[News] The Pentagon’s Massive Accounting Fraud Exposed

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Wed Nov 28 17:01:56 EST 2018


https://www.thenation.com/article/pentagon-audit-budget-fraud/


  Exclusive: The Pentagon’s Massive Accounting Fraud Exposed

By Dave Lindorff - November 27, 2018
------------------------------------------------------------------------


    How US military spending keeps rising even as the Pentagon flunks
    its audit.

On November 15, Ernst & Young and other private firms that were hired to 
audit the Pentagon announced 
<https://www.reuters.com/article/us-usa-pentagon-audit/pentagon-fails-its-first-ever-audit-official-says-idUSKCN1NK2MC> 
that they could not complete the job. Congress had ordered an 
independent audit of the Department of Defense, the government’s largest 
single cost center—the Pentagon receives two of every three federal tax 
dollars collected—after the Pentagon failed for decades to audit itself. 
The firms concluded, however, that the DoD’s financial records were 
riddled with so many bookkeeping deficiencies, irregularities, and 
errors that a reliable audit was simply impossible.

Deputy Secretary of Defense Patrick Shanahan tried to put the best face 
on things, telling reporters, “We failed the audit, but we never 
expected to pass it.” Shanahan suggested that the DoD should get credit 
for /attempting/ an audit, saying, “It was an audit on a $2.7 trillion 
organization, so the fact that we did the audit is substantial.” The 
truth, though, is that the DoD was dragged kicking and screaming to this 
audit by bipartisan frustration in Congress, and the result, had this 
been a major corporation, likely would have been a crashed stock.

As Republican Senator Charles Grassley of Iowa, a frequent critic of the 
DoD’s financial practices, said 
<https://www.grassley.senate.gov/news/news-releases/grassley-clean-audit-opinions-pentagon-remain-elusive> 
on the Senate floor in September 2017, the Pentagon’s long-standing 
failure to conduct a proper audit reflects “twenty-six years of 
hard-core foot-dragging” on the part of the DoD, where “internal 
resistance to auditing the books runs deep.” In 1990, Congress passed 
the Chief Financial Officers Act, which required all departments and 
agencies of the federal government to develop auditable accounting 
systems and submit to annual audits. Since then, every department and 
agency has come into compliance—except the Pentagon.

Now, a /Nation/ investigation has uncovered an explanation for the 
Pentagon’s foot-dragging: For decades, the DoD’s leaders and accountants 
have been perpetrating a gigantic, unconstitutional accounting fraud, 
deliberately cooking the books to mislead the Congress and drive the 
DoD’s budgets ever higher, regardless of military necessity. DoD has 
literally been making up numbers in its annual financial reports to 
Congress—representing trillions of dollars’ worth of seemingly 
nonexistent transactions—knowing that Congress would rely on those 
misleading reports when deciding how much money to give the DoD the 
following year, according to government records and interviews with 
current and former DoD officials, congressional sources, and independent 
experts.

“If the DOD were being honest, they would go to Congress and say, ‘All 
these proposed budgets we’ve been presenting to you are a bunch of 
garbage,’ ” said Jack Armstrong, who spent more than five years in the 
Defense Department’s Office of Inspector General as a supervisory 
director of audits before retiring in 2011.

The fraud works like this. When the DoD submits its annual budget 
requests to Congress, it sends along the prior year’s financial reports, 
which contain fabricated numbers. The fabricated numbers disguise the 
fact that the DoD does not always spend all of the money Congress 
allocates in a given year. However, instead of returning such unspent 
funds to the US Treasury, as the law requires, the Pentagon sometimes 
launders and shifts such moneys to other parts of the DoD’s budget.

Veteran Pentagon staffers say that this practice violates Article I 
Section 9 of the US Constitution, which stipulates that

    No Money shall be drawn from the Treasury, but in Consequence of
    Appropriations made by Law; and a regular Statement and Account of
    the Receipts and Expenditures of all public Money shall be published
    from time to time.

Among the laundering tactics 
<https://www.washingtonpost.com/world/national-security/2012/08/08/f08accac-e0a6-11e1-a19c-fcfa365396c8_story.html?utm_term=.5d5ddb017d86> 
the Pentagon uses: So-called “one-year money”—funds that Congress 
intends to be spent in a single fiscal year—gets shifted into a pool of 
five-year money. This maneuver exploits the fact that federal law does 
not require the return of unspent “five-year money” during that 
five-year allocation period.

