- While Americans worry about the disastrous
effects on our economy of the accounting scandals at Enron, WorldCom and
elsewhere, an even larger accounting scandal has somehow escaped the public
consciousness. According to estimates, the Department of Defense and the
Department of Housing and Urban Development cannot account for over $3
trillion allotted to them by Congress, amounting to thousands of dollars
of missing money for every man, woman and child in the country.
- This story hasn' gone completely unreported.
In a Jan. 29 article titled "The War on Waste," CBS News quoted
Secretary of Defense Donald Rumsfeld as saying, "according to some
estimates we cannot track $2.3 trillion in transactions." The article
went on to quote retired Vice Admiral Jack Shanahan, former commander of
the Navy's 2nd Fleet, as saying that while President George W. Bush's 2003
budget proposal calls for $48 billion in new Pentagon spending, "with
good financial oversight we could find $48 billion in loose change in that
building, without having to hit the taxpayers."
- One of the most knowledgeable and effective
critics of this epidemic of fiscal mismanagement by our government is Catherine
Austin Fitts, former managing director of Wall Street investment bank Dillon,
Read and former HUD assistant secretary in the first Bush administration.
At HUD, Fitts worked to improve accounting practices before leaving the
government to start Hamilton Securities, a firm which saved taxpayers billions
by efficiently handling HUD mortgages. Now a resident of Hickory Valley,
Tenn., and president of Solari, Inc., a community-based investment firm,
Fitts writes in her article "The Missing Money Why the Citizens of
Tennessee Are Working Harder and Getting Less"
- "In June 2001 the Senate Governmental
Affairs Committee, under the leadership of Senator Fred Thompson (R- Tenn.),
published its study, "Government at the Brink." The study describes
the failure of federal government agencies to maintain reliable financial
systems and/or to publish required independent annual audited financial
statements. The President's initial 2002 budget (before increases for 9/11)
proposed that approximately 85% of all federal appropriations be awarded
to the very same agencies the Thompson study states either (1) fail to
maintain reliable financial systems, (2) fail to publish trustworthy or,
in some cases, any, independent certified financial statements (as required
by law), or both." (Source Solari.com)
- Later in that same article, Fitts's estimates
of total financial adjustments by DOD to date make the story even worse.
"Total undocumented accounting adjustments for reported periods for
the Department of Defense [and HUD for fiscal 1998-2000] amount to a whopping
$3.3 trillion, or $11,700 for every American. The Department of Defense
has failed to produce independent audited financial statements since the
requirement went into effect in 1995. HUD's Inspector General refused to
certify HUD's fiscal 1999 financial statements."
- Fitts added in an interview by email
that the HUD inspector also cited $59 billion missing from HUD for fiscal
1999, but said that this is only the tip of the iceberg of mismanagement
at HUD. "That report also indicated $17 billion missing from the opening
balance; so that would be for fiscal 1998," said Fitts. "My understanding
was that the $59 billion only referred to undocumented adjustments on the
liabilities side of the balance sheet, and in fact the problems were greater
on the asset side. HUD refused to disclose the undocumentable adjustments
for fiscal 2000."
- Investigative reporter Kelly Patricia
O'Meara wrote about the scandal in the Aug. 10, 2001 issue of Insight Magazine.
She quoted DOD Deputy Inspector General Robert Lieberman making the following
remark before Congress "The extensive DOD efforts to compile and audit
the FY [fiscal year] 2000 financial statements for the department as a
whole and for the 10 subsidiary reporting entities like the Army, Navy
and Air Force General Funds, could not overcome the impediments caused
by poor systems and unreliable documentation of transactions and assets."
- O'Meara's article also quoted the January
2001 report "DOD Major Management Challenges and Program Risks"
by the General Accounting Office (GAO), the investigative arm of Congress,
saying "[The Pentagon] continues to confront pervasive and complex
financial management problemsâ¤ and has been on our list of
high-risk areas vulnerable to waste, fraud, abuse and mismanagement since
1995. To date, no major part of the department's operations has passed
the test of an independent financial audit because of pervasive weaknesses
in the department's financial management systems, operations and controls."
- An additional problem with making the
Pentagon fiscally accountable was exposed in a July 22, 1999 article in
the New York Times by Tim Weiner, titled "Pentagon Defied Laws and
Misused Funds, Panel Reports." Wrote Weiner "Congress says in
a new report that the Pentagon defied the law and the Constitution by spending
hundreds of millions of dollars on military projects that lawmakers never
approved." Weiner quoted Rep. Jerry Lewis (R- Cal.) as saying that
the Pentagon apparently believes "that it can even move money to a
program Congress has closed down, maybe presuming, 'Oh, well, nobody will
- "The Constitution is pretty clear
on this," continued Lewis later in the article. "It says 'No
money shall be drawn from the Treasury but in consequence of appropriations
made by law.'" Added Weiner "The law and Pentagon procedures
allow military officials to shift funds from one account to another, but
not without telling Congress. They cannot finance programs Congress never
approved, or use money for a purpose that lawmakers never intended. But
they have done so for years, the committee's report and its staff members
said." So what is being done to improve the accounting practices in
- According to Fitts and an April 18 item
in the Potomac Tech Journal, the company credited with the $59 billion
loss at HUD has been awarded the contract to redesign DoD's current business
processes. Wrote Taylor Lincoln for the Potomac Tech Journal "Potomac-area
firms American Management Systems and DynCorp have won slices of a $50
million to $100 million Defense Department financial management project
for which IBM Corp. is the lead contractor, Fairfax, Va.-based AMS said
today." AMS, along with subcontractors DynCorp and Lockheed, developed
the faulty "HUDCAPS" financial software used by HUD.
- It remains to be seen whether AMS and
its partners will recover the missing money by installing new financial
architecture for the Pentagon, or whether the missing money will be written
off due to faults in the older system. However, Fitts says there are possible
avenues through which we might recover the missing funds. "We need
to identify where it went and get it back," said Fitts, "either
through seizures or the creation of set aside claims. Unless we do so,
we will find ourselves at the mercy of a group of creditors who are our
creditors because they are financing us with the money they stole from
our public and private pension funds."
- Fittsâ¤ writings on the
subject indicate she has little confidence in our government's ability
to correct itself, without a complete overhaul of the way funds are collected
and appropriated in this country. "I believe that the only way to
ensure fiscal accountability is to create legal and/or trust or escrow
mechanisms at the state and local level to condition payment of tax monies
on compliance with the law," said Fitts. "The federal government
is breaking the law as a matter of intentional ongoing policy. At this
point, there needs to be a way to place sufficient control on the cash
payments to require compliance with the law."
- As Americans watch their 401-K programs
evaporate in the current economy, and wonder if Social Security will be
there for them when they retire, it seems that another cause for grave
concern has arisen due to our government's lack of financial transparency