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Floor Statement regarding Audit Oversight Failure by Department of Defense Inspector General

Senator Charles Grassley
Floor Statement of U.S. Senator Chuck Grassley –

Audit Oversight Failure by the Department of Defense Inspector General
Wednesday, November 14, 2012

Mr. President, with sequestration looming on the horizon, Congress needs a truly independent Department of Defense (DoD) audit oversight capability. We need it to root out waste.

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

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

Mr. President, I am reluctant to say this, but it needs to be said. I fear – and 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 effort to bring the Defense Department into compliance with the Chief Financial Officers (CFO) Act.

Today, the Department of Defense is the only federal agency that still cannot pass the test.
So, Secretary Panetta turned up the pressure. He wants to move the audit readiness date up by 3 years – from the congressionally mandated date of 2017 to 2014. This is a daunting task, which I spoke about here on the floor last December 11th . I say daunting because there is a big pothole in the road my friend, the Secretary, may not know about.

The kingpin of his 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 lacking. They did not meet prescribed audit standards.

To make matters 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?

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 non-endorsement report, was finalized but never signed and issued. It was simply buried in a deep hole and covered up 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 squeaky clean. I now have the non-endorsement report and other relevant audit work papers. They tell a very different story.

The financial statements produced by smaller organizations, like the Defense Finance and Accounting Service, are audited by Certified Public Accounting (CPA) firms. But this is always done under the watchful eye of the Inspector General. The Inspector General must validate those opinions.

The firm Urbach Kahn & 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 IG announced that it would issue a non-endorsement report but never did.

And that’s why the Senator from Iowa is here on the floor today. What happened to the non-endorsement report?

All the evidence appears to indicate that the Inspector General may have quashed the non-endorsement 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 # 1

The contract, which governed the audits in question, is a good place to start, because it set 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 specified 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 #2

The Inspector General’s Decision Memorandum and final version of the Non-Endorsement 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 firm’s audit opinion did not meet prescribed standards, the Inspector General’s representative prepared a non-endorsement letter and instructed that payments on outstanding invoices be stopped. Those decisions precipitated a classic bureaucratic impasse.

Red Flag #3

The impasse came to a head at the Defense Finance and Account Service’s Audit Committee meeting held on January 27, 2010, where 3 options were considered: 1) The IG would issue a non-endorsement letter; 2) The CPA firm would do more work on accounts payable and undelivered orders issues; and 3) The IG would do additional work.

The next day – January 28,th 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 non-endorsement letter.

Red Flag #4

The Defense Finance and Accounting Service immediately implemented a series of measures that appeared to by-pass and eliminate oversight by the Inspector General.

In what appears 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 19th. 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 contracting 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 a non-endorsement letter.

It’s as if Mr. Gomolak had super-human powers and could reach back in time and wipe the non-endorsement report clean off the slate, like it never 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 #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 3 main targets of the audit: the accounting agency, the CPA firm, and the Chief Financial Officer, who supervises the central accounting agency. All appeared to share one common goal:  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 Office expressed a willingness to do more work. And when it became evident that was not a viable option, it declared that a non-endorsement letter would be issued. Those were good moves.

Unfortunately, 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 on February

Then on April 13,th the IG informed the accounting agency by telephone that the non-endorsement report would not be issued. That was a bolt from the blue.

Red Flag #6

In a letter to me dated May 26th, 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 non-endorsement report was unnecessary because the Inspector General’s Office had already informed the Audit Committee of its decision to non-endorse the opinion.

Is the Inspector General implying that Ms. Marsh’s verbal non-endorsement announcement constituted de facto or unofficial non-endorsement? If that is indeed the case, then how come the central accounting agency still pretends to have earned a clean bill of health?

Mr. President, there is something wrong with this reasoning. Failing to issue the non-endorsement report left the opinion under a dark cloud, where it remains today.

In addition, the Inspector General also suggested that doing a mere 2-3 weeks of additional work “to finalize” the non-endorsement letter would not have constituted a “good use of audit resources,” that is, it would have been a waste of money.

The need for 2-3 weeks of extra work appears to be a real stretch. I have the non-endorsement letter. It was finished. All it lacks is Ms. Marsh’s signature.

More importantly, however, the IG’s office does not seem to understand either the purpose or 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, 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 makes, well … that makes this work inherently important.

Red Flag #7

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 – auditing the books of a key defense agency. If true, that would be cardinal sin for an 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 the challenge.

Why did the IG just roll over?  Why did the IG fail to assert its independent audit authority?

Stopping work at that 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 non-endorsement report on the flawed opinion?

Was that report quashed to spare the Chief Financial Officer another black eye for the unending accounting screw-ups?

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, Mr. President, about one thing:  On this audit, effective oversight collapsed.

Now, 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 – yes or no? As the drive to audit readiness begins in earnest, Secretary Panetta and the Congress need a straight answer right up front. Leaving it in limbo is unacceptable.

In closing, I would like to emphasize one point. My inquiry is about important principles.

True, the preparation of these financial statements and all the attendant audit work probably cost the taxpayers 10 or 20 million dollars. To the average American, that’s big bucks.  Since the audits came to nothing, waste surely occurred. Any waste is unacceptable.

But putting important principles at risk was as egregious as the 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 costs. That’s 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’s what the evidence appears to suggest so far.

If the integrity and 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.

I yield the floor.

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