Hale, who retired in 2014, said in an interview that implementing any large-scale reform at the Pentagon, such as improving the reliability of its accounting software, “is like trying to push a block across sandpaper” because coordination is required between dozens of agencies, combatant commands, field activities, and military services. Other financial concerns, such as financing wars abroad while complying with legislated spending caps, were considered more urgent tasks, he said.
But Hale said he does not question the need to reform the way the department keeps track of its spending, because electronic logs of Defense Department transactions are often old and supporting documentation is poorly organized.
That means the department is unable to accurately account for its debts and credits at the end of each financial cycle, according to multiple reports from Hale’s office and the Pentagon’s Office of Inspector General. Sen. John McCain (R-Az.), chairman of the Senate’s armed services committee and one of the GAO report;s requesters, described this shortcoming as “shameful” at a discussion about budget reform and defense spending at the Heritage Foundation on July 15.
“Shouldn't the taxpayers of America know where their dollars are being spent on national defense?” McCain asked.
Congress has been growing increasingly impatient and threatening to turn the screws. Since 2012, lawmakers have introduced an “Audit the Pentagon” bill that would punish the department if it fails to produce a modern accounting of its transactions, but the bills have not made it to the House or Senate floor. The latest version, introduced in February by Sen. Joe Manchin III (D-W.Va.) and eight co-sponsors, states that if the department misses the 2017 deadline, it will not be able to buy certain weapons or shift funds from one account to another.
To help modernize its bookkeeping, the department has invested in accounting software improvements over the past several years, which themselves cost more than $15 billion through 2017, according to a 2012 report by the department’s auditor. It has further spent tens of millions of dollars hiring accounting firms to help the military services meet their requirements.
Grant Thornton, for example, collected $32 million from 2010 until 2014 to audit the Marine Corps’s report of how it had spent its budget each year and determine whether it had correctly recorded its financial intakes and expenditures, according to Grassley. The firm’s favorable verdict, seconded by the inspector general, was the basis for the public celebration.
Michele Mazur, a spokesperson for Grant Thornton, when asked if the firm would return its fee since its initial endorsement was in the end rejected by the Pentagon, stated by email that “We are confident that our work complied with all professional standards.”
Grant Thornton and other big accounting firms, such as KPMG and Ernst and Young, who check the books of the military services, are supposed to work hand-in-hand with the Pentagon’s Office of Inspector General, run by Jon T. Rymer, who worked as a Director of KPMG and audited federal financial agencies before taking his current job in 2013.
Each year for nearly two decades, teams of specialists in the inspector general’s office have examined the accounting firms’ work and judgments and announced whether they found their judgments credible. They are, in effect, watchdogs on the arduous process of bringing the department’s bookkeeping into the twenty-first century, and bear ultimate responsibility for auditing the department’s accounts.
In the Marine Corps audits for fiscal years 2010 and 2011, the inspector general’s teams and Grant Thornton agreed that the Marine Corps had not kept a passable record of its budgetary activity. But in the 2012 audit, Grant Thornton’s accountants recommended a passing grade but their overseers from the Pentagon inspector general’s office initially disagreed.
In the lists of orders that the Corps reported placing in 2012, for example, the oversight team found $399 million in erroneously recorded transactions. That exceeded the level of error the overseers were willing to accept for the placed-orders category of accounts — $275.3 million — and thus rendered the team unable to sign off on the entire category.
Because the payments category constituted more than 90 percent of the Corps’s total budget statement, the inspector general’s team said that only 8.1 percent—at most—of the Corps’s accounting could credibly be described as “materially correct,” according to an email that the inspector general’s team leader, Cecelia Ball, wrote her supervisor on May 22, 2013. The email was given to the Center for Public Integrity by a source who had access to evidence used by the GAO to review the audit.
The GAO’s investigators said however that the extent of the misreporting might have been even worse than what the inspector general’s team reported; they found, for example, $35.8 million in additional errors or unreliable transactions beyond the $773 million that auditors also found. The investigators also spotted $231.5 million in shipping transactions that the auditors accepted as reliable without sufficient evidence, according to the report. It said that “management” in the inspector general’s office nonetheless told Ball’s team to certify that the Marine Corps’s accounts were in order.
Although the GAO had access to internal Pentagon documents, its report did not name who applied the improper pressure. But an Oct. 8, 2014 internal review at the inspector general’s office, by Ashton Coleman, Jr., seen by the Center, stated that the deputy inspector general for auditing’s close ties to a partner at the accounting firm “would lead a third party to perceive that undue influence” could have been exercised by the auditing firm on the team’s conclusions at three points in its deliberations. The holder of the deputy’s post was then Daniel R. Blair, who previously led financial audits at the GAO and worked as a public accountant.
Ball, in an Aug. 14, 2013 message to colleagues about feedback she had received from her supervisor at one point said Blair, in particular, believed the team had “to do what it takes” to reach the same positive conclusion as Grant Thornton, according to a copy of her email. Reached by phone at her home in Kansas City, Ball declined comment.
Ten days before the inspector general endorsed the audit in December 2013, Ball’s supervisor Edward Blair — no relation to Daniel — wrote to Daniel Blair, reminding him of the “many occasions” on which the team had found Grant Thornton’s conclusions about the accuracy of the Corps’s financial records unreliable. He also presciently warned that the “GAO may hone in on” flaws in the accounting if it conducted a review.
Ultimately, one of Daniel Blair’s colleagues — Lorin T. Venable, assistant inspector general for financial management and reporting — signed an 8-page report stating that the Corps had “fairly” reported its budgetary activity for the year. But the GAO in its report said this report ignored evidence that “should have raised significant doubts” about the reliability of the audited information, such as transactions for which the Marine Corps had no documentation and discrepancies between accounts that should have had the same balance.
“These actions appear to show how undue influence and bias trumped objectivity and independence,” Grassley said. He said emails sent between one of Grant Thornton’s partners and Daniel Blair “suggest a professional relationship that was far too cozy.”
Venable, through Pentagon spokesperson Bridget Serchak, declined to comment. Serchak said Grant Thornton itself discovered the Marine Corps records that formed the basis of its endorsement were incomplete, when the firm audited the Corps’s accounts for 2014. She declined to comment on the emails making clear that staff had identified the shortcomings in 2013.
Reuters first reported on May 20 that Blair had overruled his own oversight team after they found the Corps financial records faulty. Three weeks later, the Pentagon’s inspector general demoted him to the position of deputy chief of staff at the agency.
“Dan made major and lasting contributions as the DIG for Audit,” inspector general Rymer wrote in a June 10 email addressed to his staff. As deputy chief of staff, he added, Blair will focus on financial management and information technology, but not oversee accounting reports.
Asked whether the reassignment was related to Blair’s handling of the Marine Corps audit, Serchak sent a statement from Rymer that Blair had said he was “ready for a career change” and Rymer thought he would help add “more management depth to our internal OIG financial management.” In written comments included in the GAO report, Ann-Cecile McDermott, the Corps’s fiscal director, contested that the Corps could not provide support for certain transactions and disputed that “significant” weaknesses impair the Corps’s ability to produce reliable financial information. But she also acknowledged “much work remains.” Mark Easton, the Pentagon’s deputy chief financial officer, did not contest any specific statements by the GAO but chastised the report’s authors for not recognizing “many of the corrections and improvements already made” by the Marine Corps, and for not “constructively” describing the value of the audit to the Marine Corps.