25 August 1998

The Constitution, Situational Ethics & the Phony Debate Over More Defense Spending

by Chuck Spinney

August 25, 1998

Comment: #169

Discussion Thread: #s 49, 61, 114

References (Attached beneath main text):

[1] Letter from Secretary of Defense to Mr. David Mosso, Chairman, Federal Accounting Standards Advisory Board, May 15, 1998.

[2] Elaine Grossman, “Comptroller Appeals to Board to Ease Up on DoD,” Inside the Pentagon, July 9, 1998. 

[3] Elaine Grossman, “Financial Statements Called Unreliable: DoD Inspector General Blames Comptroller For Poor Accounting,” Inside the Pentagon, August 6, 1996. 

[4] Elaine Grossman, “Despite objections by government watchdogs … Accounting Board Grants DoD Request for Less Demanding Standard,” Inside the Pentagon, August 13, 1998.


My aim in this commentary is to tie the Pentagon’s decision-making crisis to the requirements of Constitution. I intend to show (1) HOW our corrupt accounting system makes a mockery of its system of checks and balances and (2) WHY anyone in government who condones, accepts, excuses, or tolerates these corrupted accounting systems violates the values and duties he or she professes and is expected to uphold.


As I have stated repeatedly, the leaders in the Defense Department face three intractable decision-making problems: First, new weapons are simply too expensive. Consequently, the modernization plan can not buy enough of them to replace the aging weapons in our inventories on a timely basis, even if procurement budgets increase to $60 billion in the near term as planned, there are no more cost overruns, and budgets continue to rise steadily for the next eight to ten years. But changing to a more realistic menu of lower-cost weapons will not be not easy, because the front loaders and political engineers have used the ‘window of indecision’ to build powerful political protection networks by spreading subcontracts, profits, and patronage to hundreds of congressional districts. Second, the readiness posture of our military forces is deteriorating, a fact the Secretary of Defense acknowledged recently to the Chairman of the House National Security Committee [#157]. But reversing the readiness decline is made more difficult because the “rising cost of low readiness” (an economic consequence of buying ever-more complex weapons) has ratcheted up operating costs of per combat unit [see #100, for example]. Finally, an unauditable accounting system [See DoD/IG testimony attached to Comment #61], together with a broken planning system [see my 1994 memo, Reference #3 to Comment #166] transforms a difficult situation into a Gordian Knot by making it impossible to assemble the information needed to resolve the first two problems.

Each Summer, senior decision makers in the Office of the Secretary of Defense (OSD) review the draft submissions of the new six-year budget plans of each military service to determine if these plans conform to the Defense Secretary’s guidance and priorities. Last May, the military services submitted their drafts to OSD. These plans reeked of budgetary shortfalls [Comment #s 105, 117, 118, 119]. Nevertheless, the leaders of the ongoing Summer review chose once again to ignore completely the root causes of the modernization and readiness problems that are reflected in these shortfalls. By refusing to examine these causes, they are helping to set the stage for a phony debate over the need for larger defense budgets [Comment #s 159, 165, 166, 167, 168 and related threads]. There is no threat to justify higher budgets. Moreover, throwing money at the Pentagon, without first fixing the corrupt accounting system, might relieve readiness pressures somewhat in the short term, but such a policy will put into place a chain of decisions that will worsen the readiness and modernization problems over the long term.

The bookkeeping shambles has been getting worse for at least 25 years and is now, by far, the most egregious of these problems. Without reliable information, effective decisions cannot even be defined, let alone made and executed. So, from the perspective of effective management, detoxifying the corrupted accounting system is clearly a necessary precondition to understanding and resolving the first two problems.

Effective decision making, based on reliable information, is not an impossible dream, but it will take strong leadership and hard work to avoid squandering more of our nation’s scarce resources. A recommendation laying out a plan to produce and use such information is contained in a report I forwarded to the Director of Program Analysis and Evaluation in the Spring of 1997, and when no one in the Pentagon responded to it, I published it in both Challenge and Strategic Review.

The importance of the bookkeeping shambles, however, goes far beyond the issue of competent decision making, however. A corrupted accounting system makes a mockery of the intent and architecture of the Constitution.

We will now turn our attention to this latter issue. Part I describes why the Constitution provides the necessary intellectual framework and moral guidance for understanding and resolving the Defense Department’s accounting crisis, and (2) Part II shows how decision makers in the Pentagon have lost sight of this framework and managed to construct a logically inconsistent and morally indefensible strategy to protect the unworkable status quo described above.


The Framers of the Constitution designed the system of checks and balances to prevent the rise of unaccountable or, in their words, tyrannical power. They understood their system could not function effectively, if the separate branches of the Federal Government used their monopolistic control of information to misrepresent the nature of their activities or to bias the choices facing the entire system of shared power. Without reliable information, it is impossible to hold the individuals and agencies accountable for their separate actions and intentions, and their grand design for resolving disputes and determining policy via a system of checks and balances would become, to paraphrase Mr. Madison, a prologue to a farce or a tragedy or both.

In this context, many pundits and historians have decried the loss of Comity, or the idea that people can disagree and be civil at the same time, in our nation’s political transactions, which necessarily involve an exchange of information. To be sure, comity is a necessary condition in our Constitutional design. But this requirement does not mean people must be nice or polite to each other. It does imply, however, there must be some minimum standard of honesty disciplining the information used to support political transactions.

The Framers were especially aware of this need when accounting for those transactions that shaped the flow of the people’s money into and out of the Treasury. They set this standard in Article 1, Section 9, Clause 7 of the Constitution, also known as the Accountability and Appropriations Clause, [hereafter referred to a the Accountability Clause] which states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” [Capitalization in original for emphasis]

Note the construction of this clause: “No Money” is an absolute and universal prohibition on any expenditure. It is the purest form of the prohibition “thou shalt not.” Note also how the language and punctuation links [legally enacted appropriations] to [expenditures] to [ALL receipts and ALL expenditures] to [reporting requirements]. This linkage, coupled to the absolute prohibition, defines the minimum standard of honest bookkeeping. The Constitution says the government’s financial accounting system must be grounded precisely on an information system that describes any specific expenditure of any branch or agency of government as a consequence of the specific legally-enacted appropriation that authorized that expenditure (i.e., one passed by Congress and signed by the President).

