Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Pentagon Can't Pass an Audit After 30 Years
Transcript
- Lucas: The Pentagon has a legal requirement to produce auditable financial statements. That mandate came from the Chief Financial Officers Act of 1990. Thirty-six years later, the Department of Defense still cannot pass an audit. Luna: Thirty-six years. That's not a delay; that's a institutional failure. What's the current status? Lucas: The DoD attempted its first full audit in 2018. The result was a disclaimer of opinion, which is auditor-speak for 'we have no idea if these numbers are right.' They've repeated that exercise every year since, and every year it's the same disclaimer. Luna: And how much does this annual exercise cost? I've heard numbers that sound, well, fictional. Lucas: The Government Accountability Office has tracked it. In fiscal year 2023 alone, the Pentagon spent about two point three billion dollars on audit-related activities. That's consulting fees, software upgrades, staff training, and the actual audit itself. Lucas: That's two point three billion — every single year — for an audit that consistently fails. To put that in perspective, that could fund the entire National Park Service for roughly six months. Luna: And yet, after all that spending, they still can't tell Congress where the money went. What's the root cause? Is it just that the department is too big? Lucas: Size is part of it. The DoD's budget is around eight hundred billion dollars. But the real problem is the infrastructure. They rely on more than three thousand legacy financial management systems, many of them built in the 1970s and 1980s, that do not talk to each other. Luna: So you have the Navy using one system, the Army another, and no central ledger. Lucas: Exactly. The result is that basic questions — like how many spare parts we own, or how much inventory sits in a warehouse — cannot be answered reliably. A 2022 audit of Army equipment found that the service could not account for over two hundred billion dollars of its assets. Luna: That's not just a bookkeeping problem. That's a national security risk and a massive waste of taxpayer money. Lucas: It is. And here's the irony: while the Pentagon spends billions trying to clean up its books, the lack of a clean audit makes it easier for waste and fraud to go undetected. The GAO has found that errors in the DoD's financial statements routinely exceed fifty billion dollars per year. Lucas: So you've got a cycle where the system is too broken to audit, the audit process costs billions, and the failure to audit lets billions more leak out. And the consequences for failing? Essentially none. There's no penalty for a disclaimer. Luna: Sounds like a perverse incentive structure. Some might say it's almost designed to fail. Lucas: I think that's a fair observation. Look, we talk about this kind of stuff every day, and it's a big reason we do this show. A quick honest thing: a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes possible. Keeps it ad-free, keeps us independent. Luna: Absolutely. And it's that support that lets us dig into topics like this one, which really matter but don't always get the airtime they deserve. Lucas: Right. So back to the Pentagon. The most obvious fix would be to replace those three thousand legacy systems with a single, modern enterprise resource planning platform. The DoD has actually tried that — a project called Business Systems Modernization — but it's been plagued by cost overruns and delays. Luna: How many times have we seen that pattern? Government tries to modernize IT, ends up spending more than the original system cost, and still doesn't deliver. Lucas: Exactly. The GAO has designated DoD financial management as a high-risk area since 1995. That's thirty-one years on the 'high-risk' list. Meanwhile, the Pentagon is under no near-term deadline to fix it. Congress has not attached real consequences to failing the audit. Luna: What would consequences look like? A spending cap? A reduction in budget authority? Lucas: Those are possibilities. Some reform advocates suggest tying a portion of the DoD's budget to achieving an unmodified audit opinion. But the political will isn't there. Defense spending is a third rail; cutting it because of a bookkeeping problem is a tough sell. Luna: So we might be stuck in this loop for another decade. Lucas: Unless something changes. There is some progress — the Marine Corps actually received a clean audit on its Statement of Budgetary Resources in 2023. So it's possible for parts of the department to get there. But the whole enterprise? It's going to take a cultural shift, not just a software upgrade. Luna: A cultural shift driven by leadership or by public pressure? Lucas: Probably both. The public pressure part is where shows like ours come in. The more people know that the Pentagon can't pass an audit, the more likely they are to ask their representatives why that's acceptable. Luna: So we're doing our part. Lucas: We try. And on that note, if you want to help us keep digging into these stories, you know where to find us. Otherwise, let's leave it here: the Pentagon may not have clean books, but at least we know why.