[Congressional Record Volume 159, Number 175 (Wednesday, December 11, 2013)]
[Senate]
[Pages S8628-S8631]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]



                 How the Audit Process was Compromised

  For several years, I have been trying to get the Defense Department 
inspector general to do its job, and I have had

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several investigations, a lot of them implemented because of 
information that comes to me from whistleblowers. I will speak to that 
point now and talk about two important audits bungled by the Department 
of Defense inspector general's office.
  There is something very important I need to say right upfront. A 
brandnew inspector general, Mr. Jon Rymer, is now in place. The events 
I am about to describe happened a few years ago, but none reflect on 
his leadership which I hope will bring about a big change in the 
inspector general's office at the Department of Defense.
  When faced with a frontal assault on its audit authority by the 
target of one of its audits, senior IG officials got a bad case of weak 
knees and caved under pressure. They trashed high-quality audit work 
that was critical of a certified public accounting firm and its 
opinions. In doing this, they covered up reportable deficiencies, they 
allowed the audit target to run roughshod over sacred oversight 
prerogatives, without uttering one word of protest or asking one single 
question.
  I am talking about audits of the financial statements produced by the 
Department's Central Accounting Office. This is what I refer to as 
DFAS, which stands for Defense Finance and Accounting Services. The 
audits were conducted by a CPA firm, but supposedly under the watchful 
eye of the inspector general, or IG, but not really under his eye.
  The story of the two bungled audits is told in an oversight report 
which I have now posted on my Web site.
  While I received the first anonymous email on this matter in April of 
2012, my audit oversight work actually began more than 5 years ago. It 
was triggered by a steady stream of tips from whistleblowers 
complaining about the quality of these audits. These reports then 
grabbed my attention.
  My colleagues may wonder why the Senator from Iowa is down in the 
weeds in such arcane issues. The reason is simple. It is the importance 
of audits.
  Audits are probably the primary oversight tool for rooting out fraud 
and waste in the government. To protect the taxpayers, Congress needs 
to ensure that government audits are as good as they can be. They must 
produce tangible results. They must be able to detect theft, waste, 
mismanagement, and then recommend corrective action.
  With mounting pressure for serious belt-tightening under 
sequestration, audits have taken on an even greater importance. Audits 
should help senior management separate the wheat from the chaff and 
apply mandated cuts where they belong. Sequestration cuts should be 
guided by hard-hitting, rock-solid audits. Unfortunately, rock-solid 
audits produced by the inspector general's office are hard to come by, 
and that is the problem.
  After evaluating hundreds of audits, I issued three oversight reports 
in the years 2010 and 2012. With a few notable exceptions, I found that 
the inspector general's Audits were weak, ineffective, and wasteful--
wasteful when we consider that we spend $100 million a year to produce 
them. Poor leadership is part of the problem, but there is still 
another driver; that is, the Department's broken accounting system. It 
allows fraud and waste to go undetected and unchecked. That is bad 
enough, but the lack of credible financial information makes it very 
difficult to produce hard-hitting audits. Auditors are forced to do 
audit trail reconstruction work to connect the dots on the money trails 
and, of course, that is very labor intensive, very time-consuming work.
  Although the Department continues to spend billions to fix the busted 
accounting system, I am sorry to say it is still not working right. The 
Department cannot pass the Chief Financial Officers Act audit test. It 
is unable to accurately report on how the taxpayers' money is spent as 
it is required to do each year under that law. By comparison, every 
other Federal agency has passed that test. Why not the Department of 
Defense?
  So long as the accounting system is dysfunctional, audits will remain 
weak and ineffective and the probability of rooting out much fraud and 
waste during sequestration is low--and then still continuing to waste 
$100 million that we spend on the inspector general's office.
  While I am talking about the need for better audits, I would like to 
offer a word of encouragement to the Special Inspector General for 
Afghanistan Reconstruction, John Sopko. He is the head of SIGAR, which 
is the name for the Special Inspector General for Afghanistan, or 
SIGAR, for short. SIGAR is cranking out aggressive, hard-hitting 
audits, and I commend SIGAR for doing that--setting a good example. The 
audits I am about to discuss, by contrast, deserve darts, not laurels.

