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The Defense Department's inspector general is planning a major overhaul of the watchdog office, including stepping up efforts to help the Pentagon improve its bookkeeping.

Joseph Schmitz, who was confirmed by the Senate as head of the 1,200-person office last spring, told Government Executive that he would soon put together a cadre of 150 "elite" accountants and financial personnel to work with the Pentagon comptroller to help Defense receive a "qualified" opinion on its financial audit within two years.

For the past four years, the department has received a "disclaimer" on its financial statements, meaning that auditors could not determine if the information in the statements was reliable. A qualified opinion is a step on the road to the ultimate goal of an "unqualified" opinion by auditors that the department's financial statements are reliable.

Schmitz called it "scandalous" that less than 1 percent of Defense's nearly $400 billion budget has received a clean financial bill of health.

Schmitz says the auditors would receive special training, including courses to become certified public accountants, and would report to a newly created director of Defense Financial Services, who would head the new unit.

The Pentagon's top cop says the focus on improving financial reporting is in keeping with the Bush administration's management agenda. The White House has told all agency heads that they are responsible for filing clean financial reports.

Schmitz says even with 150 auditors working on the project, outside accounting firms will have to be hired to meet the two-year deadline. Defense could spend as much as $200 million over the next few years to hire outside auditors to help balance its ledgers, he said.

Schmitz, a former Navy officer and reservist who previously has worked in Washington as a corporate attorney, says a reorganization of the IG office is long overdue. An independent assessment, commissioned by Schmitz, found four paramount concerns: poor senior leadership, defects in organizational structure, lack of inspection capability and a flawed promotion process.

Schmitz is implementing a new organizational plan that will flatten the office's management structure from five to three layers. Schmitz said none of the IG office's 17 senior executive service positions would be eliminated, but instead the people in those jobs would report more directly to him rather than to a series of deputy inspector generals. Also, the office's deputy director position would be eliminated and that job's responsibilities would be shared between the three assistant inspector generals for auditing, policy and inspections, and investigations, Schmitz said. All will report directly to the IG.

By flattening the office's management, Schmitz said he hopes to vastly reduce the 18 months it now takes for most audit reports to be approved for publication. Many younger auditors have expressed frustration that it takes months for their work to be reviewed by the office's various layers, Schmitz said.

In addition, Schmitz wants to better coordinate training programs and standards between the department's IG office and its service counterparts. He said he intends to appoint an "academic dean" to create a "virtual university" for sharing information among Defense and service IGs and audit agencies.

Defense Secretary Donald Rumsfeld "declared war on bureaucracy, and everything you see in this transformation and all these leadership initiatives are geared toward enabling this organization to literally be in the forefront of that battle," said Schmitz.

COMMENTS

• The fact that government auditors have been unable to certify government financial statements is a serious problem, but one that should not be attributed solely to financial management as practiced by executive branch agencies like the DoD. The Congress helped set the stage for the current situation by passing (no doubt with the best of intentions) the Chief Financial Officers' (CFO) Act of 1990, which required, among other things, that every federal agency begin producing external, GAAP-compliant financial statements (Balance Sheet, Income Statement, and Cash Flow) basically identical to the statements that publically traded companies must submit to the SEC, as if government agencies were going to begin selling stock in themselves. The problem with that approach is that such "external" statements are of basically no use to internal managers trying to understand and control their internal operating costs. In the case of the DoD, for example, this point was made by Secretary Rumsfeld's high-level "Task Force on Transforming Financial Management," led by Mr. Stephen Friedman, a former Chairman of Goldman,Sachs & Co., when it stated in its April 2001 report that: "the support of management decisionmaking is not generally an objective of the financially based information currently developed or planned for future development." The sad thing here is that even if the DoD's financial statements are eventually able to earn unqualified opinions (after how many more years of effort and expense? - 150 of the IG's best people plus another $200 million to outside accounting firms?), managers in the DoD will still be no closer to having the kind of information they need to begin understanding and controlling their operating costs than they were twelve years ago—the very kind of information the Congress has almost certainly wanted them to have all along. It would be refreshing if Mr. Schmitz, the new DoD IG would, in addition to the actions he is taking to help the DoD achieve unqualified opinions on its financial statements, were also to initiate a new dialogue with the Congress, to determine whether what the DoD (and virtually every other agency in the Executive Branch) is struggling, at great effort and expense, to do, is in fact aligned with the Congress' true intent regarding financial management. Christopher Hanks Posted March 3, 2003 12:12 PM