-term stress leave).
Now, consider that even these firms’ Herculean efforts are trying to address organizations that are orders of magnitude smaller and less complex that the US Department of Defense.
For instance, the DoD has about 5.2 million inventory items, compared with 11,000 at Wal-Mart or 50,000 at Home Depot stores. Now multiply that by the fact that the same item may have several different order codes in different DoD departments, which do not use the same format. The DoD also has $1.3 trillion in assets (Wal-Mart: $120 billion) and $1.9 trillion in liabilities (Wal-Mart: $20 billion).
Which means their problems may continue for some time. To add to the difficulties involved, the Pentagon only began putting income statements together in the 1990s; before that, it had never needed to put a value on anything. Some believe that overhang will cripple any “clean audit efforts,” which stood at 16% of assets and 49% of its liabilities as of June 2005.
As Winslow T. Wheeler of the Center for Defense Information, puts it:
“It’s not that DOD flunks audits, it’s that DOD’s books cannot be audited. DOD aspires for the position where it flunks an audit.”
There are initiatives underway like the Military Equipment Valuation & Accountability effort, which aims to put a cost on all of the DoD’s equipment that can be depreciated over its service life. An important milestone was reached in February 2006: for the first time in its history, DoD claims that it has established the cost of each item of military equipment in inventory in 1,101 programs. The Property and Equipment Policy Office is in the process of updating these costs to a common date of June 30, 2006, and developing an information technology system to offer continuous reporting in the DoD financial statements quarterly. Finally, the Office is working with the Department of Defense Inspector General to obtain an audit of the updated costs.
According to Jim Minnery, an accountant in Ohio who works for the Defense Finance and Accounting Service, even more serious problems exist.
“Their systems can’t keep track of who they’ve sold stuff to, who owes them, who they owe.”
The News & Observer documents problems that have cropped up, and they seem to support Minnery’s position. Problems getting some Guard soldiers medical treatment (they were fixed manually). Frequent pay problems. Maintenance work orders that can’t be completed due to bad data that strangles parts supply. Major discrepancies in material shipped to vs. received by the US Army. Not to mention that… “the department had collected only $687,000 of an estimated $100 million it was entitled to from a mandated levy on DOD contractors.”
Even Donald Rumsfeld had called the Pentagon’s arcane accounting systems and bureaucracy “a matter of life and death” – though admittedly, that was on September 10th, 2001.
The News & Observer reports that the US Defense Department now hopes to settle the balance sheet on 47% of assets and 49% of liabilities by 2007. Its story has a lot of good material detailing the scope of this problem, and comes highly recommended.
This is an issue that DID will return to in future; the Pentagon’s accounting problems are not limited to issues of day to day functioning. They also go right to the heart of the US system’s ability to properly evaluate and learn from procurement decisions over the long term.
- Portfolio.com (May 2008) – The Pentagon’s $1 Trillion Problem