This is not a minor issue, nor is the Accountability Clause a recondite remnant of 18th Century linguistic gymnastics. According to the late Edward S. Corwin, one of our nation’s foremost constitutional authorities, the Accountability Clause ... “more than any other, gives Congress control over the acts of the other branches of government, the President, the courts, the military, and so on, since all depend on money to carry out their business.” Note also that the Accountability Clause appears in Article 1, Section 9, which places limitations on the power of Congress. That means Congress cannot delegate the power implicit in this clause or change it in any way. The only way to change the limitations imposed by the Accountability Clause is by amending the Constitution.

Despite the Constitution's clarity of original intent and language, Congress has found it necessary to pass laws from time to time to give contemporary form to, and put teeth into, the checks and balances implicit in the Accountability Clause [see quotation of Comptroller General in the Reference to Commentary #152].

The Anti-deficiency Act ( 31 USC 1342 and supporting sections of Title 31, including 1241, 1501, 1511-1519) is a collection of such enabling statutes. This act prohibits government employees from authorizing or making a contract that would involve an expenditure or obligation of money that has not been appropriated. It also states that a government employee or agency may not accept voluntary services for which no money has been appropriated. Violation of the Anti-deficiency Act is felony punishable by up to two years in the slammer and a $5,000 fine.

The Supreme Court recently reinforced the constitutionality of this point, when it upheld the Anti-deficiency Act in Hercules v US (4 Mar 96), by saying … “The Anti-Deficiency Act bars a federal employee or agency from entering into a contract for future payment of money in advance of, or in excess of, an existing appropriation.”

Taken together, Article 1, Section 9, Clause 7 of the Constitution, Professor Corwin’s interpretation of it, the Anti-deficiency Act, and the holding of the Supreme Court make it easy to convert the requirements of the Constitution into a minimum acceptable auditing standard to guide the design of, or changes to, any agency’s bookkeeping system: Namely each expenditure of money by any agency of any branch of the Executive (or Congress or the Judiciary) for any long-term asset or current operation MUST be explicitly, reliably, and clearly connected to the legally enacted Appropriation of that money.

An engineer would call this standard a ‘design specification,’ which raises a question of performance: What system level performance goal is this design spec supposed to achieve?

It is crucially important for readers to recognize that the Framers of the Constitution viewed accountability and checks and balances as SAFEGUARDS against tyranny. In this regard, the intent of the Accountability Clause and its enabling statutes is NOT to establish a cost-accounting system for the purpose of assisting appointed officials in their duty to efficiently manage the activities of their agency. These accounting requirements are intended to EMPOWER the system of checks and balances in order to prevent the insensible accretion of unaccountable or tyrannical power by any branch or individual in government. Efficiency, however desirable it might be, is simply NOT a relevant consideration to the design of this architecture.

From a systems design viewpoint, the preceding ideas of accountability are mechanical in nature, with a negative feedback control loop energized by a legal bludgeon. But machines don’t play politics, people do, and they use their minds. The macroscopic constitutional design will not work in a self-actuating sense, unless there is some compatible ideal of honesty to positively shape the actual conduct of the individuals who produce and use the information that flows among the competing power centers within the system of checks and balances. Obviously, there must be a harmonious interaction among the macroscopic and microscopic levels of activity. How do we inspire individuals and groups to try willingly, and proactively, to attain that necessary comity, while they are engaged in a struggle to gain advantage in a political competition, where the desire to “win” will tempt them to cut corners and take advantage of fast-breaking opportunities?

In other words, how do we channel the energy of loyalty, duty, responsibility, initiative and honor of individuals (who are struggling to achieve their own goals) in a constitutionally constructive direction? A student of evolutionary processes will recognize immediately that this question is about self-organizing behavior at the individual level or, put another way, at the level of the microscopic variations. This implies a need for some form of a positive feedback control loop, to amplify constructive initiatives by individuals when they are confronted by unpredictable circumstances that demand creative responses. This requirement brings us face-to-face with the Oath of Office.

The law (5 USC 3331) requires EVERY individual, elected or appointed to an office of honor or profit in the civil service or uniformed services to take the following oath as a condition of employment in any branch of the Federal Government: 

“I, [name], do solemnly swear (or affirm) that I will SUPPORT and DEFEND the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God.” [emphasis added]
The oath is the individual’s unconditional contract with the Constitution. It means supporting and defending the Constitution in the performance of duties takes precedence over supporting or defending the parochial interests of any individuals or factions or organizations within or without the Federal Government. The phrase “bear true faith and allegiance” means that the individuals accepts the Constitution as the external framework defining acceptable behavior, within which, one evolves a personal sense of duty, responsibility, and honor to motivate, shape, and constrain one’s official conduct.

With regard to the question of comity, the phrase “bear true faith and allegiance” establishes the Constitution as the minimum universal standard of acceptable behavior that ALL employees of the Federal government PROFESS and are EXPECTED to uphold during the omnipresent struggle for advantage.

Given the centrality of accountability to the grand architecture of the Constitution and the binding nature by which the oath of office links individual behavior to that grand design, we can now rephrase the question which launched this commentary:

Given the minimum standard of honesty they profess and are expected to uphold, why do senior managers in the Office of the Secretary of Defense permit a corrupted accounting system to persist year after year?


We can a make a first-order cut into this question by placing it in the context of the Pentagon’s response to the reporting requirements imposed by the Chief Financial Officers Act of 1990, Public Law 101-576, and its related laws (referred to collectively as the CFO Act).

The aim of CFO Act is to produce more complete, reliable, timely, and consistent financial information for use by the executive branch and Congress (and presumably the American citizenry). It established a time-phased plan for improving accounting systems and auditing procedures. As part of this plan, on September 2, 1993, the Office of Management and Budget (OMB) issued a statement describing the objectives of the Federal Financial Reporting System. 