  I first came to the floor to speak on this subject on November 14, 
2012. At that point, I completed a preliminary review of seven red 
flags or potential problem areas that popped up on my radar screen. 
Since then, I have double-checked the facts. I have confirmed my 
preliminary observations. I did this by examining the official audit 
records known as work papers. So I will not walk the same ground again 
tonight. Instead, I will briefly summarize what I did, how I did it, 
what I found, why it is important, and offer some fixes for 
consideration.
  To conduct this investigation, I had to examine literally thousands 
of documents. I could not have done it without the help and guidance of 
CPA-qualified government auditors. Evidence uncovered in the work 
papers were validated with interviews and written inquiries with 
knowledgeable officials. Together, these tell the story of what 
happened and of course it is not a pretty picture.
  True, my report is nothing more than a snapshot in time, but if this 
snapshot accurately reflects the work being produced by the IG audit 
office, then we have big problems.
  In a nutshell, this is what I found out: A CPA firm, Urbach Kahn & 
Werlin, which goes by UKW, had awarded an unblemished string of seven 
clean opinions on the central accounting agency's financial statements. 
Then the IG stepped in and took a 2-year snapshot for fiscal years 2008 
and 2009. It was supposed to report on whether those statements and 
opinions met prescribed audit standards, but due to a series of ethical 
blunders, that job was never finished.
  A third review was planned for 2010, but after the 2008-2009 fiasco, 
it was canceled, allowing DFAS--the Defense, Finance, and Accounting 
Service--it allowed DFAS to rack up another string of clean opinions 
through last year. All together, this work probably costs the taxpayers 
in excess of $20 million.
  The work performed by DFAS in 2008 and 2009 was substandard. The 
outside audit firm rubberstamped DFAS's flawed practices using 
defective audit methods.
  For its part, the inspector general was prepared to call foul on the 
CPA firm for substandard work but got sidetracked and then steamrolled 
by DFAS. The contract gave the IG preeminent oversight authority to 
accept or reject the firm's opinions. The whole purpose of the contract 
was to position the auditors to make that determination. If the firm's 
opinions met prescribed standards, they would be endorsed. If not, the 
IG would issue a nonendorsement report.
  On both the fiscal year 2008 and 2009 audits, the record clearly 
indicates the IG's audit team determined that the firm's opinions did 
not meet prescribed standards. They did not merit endorsement. Though I 
cannot cite work papers to prove it, whistleblowers alleged that top 
management ordered them to endorse the 2008 opinion with this caveat: 
If known deficiencies were not corrected in the 2009 opinion, a 
nonendorsement was guaranteed. When the very same deficiencies popped 
up again--in other words, in 2009 as they did in 2008--the auditors 
prepared a hard-hitting nonendorsement report as promised. It was even 
signed. The transmittal letter was ready to go out the door.
  The nonendorsement decision had been communicated to DFAS via email 
in unmistakable terms. In line with that decision and contract 
requirements, the IG took steps to cut off payment to the CPA firm 
based on advice of the inspector general's legal counsel.
  The next step was to issue the nonendorsement report. But this is 
where the inspector general chickened out. In a power vacuum, DFAS 
moved swiftly to block the report with a blatant end-run maneuver to 
bypass independent oversight. So DFAS literally neutered independent 
oversight by the inspector general with two bold moves: On the

