- If America learned anything from the Enron mess it is
how easily the books can be cooked. After spending weeks reviewing the
audits of federal departments and agencies, INSIGHT is convinced the U.S.
government doesn't cook its books ó your government is honest enough
to admit that it just doesn't know where the money went.
- The point of the annual audit reports is to inform Congress
and the American people how, where and why their hard-earned tax dollars
were spent during the previous year. The audits are a barometer that tells
Congress whether a particular agency or department is fiscally responsible
and whether it should be entrusted with additional funds.
- But this is an age of euphemism, so the money being provided
to the government by taxpayers is called everything but money, becoming
assets and transactions in vague imitation of business. The government
also has its own terms for missing money, including "unsupported entries,"
"material-control weakness," "adjusted records," "unmatched
disbursements," "abnormal balances" and "unreconciled
- While INSIGHT consistently has reported money problems
plaguing the government ó and in particular the Department of Defense
(DoD) ó this year DoD has been the recipient not only of its annual
budgeted appropriations but of additional tens of billions of dollars to
fight the war on terrorism. It therefore seems appropriate to take a look
at how the federal defense establishment is handling your money.
- According to U.S. Comptroller General David Walker, "To
date, none of the military services or major DoD components have passed
the test of an independent financial audit." Walker continues, "DoD
faces financial-management problems that are pervasive, complex, long-standing
and deeply rooted in virtually all business operations throughout the department."
- In a report to the DoD comptroller, Undersecretary of
Defense Dov Zakheim, acting Assistant Inspector General for Auditing David
Steensma wrote: "We reported that DOD processed $1.1 trillion in unsupported
accounting entries to DOD Component financial data used to prepare departmental
reports and DOD financial statements for FY2000. For FY2001 we did not
attempt to quantify amounts of unsupported accounting entries; however,
we did confirm that DOD continued to enter material amounts of unsupported
accounting entries to the financial data."
- What this gibberish means is that the DoD still cannot
account for at least $1.1 trillion from fiscal 2000 under former president
Bill Clinton, and the assistant inspector general of DOD wouldn't even
touch the unsupported money expenditures for fiscal 2001 because "material
amounts" still couldn't be accounted for properly in the year George
W. Bush came to power. The trillion-dollar question is how much is "material
amounts"? Because the auditor would not "quantify" the amount,
some fear it's worse than the previous year's unaccounted for $1.1 trillion.
- Of course the Department of the Army, headed by former
Enron executive Thomas White, had an excuse. In a shocking appeal to sentiment
it says it didn't publish a "stand-alone" financial statement
for 2001 because of "the loss of financial-management personnel sustained
during the Sept. 11 terrorist attack."
- So where is that missing $1.1 trillion? Traditionally
the top dogs at the Pentagon haven't liked the word "missing."
The rationale at DoD has been that just because the money can't be accounted
for doesn't mean it is lost, stolen or strayed. According to Susan Hansen,
a spokeswoman for DoD: "These are unsupported entries. When the auditors
go to audit the books and they look at the balance sheet for the year,
someone has entered in an adjustment because they made an error somewhere."
- You see, continues Hansen: "They don't carry the
transaction across; there's no way they can track it to where the adjustment
first came from. These are called 'unsupported' adjustments. In auditing
you have to follow the trail from the first time that the entry first enters
the system to the time it leaves it. In the Defense Department it means
that if you bought a piece of equipment and it moved from the Army to the
Navy to the Air Force over the course of years, you have to be sure that
piece of equipment and its dollar value is the same piece of equipment."
- Hansen concludes that the problem is with "the way
the Defense Department's records systems were set up - They weren't set
up to do this kind of commercial bookkeeping. So what people have done
is added up all of these adjustments, entries or auditor's notes on the
side of the audits and have come up with these huge amounts. And somehow
along the way, in the course of conversations, it has been referred to
as 'missing' money. It's not missing. It just cannot be supported with
our current systems in a standard bookkeeping system."
- Voil¦! It's the accounting systems that don't
account for the vanished money that are responsible for the inability of
anyone at DoD to find $1.1 trillion that's, well, missing.
- Despite its unique position of never having been able
to produce a credible audit, DoD is not the only governmental agency to
have money problems. For example, the comptroller general further reported
that, "as in the four previous fiscal years, we were unable to express
an opinion on the governmentwide consolidated financial statements because
of certain material weaknesses in internal control and accounting and reporting
issues. These conditions prevented us from being able to provide the Congress
and American citizens an opinion as to whether the consolidated financial
statements are fairly stated in conformity with U.S. generally accepted
- In other words, the top auditor is saying that the agencies
and departments of the federal government couldn't properly account for
the money each was entrusted with and, therefore, he couldn't produce a
legitimate consolidated financial statement.
- Comptroller General Walker did mention that several agencies
are working diligently to put reliable financial-management systems in
place. For example, Secretary of Defense Donald Rumsfeld has set aside
$100 million to fix the Pentagon's accounting system. And the Department
of Housing and Urban Development (HUD), which under Andrew Cuomo couldn't
account for $59 billion in its fiscal 1999 audit, again has changed course
on its accounting system (see "Why Is $59 Billion Missing from HUD?"
Nov. 6, 2000, and "Inside HUD's Financial Fiasco," June 25, 2001).
Rather than scrap the notoriously flawed HUD Central Account and Program
System (HUDCAPS), the department now has decided to keep it until a review
can be completed.
- An ironic twist to the problems HUD is having with its
financial-management system is that American Management Systems (AMS),
which has the contract for HUDCAPS, recently reported increased profits.
Despite the fact that HUDCAPS seemingly doesn't work, and hasn't since
the day it was installed, AMS still is getting paid ó leaving many
critics to wonder if there should be a federal lemon law for bum financial-services
- But not to worry, HUD apparently has learned how to work
around "unreconciled differences." According to the most recent
audit, "an immaterial difference exists between HUD's recorded fund
balance with the U.S. Treasury and the U.S. Department of Treasury's records.
It is the department's practice to 'adjust' its records to agree with Treasury's
balances at the end of the fiscal year."
- In other words, if HUD's checkbook reflects a balance
of $1 billion and Treasury reflects HUD's balance as $2 billion, HUD just
accepts Treasury's balance and moves on as if everything were just fine.
The unaccounted for $1 billion is regarded as "immaterial."
- Overall, the federal government earned a grade of "D"
from its auditors for financial management in fiscal 2001; 16 of the 24
federal agencies received lower grades than the previous year. More important
is that year after year key information continues to be missing from the
audits ó beginning with which companies have federal contracts for
designing, bringing online and maintaining those financial systems that
consistently are blamed for producing unauditable books.
- In October 2001, Rep. Steve Horn (R-Calif.), chairman
of the House Government Reform subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, told INSIGHT that "if
some government contractors are unable to develop systems that can provide
that type of information, Congress needs to know it, and we're asking GAO
[the Government Accounting Office] to look into it."
- To date, no audit from any government agency or department
lists or even mentions the contractors getting paid hundreds of millions
of dollars to produce reliable accounting systems. And despite the fact
that Congress has oversight of agency spending, and every year tells the
agencies to get their financial houses in order, even Congress says it
doesn't know which companies have the contracts to put reliable accounting
systems in place.
- Because none of the information provided to the comptroller
general is reliable enough to form an opinion of the government's financial
standing, next year Congress may want to scrap the financial grading system
it put in place for the agencies and instead require a "contractor"
grade card. If those contractors continue to fail, the agencies have no
hope of succeeding. That is, assuming the financial accounting systems
really are responsible for the fact that trillions of dollars can't be
ac-counted for and that the bureaucrats aren't just cooking the books.