OMB listed its first objective as “Budgetary Integrity” and defined its importance in Paragraph #113, which tied the requirements of the CFO act directly to the Accountability Clause of the Constitution. Paragraph #113 says, 

“This objective [for budgetary integrity] arises generally from the responsibility of representative governments to be accountable for the monies that are raised and spent and for compliance with law. More specifically it arises from the requirement in Article I, Section 9 of the Constitution … “ Paragraph #114 reinforces this link by saying, “The focus of this objective is retrospective. That is, the focus is on recording actual data from budget execution against appropriations made by Congress using existing budgetary standards.”
The CFO Act also requires the Inspector General of each agency of the U.S. government to produce an independent audit that agency’s books each year to determine if the accounting systems comply with established standards of government accounting. The Defense Department has been flunking these audits since they began, as is evidenced by the almost endless litany of Disclaimers of Opinion issued by the Inspector General (which have been confirmed in separate audits by the General Accounting Office) over the last several years [Commentary #61 and its Reference describe the DoD/IG’s reasons for issuing these disclaimers].

Finally, the CFO Act also created the Federal Accounting Standards Advisory Board (FASAB) to develop and phase in the relevant accounting standards for the Federal Government. The phase-in schedule for these standards requires the Defense Department to begin accounting for the value of past expenditures for all assets (plant, property, and equipment) used to support the Defense Department’s operations on September 30, 1998.

Reference #1 attached to this Commentary is a 15 May 1998 letter from the Secretary of Defense to Mr. David Mosso, Chairman, of the Federal Accounting Standards Advisory Board (FASAB), which I urge readers to examine carefully. It includes a formal dissent to the some of the reporting requirements due to take effect in September 1998. The letter was prepared as part of a response to an “Exposure Draft” of new standards, written by the FASAB in February, in preparation for a formal hearing by the FASAB in June.

Specifically, Secretary Cohen objected to the requirement that the Pentagon use historical costs when accounting for its Property, Plant, and Equipment. Bear in mind, under the strictures of the Constitution and the Anti-deficiency Act, all historical costs are, or should be, past expenditures CONSEQUENT to legally enacted appropriations. Recall also that that the Office of Management and Budget established the retrospective focus to the objective of budgetary integrity.

Let’s examine the counter-argument made the Defense Secretary in this letter. Mr. Cohen begins by saying what is important to HIM: namely the quantities, and the condition, of National Defense Property, Plant and Equipment (PP&E) now available and how much is being spent (cost trends) to procure the PP&E needed to accomplish the mission. Next, he builds the case by saying what is not important to HIM, namely historical cost information for PP&E (some procured as long ago as 1950s), because this information is not useful for making current decisions. Finally, Mr. Cohen says the Department does not have all the documentation needed to satisfy the proposed audit requirements, and he nails the coffin shut by saying, the HIGH COST of developing the unneeded accounting systems would take money away from needed readiness and modernization programs.

There are two gaping flaws in his argument.

First, the argument is an irrelevant distraction, because it substitutes the objective management efficiency for the objective of budgetary integrity. It substitutes a flexible system of situational ethics, defined by what is convenient to managers, for the immutable system of ethics, defined by the intersection of the Constitution with one’s unconditional oath to support and defend it, including the requirements implicit in the Accountability Clause. This kind of argument might apply if one were designing an internal management accounting system, but the first objective of budgetary integrity is to improve the Executive Department’s accountability to others in a Constitutional sense. Indeed, that is why the audits performed by the Inspector General use a retrospective perspective to link expenditures to appropriations.

Second, in addition to being an irrelevant distraction, Mr. Cohen’s argument is illogical. It assumes one can PREDICT what expenditures are needed for current or future readiness and modernization, while admitting one can not determine how past expenditures ACTUALLY shaped past readiness and modernization. This is the same as saying it is easier to perform a more difficult task (PREDICTION) than a simpler task (DESCRIPTION).

Whoever prepared this fatally flawed letter did the Secretary of Defense and the nation a grave disservice. While References 2 and 3 to this commentary do not address this issue, they do provide some insight into WHY Mr. Cohen’s staff induced him to sign an irrational letter that is at variance with the intent and letter of the Constitution.

In Reference #2, for example, Elaine Grossman describes the testimony of William Lynn, the Pentagon’s Comptroller, to a public hearing of the FASAB on 26 June.

Lynn acknowledged the Pentagon needs “to be able to show to the American taxpayer, the Congress, the American public, that we are indeed proper financial stewards, that we indeed are taking care of the large amount of resources that we have been given temporary custody of.” These are the right sounding words, but he also admitted the Pentagon CAN NOT produce a valid accounting trail that links original costs to PP&E assets.

But rather than meet the objectives of the accounting regulation, Grossman reports that the Chief Financial Officer of the Pentagon asked the FASAB to relax the standard to make life easier for managers in the Pentagon. Lynn requested the FASAB to adjust the standard to require only aggregate numbers by major system categories, like “aircraft,” for the current year and the preceding four years. Forcing DOD to move more quickly, Lynn argued, would undermine efforts to improve accounting standards by destroying morale. To this end, he pleaded, “I need for you to help us adapt the standards that you’re developing to make them relevant for the line managers in the Pentagon, the line managers in the Department of Defense … With the secretary’s personal commitment, I can get their attention. But to get their dedication, I need to show that this is going to help them do their jobs. It needs to be relevant to them.”

Lynn’s argument is also fatally flawed.

First, it is illogical to assume Lynn’s accountants can produce auditable aggregate data, when they are not capable of producing the auditable detailed data that are the necessary building blocks of the aggregates. Unfortunately, Ms. Grossman’s report does not indicate whether this basic contradiction mattered the members of FASAB, who, according to my sources, seemed to be hunting for a reason to defer to the Pentagon’s illogical wishes.

Second, the idea of limiting accounting standards for major assets to the current year and the last four years is patently absurd. The overwhelming bulk of the Pentagon’s expenditures for plant, property, and equipment is for assets that last well in excess of four years. Airplanes and ships may last as long as long as 50 years, and even low cost support items, like pickup trucks or air conditioners, are routinely kept for more than four years. Under this reporting requirement, for example, the Pentagon would not have to account for the cost of the B-2 bomber, because the last one was bought more than four years ago. Such an wacky accounting practice would NEVER be tolerated in financial statements of a publicly owned corporation.

Third, Lynn did not explain, nor was he questioned, how a relaxation of an accounting requirement to tie expenditures for assets to appropriations could be deemed an improvement in accounting practices, given OMB’s Objective #1 (Budgetary Integrity) and the many disclaimers of opinion issued by the Defense Department’s own Inspector General, not to mention the restrictions of the Accountability Clause of the Constitution and the Anti-deficiency Act.

