Pentagon Needs More Accurate Cash Management, Watchdog Warns

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In the latest bump on its rocky road to auditability, the Defense Department on Tuesday received a warning from its inspector general that its multi-agency cash management practices done in concert with the Treasury Department are inaccurate.

In a sample review of the Defense Finance and Accounting Service’s September 2016 cash management report, auditors found the statement “not complete, accurate, or supported by the details necessary for” agencies known as Other Defense Organizations to perform reconciliations for the Fund Balance With Treasury.

Those other agencies include the Defense Information Systems Agency, DOD Education Activity, Defense Acquisition University, Defense Contract Management Agency and Defense Advanced Research Projects Agency.

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The Indianapolis-based DFAS did not design the cash management report to include all financial activity for each defense component, as required under department regulations and the mandatory status report for Financial Improvement and Audit Readiness, the IG wrote.

As much as $3.6 billion in financial activity for the revolving Defense Working Capital Fund went unreported, and the Indianapolis team, in some cases pressured by sequestration, made $322.6 million in “unsupported adjustments” to resolve differences between the cash management statement required under the so-called Treasury Index 97 appropriation and DOD’s central reporting system. This happened because the DFAS staff “did not have the requisite information to properly conduct” account reconciliations for operations and maintenance spending with the Treasury account, the report said.

“As a result,” it added, “the accounts will be misstated on the individual ODO financial statements and the DOD Agency-wide financial statements—and ODOs management will not be able to make informed budget decisions regarding operations. This is particularly important in the wake of the first full financial statement audit in the department's history.”

The IG made a series of recommendations that included splitting up the Defense Working Capital Fund among several agencies and having sign-offs from each affected Pentagon component.

Deputy Chief Financial Officer Mark Easton disagreed with the recommendation to create individual capital accounts, saying it would remove valuable flexibility in managing cash balances and may put the ODOs “at greater risk of experiencing cash shortages” when funding military operations such as humanitarian emergencies or to counter spikes in fuel prices.

The recommendation for individual agency written approval was rejected by the Indianapolis team as impractical. “The nature of some adjustments made by DFAS-Indianapolis Departmental reporting is such that a single adjustment can impact dozens of Other Defense Organizations’ lines of accounting,” they wrote.

Easton’s team also suggested that the IG had focused only narrowly on the cash management report, referring them to other departmental tools and the more comprehensive audits being done by private firms.

The IG asked the Office of the Defense Secretary to reconsider its rejections.

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