DOD Inspector General Oversight Failure

Floor Speech

Mr. GRASSLEY. Mr. President, I am getting the runaround from the inspector general at the Department of Defense, and my remarks, which are fairly lengthy, will be connected with that problem I am having. With sequestration looming on the horizon, Congress needs a truly independent Department of Defense audit oversight capability. We need it to root out waste.

As my friend from Oklahoma, Senator Coburn, knows all too well, rooting out Department of Defense waste is no easy task. His new report identifies some excellent examples of waste ready for removal. I commend Senator Coburn for his outstanding work and stand ready to help him.

But to successfully root out waste day in and day out, there must be a topnotch audit quality and capability in the hands of an inspector general who is ready and willing to use it effectively.

I am reluctant to say this, but it needs to be said. I fear, and I suspect, that the independence of the inspector general's audit capability may have been compromised. I say this because of the story I am about to tell. This story is about a difficult audit, where the inspector general apparently got a bad case of weak knees and caved under pressure. The inspector general dropped the ball on an audit that should be a critical component in Secretary Panetta's good-faith effort to bring the Defense Department into compliance with the Chief Financial Officers Act.

Today, the Department of Defense is the only Federal agency that cannot pass the test. So Secretary Panetta turned up the pressure. He wants to move the audit readiness date up to no more than 3 years from the congressionally mandated date of 2017 to 2014. This is a daunting task, which I spoke about here on the floor almost 12 months ago now, on December 11 of last year. I say it is a daunting task because there is a big pothole in the road the Secretary faces that he may not know about, hence the reason I am speaking.

The kingpin of this initiative--the Department's flagship accounting agency known as the Defense Finance and Accounting Service--may not be ready to produce credible financial statements. It claims to have earned a clean opinion. Yet when its financial statements were put under the inspector general's microscope, they were found to be very lacking. They did not meet the prescribed audit standards.

To make matters worse--far worse--all the evidence suggests the inspector general may have quashed this negative audit report, allowing the charade to continue unchecked. This oversight failure could leave a gaping hole in Secretary Panetta's master plan.

Except for the Corps of Engineers, the Defense Finance and Accounting Service handles all the Department's financial transactions. It should be the foundation of Secretary Panetta's initiative. It was created over 20 years ago to clean up the Department's financial mess. It should be exerting leadership in this arena and showing the rest of the Department how to balance the books. Its audit needs to be as clean as a whistle. If the Department's central accounting agency can't earn a clean opinion, then who can earn a clean opinion?

Today the central accounting agency's claim of a clean opinion may be hollow. The inspector general, who is responsible for making those judgments, rejected that opinion. The inspector general reviewed it and concluded that it did not pass muster. Unfortunately, the inspector general dropped the ball and quit before the job was done.

The inspector general's report, known as a nonendorsement report, was finalized but never signed and issued. It was simply buried in some deep hole and covered with dirt. Were it not for whistleblowers who are in touch with my office, we might think the Defense Finance and Accounting Service's statements were somehow squeaky clean. I now have the nonendorsement report and other relevant audit workpapers, and they tell a very different story.

The financial statements produced by smaller organizations, such as the Defense Finance and Accounting Service, are audited by certified public accounting firms. But this is always done under the watchful eye of the inspector general. In the end, the inspector general must validate those opinions produced by a CPA firm.

The firm Urbach Kahn and Werlin, UKW, examined the defense accounting agency's statements. It awarded an unqualified opinion or passing grade. The inspector general, by comparison, reached a different opinion. It concluded that those statements did not meet standards. The inspector general announced that it would issue a nonendorsement report, but that report was never issued.

That is why this Senator is here on the floor today. What happened to the nonendorsement report? All the evidence appears to indicate that the inspector general may have quashed the nonendorsement report. That assessment is based on a continuing review of all the pertinent documents. I would like to briefly review those facts so my colleagues can understand where I am coming from.

Seven red flags have popped up on my radar screen.

