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Weak oversight and sloppy accounting cause $6.5-trillion mystery in Army financial statements

The United States Army cannot adequately account for $6.5 trillion in adjustments made to its year-end 2015 financial statements, according to a Department of Defense's Inspector General’s report released July 26.

The inspector general says the adjustments, made through “journal vouchers,” lacked essential documentation, or were inaccurate or incomplete.

The result, the report says, is that Defense Department and army managers “could not rely on the data in their accounting systems when making management and resource decisions”

The inspector general warned that until the army and the Defense Finance Accounting Service (DFAS) got control over their accounting problems, “there is considerable risk that [Army General Fund] financial statements will be materially misstated and the Army will not achieve audit readiness by the congressionally mandated deadline of September 30, 2017.”

Nothing in the inspector general’s report says the trillions of dollars in question were lost or stolen.

Instead, the report illustrates a decades-long problem with military accounting practices that make keeping track of how and why the Pentagon spends taxpayer dollars so difficult.

Mandy Smithberger, director of the Straus Military Reform Project at the Center for Defense Information (CDI), told AMI Newswire the problems with military accounting are “enduring.”

One of the biggest, Smithberger said, is complexity.

The "initial gathering of this information is so decentralized by offices with varying documentation quality that DFAS accountants do end up scrambling at the last minute to document what they can and allow the remaining ‘mystery' numbers to stay in so that they can meet their deadline,” she said.

"As far as the quantity goes,” Smithberger added, "it is gobsmacking.”

Part of the problem stems from the DFAS, which the inspector general says "did not adequately support $2.8 trillion in third-quarter adjustments and $6.5 trillion in year-end adjustments made to Army General Fund data during FY 2015 financial statement compilation.”

Bridget Ann Serchak, the chief public affairs official for the DOD's Office of Inspector General, told AMI Newswire that both the $2.8-trillion and $6.5-trillion figures cited in the report "are possible because adjustments are made to the Army General Fund financial statement data throughout the compilation process for various reasons, such as correcting errors, reclassifying amounts and reconciling balances between systems."

"The general ledger data that posts to a financial statement line can be adjusted for more than the actual reported value of the line," she said.

"For example, there was a net unsupported adjustment of $99.8 billion made to the $0.2 billion balance reported for Accounts Receivable."
Documenting the reasons behind those adjustments, including specific transaction information, is critical for creating a reliable and accurate audit trail, a task the inspector general says DFAS personnel failed to do.

Without a documented reason for why an adjustment is made, “the accuracy and completeness of the [Army General Fund] financial data could not be confirmed, and some adjustments may go undetected.”

In the fiscal year-end 2015 report on the Army’s General Fund, the inspector general found DFAS has made 142,355 adjustments to the financial statements.

Of those, 138,887, representing over $4.4 trillion in transactions, lacked proper documentation.

In its own sampling of the adjustments, the inspector general found that transactions were changed in order to make “general ledger amounts agree with other data sources” without DFAS personnel “reconciling the differences or determining which data source was correct.”

In addition, DFAS “corrected errors or reclassified amounts to other accounts” without documentation saying why the changes were necessary.

In some cases, the inspector general found that DFAS simply “changed general ledger data without adequate documentation to support the adjustments.”

The inspector general notes that DFAS “did not prioritize” the correction of errors in its data and reporting systems.

Had the agency done so, the report says, “the number of [journal voucher] adjustments should have decreased,” and given personnel time to conduct research to fully document, and reduce, other undocumented adjustments.

The report also said the DOD's accounting system removed 16,513 of 1.3 million records from from the data set, but no one knows why.

"Without support for why these records were removed,” the inspector general wrote, "we could not determine whether the records contained valid transactions that the Army should have reported in its financial statements.”

Without those records, the inspector general was unable to determine "whether the removed records materially impacted the FY 2015 AGF third-quarter financial statements."

The inspector general recommended a series of actions to correct the problems, including identifying the “root causes of errors” that result in undocumented adjustments to the army’s balance sheet.

Both army and DFAS officials agreed with the report’s recommendations.

The Cato Institute’s Benjamin Friedman, a research fellow in defense and homeland security studies, told AMI Newswire that while the dollar amounts in the report are staggering, they aren't the real problem.

“Being audit-ready is a mostly symbolic issue for people worried about Pentagon waste," Friedman said.

"But there are more important and pressing issues with the Defense budget than having audit-ready financial statements we have to address” he added, saying the real issue is a persistent lack of fiscal discipline and budgetary honesty within both Congress, which appropriates the money, and the DOD, which spends it.