Financial Accountability and Contractor Oversight Failures

Danielle Brian & Beth Daley, Project On Government Oversight,
202-347-1122

Recent indicators suggest that the Quadrennial Defense Review (QDR) and Secretary Rumsfeld's Review will recommend hundreds of billions of dollars in Department of Defense (DOD) spending increases at a time when serious financial accountability and oversight failures plague the Pentagon.

Financial Accountability

In FY 2000, $1.1 trillion out of a total of $4.4 trillion of accounting entries reviewed by the DOD Inspector General could not be supported "by reliable explanatory information and audit trails." In other words, 25% of taxpayer dollars spent by the Pentagon are potentially being wasted, stolen or misspent.

Despite efforts spanning a decade, the DOD has made little progress on becoming financially accountable. According to May, 2001 GAO testimony: "To date, none of the military services or major DOD components have passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations and controls." The GAO added: "The department was unable to reconcile an estimated $3.5 billion difference between its available fund balances according to its records and Treasury's at the end of fiscal year 2000-similar in concept to individuals reconciling their checkbooks with their bank statements."

Accounting for the nation's tax dollars starts with a realistic assessment of how these dollars will be spent. However, reality has been absent from DOD budgetary planning. According to a recent analysis by the General Accounting Office (GAO) of the QDR and other planning processes, "Since the mid-1980's, we have reported that DOD employs overly optimistic planning assumptions in its budget formulation." According to this report, DOD continues to "use projections for increased procurement funding that do not recognize significant historical experience," "underestimate operating costs," and "include unrealistic estimates of savings."

Acquisition Reform and Contractor Oversight

Enormous political pressure has driven the agenda to increase contracting and privatization of government activities. However, these efforts have been accompanied by decreased contractor oversight and accountability. Defense contractors are now taking advantage of new opportunities to overcharge the federal government because of policy changes made under the banner of acquisition reform.

The $435 hammer and the $640 toilet seat that made Pentagon overspending famous in the 1980's are no longer a historical phenomena. A November, 2000 GAO study found a resurgence of spare parts "sticker shock." According to the study, the cost of 2,993 spare parts purchased in 1998 by the military increased by 1,000 percent or more in just one year. In most cases, defense contractors underestimated the original cost of the spare parts and then increased prices later. Defense officials told the GAO that discrepancies between estimated and actual prices were often the result of a lack of manpower needed to perform a "thorough price scrub, " meaning a review when a weapon system was initially delivered. Spare parts prices are simply one accessible indicator of the state of the Pentagon's spending practices.

Acquisition policy changes made by the Federal Acquisition Streamlining Act of 1994, and later revised by the Federal Acquisition Reform Act of 1996, are at the core of current DOD pricing problems. The original intent of such changes was to allow the government to cut the red tape when buying "off-the-shelf" publicly-available items. However, definitions of competitive bidding and free market-where supply and demand really do dictate price-were detrimentally weakened. Like taking the audit controls off federally insured savings and loans, undermining these standards has left the Treasury unprotected. Mergers throughout the defense industry have further minimized the role of competition in controlling costs.

Taxpayer protections have also been undermined by staffing and budgetary cutbacks at agencies overseeing contractors. Large reductions in the DOD acquisition workforce have already taken place, and more are planned. But the rhetoric to reduce DOD infrastructure has resulted in cuts to agencies that are successful at reining in Pentagon overspending and industry fraud. These cuts are penny wise but pound foolish. According to an analysis by the Project On Government Oversight, in varying years between FY92 and FY97, these cuts include but are not limited to:

19% cut in staff positions at the Defense Contract Audit Agency (DCAA) which "saves almost $10 for each dollar invested";
21% cut in the Department of Defense Inspector General's (IG) office which recovered $466 million in FY 1996-97 fraud investigations; and
1/3 cut in staff at the General Accounting Office (GAO), which played a central role in saving $1.7 billion from the troubled F-22 program.

In March, 2000, the DOD Inspector General (IG) testified that "less than ten of the several hundred weapon system projects are being comprehensively reviewed by DOD internal auditors each year." For service contracts, few internal audits are conducted at all. According to the DOD IG who reviewed 105 of these contracts: "We were startled by the audit results, because we found problems with every one of the 105 actions. In nearly 10 years of managing the audit office of the IG, DOD, I do not ever recall finding problems on every item in that large a sample of transactions, programs or data."

Recommendations

Freeze DOD spending until the agency can produce a clean audit. Increasing DOD spending will not only result in the squandering of taxpayer dollars, it will reward and encourage the unacceptable and intractable lack of DOD financial accountability.
In order to prevent defense contractor ripoffs, taxpayer protections should be reinstated including stronger definitions for what constitutes competitive bidding and the use of the commercial designation. Cost or pricing data should also be required more often.
In order to save taxpayer dollars, the budgets and staffing of independent oversight agencies such as the GAO, the Inspector General, the Cost Accounting Standards Board, and the Defense Contract Audit Agency should be reinstated to their previous levels. These agencies never should have been included in DOD acquisition workforce cuts.

Financial Accountability and Contractor Oversight Failures

Danielle Brian & Beth Daley, Project On Government Oversight, 202-347-1122