The Navy Wants to Throw Its Internal Auditor Overboard

The Navy is about to embark on one of the largest and riskiest spending sprees in its history. It’s also gutting the office responsible for mitigating that risk, queueing up a 70% budget cut for its internal auditor amid agency-wide cuts to help pay for the Navy’s massive shipbuilding plan.

Records obtained by the Project On Government Oversight (POGO), as well as accounts from current and former Naval Audit Service employees, show the Navy is already starting to push sizeable cuts to the office and its workforce even though Congress hasn’t yet approved them—and the cuts could make it impossible for the audit service to do its job.

POGO has also learned that the Navy is considering shutting down its audit service entirely, and that leadership recently told the office not to start new audits.

The Trump appointee pushing the cuts, who formerly performed the duties of Department of Defense comptroller, had previously looked at making drastic budget cuts to the Army and Air Force auditors, according to internal documents POGO obtained.

The Naval Audit Service, like its counterparts in the Air Force and Army, is tasked with independently assessing the agency’s operations, finding and reducing risk, and advising the secretary of the Navy of better ways to save and spend money. In the past five years, the audit service, which has an average budget of about $45 million, found nearly $70 million in potential fraud and assisted law enforcement in 43 cases, according to the Naval Audit Service’s annual report.

The cuts—which would represent the largest downsizing in the audit service’s nearly 70-year history—are concerning to experts in Pentagon oversight and accounting.

“This is really unprecedented at the level it’s being proposed. I’ve been around or watching defense for 50 years, and I know of no parallel,” said Richard Chambers, who served for decades in Pentagon oversight roles, including as the Army’s director of internal review. “When you cut those resources, that’s when fraud, waste, misuse, and mismanagement becomes rampant. There is a deterrent effect of a strong audit. You keep them because they keep you out of trouble and they pay their way.”

It appears the audit service does indeed pay for itself. According to its most recent annual report, in the past five years the audit service’s reports have led to $2.3 billion in potential savings for the Navy. In 2018, an audit service report led to the Marine Corps saving $1.9 billion by avoiding an unnecessary purchase of “war reserve materiel,” ammunition and other equipment strategically placed in case of war. Over the past five years, the audit service says it found savings worth over 1.5 times its operating costs.

In a September 2020 letter obtained by POGO, the head of the Naval Audit Service, Auditor General Debra Pettitt, pleaded with Navy leadership to reconsider the massive cut.

“The budget cut to the Naval Audit Service will destroy the Naval Audit Service’s ability to fulfill its mission,” she wrote.

The cuts, first reported earlier this year by the Navy Times, are a project of acting Secretary of the Navy Thomas Harker, two Navy officials who feared retaliation if named told POGO. Harker had been appointed Navy comptroller by then-President Donald Trump and later performed the duties of comptroller of the Department of Defense.

The plan to shrink the audit service’s budget comes as part of the “Stem-to-Stern Review,” an effort to cut “low priority, redundant, or legacy capabilities” across the Navy to generate $40 billion to be used toward the goal of a 355-plus-ship Navy by 2030. The Navy-wide cost-cutting initiative was spearheaded by then-acting Secretary of the Navy Thomas Modly. After his well-publicized resignation, his three successors have continued his efforts.

In an internal memo last October, the auditor general warned her staff that there was an effort by senior Navy officials to propose legislation to completely disband the audit service.

Harker did not respond to a detailed list of questions from POGO about the rationale for the drastic cuts, and a Navy spokesperson “would not comment on future budgetary decisions until the budget request is submitted to Congress later this year.”

An internal Navy video provided to POGO reveals, in stark terms, Harker’s reasoning for the planned cuts, and the Navy’s awareness of their potential effects. In a virtual meeting for the secretary of the Navy’s office earlier this year, Harker was asked about the cuts. He explained that “we can accept risk by decreasing some of the level of support that was provided by the Naval Audit Service, and that there’s a higher priority for us to invest in building additional ships.”

Dov Zakheim, who served as then-President George W. Bush’s Pentagon comptroller, sees the cuts as misguided. “It’s in the Navy’s interest to demonstrate that it is in control of costs, which of course, having an audit capability helps them to do,” he said. “But by cutting back on the auditors it certainly doesn’t look like it’s controlling costs. I doubt it is the uniformed Navy that’s pushing this.”

The alleged savings from reducing the audit service’s budget, less than half the cost of each of the Navy’s F-35 aircraft, pale in comparison to the projected costs of the current shipbuilding plan. Reaching the 355-ship goal would be enormously expensive, and the plan carries the risk for explosive cost growth.