Finally, even more than Secretary Cohen’s letter to David Mosso [Reference #1], Lynn’s argument is based on the fallacious assumption that accounting standards exist for the convenience of the bureaucracy and, therefore, they can and should be changed in the interests of greater bureaucratic efficiency, convenience, and morale. Setting aside the obvious question of how less detailed information could possibly produce better and more efficient decisions, the assumption that accounting standards exist to make life easier for bureaucrats in the Pentagon turns the Constitutional concept of accountability and checks and balances on it head.

To make matters worse, the Defense Department’s Inspector General issued yet another critical audit report in June. In Reference #3 (attached below), for example, Ms. Grossman reports the Inspector General reported that the Pentagon had made little improvement in accounting for its expenditures and assets, because DoD did not use transaction-driven general ledgers for its accounting systems and could not produce audit trails linking account balances to supporting documentation or attach accurate values to plant, property, and equipment. The Air Force, for example, could not verify assets valued at $293 billion and the Defense Finance and Accounting Service had to made $350 billion and $459 billion worth of unreconciled adjustments of to the Army and Navy general ledger accounts to match certified status data.

The Inspector General laid part of the blame for this appalling state of affairs squarely on Pentagon’s CFO, whose organization apparently did not have enough “morale” to provide the military services with their FY 1997 DoD “form and content guidance” to guide the preparation of their annual financial statements until January 14, 1998, or AFTER the services had already prepared the second version on their FY 1997 statements. The Inspector General concluded, “The DoD control environment was not conducive to the preparation of auditable financial statements because the CFO did not provide timely guidance to the DoD components.”


In Reference #4 (attached below), Ms. Grossman reports that the Financial Accounting Standards Advisory Board (FASAB) caved into the Pentagon’s request and reversed the accounting standard, despite the clear requirement to conform with the Accountability Clause of the Constitution and the retrospective standard for Budgetary Integrity established by the Office of Management and Budget in 1993. The FASAB, in a transparent attempt to blunt criticism, said it would sponsor a year long study of accounting alternatives.

Studying a problem is the standard Washington distraction operation: a study creates the impression of action while permitting ‘business-as-usual’ to continue unabated. Even in the unlikely event where the FASAB study makes a persuasive case for an alternative standard, a knowledgeable official told Ms. Grossman it will take at least another year to take it through the government review process. This is tantamount to a three-to-four year delay, which in the sound bite politics of contemporary Washington is forever, because there is a Presidential election in two years, and it will take a new President at least one and probably two years to build the support needed to tackle the accountability tar baby, assuming he or she wants to.

By their own words and deeds, senior officials in the Pentagon have shown us that they view accountability requirements in terms of bureaucratic convenience, not the Constitutional standards they profess and are expected to uphold.

Moreover, the pusillanimous ruling by the FASAB, a panel established by the Secretary of the Treasury, the Office of Management (OMB) and Budget and the Comptroller General (who is part of the Legislative Branch of Government), directly negates the objective of Budgetary Integrity established by OMB in response to the requirements of the Chief Financial Officers Act, and more importantly, the requirements of the Accountability Clause of the Constitution.

My guess is that Mr. Madison would call the proposals of the Pentagon’s leadership and ruling of the FASAB prologues to a farce or tragedy. Thomas Paine, on the other hand, would probably be angry and call these proposals a form of tyranny, because, the FASAB and the Pentagon have acted as if they could arbitrarily change a check on power of Congress that can NOT be changed or delegated without amending the Constitution.

On the other hand, students of maneuver warfare theory will see the practical value of a corrupt bookkeeping system: it is a great tool for shaping the battlefield prior to a phony debate over the need to increase the defense budget.

Welcome to the 21st Century, where the Pentagon has moved beyond information revolution and replaced the anachronistic ideas of Madison, the quaint passions of Paine, and the careful intellect of Professor Corwin with the situational ethics of the post-information era.

Chuck Spinney

[Disclaimer: In accordance with 17 U.S.C. 107, the following material is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only.]

Reference #1

WASHINGTON. DC 20301-10000
May 15, 1998

Mr. David Mosso
Chairman Federal Accounting Standards Advisory Board
441 G Street, NW, Suite 3B18
Washington, DC 20548

Dear Mr. Chairman:

This letter is in response to the Exposure Draft, “Amendments, Accounting for Property, Plant and Equipment,” dated February 1998. The Department of Defense concurs with most of the Exposure Draft, and I commend the efforts and progress made by the board in developing government-wide standards for federal accounting.

Question 2 of the Exposure Draft asks whether reporting the quantities and cost trends of National Defense Property, Plant and Equipment am appropriate and useful vice reporting the historical acquisition costs of National Defense property, Plant and Equipment I have a very strong opinion on this issue. As the senior executive and decision maker within the Department of Defense, what is important to me are the quantities, and the condition, of National Defense Property, Plant and Equipment assets to deter potential aggression, and should deterrence fail, to combat hostile enemy threats I am also very interested in, and concerned about, how much is being spent (cost trends) to procure needed National Defense Property, Plant and Equipment assets to accomplish the Department’s mission. As you are probably aware, the quantity and the condition of National Defense Property, Plant and Equipment assets affect the readiness of U.S. Armed Forces. This is vital information to me and most likely very useful to other federal decision makers and the public.

What is of far less importance to me am the historical acquisition costs of National Defense Property, Plant, and Equipment assets previously acquired. Furthermore, I do not understand how historical cost information could be useful in making decisions about Department of Defense matters. Such historical cost information represents the costs of assets procured over many years some as long ago as the 1950s or earlier combined with the cost of assets procured recently. As the complexity of weapons systems has changed substantially over this period, so too have the costs of weapons systems increased. (For example the cost of one B-2 aircraft could exceed the total costs of all B-52 aircraft still in service in the Department.) The reporting of the aggregate sum of such very disparate amounts appears to serve no useful purpose.

