February 10, 2006
Friday

WASHINGTON - When Perry Jefferies was serving in Iraq, the computers showed that his 4th Infantry Division troops had access to drinking water, a place to shower and working wheels on their vehicles.

As the 1st sergeant came to understand when scrounging for water, towing immobilized tanks and driving to other posts or to Kuwait to pick up needed parts, the Pentagon's bookkeeping doesn't always match reality.

Jefferies saw the real-life results of what has for years been a visible "accounting" problem in Washington - the Pentagon's inability to keep accurate track of transactions and assets.

A labyrinth of arcane and incompatible accounting systems has in recent years led the department to pay the wrong amounts to troops, civilian workers and contractors; to lose track of its equipment, even hard-to-misplace planes and tanks; and to improperly document trillions of dollars in transactions that leave tax dollars vulnerable to abuse, according to government reports.

A long-elusive "clean audit" sought by the Department of Defense - for years pegged for 2007 - is nowhere on the horizon. The agency's books are such a mess that its accountants have stopped wasting money trying to audit them.

"We don't know how badly managed it is," said Winslow T. Wheeler, director of a military reform project at the Center for Defense Information. "It's not that DOD flunks audits, it's that DOD's books cannot be audited. DOD aspires for the position where it flunks an audit. If this were a public company, it would have gone belly up before World War II."

The accounting problems would cost taxpayers $13 billion in 2005, Gregory D. Kutz, a managing director for the investigative arm of Congress, the Government Accountability Office, told lawmakers last summer.

"That's $35 million a day," he added for emphasis.

At the heart of the problem is what government accountants like to call the agency's "stovepiped" setup, a tangle of 4,150 different business operations. (Until 2004, the department said it had 2,200 varied systems, but last year it reported finding an additional 1,900.) It has 713 different human resources systems, for example.

The business systems haven't been easy to integrate for a number of reasons, not the least of which is the sheer volume and complexity of the operation. For example, the Defense Department has at least 5.2 million inventory items, compared with 11,000 at Wal-Mart or 50,000 at Home Depot stores, said Thomas B. Modly, deputy undersecretary of defense for financial management.

"There's probably nothing like it in the world," said Jeffrey Steinhoff, managing director for financial management and assurance at the GAO. "It's not a mom and pop store."

Jim Minnery, an accountant in Ohio who works for the Defense Finance and Accounting Service, said few people understand the enormity of the task.

A central problem is that the Pentagon didn't document what its assets were worth before Congress decided in the early 1990s to get serious about federal spending accountability, he said.

"The Pentagon wasn't in the business of making money, so they never needed an income statement," Minnery said. "They expensed their assets like planes and buildings and such. ... They dished money out, and they never kept track of what they owned."

When forced to put together a financial statement, the agency had to try to assign a value to everything, new and used, on its bases and inside its offices, storage rooms and arsenals.

"That's one of the main reasons I don't believe they'll ever have a clean (audit)," said Minnery, whose complaints about missing money in 2002 earned him a label as a whistleblower.

Even basic accounting procedures fail. Minnery said some systems make it impossible to match checks that have been written to the bills that were being paid.

"Their systems can't keep track of who they've sold stuff to, who owes them, who they owe," he said.

Another factor that has evolved over the decades is a decentralized system that records the same part with a multitude of different multi-character codes, and difficulties ensue with any cross-service transaction because their ordering codes differ as well.

"The Navy has a set (of codes), the Army has a set, the Air Force has a set," Minnery said. "They don't have the same number of digits and they can't match each other."

The department has been unwieldy for decades. In 1960, President-elect John F. Kennedy decided he needed to tap a financial "whiz kid" from Ford Motor Co., Robert S. McNamara, to be defense secretary.

Goals of getting the Pentagon's financial house in order have evaded both Republican and Democratic administrations.

"No one has proven themselves strong enough to tackle it," said Danielle Brian, executive director of the Project on Government Oversight, a watchdog group.

The GAO began classifying some government agencies as "high risk" in 1990, and DOD's supply chain and weapon systems acquisitions have remained on the list ever since. Six additional defense divisions were on the risky list as of 2005.

"Nothing's gotten better," Brian said. "It keeps getting worse."

The consequences have been well-documented in a relentless stream of damning reports by the GAO. Ineffective accounting systems have lost track of planes and tanks, left wounded soldiers without pay, and stranded troops without everything from meals and water to tires and generators.

The current administration recognized the real-world costs early on.

In a speech he gave on Sept. 10, 2001, Defense Secretary Donald Rumsfeld called the arcane accounting systems and bureaucracy one of the biggest threats to national security.

"It is not, in the end, about business practices, nor is the goal to improve figures on the bottom line," Rumsfeld said. "It's really about the security of the United States of America. And let there be no mistake, it is a matter of life and death.

"Every dollar squandered on waste is one denied to the warfighter," he added.

The Defense Department has spent hundreds of millions of dollars on new business systems and consultants to try to fix the problems. The latest effort is going well because the managers are doing a better job of showing staff how improvements can help troops, said Paul Brinkley, deputy undersecretary of defense for business transformation.

"By making the business process support the warfighter more efficiently, we are seeing a significant amount of momentum," Brinkley said.

Despite good intentions, there has been little quantifiable progress.

For example, two automation systems meant to resolve disbursement problems cost the government $179 million but failed, the GAO said.

"They're not close to the finish line," said the GAO's Steinhoff. "They have a long way to go."

The department had gotten a "clean opinion" on only 16 percent of its assets and 49 percent of its liabilities as of June, Modly told lawmakers.

Modly said in an interview that the Defense Department now hopes to settle the balance sheet on 47 percent of assets and 49 percent of liabilities by 2007, which until recently was its self-imposed goal for getting a clean audit for the whole department.

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