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<div class="header reader-header reader-show-element"> <font
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href="https://www.thenation.com/article/pentagon-audit-budget-fraud/">https://www.thenation.com/article/pentagon-audit-budget-fraud/</a></font>
<h1 class="reader-title">Exclusive: The Pentagon’s Massive
Accounting Fraud Exposed</h1>
<div class="credits reader-credits">By Dave Lindorff - November
27, 2018<br>
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<h2>How US military spending keeps rising even as the
Pentagon flunks its audit.</h2>
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<p><span>O</span>n November 15, Ernst & Young and
other private firms that were hired to audit the
Pentagon <a
href="https://www.reuters.com/article/us-usa-pentagon-audit/pentagon-fails-its-first-ever-audit-official-says-idUSKCN1NK2MC">announced</a>
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.</p>
<p>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 <em>attempting</em> 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.
</p>
<p>As Republican Senator Charles Grassley of Iowa, a
frequent critic of the DoD’s financial practices, <a
href="https://www.grassley.senate.gov/news/news-releases/grassley-clean-audit-opinions-pentagon-remain-elusive">said</a>
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.
</p>
<p>Now, a <em>Nation</em> 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. </p>
<p>“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.
</p>
<p>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.</p>
<p>Veteran Pentagon staffers say that this practice
violates Article I Section 9 of the US Constitution,
which stipulates that
</p>
<blockquote>
<p>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. </p>
</blockquote>
<p>Among the laundering <a
href="https://www.washingtonpost.com/world/national-security/2012/08/08/f08accac-e0a6-11e1-a19c-fcfa365396c8_story.html?utm_term=.5d5ddb017d86">tactics</a>
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.
</p>
<p>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.
</p>
<p>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 <a
href="https://missingmoney.solari.com/wp-content/uploads/2017/01/DODIG-2016-113.pdf">reported</a>.
</p>
<p>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 <em>The Nation</em>. 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.
</p>
<p>Indeed, Congress <a
href="https://dod.defense.gov/News/Article/Article/1601016/president-signs-fiscal-2019-defense-authorization-act-at-fort-drum-ceremony/">appropriated</a>
a record amount—$716 billion—for the DoD in the
current fiscal year of 2019. That was up $24 billion
from <a
href="https://dod.defense.gov/News/Article/Article/1394990/trump-signs-fiscal-year-2018-defense-authorization/">fiscal
year 2018’s</a> $692 billion, which itself was up
$6 billion from <a
href="https://thehill.com/policy/defense/311725-obama-signs-annual-defense-policy-bill-into-law">fiscal
year 2017’s</a> $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. </p>
<p>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?”
</p>
<p>“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 <em>The Nation</em>. “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.”
</p>
<p>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.
</p>
<p>“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 <a
href="https://www.defensenews.com/congress/2018/05/08/did-military-hid-niger-mission-from-congress-key-senator-asks/">appears</a>
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.
</p>
<p>“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.
</p>
<p><em>The Nation</em> 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.”
</p>
<p><span>T</span>he scale and workings of the
Pentagon’s accounting fraud began to be <a
href="https://missingmoney.solari.com/">ferreted
out</a> 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. </p>
<p>“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.”
</p>
<p>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.
</p>
<p>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.
</p>
<p>To be clear, Skidmore, in a <a
href="https://missingmoney.solari.com/wp-content/uploads/2017/01/Unsupported_Adjustments_Report_Final_3.pdf">report</a>
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.
</p>
<p>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 <a
href="https://www.youtube.com/watch?v=xU4GdHLUHwU">announcement</a>.
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.
</p>
<p>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.”
</p>
<p>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 <em>The Nation</em>, “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.”
</p>
<p>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.
</p>
<p>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.”
</p>
<p>There is a grain of truth in Serchak’s explanation,
but only a grain.
</p>
<p>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.
</p>
<p>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.
</p>
<p>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.) </p>
<p><em>Nation</em> 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.
</p>
<p>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 <em>The
Nation</em>’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 <em>The Nation</em> to obtain the
uncensored document awaits a response.
</p>
<p>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.”
</p>
<p>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.
</p>
<p>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.
</p>
<p>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.
</p>
<p>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.
</p>
<p>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?
</p>
<p><em>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.</em> </p>
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