The phony numbers are referred to inside the Pentagon as “plugs,” as in 
plugging a hole, said current and former officials. “Nippering,” a 
reference to a sharp-nosed tool used to snip off bits of wire or metal, 
is Pentagon slang for shifting money from its congressionally authorized 
purpose to a different purpose. Such nippering can be repeated multiple 
times “until the funds become virtually untraceable,” says one 
Pentagon-budgeting veteran who insisted on anonymity in order to keep 
his job as a lobbyist at the Pentagon.

The plugs can be staggering in size. In fiscal year 2015, for example, 
Congress appropriated $122 billion for the US Army. Yet DoD financial 
records for the Army’s 2015 budget included a whopping $6.5 trillion 
(yes, trillion) in plugs. Most of these plugs “lack[ed] supporting 
documentation,” in the bland phrasing of the department’s internal 
watchdog, the Office of Inspector General. In other words, there were no 
ledger entries or receipts to back up how that $6.5 trillion supposedly 
was spent. Indeed, more than 16,000 records that might reveal either the 
source or the destination of some of that $6.5 trillion had been 
“removed,” the inspector general’s office reported 
<https://missingmoney.solari.com/wp-content/uploads/2017/01/DODIG-2016-113.pdf>. 


In this way, the DoD propels US military spending higher year after 
year, even when the country is not fighting any major wars, says 
Franklin “Chuck” Spinney, a former Pentagon whistle-blower. Spinney’s 
revelations to Congress and the news media about wildly inflated 
Pentagon spending helped spark public outrage in the 1980s. “They’re 
making up the numbers and then just asking for more money each year,” 
Spinney told /The Nation/. The funds the Pentagon has been amassing over 
the years through its bogus bookkeeping maneuvers “could easily be as 
much as $100 billion,” Spinney estimated.

Indeed, Congress appropriated 
<https://dod.defense.gov/News/Article/Article/1601016/president-signs-fiscal-2019-defense-authorization-act-at-fort-drum-ceremony/> 
a record amount—$716 billion—for the DoD in the current fiscal year of 
2019. That was up $24 billion from fiscal year 2018’s 
<https://dod.defense.gov/News/Article/Article/1394990/trump-signs-fiscal-year-2018-defense-authorization/> 
$692 billion, which itself was up $6 billion from fiscal year 2017’s 
<https://thehill.com/policy/defense/311725-obama-signs-annual-defense-policy-bill-into-law> 
$686 billion. Such largesse is what drives US military spending higher 
than the next ten highest-spending countries combined, added Spinney. 
Meanwhile, the closest thing to a full-scale war the United States is 
currently fighting is in Afghanistan, where approximately 15,000 US 
troops are deployed—only 2.8 percent as many as were in Vietnam at the 
height of that war.

The DoD’s accounting practices appear to be an intentional effort to 
avoid accountability, says Armstrong. “A lot of the plugs—not all, but a 
substantial portion—are used to force general-ledger receipts to agree 
with the general budget reports, so what’s in the budget reports is 
basically left up to people’s imagination,” Armstrong says, adding, “Did 
the DoD improperly spend funds from one appropriated purpose on another? 
Who can tell?”

“The United States government collects trillions of dollars each year 
for the purpose of funding essential functions, including 
national-security efforts at the Defense Department,” Senator Grassley 
told /The Nation/. “When unelected bureaucrats misuse, mismanage and 
misallocate taxpayer funds, it not only takes resources away from vital 
government functions, it weakens citizens’ faith and trust in their 
government.”

This Pentagon accounting fraud is déjà vu all over again for Spinney. 
Back in the 1980s, he and a handful of other reform-minded colleagues 
exposed how the DoD used a similar accounting trick to inflate Pentagon 
spending—and to accumulate money for “off-the-books” programs. “DoD 
routinely over-estimated inflation rates for weapons systems,” Spinney 
recalled. “When actual inflation turned out to be lower than the 
estimates, they did not return the excess funds to the Treasury, as 
required by law, but slipped them into something called a ‘Merged 
Surplus Account,'” he said.