Navy officials testifying on the fiscal year 2021 budget submission estimated that the current plan would cost between $120 billion and $130 billion over the next 10 years. But the total cost could be much greater if one or more of the new ships ends up being more expensive than anticipated—something almost guaranteed to happen if history is any guide. The Congressional Budget Office estimated the shipbuilding effort’s total cost will be 31% higher than the Navy’s estimate, which would require a doubling of past Navy spending.

It is difficult to find a recent shipbuilding effort that was not massively over budget, poorly conceived, or years behind schedule.

The Navy’s new aircraft carrier, expected to be delivered in 2014, is still not finished and was nearly 25% over budget, at $12.9 billion as of 2017. The Littoral Combat Ship, designed to be fast, light, and to fight in contested waters, is widely considered a failure, after numerous breakdowns, a sticker price that skyrocketed from $220 million to $940 million per ship, and a flawed multi-mission modules concept that was shelved after costing taxpayers $7.6 billion.

“Navy ships cost billions more and take years longer to build than planned while often falling short of quality and performance expectations,” a Government Accountability Office report on the topic concluded. The report found that shipbuilding, especially when building multiple ships, comes with a significant amount of risk.

The audit service is one tool the Navy’s leadership can use to navigate and address this same risk.

In a recent letter to Secretary of Defense Lloyd Austin, Chambers, the former Pentagon oversight official, wrote: “History tells us that such ambitious construction agendas are ripe for fraud, waste, and abuse. The U.S. Naval Audit Service has a proven record of effectively identifying such waste.”

In the internal video of the all-hands meeting, Harker argued the Navy can accept increased risk, and that the Navy is sufficiently audited by the Pentagon’s inspector general offices and the Government Accountability Office. He pointed out that of the Cabinet-level agencies, the Department of Defense is the only one with internal audit services for individual components.

However, in her September 2020 letter to Navy leadership, auditor general Pettitt wrote, “Department of Defense Office of Inspector General officials have stated that they cannot absorb our oversight coverage,” and that “risks for fraud, waste and abuse within DON [Department of the Navy] programs will escalate exponentially.”

An audit service official told POGO that at minimal staffing levels, some crucial work would not happen, such as “sexual assault complaint reviews, shipyard time and attendance, requests from local commands … to help them get compiled with Financial Improvements and Readiness guidance to get DON’s financial statements in order.”

At least one former Pentagon inspector general agrees. “Without a well-staffed and adequately resourced Naval Audit Service the flood gates will be open to abuses and misdeeds that will lower our Nation’s security and undermine effectiveness,” said Gordon Heddell, who served as the Defense Department’s inspector general under then-President Barack Obama. “The intellectual and analytical factors that go into complicated acquisition decisions will be dramatically compromised and billions of dollars will be lost.”

Without waiting for the approval of Congress or the Biden administration, the Navy has already taken actions to implement the cuts. Decisions to reduce accountability and weaken internal controls typically are not made without lawmakers’ approval.

According to a senior audit service official who was not authorized to speak on the record, the Navy has ordered the service to shrink from its current 290 employees to 120 by this October, regardless of whether the cuts make it into the final budget. And in a move that alarmed Naval Audit Service officials, Harker, in a verbal communication in February, instructed the auditor general “not to begin any new audits this year.”

The proposed cuts to the Naval Audit Service apparently caught the attention of Representative Elaine Luria (D-VA), a former Navy commander. Luria represents the Virginia Beach area, which includes a regional office of the audit service. If the cuts go forward, the office in her district would likely shut down.

In a February letter to Navy leadership, Luria, who also sits on the House Armed Services Committee, asked for evidence of the analysis done as the basis for the cuts, and expressed concern that the cuts “come at a critical time when the Navy must focus on being an efficient steward of taxpayer dollars.” In her letter she also expressed concern that the Navy did not notify Congress before ordering the downsizing.

Officials at the audit service expect the cuts will move forward unless “serious concern” is raised by Congress, a permanent Navy secretary who opposes the cuts is appointed by President Joe Biden, or a direction from higher levels in the Pentagon is given to preserve the service.

According to the Government Accountability Office, if any branch of the military needs an increase in accountability, it is the Navy and Marine Corps. Last year, the Navy led the Department of Defense inspector general’s ranking of components with the most “open recommendations,” covering topics including contractor oversight, finance and accounting, and acquisition. Defense Department financial management has been on the Government Accountability Office’s “High Risk List” for nearly three decades. Taken as a whole, this paints a picture of an organization in need of more, not less, oversight.

