- The Defense Department cannot account for $1.1 trillion
that seems to have vanished within the tangled system of financial accounting
put in place by private contractors.
-
- Every year trillions of dollars are unaccounted for by
federal agencies, and every year these same agencies are called before
congressional oversight committees to explain this mismanagement of taxpayers'
funds.
-
- Year after
year the bureaucratic mea culpas are longer on process and shorter on substance,
leaving overseers with little or no information that is useful to correct
the gross mismanagement. Take, for instance, the financial mess at the
Department of Defense (DOD).
-
- In May, DOD
Deputy Inspector General Robert Lieberman reported to Congress that "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."
-
- Without ever
using the word "money," a practice common among inspectors general
(IGs), the deputy IG at the Pentagon read an eight-page summary of DOD
fiduciary failures. He admitted that $4.4 trillion in adjustments to the
Pentagon's books had to be cooked to compile the required financial statements
and that $1.1 trillion of that amount could not be supported by reliable
information. In other words, at the end of the last full year on Bill Clinton's
watch, more than $1 trillion was simply gone and no one can be sure of
when, where or to whom the money went.
-
- For most Americans,
an official admission that $1.1 trillion in taxpayers' money cannot be
accounted for is incomprehensible. To put it in perspective, consider that
this missing sum would buy the following:
-
-
- * nearly 14 million accounting degrees from any four-year
state college, estimating the cost at $20,000 per year;
-
- * 36 million automobiles at an estimated cost of $30,000
each; and
-
- * about 8 million single-family houses costing $140,000
per home.
-
- Also, consider
this:
-
-
- * Assuming the average working life is 30 years, the
average annual income is $34,000 and the average federal tax on that income
is $6,830, nearly 5.5 million Americans will work their entire lives to
pay $1.1 trillion in taxes.
-
- * In fiscal 1999, 124,227,000 Americans paid a total
of more than $855 billion in individual income taxes, which means that
the next year the Pentagon misplaced, lost or otherwise cannot account
for all the money the IRS collected in fiscal 1999 from individual, estate,
gift, corporate and excise taxes.
-
- The General
Accounting Office (GAO), which is the investigative arm of Congress, wrote
in its January 2001 report, DOD Major Management Challenges and Program
Risks, that the Pentagon "continues to confront pervasive and complex
financial-management problems 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."
-
- Specifically,
the GAO found that the DOD had "(1) an inability to reconcile an estimated
$7 billion difference between its available fund balances and the Treasury's
balance; (2) there were frequent adjustments of recorded payments between
appropriation accounts - with nearly $1 of every $3 in fiscal year 1999
contract payments representing an adjustment; and (3) there are incorrect
or unsupported obligations."
-
- What this means
to the average American is that the Pentagon checking-account balance doesn't
match the bank (Treasury) balance. One out of every three dollars entered
in the ledger had to be adjusted to get the account in balance - with the
Pentagon owing huge sums for which it cannot account.
-
- Despite the
comprehensive analysis of the DOD's finances by the GAO, little, if any,
specific information is provided about the contractors paid hundreds of
millions of dollars to put reliable and accurate financial-accounting systems
in place at DOD.
- The GAO made
it clear in the January report that the DOD's financial-management system
is "flawed with decades-old problems that will be impossible to reverse
overnight: They do not comply with federal financial-management-systems
requirements and were not designed to collect data in accordance with generally
accepted accounting principles." Yet nowhere in the GAO report are
the companies identified that were contracted to put such systems in place.
-
- When asked
why these contractors were allowed to remain anonymous, especially in light
of the enormous amount of money at stake, GAO Director of Financial Management
and Assurance Gregory Kutz tells Insight: "That's a good question.
I don't think we've ever been asked by Congress to look at that. Our work
is mandated by Congress, and it is based on how they ask us to carry out
investigations. We tend to point the finger at the department and not the
contractors they hire. But it's a good point and it would be interesting
to do a report about what level of blame might be placed on specific contractors.
There are pockets of excellence but, for the most part, we're not getting
good value for our money."
-
- How many contractors
has the DOD hired to set up a reliable financial-management system? The
GAO doesn't have the information. In fact, Kutz tells Insight, "I'd
have to spend months trying to find who the contractors are, and even then
there is no way to be sure. With DOD you don't know if you have a complete
list of the systems, and even then the list probably would be several pages
long. DOD has so many people building systems for them it's part of the
problem."
-
- DOD public-affairs
spokeswoman Susan Hansen explains that "the systems currently in place
weren't developed to link all the information. It isn't one particular
vendor's fault that the system isn't integrated. For decades leading up
to the legislation calling for auditable financial statements, having the
system linked together was not part of the vendor's requirements. This
administration is looking at developing at DOD a financial-management architecture
- a system that works together."
