Two agencies lack the basics to pass audits

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 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 shows that most of the 15 executive departments pass their audits, although many agencies - including NASA, the Coast Guard and FEMA - have been frequently cited for serious accounting errors.

The Homeland Security Department, with a $35 billion budget, 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 year, has never come close to passing. Because that department makes up at least 20 percent of all federal spending, the overall government also has failed its audits since the 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 Treasury is a guaranteed funding source.

Still, Tina Jonas, chief financial officer of the Department of Defense, and David Norquist, chief financial officer at Homeland Security, agree that a disclaimer on an audit leaves their agencies vulnerable to waste and fraud. Both said they had other checks in place aimed at controlling how money is spent, but they acknowledged that resolving the audit problems would save their agencies money.

Members of Congress are often frustrated at the lack of proper accounting.

"The inability of Defense and Homeland Security to pass financial audits is costing taxpayers dearly. There is no accountability for billions in wasteful spending," said Rep. Henry A. Waxman (D., Calif.), chairman of the House Oversight and Government Reform Committee. "Private contractors are getting rich, military equipment can't be tracked, and fraud is growing."

Jonas concedes the Defense Department has a larger problem than most other federal agencies.

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

The Department of Homeland Security, established in 2002, faces slightly different challenges. Norquist said that despite recent problems, officials had "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 the agency is meeting its own policies. Nor is there a central accounting system.

Some experts say the accounting standards for federal agencies do not make sense because they treat the government like a company rather than a public entity, which collects taxes and spends what is needed.

"The bottom line is that you have the president's budget passed by Congress, and these agencies have a line in there of how much money they're going to get," said Kent Smetters, a former deputy assistant Treasury secretary who is an instructor at the University of Pennsylvania's Wharton School. "And what these audits say is that they can't trace how that money actually gets spent. That's a problem."