In terms of discretionary spending, the Department of Defense (DoD) is the largest department in the U.S. government, employing over a million American servicemembers and hundreds of thousands of civilian personnel. Currently, Congress is working on a National Defense Authorization Act (NDAA) that provides $886 billion — the largest amount ever authorized — for DOD. The House passed its package last week, and the Senate is expected to finalize its version this week.
The total price tag for defense spending could be pushed higher as the White House is expected to request supplemental funding for the war in Ukraine. However, the Pentagon has never passed a financial audit cleanly. In other words, year after year, auditors continue to uncover discrepancies with how DoD reports financial data and even find evidence of mismanagement. This longstanding history of financial mismanagement should give pause to lawmakers before further boosting the Pentagon's budget.
Early Audit Problems
In the 1990s, Congress passed The Chief Financial Officers Act of 1990, requiring all federal agencies to complete annual financial audits. However, DoD instead took nearly 30 years to complete their first audit in 2018. As Politico reported at the time, it only covered the Defense Logistics Agency (DLA), DoD’s purchasing agency. The DLA serves as the ‘Walmart’ of the military, acquiring military equipment and processing nearly 100,000 orders a day on behalf of all the military branches.
The audit was conducted by Ernst & Young (EY), an independent accounting firm which found that “the DLA failed to properly document more than $800 million in construction projects…”
EY also found major discrepancies with the way accounting records were kept, citing in its report that the DLA had misstatements in its books totaling nearly $465 million, and had little or no documentation for nearly $384 million worth of construction projects. The EY report went on to warn that the DLA was unable to reconcile its general ledger with that of the Department of Treasury. Army Lt. Gen. Darrell Williams, the DLA director at the time, wrote in response to the findings, “We are committed to resolving the material weaknesses and strengthening internal controls around DLA’s operations.” Only time will tell if these words hold true, but it raises the question, what kinds of material weaknesses make it so difficult for DoD to pass an audit?
Why Can’t DoD Pass an Audit?
Many have come up with excuses for the DLA, claiming its sheer size and large budget make it nearly impossible to keep track of projects and inventory. However, private companies such as Walmart and Amazon are held to very strict standards regarding how they report financial data, yet have seemingly no issues accurately tracking shipments and inventory. For example, Amazon sells nearly 600 million different items and ships nearly five billion items across the globe every year. Yet, despite scrutiny by government agencies such as the IRS and the SEC, Amazon has never failed an audit.
It is clear DoD and private companies are not held to the same stringent standards when it comes to reporting financial data. If private companies fail an audit, or simply misrepresent data when reporting, they may be subject to heavy fines and penalties — and in some extreme cases, executives could face jail time. Yet, if DoD fails an audit, there are seemingly no consequences.
Since that initial audit, DoD has done little to prevent waste, fraud, and abuse. The wasteful spending of DoD has caught the attention of some members on Capitol Hill resulting in a recent investigation by the House Committee on Oversight and Accountability. In a March 2023 letter to DoD Secretary Lloyd Austin, the committee wrote:
“DoD’s inability to adequately track assets risks our military readiness and represents a flagrant disregard for taxpayer funds, even as it receives nearly a trillion dollars annually.”
The Committee investigation was prompted after DoD failed its fifth consecutive audit in November of 2022. This time, auditors found that DoD was unable to account for 61 percent of its $3.5 trillion in assets. The letter went on to state that, “DoD estimated in 2014 that contractors were in possession of $220 billion in government furnished property but GAO says that estimate is significantly understated.” The audit found a majority of inefficient or untraceable spending went to military contractors.
A more recent GAO report released on July 13, 2023 highlighted the need for reform within DoD. GAO recommended several strategies for DoD to improve financial accuracy and ensure clean audits in the future. Since 2018, DoD has taken steps to improve material weaknesses within its systems including:
improving the Fund Balance with Treasury;
strengthening and securing its IT systems environment by establishing user access controls; and
creating and maintaining a universe of transactions for financial reporting.
However, as GAO notes, several recommendations remain open including recommendations surrounding DoD’s financial management strategy, corrective action plans, and audit roadmaps.
Need For Oversight of Funds Sent to Ukraine
As Congress prepares to authorize nearly $900 billion in defense spending, they must be mindful of DoD’s poor audit history and its inability to adequately track its spending. In FY 2023, Congress authorized $67.1 billion in defense assistance to Ukraine, and military aid to Ukraine in FY 2024 will likely increase. Lawmakers and DoD officials must ensure proper financial management of resources and equipment as it continues to debate defense spending levels. They must be wary of DoD’s poor track record in managing weapons and assets and should be careful to enact proper safeguards against mismanagement, and ensure dollars spent are protected from waste, fraud, and abuse.
Conclusion
With voting expected to take place in the Senate this week on the NDAA, lawmakers should consider provisions that would require DoD to achieve a clean audit as a requisite for future funding levels. One such amendment proposed by Senator Todd Young (R-IN) would require DoD to achieve a clean audit by fiscal year 2027. NTU urged lawmakers previously to “stop treating DoD with kid gloves and ‘carrots,’ and instead start punishing the agency with ‘sticks’ for ongoing failure to keep its financial house in order.” Although Senator Young’s amendment carries no penalties if DoD is unable to meet the requirement, it represents a good starting point for curbing rampant spending and restoring oversight and accountability in our government’s handling of taxpayer funds.