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Archive for Saturday, September 15, 2007

Defense, Homeland Security departments can’t pass audits

September 15, 2007

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Ten years after Congress ordered federal agencies to have outside auditors review their books, neither the Defense Department nor the newer Department of Homeland Security has met even basic accounting requirements, leaving them vulnerable to waste, fraud and abuse.

An Associated Press review shows that the two departments' financial records are so disorganized and inconsistent that they have repeatedly earned "disclaimer" opinions, meaning that they simply cannot be fully audited.

The Federal Financial Management Improvement Act of 1996 requires, among other things, that the financial systems of major federal agencies "comply substantially" with generally accepted accounting standards. Each year, those agencies are required to release results of outside audits.

The AP review of financial statements from the federal government's 15 executive departments shows that most pass their audits, although many agencies - including NASA, the Coast Guard and FEMA - have been frequently cited for serious accounting errors.

The entire Homeland Security Department, with a $35 billion budget this fiscal year, passed its first audit in 2003 with strong stipulations, but has failed every one since.

And the Defense Department, with a $460 billion budget this fiscal year, has never even come close to passing. Because that department makes up at least 20 percent of all federal spending, the entire federal government also has failed its audits since the congressional mandate took effect.

Failing an audit in any other venue could have dire consequences - a public company's stock could plummet, state and local governments could see bond and credit ratings sink. But for the federal government, effects are less direct because the U.S. Treasury is a guaranteed funding source.

Still, Tina Jonas, undersecretary and chief financial officer of the Department of Defense, and David Norquist, chief financial officer at the Homeland Security Department, agree that a disclaimer on an audit leaves their agencies vulnerable to waste and fraud.

At last count, accounting at the Defense Department is performed in 4,000 different business systems, Jonas said. And in its most recent audit, the department acknowledged that it had more than $270 million worth of unsupported accounting entries.

Jonas noted that there also have been what she called "significant successes." In 2001, the Pentagon had hundreds of inoperable accounting systems and no data standards. This year, she said, it received a clean audit opinion on $215 billion, or 15 percent, of its assets and $967 billion, or 49 percent, of its liabilities.

Established in 2002, the Department of Homeland Security faces different challenges. Norquist, the agency's third chief financial officer, said that despite recent problems, officials have "a number of checks on our numbers and our budgets."

What there isn't, however, is a central financial management manual - something all other federal agencies have - that would enable auditors to check if Homeland Security is even meeting its own policies.

Nor is there a central accounting system: In 2005, after spending $52 million, DHS dropped a $229 million contract with BearingPoint to develop a single software accounting system after it became obvious it wasn't going to work. The department now plans to base its systems on those already in place at the Transportation Security Administration or Customs and Border Protection.

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