Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the Pentagon Keeps Its Books Secret
Transcript
- Lucas: So the largest single organization in the entire federal budget spent fiscal year 2025 without being able to tell you, or Congress, or the President exactly where about three point eight trillion dollars of assets actually are. Luna: Three point eight trillion. That's not a rounding error. That's the Pentagon, isn't it? Lucas: It is indeed the Department of Defense. For the eighth straight year, the DoD received what's called a disclaimer of opinion on its financial audit. That's auditor-speak for 'we couldn't verify enough of the numbers to give any kind of pass or fail grade.' Luna: And this isn't some obscure agency. We're talking about a budget that's larger than the GDP of most countries. Lucas: Right. The Pentagon's budget request for 2026 was about eight hundred and fifty billion dollars. But the assets they're supposed to track — the planes, the ships, the real estate, the spare parts, the ammunition — that's the three point eight trillion I mentioned. And according to the auditors, the DoD's financial statements are 'not reliable enough to make informed decisions.' Luna: So what exactly breaks? I mean, where does the system fail? Lucas: It fails in a thousand small places that add up to one giant mess. The Pentagon runs on something like one thousand four hundred different legacy accounting and financial management systems. Some of them still run on code written in the 1970s. There are systems that don't talk to each other, that record the same asset in different databases with different values, and that rely on manual data entry from people in uniform who were trained to fly helicopters, not reconcile ledgers. Luna: It sounds less like a single organization and more like a federation of fiefdoms, each keeping its own books. Lucas: That's essentially the diagnosis. Each branch — Army, Navy, Air Force, the Marine Corps — has its own way of doing things. And within each branch, individual commands and bases have their own workarounds. The result is that when an auditor asks 'How many M16 rifles do you own and where are they?' the answer is often a shrug. Luna: But Congress has been mandating audits for decades. The Chief Financial Officers Act was 1990. The Government Management Reform Act was 1994. What happened? Lucas: Compliance deadlines got pushed back, repeatedly. For years the Pentagon argued that auditability would interfere with warfighting readiness. And to be fair, there's a kernel of truth — you don't want a procurement officer filling out spreadsheets while a unit is deploying. But at some point the excuses become a pattern. Luna: It's also a staggering amount of money being spent on the attempt. The DoD has poured billions into ERP systems — enterprise resource planning software — trying to modernize. A program called the Defense Enterprise Accounting and Management System, or DEAMS, was supposed to fix this. It cost over a billion dollars and was eventually cancelled. Lucas: I remember that. And there's a deeper structural issue too, which is that the DoD doesn't have a single chief financial officer with real authority over the entire department. The comptroller role exists, but the service branches retain enormous autonomy. So even when a modernization program gets approved, implementation is fragmented. Luna: This reminds me of something. If today was actually useful to you, the way these stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. It's a small way to keep conversations like this going without sponsors. Lucas: Yeah, that really does help. So back to the Pentagon — one of the most concrete consequences is that no one can fully track whether the department is paying fair prices for spare parts. There are famous horror stories: the six hundred dollar toilet seat, the seven thousand dollar coffee maker. Those are symptoms of an accounting system that can't tell you what you already own, so you buy new stuff you don't need. Luna: And that feeds into a bigger problem: the national debt. If we can't even audit the largest chunk of discretionary spending, then any serious conversation about fiscal responsibility starts with a question mark. Lucas: Exactly. The Government Accountability Office — the GAO — has made DoD financial management a 'high risk' area since 1995. That's thirty-one years. And the Pentagon has made progress on certain things: they can now account for cash, they've improved inventory tracking in some depots. But the overall picture hasn't changed. Luna: Is there any precedent for a federal agency this size actually fixing its books? Lucas: The Department of Homeland Security was in a similar mess after 9/11. They failed audits for years. But around 2018 they got serious, consolidated their financial systems, and eventually received a clean opinion. It took over a decade and cost billions, but it happened. Luna: So it's possible, but it requires sustained political will and leadership. And the DoD has a revolving door of leadership every two to four years. Lucas: Right. The average tenure of a DoD comptroller is about two and a half years. And each new appointee has to learn the system, decide on priorities, and then they're gone. Meanwhile the underlying accounting systems are so complex that replacing them is a multi-year project that spans administrations. Luna: There's also a perverse incentive: if you can't track your assets, you can't be held accountable for losing them. So there's no internal constituency for transparency. Lucas: That's a cynical take, but I think it's partly true. The services don't want to be told how to manage their money. And Congress, which is supposed to oversee this, often benefits from the opacity because it allows them to fund programs without scrutiny. The result is a kind of equilibrium where nobody pushes hard enough to fix it. Luna: Let's talk about what a real fix would look like. Not just a new software system, but a genuine reform. Lucas: A few things. First, you'd need a single, department-wide accounting system that every unit uses. That means killing off the one thousand four hundred legacy systems — politically painful because each one has its own contractors and supporters. Second, you'd need to give the comptroller real authority over all financial operations, including the ability to fire or reassign people who don't comply. Luna: And third, you'd need to tie budget requests to auditable data. If you can't show that you've accounted for last year's money, you don't get next year's increase. Lucas: That would be the ultimate leverage. But Congress has never done it because it would also constrain their ability to add earmarks and pet projects. So we're in this loop where the audit fails, the Pentagon promises to do better, Congress expresses concern, and then nothing fundamental changes. Luna: One thing that could force change is a fiscal crisis. If the debt to gdp ratio keeps climbing and interest payments crowd out defense spending, suddenly the waste becomes intolerable. Lucas: Maybe. But we've been hearing that warning for years. The projected interest on the national debt for 2026 is over one trillion dollars — that's more than the entire defense budget. And yet the Pentagon still can't pass an audit. It's a strange situation where the largest line item in discretionary spending is also the least accountable. Luna: So what's the bottom line for a taxpayer listening to this? Should they be outraged or just resigned? Luna: And if you want more episodes that dig into how your tax dollars are actually spent, you know where to find us. Lucas: Exactly. That's all for today. Thanks for listening.