Championing Responsible National Security Policy

Massive Pentagon Agency Can’t Complete Audit—Again

(Animated illustration: CJ Ostrosky / POGO)

For the second year in a row, a little-known but massive Pentagon agency won’t be able to complete an independent audit. The Defense Logistics Agency (DLA) handles more taxpayer dollars in a year than several Cabinet-level departments, but auditors have informed agency leadership that they will not be able to complete their audit for fiscal year 2018, according to a recent Agency newsletter obtained by the Project On Government Oversight.

If the Department of Defense is important enough for Congress to allocate nearly $700 billion to, then it should also be important enough for Congress to hold agencies accountable for how the money is spent.

The official result, a “disclaimer of opinion,” applies to all three of the funds the agency manages, and matches the result of last year’s attempted audit. Last year, in addition to their disclaimer of opinion, auditors from the firm Ernst & Young wrote a separate report explaining why they were unable to reach an opinion. That report focused on the Agency’s weak financial controls and included pages of bullet-pointed recommendations. The report made headlines by bringing to light numerous problems, including improper documentation of over $800 million in construction projects and $100 million in other assets, and the Agency’s inability to reconcile its top-line numbers with those of the Treasury Department.

“It is important to note that a disclaimer of opinion is not considered a failure,” DLA Director Lieutenant General Darrell Williams wrote after last year’s audit results. “DLA has been transparent in its problem areas and identified material weaknesses and critical corrective action plans where necessary.”

But according to the recent newsletter, over the past year the Agency “did not complete or implement its Corrective Action Plans (CAPs) for the material weaknesses identified during the [Fiscal Year] 2017 financial statement audits. [Ernst & Young] is therefore unable to perform sufficient testing to provide a basis for an audit opinion.” The newsletter attempts to spin the result as “neither a positive nor a negative opinion,” which is technically true, but only in a very narrow sense. The fact that the Agency’s financial controls are so full of holes that auditors couldn’t finish their review is clearly not a success. The fact that it happened a second time because the Agency failed to complete or implement Corrective Action Plans also clearly goes into the “negative” column, even if improvements have been made.

“Each of the 2017 CAPs has its own timeline and milestones for completion,” an Agency spokesperson told POGO. “Some are longer term due to operational complexity and dependence on Defense Finance and Accounting Service processes and resolution of policy issues. DLA is diligently working the CAPs at every level within the agency. Our goal is to make measurable progress every year.” Exactly how much the Agency has left to do is unclear, but will be revealed when this year’s final report is delivered on November 15.

The DLA employs 27,000 people and managed over $35 billion in goods and services last year. Similar to the General Services Administration, it negotiates lower prices by purchasing millions of commercially available products in bulk and then shipping them around the world. It supplies 86 percent of the military’s spare parts and practically all its fuel, manages stockpiles of strategic materials, and re-utilizes or disposes of material that is no longer needed.

In recent years, the Agency has faced mounting criticism. In 2010, the Government Accountability Office found that over half the Agency’s total inventory (which was worth an average of $13.7 billion for the years reviewed) exceeded agency acquisition requirements, and over a third exceeded both those requirements and two additional years of estimated demand. A 2015 investigation by a government watchdog found that the Agency overpaid for certain aircraft parts and overstocked others.

In 2012, the Agency began a “major push” to become audit ready by 2015, two years ahead of a Congressionally mandated deadline. Mock audits revealed that, separately from ordering too much inventory, the Agency wasn’t properly tracking what it did have. “Stuff we thought should be on our books we didn’t have it in our records. Our financial system was not reflecting the right inventory,” said Simone Reba, the agency’s deputy director of finance, according to a 2015 Politico article. Looking forward, Reba confidently asserted, “We are ready for audit. We believe we have done enough to pass. No one is as far along as we are.”

The DLA has serious problems stewarding the massive amount taxpayer resources entrusted to it. Unfortunately, the same is also true for the Department of Defense as a whole, which has ignored Congressional deadlines to become auditable since 1992. If the Department of Defense is important enough for Congress to allocate nearly $700 billion to, then it should also be important enough for Congress to hold agencies accountable for how the money is spent. Congress will have an excellent opportunity to do that when the results of the first-ever Department-wide audit attempt are released on November 15.