Pentagon Fails Audit and Nobody in Washington is Surprised

DoD Flunks AuditPentagon Fails Audit and Nobody in Washington is SurprisedDoD fails its first ever, much-anticipated audit.

National Security,  | Quick Take
Nov 16, 2018  | 3 min read | Print Article

The much-anticipated first audit of the Department of Defense landed in public view this week. The first and biggest takeaway? They failed. And nobody is surprised.

The number two civilian official in the Pentagon is Deputy Secretary of Defense Patrick Shanahan. To quote him, “We failed the audit. But we…never expected to pass it.” And for that, Mr. Shanahan receives the dubious distinction of the Taxpayers for Common Sense “Quote of the Week”.

Formal audits are dense and data-filled tomes, so this piece constitutes our initial analysis of the full document. There will be much to read, ruminate, and write about in the coming weeks, so keep coming back to check out our latest. But here are some preliminary observations.

First, some organizations within DoD were given “clean” audit opinions, which means they passed. Those organizations are:

  • U.S. Army Corps of Engineers – Civil Works
  • Military Retirement Fund
  • Defense Health Agency – Contract Resource Management (which is a subset of DHA)
  • Defense Contract Audit Agency (would have been tres embarrassing had they failed!)
  • Defense Finance and Accounting Services Working Capital Fund (also an embarrassment if they had failed.)

Receiving “modified opinions”, meaning their financial statements were fairly presented but don’t comply with generally accepted accounting principles:

  • Medicare-Eligible Retiree Health Care Fund
  • Defense Commissary Agency

Not passing:

  • Everybody else

But we know taxpayers will be heartened to hear that the Army, Navy, and Air Force “properly accounted for major military equipment and military and civilian pay.” Well, there are about a zillion things that a military department does outside of equipping and paying people, so we don’t find that tremendously reassuring.

Other interesting takeaways:

  • The Pentagon has $2.8 trillion in total assets…and $2.6 trillion in liabilities.
  • Of those liabilities, more than 94% consist of military retirement and employment benefits. There is no easy solution to that challenge.
  • The Inspector General’s report on “Management Challenges” is included in the audit. The top four challenges of ten are listed as:
    • #1: Implementing DoD Reform Initiatives
    • #2: Countering China, Russia, Iran and North Korea
    • #3: Countering Global Terrorism
    • #4: Implementing reforms recommended by the audit
  • To our minds, numbers two and three are strategic and tactical challenges while numbers one and four are management challenges. These are apples and oranges.
  • The audit points out that improper payments are a minuscule percentage of overall DoD payments. However, the audit also noted they have increased 25% from FY17 to FY18. What caused that increase and can the trend be reversed?
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Finally, talk about your bad timing! Wednesday the National Defense Strategy Commission released its final report recommending the Pentagon get as much as $972 billion by Fiscal Year 2024. Twenty-four hours later the Pentagon announced it failed the audit.

Call us curmudgeons, but we think there ought to be a full accounting of what the Pentagon spends now before we jack up spending to almost a trillion dollars a year.