In the series finale of The Office, the shortcut accounting strategy of mistake-prone Dunder-Mifflin accountant Kevin Malone is revealed. If the numbers don’t work – just insert a made-up digit (which he called a “Keleven”) to force them to work.
“A mistake plus ‘Keleven’ gets you home by seven.”
While Kevin was fired for his fraudulent accounting practices, it seems he would fit right in at the Defense Finance and Accounting Service (DFAS) – the Pentagon’s accounting support office.
The Government Accountability Office (GAO) released a “bombshell” report this week that found that the DoD made more than 562,568 accounting adjustments in 2018. It is reported that these adjustments totaled $35 trillion in value.
While adjustments can be a routine part of bookkeeping, the amount, type, and lack of support for the DoD adjustments are well outside the bounds of normal accounting practices.
The most egregious example is the use of forced-balance adjustments – the Pentagon’s version of Keleven.
The Treasury serves as the the government’s bank and keeps the records for spending authority for each federal agency. Each agency is supposed to reconcile their cash balances with the Treasury’s records each month – similar to an individual balancing their checkbook.
The DoD components (i.e. Army, Navy, etc) send their summarized financial data to DFAS, who then consolidates that information to obtain department-wide financial information which is used to check the numbers against the Treasury.
If the numbers that the DFAS collects from the components does not match the balance at the Treasury, instead of researching and identifying the cause of the differences – the DoD will use a trick out of the Kevin Malone playbook and adjust the numbers to force them to match…without even checking to see why they didn’t match in the first place.
Or as GAO puts it, “we found that DFAS systematically recorded forced-balance adjustments to replace information that DOD components submitted with the amounts that Treasury reported without reconciling and researching the causes of differences and making any appropriate adjustments.”
This includes one example where DFAS decreased its fund balance with the Treasury “by $14,232,000 without recording a change to a corresponding account.”
In the private sector this practice is called fraud. In the Pentagon it’s a normal business practice.
These are not just some rare occasions of malfeasance. In the fourth quarter of 2018 alone, DFAS made approximately 36,000 forced-balance adjustments.
GAO also found that the DoD uses accounting adjustments on an automated basis without properly ensuring that the numbers work. While these adjustments can be appropriate, DFAS does not utilize a system to ensure that these adjustments are accurate. Instead, they examine a sample selection of adjustments. If no errors are found they determine that all the adjustments in that category are accurate for the entire year.
GAO determined that 96% of the approximately 200,000 adjustments that DFAS made in the fourth quarter of 2018 were made without proper support documentation as required by DoD policy and federal control standards.
The DoD is the only federal agency that cannot pass an audit. The mass use of adjustments is a major indicator of why.
Unfortunately, there is no sign that this will be changing soon. While DoD did acknowledge to GAO that they are implementing a strategy to provide supporting documentation when they make adjustments, the DoD does not have any plans to fix the accounting systems that lead to the ubiquitous use of accounting adjustments in the first place.
Financial information is critical to decision makers and the public so that we can make sure our taxpayers’ dollars are being used wisely. The GAO report indicates that DoD’s numbers are unreliable, which means we don’t have financial information we can trust in order to make well-informed decisions.
Yet, Congress continues to provide massive funding boosts to the agency. Since 2016, defense spending is up $130 billion or 21%.
So much for incentives to get the DoD to clean up their act.
The good news is, Pentagon spokesman Kevin Malone says they think they’ll be able to fix the system by 20-keleven.