In many instances, especially for many of the Department’s older weapon systems, the Department no longer has documentation of historical cost information of a nature that would satisfy audit requirements. Additionally, implementing new systems fore capturing historical cost information for future weapons systems and related equipment would be extremely expensive. The Department of Defense should not be asked to redirect valuable resources from needed readiness and modernization programs to develop the means to report and validate information that is of questionable benefit. Therefore, I am opposed to a requirement to report the historical costs of National Defense Property, Plant and Equipment.

Question 5 of the Exposure Draft asks respondents to comment on the proper accounting treatment for ammunition and munitions. As stated in the Statement of Federal Financial Accounting Standards No. 8, “Supplementary Stewardship Reporting,” stewardship assets are investments by the Federal Government for the benefit of the Nation and are intended to provide long-term benefits to the public, The very large investment chat the Department of Defense has made in the various types of ammunition and munitions, which are essential to the operation of the Department’s weapons systems, serves a long-term benefit to the Nation by providing a deterrence to international hostilities and aggression.

The alternative to treating ammunition and munitions as plant, property and equipment appears to be to treat ammunition and munitions as operating materials and supplies. The Department of Defense believes that ammunition and munitions do not meet the definition of operating materials and supplies, since ammunition and munitions are: (a) acquired with investment fund,, (b) managed through centralized databases to provide world-wide visibility of assets, (c) subjected to special security controls and safeguards against loss, (d) stored, generally, by the Single Manager for Conventional Ammunition, at designated ammunition depots until such time Its issued, (e) issued without cost to the recipient, (f) not held for sale (unlike non inventory, which is held for sale) and (g) Subject to environmental and deferred maintenance considerations. Additionally, in some instances, ammunition and munitions are weapons systems themselves, or, in other instances, used in conjunction with weapons systems. These characteristics more nearly relate to property, plant and equipment.

Clearly, in the opinion of the Department of Defense, ammunition and munitions meet definition of property, plant and equipment (useful life of 2 years or more. acquired for use by the entity and not held for sale). Since ammunition and munitions meet the definition of property, plant and equipment, and because they are integral to the operation of weapons systems; ammunition and munitions should be categorized as National Defense property, Plant and Equipment and recognized as stewardship assets.

Typically, the Board’s accounting standards are applicable to all or most federal agencies. However, the majority of the proposed amendments in this Exposure Draft affect only the Department of Defense. Therefore. I ask that the Board, when deliberating on comments from the respondents, place more weight on the comments from the Department of Defense. I emphasize this because other respondents may not be as concerned about, and certainly less likely to be aware of, the cost of implementing alternatives to the proposed Exposure Draft amendments. Additionally, they may not fully understand the limited benefits that such alternatives may offer.


/s/ Bill Cohen

Reference #2

Inside the Pentagon.
Vol 14, No. 27, July 9,1998

Comptroller Appeals to Board to Ease Up on DoD … Pentagon Official Says DoD Cannot Meet Cost Reporting Requirement

Elaine M. Grossman

Reprinted with permission of Inside Washington Publishers.  This article may not be reproduced or redistributed, in part or in whole, without express permission of the publisher.

In a public hearing late last month, Pentagon Comptroller William Lynn acknowledged the Defense Department is simply unable to satisfy a government cost accounting regulation under which the Pentagon is expected to assemble an auditable accounting trail for all its major assets, starting with its huge arsenal of weapon systems. But while public interest groups are calling on a federal accounting board to hold DOD’s feet to the fire in providing full weapons cost histories, the Pentagon has trotted out its chief financial officer to get the reporting requirement relaxed.

The standards currently in place call on the Pentagon, beginning Sept. 30, 1998, to report annually to Congress the dollar value of its investments in currently maintained major assets since they were first procured. But in response to Pentagon complaints that the rule is too stringent, the Federal Accounting Standards Advisory Board has drafted an amendment to the regulation that would allow the Defense Department instead to report national defense “plant, property and equipment” or PP&E in only aggregate numbers by major system categories—like “aircraft’—for the current year and the preceding four years (Inside the Pentagon, June 18, pi).

In an “exposure draft” circulated earlier this year, FASAB—the federal accounting oversight panel—said it “believes that information on quantities plus cost trends … would be more useful to users of financial statements than historic cost of PP&E on hand.”

Lynn agreed. “I need your help,” the defense comptroller told the FASAB at its June 26 hearing. “I need for you to help us adapt the standards that you’re developing to make them relevant for the line managers in the Pentagon, the line managers in the Department of Defense,” he said. “With the secretary’s personal commitment, I can get their attention. But to get their dedication, I need to show that this is going to help them do their jobs. It needs to be relevant to them.”

But representatives of government watchdog groups also testifying at the June 26 FASAB hearing said the relevant data for maintaining proper oversight of taxpayer dollars are the detailed, auditable cost histories. Watering down the reporting requirement would make it more difficult to track Pentagon expenditures, even as the jobs of DOD program managers and accountants might be made easier, these advocates said.

The proposed aggregate figures do little for Ralph DeGennaro, the executive director of the Washington, DC based Taxpayers for Common Sense. “I’m more interested in the individual weapon system costs. I want to know what they told me the B-2 [bomber] was going to cost, and what it costs now,” DeGennaro said, “because I want to hold accountable the contractor that built it, I want to hold accountable the officers and the civilian officials of the Department of Defense that promoted the weapon and were responsible for overseeing its procurement, I want to hold accountable the members of Congress and the committees in Congress that authorized and appropriated the money to buy it, and I want to have the information the next time the same people come along and want us to buy something.”

At least one panel member appeared to agree. Donald Chapin, a former General Accounting Office official who joins eight other members on the FASAB, cited earlier comments by Lynn and former Pentagon officials acknowledging that members of Congress are frustrated by a lack of credibility in DOD cost figures.

The amendment under consideration by the FASAB “provides for the status quo … [and] the status quo is not adequate,” said Lisa Jacobson, GAO’s director of defense audits. Noting that pending a forthcoming GAO report on the matter she was voicing her own views at the June 26 hearing, Jacobson told the FASAB, “There is not a current connection between the accounting systems and the logistical systems and the acquisition systems. And one of the objectives of financial reporting that you guys laid out was to provide for that systems accountability as well.”

She noted the FASAB had laid out a standard that a financial statement not only must provide meaning in and of itself, but also must be judged worthwhile when faced with the questions, “How does it support the systems objective? How does it support budget integrity?”