“In that way, the Pentagon was able to build up a slush fund of almost 
$50 billion” (about $120 billion in today’s money), Spinney added. He 
believes that similar tricks are being used today to fund secret 
programs, possibly including US Special Forces activity in Niger. That 
program appears 
<https://www.defensenews.com/congress/2018/05/08/did-military-hid-niger-mission-from-congress-key-senator-asks/> 
to have been undertaken without Congress’s knowledge of its true nature, 
which only came to light when a Special Forces unit was ambushed there 
last year, resulting in the deaths of four US soldiers.

“Because of the plugs, there is no auditable way to track Pentagon 
funding and spending,” explains Asif Khan of the Government 
Accountability Office, the Congress’s watchdog on the federal 
bureaucracy. “It’s crucial in auditing to have a reliable financial 
record for prior years in order to audit the books for a current year,” 
notes Khan, the head of the National Security Asset Management unit at 
GAO. Plugs and other irregularities help explain why the Pentagon has 
long been at or near the top of the GAO’s list of “high risk” agencies 
prone to significant fraud, waste, and abuse, he adds.

/The Nation/ submitted detailed written questions and requested 
interviews with senior officials in the Defense Department before 
publishing this article. Only public-affairs staff would speak on the 
record. In an e-mailed response, Christopher Sherwood of the DoD’s 
Public Affairs office denied any accounting impropriety. Any transfer of 
funds between one budgetary account and another “requires a 
reprogramming action” by Congress, Sherwood wrote, adding that any such 
transfers amounting to more than 1 percent of the official DoD budget 
would require approval by “all four defense congressional committees.”

The scale and workings of the Pentagon’s accounting fraud began to be 
ferreted out <https://missingmoney.solari.com/> last year by a dogged 
research team led by Mark Skidmore, a professor of economics 
specializing in state and local government finance at Michigan State 
University. Skidmore and two graduate students spent months poring over 
DoD financial statement reviews done by the department’s Office of 
Inspector General. Digging deep into the OIG’s report on the Army’s 2015 
financial statement, the researchers found some peculiar information. 
Appendix C, page 27, reported that Congress had appropriated $122 
billion for the US Army that year. But the appendix also seems to report 
that the Army had received a cash deposit from the US Treasury of $794.8 
billion. That sum was more than six times larger than Congress had 
appropriated—indeed, it was larger than the entire Pentagon budget for 
the year. The same appendix showed that the Army had accounts payable 
(accounting lingo for bills due) totaling $929.3 billion.

“I wondered how you could possibly get those kinds of adjustments out of 
a $122 billion budget,” Skidmore recalled. “I thought, initially, ‘This 
is absurd!’ And yet all the [Office of Inspector General] seemed to do 
was say, ‘Here are these plugs.’ Then, nothing. Even though this kind of 
thing should be a red flag, it just died. So we decided to look further 
into it.”

To make sure that fiscal year 2015 was not an anomaly, Skidmore and his 
graduate students expanded their inquiry, examining OIG reports on 
Pentagon financial records stretching back to 1998. Time and again, they 
found that the amounts of money reported as having flowed into and out 
of the Defense Department were gargantuan, often dwarfing the amounts 
Congress had appropriated: $1.7 trillion in 1998, $2.3 trillion in 1999, 
$1.1 trillion in 2000, $1.1 trillion in 2007, $875 billion in 2010, and 
$1.7 trillion in 2012, plus amounts in the hundreds of billions in other 
years.

In all, at least a mind-boggling $21 trillion of Pentagon financial 
transactions between 1998 and 2015 could not be traced, documented, or 
explained, concluded Skidmore. To convey the vastness of that sum, $21 
trillion is roughly five times more than the entire federal government 
spends in a year. It is greater than the US Gross National Product, the 
world’s largest at an estimated $18.8 trillion. And that $21 trillion 
includes only plugs that were disclosed in reports by the Office of 
Inspector General, which does not review all of the Pentagon’s spending.

