"Since the mid-1990s, federal agencies have been required to produce auditable financial statements," said Sen. Tom Carper, D-Del., in opening a hearing of the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management. "Currently, the Department of Defense is incapable of doing this. In fact, its books are so bad that auditors cannot even attempt to perform a complete audit."
Carper cited a recent Wartime Contracting Commission report on $30 billion to $60 billion or more in wasteful spending in Iraq and Afghanistan, news reports of the Army overpaying for helicopter spare parts, and a Defense inspector general's report of failure to collect $200 million in delinquent debts due to poor record-keeping. "Clean, auditable financial statements can provide the roadmap we need to move from a culture of spendthrift toward a culture of thrift," he said.
The subcommittee chairman also quoted newly arrived Defense Secretary Leon Panetta saying, "It is unacceptable to me that the Department of Defense cannot produce a financial statement that passes all financial audit standards. That will change. I have directed that this requirement be put in place as soon as possible. America deserves nothing less."
Beth McGrath, the Pentagon's deputy chief management officer, said a partnership between the chief financial officer and deputy chief management officer "will help to enable successful implementation. We have also implemented a new, focused approach that includes near-term goals," as well as the long-term goal of auditability, she said. "We also use and benefit from a constructive partnership with our auditors and oversight activities."
But her colleague Robert Hale, Defense undersecretary, comptroller and CFO, said, "we don't know auditing at DoD." The department has welcomed help from outside audit professionals, he told lawmakers.
"Regrettably, our current business environment does not always meet audit standards," he said. "Many of our systems are old and handle or exchange information in ways that do not readily support current standards. The systems were designed decades ago to meet budgetary rather than proprietary accounting standards. They tend to be nonstandard and sometimes do not include strong financial controls. In these cases, the consistent application of internal controls becomes critical. Many of the legacy systems also do not record data at the transaction level, a capability essential to audit success."
Also critical was Asif Khan, director of financial management and assurance at the Government Accountability Office, which has had the Pentagon's finance systems on its high-risk list since 1995. He called the systems weak, noting that one service had reported a program was audit-ready in two areas where it was not. "It needs more oversight from Congress," Khan said, adding, "the tone at the top is the right tone."
The representatives of individual services were for the most part upbeat and ready to implement improvements. Mary Sally Matiella, assistant secretary for financial management and comptroller for the Army, said, "Auditability will help us address the cost culture" although the larger goal is to "provide information to the warfighter to make good decisions and be effective."
Jamie Morin, assistant secretary for financial management and comptroller for the Air Force, said, "The ultimate goal is not a clean statement, which is a symptom, but better financial management."
Caral Spangler, assistant deputy commandant for resources at the Marine Corps, said its efforts benefit the other services.
In the end, Carper agreed that "we're heading heading in the right direction, but we need go a bit faster."