“Those were your other financial reporting objectives,” Jacobson said. “And I think that the presentation in the amendment is losing that concept. In one of the discussions that you had on this amendment, the DOD representative did indicate that by taking these assets off the balance sheet, you clearly said that they don’t have to be part of the financial reporting system. I think the amendment clearly feeds that thought, which I believe is totally inappropriate, [and I think] that there needs to be the financial controls over these assets, that the status quo is not adequate.”

Surrounded by a number of witnesses who asserted there would indeed be value in the stricter reporting standard, Lynn acknowledged the Defense Department is not capable of providing this level of detail on costs.

The comptroller insisted the ‘primary value” of these weapon systems is not their cost, but instead their use in defending the nation. But even if auditable historic weapons costs are of interest, “it’s not practical,” Lynn said. “The equipment that we’ve acquired, we’ve acquired over the past 40 or 50 years, and the records that you would need to try and audit for each and every B-52, humvee and whatever have simply not been retained. This hasn’t been a requirement in the past end the auditable records are simply not there. We’re well beyond the record retention time frame that the Department uses.”

Thus, Lynn said, “we would endorse the proposal that you put forward in your [FASAB] draft.”

In the meantime, Lynn said, the Defense Department is working hard to improve its accounting standards. Forcing DOD to move more quickly would actually undermine those efforts by destroying morale, he said. “Inadequate databases—the inability in particular to produce auditable financial statements - is a particular problem that we think we need to be able to address. We are trying to tackle it. This is not theoretical for us.

“We think we need to be able to do this for three reasons,” Lynn continued. “First and foremost, in our view, would be to demonstrate to ourselves that we have in place sufficient internal management controls to oversee the large amount of dollars that we’re given authority over. Essentially we need the right kind of controls to run what is the world’s largest enterprise.

“Second, we need to be able to do the same to be able to show to the American taxpayer, the Congress, the American public, that we are indeed proper financial stewards, that we indeed are taking care of the large amount of resources that we have been given temporary custody of.

“And finally third, it is the law. Congress in a series of acts in the early 1990s has made the necessity of auditable financial statements the law and we intend to comply with the law,” Lynn said.

He noted, “Frankly, we had not turned to this as a priority until recently. I think there’s a good reason for that. Prior to just recently, we did not have the foundations to do it. And we are still putting the foundations in place, but I think we’re far enough along now that we can now turn to this important requirement.”

In contrast, DeGennaro insisted that it would be a mistake to roll back an existing standard that calls for accounting similar to that demanded in private enterprise. Holding DOD to a high standard is the best way to turn its ailing accounting system around, DeGennaro suggested.

“The trend is toward providing more information to the taxpayers in this information era,” DeGennaro told the FASAB. “I think you ought to have for the top 75, top 200, most expensive weapon programs, we ought to have cost data routinely reported Anything that’s currently in procurement, anything where we’re making judgments now to buy something new compared with something old, we ought to have some cost figures for the old weapon.”

Reference #3

Inside the Pentagon
August 6, 1998, pp. 3-4


Elaine M. Grossman

Reprinted with permission of Inside Washington Publishers.  This article may not be reproduced or redistributed, in part or in whole, without express permission of the publisher.

In a little-noticed audit report issued in June, the Defense Department’s inspector general found the Pentagon has made little improvement over time in accounting for the $270 billion in fiscal year 1997 annual income and $1.3 trillion in assets DOD manages, and laid much of the blame squarely at the feet of the Pentagon comptroller.

“Until control procedures are strengthened, DOD will continue to produce unreliable, unverifiable, and inaccurate financial statements,” states the IG’s June 22 report. Responsibility for financial control is in the hands of the Pentagon’s comptroller, who also serves as the Defense Department’s chief financial of officer.

Although the comptroller, William Lynn, and his predecessor, now-Deputy Defense Secretary John Hamre, have insisted repeatedly they are attempting to build new foundations for the badly broken accounting system they encountered when President Clinton first took of rice, the IG report suggests these officials have failed to take some relatively easy steps that could improve the books in the near term.

“Noncompliance with fundamental requirements affected the DOD Consolidated Financial Statements for FY 1997,” states the IG in its report. “Although many noncompliance issues related to deficient financial systems are not expected to be corrected for years, others and must be resolved earlier.” Such improvements, says the IG, “would lead to better financial statements and audit opinions.”

For example, DOD’s deputy chief financial of ricer on June 6, 1997 signed a memorandum of understanding with the IG and the director of the Defense Finance and Accounting Service, saying “the CFO was responsible for ensuring that DOD issued guidance on the form and content of the financial statements” from the military services and other DOD components, according to the IG’s report. But, the IG notes, “the CFO did not issue the FY 1997 DOD form and content guidance until Jan. 14, 1998, after the DOD components had prepared [the second version] of the FY-1997 financial statements.”

When the memo of understanding was signed in June 1997, Hamre served as comptroller. A month later, when he was promoted to his current post as DOD’s No. 2 official, Hamre’s principal deputy, Alice Maroni, stepped in as acting comptroller. Lynn took office on Nov. 19, 1997, about a month before the components issued their financial statements to DFAS.

The lack of guidance the components had in preparing service financial statements led to inconsistencies in these statements, making them unauditable, the IG states. “The DOD control environment was not conducive to the preparation of auditable financial statements because the CFO did not provide timely guidance to the DOD components,” the IG writes. “In addition, the CFO did not provide timely and auditable financial statements to the IG,” according to the report.

One example of a problem caused by the lack of guidance was the Army’s misclassification of $4.6 billion in overseas real property assets, the IG states.

The 1990 Chief Financial Officers Act requires the Defense Department to prepare annual audited financial statements. And under the 1994 Federal Financial Management Act, DOD must provide consolidated financial statements comprising those of the services and other DOD components, beginning in FY-97, to serve as part of a government-wide financial statement issued by the secretary of treasury.

The IG found the Defense Department “did not comply with several laws and regulations” relating to the 1997 financial statements. “Material instances of noncompliance included inadequate accounting systems, improper accounting, and inadequate disclosure in the financial statements … Because of the noncompliance, DOD financial statements are of limited use to DOD and other government managers.”