To be clear, Skidmore, in a report 
<https://missingmoney.solari.com/wp-content/uploads/2017/01/Unsupported_Adjustments_Report_Final_3.pdf> 
coauthored with Catherine Austin Fitts, a former assistant secretary of 
the Department of Housing and Urban Development who complained about 
similar plugs in HUD financial statements, does not contend that all of 
this $21 trillion was secret or misused funding. And indeed, the plugs 
are found on both the positive and the negative sides of the ledger, 
thus potentially netting each other out. But the Pentagon’s bookkeeping 
is so obtuse, Skidmore and Fitts added, that it is impossible to trace 
the actual sources and destinations of the $21 trillion. The 
disappearance of thousands of records adds further uncertainty. The 
upshot is that no one can know for sure how much of that $21 trillion 
was, or was not, being spent legitimately.

That may even apply to the Pentagon’s senior leadership. A good example 
of this was Donald Rumsfeld, the notorious micromanaging secretary of 
defense during the Bush/Cheney administration. On September 10, 2001 
Rumsfeld called a dramatic press conference at the Pentagon to make a 
startling announcement <https://www.youtube.com/watch?v=xU4GdHLUHwU>. 
Referring to the huge military budget that was his official 
responsibility, he said, “According to some estimates we cannot track 
$2.3 trillion in transactions.” This shocking news that an amount more 
than five times as large as the Pentagon’s FY 2001 budget of an 
estimated $313 billion was lost or even just “untrackable” was—at least 
for one 24-hour news cycle—a big national story, as was Secretary 
Rumsfeld’s comment that America’s adversary was not China or Russia, but 
rather was “closer to home: It’s the Pentagon bureaucracy.” Equally 
stunning was Rumsfeld’s warning that the tracking down of those missing 
transactions “could be…a matter of life and death.” No Pentagon leader 
had ever before said such a thing, nor has anyone done so since then. 
But Rumsfeld’s exposé died quickly as, the following morning on 
September 11, four hijacked commercial jet planes plowed full speed into 
the two World Trade Center towers, the Pentagon, and a field in 
Pennsylvania. Since that time, there has been no follow-up and no effort 
made to find the missing money, either.

Recalling his decades inside the Pentagon, Spinney emphasized that the 
slippery bookkeeping and resulting fraudulent financial statements are 
not a result of lazy DoD accountants. “You can’t look at this as an 
aberration,” he said. “It’s business as usual. The goal is to paralyze 
Congress.”

That has certainly been the effect. As one congressional staffer with 
long experience investigating Pentagon budgets, speaking on background 
because of the need to continue working with DoD officials, told /The 
Nation/, “We don’t know how the Pentagon’s money is being spent. We know 
what the total appropriated funding is for each year, but we don’t know 
how much of that funding gets spent on the intended programs, what 
things actually cost, whether payments are going to the proper accounts. 
If this kind of stuff were happening in the private sector, people would 
be fired and prosecuted.”

DoD officials have long insisted that their accounting and financial 
practices are proper. For example, the Office of Inspector General has 
attempted to explain away the absurdly huge plugs in DoD’s financial 
statements as being a common, widely accepted accounting practice in the 
private sector.

When this reporter asked Bridget Serchak, at the time a press 
spokesperson for the inspector general’s office, about the Army’s $6.5 
trillion in plugs for fiscal year 2015, she replied, “Adjustments are 
made to the Army General Fund financial statement data…for various 
reasons such as correcting errors, reclassifying amounts and reconciling 
balances between systems…. For example, there was a net unsupported 
adjustment of $99.8 billion made to the $0.2 billion balance reported 
for Accounts Receivable.”

There is a grain of truth in Serchak’s explanation, but only a grain.

As an expert in government budgeting, Skidmore confirmed that it is 
accepted practice to insert adjustments into budget reports to make both 
sides of a ledger agree. Such adjustments can be deployed in cases where 
receipts have been lost—in a fire, for example—or where funds were 
incorrectly classified as belonging to one division within a company 
rather than another. “But those kinds of adjustments should be the 
exception, not the rule, and should amount to only a small percentage of 
the overall budget,” Skidmore said.

For its part, the inspector general’s office has blamed the fake numbers 
found in many DoD financial statements on the Defense Finance and 
Accounting Service (DFAS), a huge DoD accounting operation based in 
Indianapolis, Indiana. In review after review, the inspector general’s 
office has charged that DFAS has been making up “unsupported” figures to 
plug into DoD’s financial statements, inventing ledger entries to back 
up those invented numbers, and sometimes even “removing” transaction 
records that could document such entries. Nevertheless, the inspector 
general has never advocated punitive steps against DFAS officials—a 
failure that suggests DoD higher-ups tacitly approve of the deceptions.

