Hopefully, Esper’s DOD reform includes finances
The recent Senate confirmation of Mark Esper as defense secretary closes a unique chapter in American military history. Since the Dec. 31 resignation of Jim Mattis, the world’s foremost military organization has been without a permanent leader for more than half a year, the longest period since the establishment of the position in 1947. After his Senate vote of 90-8, Esper now has a constitutional responsibility to plot the route ahead amid turbulence at home and abroad.
The incoming secretary’s top priorities, outlined recently in a memo addressed to all 3 million Defense Department employees, include increasing lethality, strengthening alliances and reforming the department for greater performance and affordability. Despite the difficulty of warfighting and diplomacy, it might be the third objective that poses the largest challenge for the U.S. government.
Since the 1990 enactment of the Chief Financial Officers Act, 24 federal agencies (the DOD included) have been required to prepare and present audited financial statements. Similar reports have long been required of publicly traded private sector companies, which are commonly able to produce audited financial statements with clean (unmodified) audit opinions within 90 days of the end of their fiscal year. In 1991, however, the Pentagon asserted that its statements were so overwhelmingly complex that they simply were not auditable.
This lack of audit readiness in the Defense Department actually prevented the entire federal government from passing its own comprehensive audit. Such has remained the case for three decades.
Last year Defense Comptroller David L. Norquist, who was confirmed as deputy defense secretary on July 30, successfully moved the department across the audit finish line. The results were not good: The Pentagon flunked its first ever full-scope financial statement audit. Yet simply completing the exercise represents real progress in the modern governing context.
Many of the audit’s findings confirmed the negative stereotypes about Pentagon transparency. Massive sub-entities such as the U.S. Army maintain records that are riddled with material weaknesses and instances of noncompliance.
The nature of the problem is both internal (poor recordkeeping) and external (occasional fraud on the part of contractors). In a recent House Oversight and Reform Committee hearing, the Pentagon’s inspector general highlighted an aerospace manufacturer that had billed the department for costs inflated 4,000 times over the true value of furnished equipment. Previous reports have disclosed egregious spending orders to the tune of $1,200 coffee cups and a $9,000 club chair. Further examples of waste abound.
Still, there are glimpses of a silver lining amid the clouds of red auditing ink. A handful of DOD offices performed admirably — if we allow adjustment on a sliding scale for the government. That has become evident following a report last month from watchdog group Truth in Accounting, which performed an independent analysis of the Pentagon Comptroller’s report and released a ranking of all 20 DOD financial units, plus the Department of Veterans Affairs.
The Army as a whole may have been one of the worst performing defense entities, but the Army Corps of Engineers maintains far stronger compliance with accounting and transparency best practices. The Corps provides engineering and construction services to the armed forces and on civil engineering projects such as dams, aqueducts, locks and levees. It might be the Corps’ close working relationship with customers at the state and local government level that fosters a culture of accountability. If the Corps fails to execute a project on time and on budget, they might have to answer to an exasperated governor or mayor.
The Corps is a small sliver of the U.S. defense establishment, with an employee count of just 37,000. The Army has 1.3 million active-duty soldiers, with 865,000 in reserve. The DOD as a whole employs more people than Amazon, United Parcel Service, McDonald’s, Target and General Electric combined. It spends more on research and development than Google, Apple and Microsoft combined.
The task of moving this massive bureaucracy toward audit compliance is a significant one. In the wake of its last attempt, the DOD has identified more than 2,400 findings, prioritized recommendations for next year and organized a database to measure progress.
“Reform is the means by which we free up time, money, and manpower to reinvest in our top priorities,” Mark Esper wrote in last month’s memo. Let’s hope that he is successful at finding “smarter, more effective ways to do business” inside the world’s largest organization.
Sheila Weinberg, CPA, is the founder and chief executive officer of Chicago-based Truth in Accounting, a 501(c)(3) nonprofit organization that researches government financial data and promotes transparency for a better informed citizenry.