Lynn recently acknowledged DOD is unable to provide auditable reports on the dollar value of its major assets, and thus cannot satisfy a government cost accounting regulation in effect as of this year (Inside the Pentagon, July 9, pi ).

As comptroller, Lynn is responsible for over half of the federal workforce and nearly half of the federal discretionary budget. “In employment and discretionary spending authority,” the IG notes in its report, “DOD is the largest U.S. government agency. In FY 1997 … DOD employed 51 percent of the 4.26 million military and civilian employees in the federal workforce and was responsible for 48 percent of the estimated $536 billion in discretionary federal budget authority.”

Franklin Spinney, a Pentagon analyst who for over a decade has called on his DOD bosses to clean up both past accounting and future planning for weapon systems, said this week the comptroller’s inability to produce sound financial statements is, in effect, an abdication of his constitutional obligation to properly account for the funds DOD spends.

“Every employee of the federal government, whether appointed or elected, takes an oath to support the Constitution, “Spinney told Inside the Pentagon on Aug. 4. “And the Constitution describes the minimum standard of behavior we profess and are expected to uphold. The foundation of the Constitution—the whole system of checks and balances is based on the principle of accountability.”

The Defense Department, Spinney said, has “constructed a system where we aren’t accountable to anybody including ourselves, which is in effect a subversion of the Constitution.”

Asked by government watchdog groups to better document DOD expenditures, U.S. defense of officials have at times suggested it would be a poor diversion of resources to force immediate compliance with a more stringent accounting system (ITP, June 18, pi). But Spinney says “efficiency has nothing to do with this. The Constitution calls for accountability.”

Beyond insufficient controls over DOD accounting, the IG says basic weaknesses in accounting systems lead to immense problems. The IG states that “the primary deficiencies were that most DOD accounting systems:

“did not use a transaction-driven general ledger to account for and manage resources;

“did not have audit trails to trace general ledger account balances back to supporting documentation or specific accounting transactions back to the general ledger;

“did not have a process for accurately identifying and reporting transactions that should be eliminated during the financial consolidation process; and

“did not accurately value Inventory and Property, Plant, and Equipment.”

“A transaction-driven system controls accounting data from the point of entry to presentation on the financial statements,” the IG explains, “and ensures that all affected accounts are accurately posted …  Lacking these controls, DOD relied on a variety of sources to obtain financial information and then crosswalked that information to a general ledger format to prepare financial statements.”

DOD’s failure to track expenses on the transaction level—even though defense accountants are supposed to do so based on a U.S. Government Standard General Ledger—leads to billions of dollars in accounting errors, the IG reports.

“Consequently, $65.4 billion of expenses reported by the Army could not be audited because Army accounting systems did not produce subsidiary ledgers showing the transactions that made up the summary accounts reported in the Army financial statements,” states the IG. “The Navy could not accurately report the value of assets and liabilities, including the status of funds appropriated, because it lacks a transaction-driven general ledger accounting system … The Air Force’s lack of a transaction-driven general ledger was one reason that the acquisition cost of Air Force assets, valued at $293 billion, could not be verified.”

In addition to a poor control environment and lax accounting practices, the Defense Department has in place insufficient control procedures, the IG finds. “Control procedures throughout DOD were not adequate to properly report balances on the financial statements,” according to the report, entitled “Internal Controls and Compliance with Laws and Regulations for the DOD Consolidated Financial Statements for FY 1997.”

“DOD allowed unsupported adjusting entries to be made; Property, Plant and Equipment to be inaccurately reported; Pensions and Other Actuarial Liabilities to be inadequately supported; Other Liabilities to be understated and unreliable; and the Notes to the Principal Statements to be inconsistently reported,” the IG states.

In one instance of improper changes made to reports, an office of the Defense Finance and Accounting Service in Indianapolis “made adjustments of $350 billion to change Army general ledger accounts to match certified status data,” according to the IG. “However, the DFAS Indianapolis Center did not attempt to reconcile the differences between the general ledger and the certified status reports.” In another instance, “the DFAS Cleveland Center made adjustments to Navy general ledger accounts totaling $459 billion.”—Elaine M. Grossman

Reference 4

Inside the Pentagon
Vol 14, No. 32, August 13, 1998 (pg.1)


Elaine M. Grossman

Reprinted with permission of Inside Washington Publishers.  This article may not be reproduced or redistributed, in part or in whole, without express permission of the publisher.

A federal accounting standards board decided last week to grant the Defense Department’s request that a financial reporting rule be relaxed, despite objections raised by government watchdog groups.

In deference to the outcry for greater Pentagon accountability the panel heard at a June 26 public forum, the Federal Accounting Standards Advisory Board will launch a year-long study on alternatives that might better meet the needs of those in and outside the government who attempt to track Pentagon expenditures (Inside the Pentagon, July 16, p3). Closely monitoring DOD funds has been nearly impossible for years, as the Pentagon’s books remain inauditable for well into the next decade and likely beyond (ITP, March 6, 1997, p3).

But in a move that surprised many observers, the FASAB on Aug. 7 decided to adopt the “exposure draft” of a rule change that will allow the Defense Department to report its expenditures on major assets in aggregate categories numbering thousands of systems, like “combat aircraft” or “ships,” for the current year and preceding four years. Only the quantities of items will be reported on a system-by-system basis under the DOD-supported amendment.

The new rule reverses a standard currently in place—which the Pentagon would have been required to implement beginning this year—that would have demanded an auditable paper trail for all major assets, in some cases going back decades.

While some critics acknowledged the existing standard did appear to exceed what is needed for accountability, they called for an amendment that would require the Defense Department to report not only quantities but also recent expenditures on a system-by-system basis. Public interest group representatives scoffed at the notion there was utility in reports on aggregate costs for ships or planes.

Other critics went further, saying it would not even be enough to force the Pentagon to report expenditures on major weapon systems. The issue “is not just not having the information,” said one such government official. “It’s [that the Pentagon is] losing control of the whole process.”

When DOD Comptroller William Lynn appeared before the FASAB at its June 26 hearing, he said such detailed cost reporting would be of little value. But faced with the testimony of watchdog groups asserting otherwise, Lynn acknowledged that even if cost reporting on a weapon system basis was required, the Defense Department is not capable of meeting that standard. Lynn insisted the Pentagon is “still putting the foundations in place” to produce auditable financial statements as required by law (ITP, July 9, p1).