Skidmore repeatedly requested explanations for these bookkeeping 
practices, he says, but the Pentagon response was stonewalling and 
concealment. Even the inspector general’s office, whose publicly 
available reports had been criticizing these practices for years, 
refused to answer the professor’s questions. Instead, that office began 
removing archived reports from its website. (Skidmore and his grad 
students, anticipating that possibility, had already downloaded the 
documents, which were eventually were restored to public access under 
different URLs.)

/Nation/ inquiries have met with similar resistance. Case in point: A 
recent DoD OIG report on a US Navy financial statement for FY 2017. 
Although OIG audit reports in previous years were always made available 
online without restriction or censorship, this particular report 
suddenly appeared in heavily redacted form—not just the numbers it 
contained, but even its title! Only bureaucratic sloppiness enabled one 
to see that the report concerned Navy finances: Censors missed some of 
the references to the Navy in the body of the report, as shown in the 
passages reproduced here.

A request to the Office of Inspector General to have the document 
uncensored was met with the response: “It was the Navy’s decision to 
censor it, and we can’t do anything about that.” At /The Nation/’s 
request, Senator Grassley’s office also asked the OIG to uncensor the 
report. Again, the OIG refused. A Freedom Of Information Act request by 
/The Nation/ to obtain the uncensored document awaits a response.

The GAO’s Khan was not surprised by the failure of this year’s 
independent audit of the Pentagon. Success, he points out, would have 
required “a good-faith effort from DoD officials, but to date that has 
not been forthcoming.” He added, “As a result of partial audits that 
were done in 2016, the Army, Navy, Air Force, and Marines have over 
1,000 findings from auditors about things requiring remediation. The 
partial audits of the 2017 budget were pretty much a repeat. So far, 
hardly anything has been fixed.”

Let that sink in for a moment: As things stand, no one knows for sure 
how the biggest single-line item in the US federal budget is actually 
being spent. What’s more, Congress as a whole has shown little interest 
in investigating this epic scandal. The absurdly huge plugs never even 
get asked about at Armed Services and Budget Committee hearings.

One interested party has taken action—but it is action that’s likely to 
perpetuate the fraud. The normally obscure Federal Accounting Standards 
Advisory Board sets the accounting standards for all federal agencies. 
Earlier this year, the board proposed a new guideline saying that 
agencies that operate classified programs should be permitted to falsify 
figures in financial statements and shift the accounting of funds to 
conceal the agency’s classified operations. (No government agency 
operates more classified programs than the Department of Defense, which 
includes the National Security Agency.) The new guideline became 
effective on October 4, just in time for this year’s end-of-year 
financial statements.

So here’s the situation: We have a Pentagon budget that a former DOD 
internal-audit supervisor, Jack Armstrong, bluntly labels “garbage.” We 
have a Congress unable to evaluate each new fiscal year’s proposed 
Pentagon budget because it cannot know how much money was actually spent 
during prior years. And we have a Department of Defense that gives only 
lip service to fixing any of this. Why should it? The status quo has 
been generating ever-higher DoD budgets for decades, not to mention 
bigger profits for Boeing, Lockheed, and other military contractors.

The losers in this situation are everyone else. The Pentagon’s 
accounting fraud diverts many billions of dollars that could be devoted 
to other national needs: health care, education, job creation, climate 
action, infrastructure modernization, and more. Indeed, the Pentagon’s 
accounting fraud amounts to theft on a grand scale—theft not only from 
America’s taxpayers, but also from the nation’s well-being and its future.

As President Dwight D. Eisenhower, who retired from the military as a 
five-star general after leading Allied forces to victory in World War 
II, said in a 1953 speech, “Every gun that is made, every warship 
launched, every rocket fired signifies, in the final sense, a theft from 
those who hunger and are not fed, those who are cold and are not 
clothed.” What would Eisenhower say today about a Pentagon that 
deliberately misleads the people’s representatives in Congress in order 
to grab more money for itself while hunger, want, climate breakdown, and 
other ills increasingly afflict the nation?

/Correction: An earlier version of this article included a mention of 
$6.5 billion in plugs in 2015. In fact, as cited elsewhere in the story, 
the correct figure is $6.5 trillion. The text has been corrected./

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