Known Unknowns

The Defense Department's prolonged financial management problems defy easy fixes.

When Defense Secretary Robert Gates appeared before the Senate Armed Services Committee during his nomination hearing in early December, he was asked by Sen. Elizabeth Dole, R-N.C., how he would address "severe" financial management problems that make independent audits of the Pentagon's bookkeeping impossible. It's a critical question for the man running an agency expected to spend $630 billion to $660 billion in 2007. "I don't have great familiarity with this," Gates admitted, but he pledged to work with Deputy Defense Secretary Gordon England to "address these issues."

Gates faces two basic financial challenges: First, find a way to get the Democratically controlled Congress to continue to pay for operations in Iraq as support for the war erodes and the cost of maintaining and replacing damaged equipment spirals out of control; and second, demonstrate greater transparency and accountability for defense spending.

For more than a dozen years now, Defense secretaries have pledged to untangle the department's convoluted finances. Since the 1990 Chief Financial Officers Act required agencies to produce independently audited financial statements, getting a clean audit has been the holy grail of federal management. But Defense doesn't even come close. And it's unlikely Gates will be able to change that during his tenure.

Nonetheless, he will inherit a viable roadmap for achieving a clean audit, according to David M. Walker, the U.S. comptroller general. The Financial Improvement and Audit Readiness Plan, developed under Defense Comptroller and Chief Financial Officer Tina W. Jonas in 2005, offers a detailed framework for prioritizing and resolving long-standing financial management problems and "represents a vast improvement over prior financial improvement initiatives," Walker told the Senate Armed Services Committee in November 2006.

"People often assert that the department doesn't know where its money is going," says Jonas. "That is incorrect. Our accounting systems are structured consistent with appropriations law. The issue about getting a clean audit is really about converting that system into what's called generally accepted accounting principles-a balance sheet."

Soon after Jonas was sworn in as Defense comptroller and chief financial officer in July 2004, she says she and her senior staff examined nearly a dozen material weaknesses in the department's inability to accurately account for assets and liabilities. They separated problems into two categories: those stemming from ineffective processes, which could be changed relatively quickly; and those stemming from antiquated systems, which would require a lot of time and expensive new technology to fix.

"We needed to have a very clear plan to go forward. It needed to have specific milestones, they needed to be achievable, and we needed to be able to demonstrate to the public and Congress that we were making progress," says Jonas of the impetus for creating the FIAR (pronounced "fire") plan.

Instead of focusing on entire organizations or agencies within Defense, Jonas attacked specific, solvable problems across agencies with the idea that by cleaning up those things, eventually entire organizations could achieve clean audits. For example, "If we don't understand our [environmental] liabilities, we're not going to be able to budget for them in the future," says Jonas. So a team from the comptroller's office worked with a team from the installations and environment office at Defense to create a database that would track environmental liabilities facility by facility, she says.

"We have about 16 percent of our assets and about 48 percent of our liabilities that have a clean opinion on those line items. By 2009, we're hoping to [have clean audits for] 65 percent of our assets and 79 percent of our liabilities. That's important progress and it's measurable," she says. "I don't want to say we've completely backed away from trying to understand what entire organizations are doing. As a matter of fact, the Army Corps of Engineers is now undergoing [its first] audit. We expect a good outcome. It's really very significant." A clean audit, or even a qualified audit, is still years away for the entire department, she says.

Walker has warned repeatedly that the Defense Department's problems have far-reaching consequences: "DoD's financial management problems are pervasive, complex, long-standing, deeply rooted in virtually all of its business operations, and challenging to resolve. The nature and severity of DoD's financial management business operations and system efficiencies not only affect financial reporting, but also impede the ability of DoD managers to receive the full range of information needed to effectively manage day-to-day operations," Walker said.

Even the Iraq Study Group weighed in on the department's financial management practices. Recommendation No. 72 in the bipartisan commission's assessment of the situation in Iraq says costs for the war in Iraq should be included in the president's annual budget request, starting in fiscal 2008. Currently, operations in Iraq and Afghanistan are funded through emergency supplemental appropriations.

"The war is in its fourth year, and the normal budget process should not be circumvented," commission members wrote. The supplemental funding process "erodes budget discipline and accountability," obscures the real cost of war in Iraq, and limits oversight, they reported.

At his confirmation hearing, Gates expressed support for legislation that would require funding operations in Iraq and Afghanistan through the normal budget process, something the White House has resisted. Says Jonas: "From my vantage point, it really makes no difference. That's really for the administration and the congressional leadership to decide how they want to address that."