-
- Like GAO's
Kutz, Hansen also was unable to provide a list of past or present contractors
tasked with setting up the financial-management system at the DOD.
- While it seems
clear that dozens of contractors have been involved in designing financial
systems at the DOD, the names of some are known. One in particular is on
the hot seat at other federal and state agencies for delivering systems
that met neither the contractor's promises nor the agency's expectations:
American Management Systems Inc. (AMS).
-
- This Fairfax,
Va.-based software company last month was hit with a $350 million lawsuit
by the Federal Retirement Thrift Investment Board for "fraudulent
procurement, fraudulent performance and reckless breach of a contract with
the Board to build a computerized record-keeping system." AMS was
contracted to "design and develop a new record-keeping system to automate,
simplify and improve the Board's service to the Fund's participants."
The estimated cost of the project was $30 million.
- However, more
than a year later, "AMS has been unable to deliver a reduced-function
system at its most recently estimated cost of approximately $87 million.
The delays and cost overruns have been caused by AMS' reckless and willful
misconduct."
-
- AMS' problems
with the Thrift Investment Board are only the latest resulting in a string
of lawsuits plaguing a company deeply involved in developing financial-management
systems for federal and state agencies - including Vermont, where AMS'
system is used in the state's tax department, and Ohio, where AMS is the
defendant in a class-action lawsuit involving the child-support-payments
system. Last year, AMS paid a record settlement to Mississippi for failure
to implement the system for the state's tax department.
-
- How involved
AMS is in developing the new "architecture" for the DOD's financial-management
system is unknown. Neither the GAO nor the DOD could provide specific information
about the kind of contracts awarded to AMS at the Pentagon. Despite Insight's
repeated attempts to obtain the information from the contractor, AMS did
not return the calls.
-
- Rep. Steve
Horn (R-Calif.), chairman of the House Government Reform subcommittee on
Government Efficiency, Financial Management and Intergovernmental Relations,
is concerned about all of this. He tells Insight that "over the last
few years federal agencies have made incremental progress toward producing
financial statements which received clean audits. But good financial management
also requires systems that provide accurate, day-to-day financial information.
If some government contractors are unable to develop systems that can provide
that type of information, Congress needs to know it, and we're asking the
GAO to look into it."
-
- Many financial
analysts familiar with contractor gouging believe that bringing the contractors
out of the shadows is the first step toward turning around the government's
financial problems. A Wall Street analyst, who asked not to be identified
for fear of retaliation, put it this way: "How is it that the companies
hired to develop financial-management systems for government that never
seem to do the job - that can't track the money or produce auditable financial
statements - don't have any problem with the financial systems in their
own companies? How is it that regardless of their size they can track their
own money and come up with clean financial statements?"
- Corporate-securities
attorney Jack Spidi of the Washington law firm of Malizia, Spidi and Fisch
tells Insight, "You don't get a 10-year grace period when you're publicly
traded. You have to submit certified audits from day one or you're in trouble.
There's no calling the Securities and Exchange Commission and telling them,
'Oh, our financial systems aren't talking to each other.'"
-
- Spidi explains:
"The government, if it were treated like a publicly traded corporation
on the stock exchange, would be required by the SEC to have these systems
in place and would be subject to very detailed and rigorous accounting
and reporting standards. If a large corporation like any of the defense
contractors were unable to provide financial statements, it could lose
its ability to trade on the exchange. Stockholders would be filing lawsuits
right and left, which would cause the stock to tank. The question is: Should
there be public reporting by government agencies like all publicly traded
corporations in the U.S. are required to provide? And, if there were, would
these agencies be more rigorous and careful about how they account for
the money? Public companies are accountable for the accuracy of their financial
statements; why shouldn't government agencies be held to the same standard?"
-
- The situation
faced by the incoming Bush administration was grave, and nowhere graver
than at the Pentagon, where insiders say Defense Secretary Donald Rumsfeld
has been heavily focused on the problem. Deputy IG Lieberman told Congress
that "although DOD has put a full decade of effort into improving
its financial reporting, it seems that everyone involved - the Congress,
the Office of Management and Budget, the audit community and DOD managers
- have been unable to determine or clearly articulate exactly how much
progress has been made."
-
- This soon may
be remedied. With Rumsfeld demanding accountability and hacking furiously
at waste, and lawmakers now calling for an investigation of which contractors
have been paid how many hundreds of millions of dollars for financial-reporting
systems that don't work, there is just a chance that something may be done
about that $1.1 trillion for which the Clinton administration could not
account.
|