[Congressional Record (Bound Edition), Volume 158 (2012), Part 11]
[Senate]
[Pages 15204-15206]
[From the U.S. Government Publishing Office, www.gpo.gov]




                DOD INSPECTOR GENERAL OVERSIGHT FAILURE

  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.

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  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

[[Page 15206]]

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 million 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.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. REID. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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