“I think in terms of what would be more useful and interesting to the public, quantity would be it,” said Nelson Toye, the Pentagon representative on the FASAB board, referring to the figures for weapon systems the new amendment would require. “Quantity is probably at this point in time easier to get—and I’m not going to say that it is easy—but it is more meaningful in my view” than the detailed cost data.

Toye objected to reporting expenditures on each of the Defense Department’s specific types of weapon systems in part because the effort to do so would be monumental and the product would be of questionable value. He said his staff has told him there are “131,000 different weapon systems—not 131,000 pieces of equipment—but 131,000 different weapon systems. We clearly … could not list all 131,000 of them.” Toye noted the defense secretary already does report quantities for major categories of assets in his annual report to Congress.

Even though the FASAB has changed the rule in a way that would make Defense Department compliance more feasible, DOD still remains in violation of a wide array of other laws and regulations requiring auditable financial statements on its $1.3 trillion in assets. The Pentagon’s own inspector general recently found DOD continues “to produce unreliable, unverifiable, and inaccurate financial statements” after many years of similar noncompliance with laws governing federal accounting (ITP, Aug. 6, p3).

Thus it is unclear whether the Pentagon will be able to fully comply even with the standard as amended by the FASAB. The cost assessments by weapon system category must still be auditable, according to government officials familiar with the FASAB process, although sources were uncertain how an aggregate figure would be auditable if expenditures on individual weapon systems could not be obtained.

The standard now being replaced would have allowed the Pentagon to use the latest acquisition cost for a major item and apply it to all similar units, said this official. This approach may have been useful for ascertaining value but would have been of limited utility in learning the investment DOD has made in its weapon systems. For example, if Pentagon leaders are correct about there being a “learning curve” that makes later procurement of a weapon system less expensive than the first few, this appraisal technique may tend to underestimate the amount paid for earlier models.

The new standard will require the Pentagon to report what it actually spent on acquiring systems by major categories, for the current fiscal year and four prior years. A greater level of detail will be found only in tabulating quantities of systems.

“If I were running the Defense Department,” said Ralph DeGennaro, executive director of Taxpayers for Common Sense, “I would have red lights and sirens going off because I don’t know where the money is going.”

In an Aug. 10 interview, DeGennaro said that at some point, the Pentagon would be called upon to meet stricter reporting standards on how its $270 billion in annual income is being spent. “Clearly the FASAB won’t lead that change. The FASAB will play on the margins,” he said. DeGennaro did note, though, his view that “there are some good people in FASAB trying to make incremental reforms.”

In coming weeks, the FASAB will finalize its new amendment and forward it for review to the principal members of the FASAB, namely the Treasury Department, the White House’s Office of Management and Budget, and the General Accounting Office, sources said. Whether the relaxed standards embodied in the exposure draft can gain the approval of GAO, the investigative arm of Congress, is uncertain. GAO’s Lisa Jacobson in June told the FASAB her personal recommendation would be to strike down the exposure draft.

Jacobson, GAO’s director of defense audits, said the new amendment essentially “provides for the status quo,” but “there needs to be the financial controls over these assets … “ She added “the status quo is not adequate.”

If the three agencies agree on the changes, they will go to Capitol Hill. The new rule will enter into effect if there are no congressional objections.

During the Aug. 6 debate over whether to move forward with the DOD-supported exposure draft, a number of panel members expressed a desire to see the Pentagon make substantial improvement in its ability to track and report its current and future expenditures—even if historical data has been lost. “I did feel—after the hearing especially—a sense that if we had no requirement or expectation for [tracking this] information, it looked like we were heading towards” a future in which “there’s no record-keeping requirement to keep track of any sort of values,” said Gerald Murphy, a member of the nine-person FASAB, at last week’s meeting, which was open to the public.

“Based on some of the testimony and other comments,” Murphy continued, “I felt that that was going to be a very hard position for FASAB to take. And so I was interested in using something that recognized the current situation—that recognized the tremendous cost which would be involved in having to go back and trying to value lots of old assets—but was looking for a way to provide something for the future, where we could over time get some good value data … What I sought was to] in essence have some sort of transitional period whereby for all new acquisitions, you would be capturing value data for the new acquisitions and over some period of time would have a fuller inventory of value data.”

Requiring DOD to collect and report this data, Murphy said, “would simply be a step in a direction which I had thought might be appropriate.”

Ultimately the board reached consensus only on studying the possibility of calling on the Defense Department for more detailed reporting of its expenditures on assets. The decision came after several FASAB members expressed confusion over what kind of reporting the representatives of accounting groups and government watchdog organizations would find most useful.

A government official familiar with the FASAB process said it will take about a year to complete the study, then at least another year for the board to develop a new amendment, release it for public comment, and take it through the government review process.

One panel member, Donald Chapin, wanted to see the FASAB adopt the exposure draft along with a “promise” that DOD would be required at a future date to provide detailed cost information, even if this promise were not embodied in the new official accounting standard. Fellow FASAB member James Reid appeared to agree, saying the staff should study how prospective costs on major systems might be reported.

“I don’t want to drop cost as a consideration,” he said. “I don’t want to lose the cost in the future on major [systems]—or some reference to cost—because if they don’t do it, 10 years from now somebody else is going to have the same discussion. And if they start doing it, there’ll be something 10 years from now.”

But, Reid added, “I could live without cost on the [exposure draft] for the four years [of historical reporting] for a year or two till we come up with a better idea.”

Board member Norwood Jackson said, though, “I think the study should not have any … predetermined conclusions.” He said that pending the results of the study in a year or so, it is hard to say just what kind of reporting would provide the most utility to accounting data users within and outside the government.

Jackson said he, for one, would have a hard time defending the current standard’s requirement for historical cost reporting. He said he had earlier voted for it “blindly,” but now realizes he “could not defend it on any conceptual grounds.” And he noted he had heard no testimony that would help him understand what utility the historical cost reporting might have. “No one has told me yet today what they’re going to do with it … But the study may tell us what to do with it,” Jackson said.

One government official, speaking on condition of anonymity, said the FASAB’s conclusion was that the exposure draft is “responsive to most people’s needs.”