Documents obtained by POGO reveal a desire to go beyond cutting the Navy’s internal auditor. In 2019, a work order signed by Harker, then the Pentagon’s comptroller, asked the Institute for Defense Analyses to “assess and analyze the potential of reducing or eliminating functions from the DoD and service audit agencies by 50-75 percent of their current resources to determine whether doing so would create significant gaps or deficiencies and provide an assessment of the cost savings versus the risk associated with any gaps.”

The ongoing $775,000 study has been interpreted by auditors as a warning that cuts and even elimination are on the horizon. An official at the Department of Defense inspector general’s office, speaking on condition of anonymity, told POGO that there is no way their office could fill the accountability gap left by removing the service audit agencies, something implied in the work order for the study.

Heddell, the former Pentagon inspector general, confirmed this, noting that the inspector general’s office is complemented by the work of the service’s dedicated auditors.

Representatives from the Air Force Audit Agency and Army Audit Agency did not respond to requests for comment. The auditor general of the Naval Audit Service declined to comment.

Over the years, the Naval Audit Service has seen cuts that have shrunk the organization from a workforce of over 500 in the 1980s, to 290 today. If the new round of cuts is approved, its ranks would be reduced to 85 in 2022.

“That would amount to barely one internal auditor per naval base and essentially end any effective assurance over the massive agency, whose budget was nearly $206 billion in 2020,” Chambers wrote in his February letter to Secretary of Defense Austin.

By comparison, the Army Audit Agency has a workforce of over 500, responsible for auditing a budget of $191 billion, and the Air Force Audit Agency has a workforce of nearly 640 responsible for a budget of $205 billion.

Even if the 70% cuts to the audit service aren’t finalized, damage has already been done, according to auditors in various offices of the service.

POGO reviewed departure emails of staff looking for other jobs in an uncertain climate. Remaining employees fear deep institutional knowledge and expertise are being lost at the service as dozens abandon ship. According to one auditor, it can take over five years to fully train an employee of the service.

The Navy has faced many high-profile scandals in recent memory, some of which could potentially have been prevented by more robust internal audit capability.

The “Fat Leonard” scandal that came to light in 2013 revealed a web of corruption among uniformed Navy officials. Dozens of Navy officials pleaded guilty. The Washington Postcalled it “perhaps the worst national-security breach of its kind to hit the Navy since the end of the Cold War.” The scandal involved lucrative “ship husbanding” contracts—private companies resupplying Navy ships, removing waste, and other harborside tasks.

Leonard Glenn Francis, the head of a large Singaporean defense contractor, pleaded guilty to bribing dozens of Navy officials with prostitutes, large sums of cash, concert tickets, and fancy hotel stays. The officials pleaded guilty to giving preferential treatment to Francis’s company in exchange for bribes, including leaking him classified information on Navy ship schedules. Not including prosecution, the scandal has cost the Navy at least $35 million in overbilled contracts, according to the Department of Justice.

Naval Audit Service officials pointed to the case as an example of the type of fraud that a strong audit service may have spotted and even prevented. The Naval Criminal Investigative Service, which relies on the audit service for forensic accounting assistance, told the Washington Post that the “biggest factor” that led to the fraud was a reduced emphasis on preventing fraud and corruption after 9/11. In the years after the attacks, the Naval Criminal Investigative Service office that investigates financial crimes had been cut from 140 agents to just nine, according to a Rolling Stone report.

According to two current and one former Naval Audit Service officials, a minimally staffed operation would not be able to work on white-collar crime cases or assist the criminal investigative agencies in their prosecutions.

Even before the “Fat Leonard” scandal became public, the Naval Audit Service, in three reports, had warned the Navy of potential weaknesses in the internal controls related to husbanding and port services contracts. The audit service had issued dozens of recommendations to Navy leadership and had found fraud and weak or nonexistent internal controls in the contracts.

From 2012 to 2013, auditors visited 239 ports to examine $50.1 million worth of husbanding contracts, and found a system with minimal accountability, relying on self-reporting and an environment “vulnerable to misuse, fraud, waste, and abuse.” This type of access and boots-on-the-ground work sets the Naval Audit Service apart from other accountability organizations at the Pentagon.

As recently as March 2021, the audit service reported to Congress that “significant controls weaknesses with the Navy [Husbanding and Port Services] program remain.” The service made 25 recommendations to address those weaknesses to Navy leadership, according to a semiannual report by Congress obtained by POGO.

Heddell, the former Pentagon inspector general, pointed out that since January 2017, there have been eight secretaries of the Navy, leading to a chaotic and disorganized Navy. “These facts alone should tell us that more, certainly not less, audit oversight is critically necessary to ensuring that our Navy and Marine Corps regain, and maintain, their world class footing.”

Without congressional action, the Naval Audit Service may not be long for this world, and its Army and Air Force counterparts could be next.