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Q&A: What it will take to fix the Pentagon's books

Monday, 23 Dec 2013 | 8:59 AM ET

(This is a sidebar article to part 3 of a 3-part series, "Unaccountable: the high cost of the Pentagon's bad bookkeeping.")

NEW YORK, Dec 20 (Reuters) - The Defense Department typically receives roughly half of annual federal appropriations, but it's never been audited. If that doesn't change, trillions more taxpayer dollars are at risk of being lost to waste, mismanagement and fraud.

Q: Is the Pentagon required to be audited? A: Yes. Congress passed a law in 1990 requiring all federal agencies to be audited annually. The law required the Defense Department to comply by 1996. The Pentagon missed that deadline and has remained in violation ever since. All other federal agencies are audited annually, and with rare exceptions, they pass.

Q: What's preventing the Pentagon from being audited? A: The Defense Department has had no working accounting system. In recent years, it has relied on at least 2,100 (estimates range up to 5,000) separate systems spread throughout the military services and other defense organizations, almost all developed independently over the years with little thought to sharing data or preparing accurate financial statements. In their annual financial reports to Congress, the Pentagon and the military services state that their figures are so unreliable that they cannot be audited.

Q: How much taxpayer money has the Defense Department spent that has never been audited since the 1996 deadline? A: About $8.5 trillion.

Q: What are the consequences? A: It is impossible for the Pentagon or any auditor to determine how much of the annual defense budget is spent as Congress directed and how much is diverted for other uses. The Government Accountability Office and the Defense Department inspector general say the lack of reliable accounting ledgers covers up unknown amounts of fraud and other improper expenditures. Dysfunctional accounting systems cause frequent pay errors to military personnel and make it hard to keep track of munitions and other supplies.

Q: What is happening now to improve the situation? A: After the Pentagon for years continually extended its own deadline for becoming audit-ready, Congress in 2009 cracked down. It set a legal deadline of fiscal 2017 for the entire department to be ready for an audit. The Pentagon and military services have been pouring billions of dollars into building modern accounting systems to meet that deadline.

Q: Why is the effort faltering? A: Many of the costly new systems don't work. Several were canceled outright as failures after amounts exceeding $1 billion were spent on each. Others were finished but fall well short of performing intended tasks. Several crucial systems are far behind schedule, making it unlikely the deadline will be met.

Q: Are there consequences for failing to meet the 2017 deadline? A: There are no legal consequences if the Defense Department isn't audit-ready by 2017.

Q: Can the problem be fixed? A: Defense analysts and former senior Pentagon officials say truly cleaning up the books can happen only if more outside pressure is placed on the Pentagon to make meaningful change in the way it operates.

Q: What, specifically, is needed to fix it? A: Congress would have to pass laws that imposed sanctions on the Defense Department if it didn't straighten out its books. Current and former defense officials and lawmakers say a comprehensive fix likely also would require explicit pressure from the president - and voters. Presidents have been reluctant to take on the Defense Department. President Barack Obama, like his predecessors, hasn't spoken out on the issue. The most recent secretaries of defense have pressed for accounting reform, but their power over the individual military services is limited.

(Reporting by Scot J. Paltrow. Edited by John Blanton.)