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same day the IG's office notified DFAS in writing that a nonendorsement 
report would be forthcoming, DFAS unilaterally and proudly declared 
that it had earned a clean opinion and ordered that all disputed 
invoices be paid. This was an act of out-and-out defiance.
  Next, it kicked the IG off the contract. Yes, my colleagues heard me 
right. The agency being audited literally kicked the inspector 
general--the oversight agency--clean off the oversight contract. In 
making this end-run maneuver, DFAS broke every rule in the audit book.
  What happened was a frontal assault on the inspector general's 
oversight authority. The frontal assault was mounted by the agency 
being subjected to the audit and by an agency whose financial reports 
were found to be grossly deficient. In the face of such outright 
defiance, I would like to think that any inspector general would have 
stood up to the offending agency and held its ground and protected and 
defended its oversight prerogatives. That is the law--but not the 
Department of Defense inspector general.
  Instead, the IG's knees buckled under pressure. The IG retreated 
before the onslaught. The IG caved and trashed the report. The IG 
rolled over and played possum, giving DFAS the green light to proceed 
full speed ahead.
  The IG accepted these blatant transgressions without expressing one 
word of criticism, without expressing one concern, without raising one 
single question.
  Other than a lone hotline complaint that disappeared down a black 
hole, no protest was ever lodged, no corrective action was ever 
proposed, and obviously no corrective action ever taken.
  The inspector general's silence appeared to signal total acquiescence 
to a series of actions that undermine the integrity of the audit 
process, which is the basis for ferreting out waste, fraud and 
mismanagement and illegal activity.
  For a Senator who watches the watchdogs, what I see is a disgrace to 
the entire inspector general community. The IG allowed DFAS to run 
roughshod over the contract, the IG Act, audit standards, and 
independent oversight. The audit firm probably got paid for the work 
that was never performed--payments that were alleged to be improper.
  Instead of exposing poor practices and improper actions by both the 
accounting agency and the CPA firm, the Office of Inspector General 
allowed sacred principles to be trampled. It just kept quiet. It turned 
a blind eye to what was going on. It hunkered down. It tried to cover 
its tracks.
  Two misguided acts set the stage for the collapse of oversight of 
these audits.
  The problem began with the contract. At the insistence of the 
Department's chief financial officer and accounting agency, the IG 
agreed to a contractual arrangement that put DFAS--the target of the 
audit--in the driver's seat. This contract allegedly violated the IG 
Act and standing audit policy, according to the assistant IG who spoke 
out at that particular time.
  To address this issue, a fragile waiver arrangement was crafted. It 
was supposed to address the legal issues and protect the Office of 
Inspector General's interests under the DFAS contract. All the parties 
involved agreed to abide by this questionable setup.
  But being nothing more than an informal trust, it came unglued under 
the pressure and controversy generated by the nonendorsement decision.
  Even the Office of Inspector General legal counsel voiced grave 
concerns about the fragile waiver arrangement. In his opinion, the 
terms of the contract ``transferred''--those words come from the Office 
of Legal Counsel--``transferred'' the Office of Inspector General 
oversight function to DFAS, the very component whose financial data was 
being subjected to the oversight. In his words--meaning the Office of 
Legal Counsel's words--the contract terms will leave the Office of 
Inspector General ``open to criticism on the Hill. . . . In two years 
some Senator will yell at us [about this]. If I had known about the 
arrangement,'' he said, ``I would have advised against it.''
  Counsel's concerns were well-founded, and similar to a modern day 
Nostradamus, this prediction has come to pass.
  The second problem was a failure of leadership at the top. When the 
inspector general's auditors reached the conclusion that the CPA firm's 
opinions did not measure up to prescribed standards, the current deputy 
IG for audit drove the final nail into that coffin.
  The official audit records make it crystal clear. The deputy IG gave 
the fateful order: ``There will be no written report.'' This was a 
lethal blow. This is how the report got bottled up. True, it 
disappeared from public view. It got buried, and DFAS was promised it 
would never see the light of day; that is, until one of my 
investigators came along and dug it out of a pile of work papers. 
Here--for the benefit of my colleagues--here it is in my hand. I hold 
it up. It did not get buried like they thought it would get buried.
  Once the deputy IG had smothered the report, DFAS knew it had the 
green light to bypass oversight with impunity.
  All of this bungling could have harmful consequences.
  First, compelling audit evidence, which undermined the credibility of 
the financial statements prepared by the Department's flagship 
accounting agency, was shielded from public exposure. The suppression 
of that evidence has helped to immortalize the myth of DFAS's clean 
opinions. It is so bad now that the myth is an inside joke. It is 
laughable, according to a former accountant. Here is what he said on 
the record to McClatchy News on November 22, 2013:

       When I was there, DFAS would brag about getting a clean 
     opinion. We accountants would just laugh out loud. Their 
     systems were so screwed up.

