Photographer: Rich Clement/Bloomberg

The Pentagon Spent Nearly $1 Billion on an Audit — And Failed

November 16, 2018Roxana Tiron & Tony Capaccio

The Defense Department failed its first-ever audit as investigators found weak information technology security that could endanger weapon inventories and equipment mislabeled in far-flung warehouses.

Auditors found no evidence of fraud in the review of finances that Congress required, even as they flagged a laundry list of problems, including uncontrolled access to computer systems and listing functioning rocket motors as out-of-order, according to Pentagon Comptroller David Norquist.

“We didn’t pass,” Norquist told reporters at the Pentagon. “We have issues and we are going to go fix them.”

Pentagon and congressional leaders expected the Defense Department to fail its first-ever audit, covering $2.7 trillion in assets and $2.6 trillion in liabilities.

“We never expected to pass,” Deputy Defense Secretary Patrick Shanahan told reporters at the Pentagon today. “Everybody was betting against us that we would even do the audit.”

Zach Gibson/Getty Images

Department of Defense Comptroller David Norquist

No Excuse

House Armed Services Committee Chairman Mac Thornberry (R-Texas) warned that the audit results should not be used as “an excuse for arbitrary cuts that reverse the progress we have begun on rebuilding our strength and readiness.”

“The process is an opportunity to find problems and identify areas for future reform,” Thornberry said in a statement. “As expected, this audit has uncovered a number of matters that Congress and the Pentagon must work together to address. We must take advantage of this opportunity to continue our reform efforts and make the Pentagon more efficient and agile.”

Asked if the audit findings will undercut public support for increased defense spending, Shanahan said: “We count ships right,” but a taxpayer should say, “ ‘Good, I’m glad you guys are putting in the discipline.’ ”

The Defense Department spent $413 million on executing the audit in fiscal year 2018; about $406 million on audit remediation and $153 million on financial system fixes, according to a fact sheet provided by the Pentagon.

“The most important thing this year is not the opinion, but that the department takes the audit seriously and seeks to fix the identified deficiencies, which the department is doing,” Glenn Fine, principal deputy inspector general, said in a statement.

Ingrained Resistance

After the last 24 years of Pentagon officials “not wanting to have the audit, to say it politely,” the current administration said, “We want the findings, we want the information,” Norquist said. Part of being good stewards of tax dollars means “pulling off the Band-Aids and fixing the problems.”

Norquist’s predecessor, Democrat Michael McCord, said the audit is the realization of a process championed by former Comptroller Bob Hale and jump-started by former Defense Secretary Leon Panetta.

“Auditing the Defense Department really exemplifies the saying ‘it’s the journey, not the destination,’ ” McCord said in an e-mail. “Even when you do finally reach the promised land” and “pass the audit, which will take some years, you have to start over and try to do it again the next year.”

All services—Army, Air Force, Navy and Marine Corps—have multiple material weaknesses that led to their failing the audit. Even so, they all could account for “the existence and completeness” of major military equipment, according to Norquist.

On a positive note, the auditors found no problems with civilian and military pay systems, according to Norquist. Personnel costs are the most expensive part of the Pentagon.

Photographer: Saul Loeb/AFP/Getty Images

The Pentagon is seen from the air over Washington on Aug. 25, 2013.

600 Locations

The Defense Department Office of Inspector General oversaw the completion of 21 financial statement audits of the department and its components, which resulted in 23 audit opinion reports. More than 1,000 auditors from independent firms including Ernst & Young LLPGrant Thornton International Ltd., Cotton & Co. LLP, KPMG LLP, and Kearney & Co. PC, conducted the work. The inspector general had its own 150 auditors overseeing the work of the independent firms.

Auditors visited more than 900 sites in 600 locations and sent more than 40,000 requests for documentation. The work resulted in more than 2,000 notices of findings and recommendations that identified deficiencies, according to a statement by the Defense Department’s inspector general in charge of overseeing the audit results.

“The thing that was most concerning I think is the IT security, leaving the systems with vulnerabilities that we need to close because of the possibility that somebody could do with that access,” Norquist said.

Auditors found inadequate controls over access, system changes, and security management of the IT systems, the inspector general’s statement said. Among the issues that stood out were insufficient segregation of duties and failing to terminate the access of users who had left. The Pentagon has already spent $153 million fixing financial systems, including IT, according to Norquist.

Serviceable Equipment

Auditors also found instances of assets in warehouses that weren’t in the inventory system. At Hill Air Force Base, Utah, for example, investigators found 71 missile motors that were listed in non-working condition but in fact were serviceable, according to Norquist.

“This is a direct benefit to readiness,” he said, and one of the issues that “we can tackle immediately.”

Meanwhile, the Navy had buildings that had been disposed of but were still in the system, while the Army has been holding on to buildings that weren’t in usable condition, according to Norquist.

“The audit is hard; it is mechanically hard,” he said, but sheds enough light on the business and operations of the Defense Department “that it is worthwhile.”

To contact the reporters on this story: Roxana Tiron in Washington at rtiron@bgov.com; Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editors responsible for this story: Paul Hendrie at phendrie@bgov.com; Larry Liebert (Bloomberg News) at lliebert@bloomberg.net; Robin Meszoly at rmeszoly@bgov.com

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