Armed For Audits

By Charles S. Clark

June 1, 2012

For want of an invoice, the battle was lost. The battle in this case is the Pentagon’s long-term quest for auditable books. But no one is giving up the fight. The congressional deadline for overhauling military accounts is 2017, and Defense Department leaders aim to achieve it three years earlier.

Much of the onus rests on Robert Hale, the Pentagon’s deputy under-secretary, comptroller and chief financial officer, who knows as well as anyone that the public can tolerate only so many stories about billions of Defense contractor dollars unaccounted for in, say, Afghanistan. “We haven’t had auditable statements for decades,” Hale says, “and I don’t think we’ll ever persuade the public we’re reliable stewards of their money if we can’t pass a test required of every viable corporation.”
 
Defense’s bookkeeping shortfalls have been on the Government Accountability Office’s list of high-risk programs since the mid-1990s. GAO’s most recent report, in April, criticized the department for failing to mobilize all committees and managers to comply with audit guidance, and for submitting premature reports of statement readiness. 
 
The challenge is complicated by sheer volume—the Pentagon in 2011 processed nearly 172 million financial transactions—and the services vary in their progress on adhering to the department’s Financial Improvement Audit Readiness plan. 
 
In an Oct. 13, 2011, memo to Pentagon civilian leaders and brass, Hale called for an “all hands” effort to improve business practices, not only to comply with legal requirements but also to aid in decision-making.
 
“We do know where we’re spending what Congress gives us,” Hale is quick to point out. If the department were off by just 5 percent, “there’d be 7 million or 8 million wrong payments to vendors and massive violations of the Anti-Deficiency Act—and we don’t see any of that happening,” he says. “But we owe it to the public to document what we do, and sometimes our business practices are not as good as they need to be.”
 
The solution comes down to what football strategists call “simple blocking and tackling, a matter of doing well what we’re supposed to be doing every day,” Hale says. Outside vendors that perform work must submit an invoice and receipts, and the receiving agency must have a report describing the amounts agreed to in a contract. But in the rush of more inspiring tasks, steps get skipped, Hale acknowledges. Supervisors have to say, “Sign the form please, I know you’re busy, but get the form filled out,” he says. “This is something that’s now important.” 
 
The services are at different places on these issues, according to Hale, who has served as comptroller of the Air Force, executive director of the AmericanSociety of Military Comptrollers, and national security specialist at the Congressional Budget Office. The Navy got started earlier and is further along—the Marines in particular—he notes. “The Army and Air Force are catching up fast and benefit from learning,” Hale says. “The Marines get asked to take a beachhead; now they’re taking a financial beachhead for us.”
 
Hale has been unafraid to seek help from private accounting firms—the Big Four and some smaller partners. “They have more practical expertise and experts who’ve been working with other agencies,” he says. The companies perform small-scale examinations and mock audits, along with staff from the Defense Inspector General’s Office. “Sometimes the audits pass, and sometimes they say, “Here’s what you didn’t do and what you need to fix it,” Hale says. “Sometimes, they even say we’ve gone a step further than needed.”
 
A major part of the remedy is new information technology, which is superior to older systems at retaining historical and detailed data rather than mere aggregate numbers, Hale says. Modern software also allows for instant retrieval of data, which is essential when auditors want statements in a hurry.
 
Oversight from Congress relative to the holy grail of clean books is “appropriate and part of our system,” Hale says, noting this endorsement is “not exactly a wish to have more because it takes a fair amount of time.” Years ago, the attention came from a variety of panels, but now it’s mostly the committees of jurisdiction, Hale says. That’s important, “particularly as we go through the inevitable change in personnel—no matter who wins the November election, Congress can make sure there is a continuity of effort,” he adds.
 
A key colleague of Hale’s is Beth McGrath, the Pentagon’s deputy chief management officer, with whom he chairs the Financial Improvement Audit Readiness Governance Board. “The rough division of labor is that she concentrates on efforts to install new [IT] systems, which is hard and needs to happen, while I concentrate on the overall process,” Hale says.
 
A separate but related component under Hale’s purview is the Defense Contract Audit Agency, which focuses on financial statements for private companies under contract with the department. That agency’s constituents are Pentagon contracting officers. “One way DCAA contributes,” he says, “is when we need to close a contract and make a final payment. DCAA performs an incurred cost audit, which says we’re ready to go so that the deputy chief management officer can finish it up.” It is not by accident, Hale adds, that two components reporting to him—DCAA and the Defense Finance and Accounting Service—have produced auditable books.
 
Soon after Leon Panetta took over as Defense secretary in July 2011, he let it be known he wanted departmentwide auditability earlier than the deadline—by 2014. “It’s a stretch goal, but the right thing to do,” Hale says. “We need to push ourselves to get there, and his personal endorsement is helpful pressure.”
 
During their near daily meetings, Panetta regularly brings up the problem, Hale adds, “despite all the other issues, like Syria and North Korea, on his mind.” Panetta’s nudge has “opened a lot of doors for us, and that point of view has permeated the organization,” Hale says. “My job is to leverage and make full use of it.”

By Charles S. Clark

June 1, 2012

http://www.govexec.com/magazine/briefing/2012/06/armed-audits/56002/