Red flag No. 1. The contract, which governed the audits in question, is a good place to start because it sets the stage for what followed. The contract was supposed to put the inspector general in the driver's seat. Section 3 of the contract clearly specifies that ``all deliverables are subject to final Department of Defense Inspector General approval.'' The opinion prepared by the public accounting firm was the main deliverable. Two members of the inspector general's audit team were designated as contracting officer representatives. They had exclusive authority to determine whether that opinion met audit standards and deserved endorsement and to approve invoices for payment. Unfortunately, as I will explain, none of the parties involved showed much respect for this contract. In fact, when the crunch came, they trashed it.

Red flag No. 2. The inspector general's decision memorandum and final version of the nonendorsement letter, both dated February 16, 2010, contain compelling evidence. The evidence points in just one direction: There was a lack of credible audit evidence to justify a clean opinion. Both the inspector general's audit team and its Quantitative Methods and Analysis Division reported major deficiencies in the CPA firm's work. Once the inspector general determined that the CPA's audit opinion did not meet prescribed standards, the inspector general's representative prepared a nonendorsement letter and instructed that payments on outstanding invoices be stopped. Those decisions precipitated a classic bureaucratic impasse.

Red flag No. 3. The impasse came to a head at the Defense Finance and Accounting Service's audit committee meeting held on January 27, 2010, where three options were considered: first option, the IG would issue a nonendorsement letter; second option, the CPA firm would do more work on accounts payable and undelivered orders issued; and third option, the IG would do additional work. Just 1 day later, January 28, a senior official from the Inspector General's Office, Ms. Patty Marsh, announced the results of the meeting. Ms. Marsh reported that a consensus was reached: No additional work would be performed. She then declared that the Inspector General's Office would issue a nonendorsement letter.

Red flag No. 4. The Defense Finance and Accounting Service immediately implemented a series of measures that appeared to bypass and eliminate oversight by the inspector general.

In what appeared to be overt defiance of the inspector general's decision, the accounting agency's Director of Resource Management, Elaine Kingston, in a letter to the accounting firm, unilaterally declared that her agency had ``proudly achieved an unqualified opinion.'' Kingston's letter was dated February 19. At that point, this opinion had been explicitly and unambiguously rejected by the inspector general, and Kingston knew it. She also authorized that all disputed invoices be paid. The invoices authorized for payment by Ms. Kingston were the very same ones previously rejected by the inspector general's contract officer representative. Their rejection was based on advice from the inspector general's legal counsel. Kingston's actions showed blatant disregard for the contract and authorized payments alleged to be fraudulent.

Then, on April 15, the central accounting agency's contract officer, Normand Gomolak, effectively eliminated independent oversight by the inspector general. He issued a letter terminating the two inspector general contract officer representatives. A known flaw in the contract allowed this to happen. Gomolak's termination order was retroactive to January 27, 2010--the very same day the inspector general revealed its intention to issue the nonendorsement letter. It is as if Mr. Gomolak had superhuman powers and could reach back in time and wipe the nonendorsement report clean off the slate, like it never really happened. As one witness put it, ``DFAS virtually kicked us--the Inspector General--out of the contract, and without so much as a whimper from the duly designated junkyard dog.''

Red flag No. 5. Under the circumstances, the stop-work order blessed by the audit committee was not surprising. That it would be accepted and tolerated by the inspector general is astonishing indeed. The consensus reached was

between the three main targets of the audit: the accounting agency, the CPA firm, and the chief financial officer, who supervises the central accounting agency--such a consensus, as it was. All appeared to share one common goal: Just simply stop the audit. That is a predictable response from audit targets, especially if there is something to hide.

The inspector general's initial response was appropriate. The Inspector General's Office expressed a willingness to do more work, and when it became evident that was not a viable option, it declared that a nonendorsement letter would be issued. Of course, those were good moves. Unfortunately, however, the Inspector General's Office quickly began to backpedal and to align itself with the stop-the-audit coalition. First, it issued a stop-work order to the audit team. That occurred February 4. Then on April 13 the IG informed the accounting agency by telephone that the nonendorsement report would not be issued. This was, of course, a bolt out of the blue.