  If the output of the Defense Department's flagship accounting agency, 
which disburses over $600 billion a year is, indeed, laughable, then 
Pentagon money managers have another big problem. As that famous 
whistleblower Ernie Fitzgerald liked to say: ``It's time to lock the 
doors and call the law.''
  Since the myth involves the reliability of data reported by the 
Department's central accounting agency, it has the potential of putting 
the Secretary of Defense's audit readiness initiative in jeopardy. 
DFAS's apparent inability to accurately report on its own internal 
housekeeping accounts for $1.5 billion--it is $1.5 billion that they 
have--casts doubt on its ability to accurately report on the hundreds 
of billions DOD spends each year. If the Department's central 
accounting agency cannot earn a clean opinion, then who in the 
Department can?
  Second, the integrity and independence of the inspector general's 
audit process may have been compromised. If the independence of the 
audit process was, in fact, compromised, as my report suggests, then 
the Department's primary tool for rooting out waste and fraud could be 
disabled--at least it was in these cases.
  If that did indeed happen, then it probably happened with the 
knowledge and silent acquiesce of senior officials in the IG's office, 
the institution that exists to root out fraud, waste, and abuse.
  In simple terms, the watchdog appointed to expose waste--not only 
expose but stop fraud and waste--may have been doing some of it himself 
or herself. If true, it clearly demonstrates a lack of commitment on 
the part of senior management to exercise due diligence in performing 
its core mission.
  Almost all of the key players allegedly responsible for the bungled 
audits still occupy top posts in the IG's audit office today. Surely, 
these officials did not act alone. This was a concerted effort. 
According to recent news reports, other higher-ups were allegedly 
involved. Senior IG officials must bear primary responsibility for this 
unacceptable and inexplicable failure of oversight. They could have, in 
fact, stopped it.
  To address and resolve these issues, I made four recommendations in a 
letter recently sent to Secretary Hagel and the new Inspector General 
Rymer.
  First, the Department of Defense CFO should pull the DFAS financial 
statements for the fiscal years 2008 and 2009 and remove those audit 
opinions from official records.
  Second, the OIG needs to undertake an independent audit of DFAS's 
financial statements for fiscal year 2012 and determine whether those 
statements and the CPA firm's opinion meet prescribed audit standards. 
The fiscal year

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2012 beginning account balances must also be verified. In response to 
my oversight, the inspector general has initiated what he called a 
postaudit review of DFAS's fiscal year 2012 financial statements. This 
is, in fact, a good move. But to ensure that it is done right this 
time, I asked the U.S. GAO to watchdog the inspector general's work. I 
want independent verification because last time there was none. This 
process will be completed next year.
  Third, the inspector general should address and resolve any 
allegations of misconduct involving DFAS officials and make appropriate 
recommendations for corrective action.
  Fourth, I am referring unresolved concerns regarding the conduct of 
IG officials to the Integrity Committee of the Council of the 
Inspectors General on Integrity and Efficiency for further review as 
provided under the IG Reform Act of 2008.
  What happened here is almost beyond comprehension.
  All of it happened under the IG's watchful eye. All of it probably 
happened with top-level knowledge. Most of it probably happened with 
top-level approval. Some of it was probably allowed to happen through 
tacit approval or silent acquiescence. All of it was bad for the 
integrity and independence of the audit process and the accuracy of 
financial information in the government's largest agency.
  As I said a moment ago, the Department has a new IG, Jon Rymer. I 
hope he is a genuine junkyard dog who likes aggressive, hard-hitting 
audits. I hope Mr. Rymer will take a long, hard look at what happened 
and work with Secretary Hagel and others to find a good way to right 
the wrongs and get audits back on track. I know he can do it, and I 
stand ready to help him in any way I can. I want Mr. Rymer to know my 
door is open to him.