Bloomberg News

Panetta to Accelerate Drive for Clean Audit of Defense Books

October 13, 2011

(Updates with Dempsey F-35 comments in sixth through tenth paragraphs and GAO analyst comment in 18th and 19th)

Oct. 13 (Bloomberg) -- Defense Secretary Leon Panetta has ordered a review of the Pentagon’s financial controls and a speed-up of preparations for a military-wide audit, steps he said are needed to assure the public that his department is minimizing waste.

Panetta, in testimony to the House Armed Services Committee today, said he is telling the department to be ready for an audit of its “Statement of Budgetary Resources” in 2014, moving up the date from 2017.

“We owe it to the taxpayers to be transparent and accountable for how we spend their dollars and under this plan we will move closer to fulfilling this responsibility,” he said. Panetta is trying to fend off spending cuts above the roughly $450 billion through 2021 called for in the Budget Control Act signed into law Aug. 2.

The new chairman of the Joint Chiefs of Staff, Army General Martin Dempsey, told the committee today that cuts beyond $450 billion might cause “irrevocable” damage to the military’s “core” for at least a decade. One result would be mid-level military personnel retiring prematurely, he said.

Panetta said no decisions have been made on specific strategy options. When pressed by the committee for an example of a future trade-off, he suggested that a decision to boost U.S. forces in Asia to counter China might mean a reduction of forces in South America and Africa.

Costs Versus Gains

The review will cover many areas, including whether costs incurred in terminating some programs would outweigh budget gains, Panetta and Dempsey said. Other subjects include overall force structure reductions and the risks involved in reducing the U.S. presence overseas in favor of a strategy that relies upon U.S.-based forces, they said.

Dempsey was asked about the Lockheed Martin Corp. F-35 fighter jet program, the Pentagon’s most expensive at $382 billion. The department plans different versions for the Air Force, Navy and Marine Corps.

“Three variants create some fiscal challenges for us,” he said. “I’m concerned about the three variants and about whether we can afford all three.”

Dempsey spokesman Colonel David Lapan said in an e-mail after the testimony that the general meant his comment to be in a “broader” context “about looking at all acquisition programs in this fiscal environment.”

Dempsey would have given “a similar answer” if he had been asked about other specific programs, Lapan said. “His point is that we have to look at all of them.”

Failed Audit

The Marine Corps recently failed an audit of its fiscal 2010 budget statement because of inadequate system controls and processes. It was the first attempt to audit the military books since Congress required resource statements in 1998, according to the Government Accountability Office, the investigative arm of Congress.

“Although the Defense Department has dedicated significant resources to improving its financial management, neither the department nor its auditors have been able to verify the weaknesses have been sufficiently corrected in order to pass an audit,” the GAO reported Sept. 22 to a panel of the House committee.

Panetta said the Pentagon is one of only two major agencies that has never had a clean audit opinion on its financial statements. The other is the Department of Homeland Security, according to the GAO.

‘Inexcusable’

“While the Department’s systems tell us where we are spending taxpayers funds, we do not yet have the details and controls necessary to pass an audit,” Panetta said in his statement today. “This is inexcusable and must change.”

Audit readiness “will give our financial managers the key tools they need to track spending, identify waste and improve the way the Pentagon does business as soon as possible,” he said.

The Defense Department already has made progress toward its audit goal, said George Little, Panetta’s spokesman.

“Recently, for example, we received a clean opinion on our funds distribution process -- a key element of the budget statement -- and expect other audit successes to follow soon,” he said in an e-mail.

GAO financial systems analyst Asif Khan said in an e-mailed statement that Panetta’s declaration “shows the focus, involvement, and commitment needed at DOD to lead the department and its components to sustainable financial management reform and audit-ability.”

--Editors: Stephanie Stoughton, Steven Komarow

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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