Red flag No. 6. In a letter to me dated May 26, the Inspector General's Office attempted to provide a plausible explanation for why this report never saw the light of day. First, the letter suggested that a formal nonendorsement report was unnecessary because the Inspector General's Office had already informed the audit committee of its decision to nonendorse the opinion. Is the inspector general implying that Ms. Marsh's verbal nonendorsement announcement constituted de facto or unofficial nonendorsement? If that is indeed the case, then how come the central accounting agency still pretends to have earned a clean bill of health? There is something wrong with this reasoning. Failing to issue the nonendorsement report left the opinion under a dark cloud, where it remains today.

In addition, the inspector general also suggested that doing a mere 2 to 3 weeks of additional work to finalize the nonendorsement letter would not have constituted a ``good use of audit resources''--that is, it would have been a waste of money. The need for 2 to 3 weeks of extra work appears to be a real stretch. I have the nonendorsement letter. It was finished. All it lacks is Ms. Marsh's signature.

More importantly, however, the Inspector General's Office does not seem to understand either the purpose or the importance of this audit oversight project. For starters, I recommend the inspector general check section 7 of the contract. It states:

The DoD OIG will perform oversight of the Contractor's work to support the decision about whether to endorse the Contractor's opinion report.

That was the stated purpose of this costly audit project--to make a decision on endorsement. From day one, however, this was a significant effort to resolve a difficult and sensitive question: Did the Defense Finance and Accounting Service deserve a clean opinion--yes or no? Since the focus of this audit was the kingpin of Secretary Panetta's initiative in the first place, well, that makes this work inherently important.

Red flag No. 7 and the last red flag. One of my main concerns about this entire matter is that it appears to point to a failure of oversight. So I ask this question: Did the Inspector General's Office cave under pressure and surrender its oversight responsibilities? By accepting and tolerating the central accounting agency's actions, the Office of the Inspector General appears to have allowed a Defense Department entity to effectively block its ability to perform one of its core missions; that is, auditing the books of a key defense agency. If true, this would be a cardinal sin for the inspector general.

The central accounting agency allegedly violated the terms of the contract. It allegedly made fraudulent payments, and it unilaterally terminated oversight. Yet, in the face of such blatant defiance, the Inspector General's Office turned a blind eye to this challenge.

So you have to ask the question, Why did the IG just roll over? Why did the IG fail to assert its independent audit authority? Stopping work at this critical juncture does not appear to have been a responsible oversight option. Why did top management fail to allow the oversight team to finish its work and render a decision on the opinion? Why quit when it was on the very edge of issuing a nonendorsement report on the flawed opinion? Was that report quashed to spare the chief financial officer another black eye for the unending accounting screwups or did the IG drop the ball because everyone involved knew these financial statements were in such bad shape they could never pass the test?

While we may never know the reasons for what happened, I feel certain about one thing. On this audit, effective oversight collapsed. Congress and the citizens of this country need some answers, but one is paramount: Did the Defense Finance and Accounting Service earn a clean opinion? A simple yes or no. As the drive to audit readiness begins in earnest, and that is under Secretary Panetta's leadership, the Secretary and the Congress need a straight answer right upfront. Leaving it in limbo is unacceptable.

In closing, I would like to emphasize one point. My inquiry is about some very important principles. True, the preparation of these financial statements and all the attendant audit work probably costs the taxpayers somewhere between $10 and $20 million. To the average American, those are big bucks. Since the audit came to nothing, waste surely occurred. Any waste, whatever it is, is unacceptable.

But putting important principles at risk was as egregious as the dollar waste. What I am talking about are ethical standards, audit standards, and the integrity of the audit process. Those standards must be protected at all cost. That is one of the inspector general's jobs, to watchdog and follow those guiding principles.

The record appears to show that these standards got trampled and this may have happened with the IG's knowledge and approval. That is what the evidence appears to suggest so far. If the integrity and the credibility of that process were undermined, then the effectiveness of one of our primary oversight weapons would be gravely impaired. When and if those lines are crossed, the inspector general and anyone else involved would be treading on dangerous territory. If such transgressions occurred, then there must be corrective action and accountability.

When I complete this oversight investigation, I will submit a final report to Secretary of Defense Panetta. It will contain findings and recommendations for the Secretary's consideration. To facilitate this process, I ask Deputy Inspector General Halbrooks to answer all my outstanding questions promptly. In other words, I am getting tired of being jerked around.

I yield the floor. I suggest the absence of a quorum.

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