Prepared Floor Statement of U.S. Senator Chuck Grassley of Iowa

"How the Audit Process Was Compromised"

Wednesday, December 11, 2013

Mr. President, I come to the floor today to talk about two important audits that were bungled by the Department of Defense (DoD) Inspector General's (IG) Office.

There is something very important that I need to say right up-front.  A brand new Inspector General, Mr. Jon Rymer, is now in place.  The events I am about to describe happened several years ago.  None reflect on his leadership.

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 (CPA) firm's 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 agency.  This is DFAS, the Defense Finance and Accounting Service.  The audits were conducted by a CPA firm but supposedly under the watchful eye of the Inspector General or IG.

The story of the two bungled audits is told in an oversight report, which is now posted on my web site.

While I received the first anonymous email on this matter in April 2012, my audit oversight work actually began more than five years ago.  It was triggered by a steady stream of tips from whistleblowers, complaining about the quality of those audits.  These reports grabbed my attention.

My colleagues may wonder why the Senator from Iowa is down in the weeds on such arcane issues.  The reason is simple.

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, and mismanagement and recommend corrective action.

With mounting pressure for serious belt-tightening under Sequestration, audits have taken on 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.

After evaluating hundreds of audits, I issued three oversight reports in 2010-12.  With a few notable exceptions, I found that the Inspector General's audits were weak, ineffective, and wasteful.  Yet they cost $100 million a year to produce.

Poor leadership is part of the problem.

But there is another driver, and that's the department's broken accounting system.  It allows fraud and waste to go undetected and unchecked.  That's 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 trail.  That is labor intensive and time consuming work.

Although the department continues to spend billions to fix the busted accounting system, it's still not working right.  The department cannot pass the Chief Financial Officers (CFO) Act audit test.  It is unable to accurately report on how the taxpayers' money is spent -- as it is required to do each year by law.  By comparison, every other federal agency has passed the test.

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 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's the head of SIGAR for short.  Well, SIGAR is cranking out aggressive, hard-hitting audits, and I commend SIGAR for that.

The audits I am about to discuss, by contrast, deserve darts - not laurels.

Mr. President, I first came to the floor to speak on this subject on November 14, 2012.  At that point, I had 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 that same ground again today. Instead, I will briefly summarize what I did; how I did it; what I found; why it's 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 was validated with interviews and written inquiries with knowledgeable officials.  Together, these tell the story of what really happened.  And it's 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's Audit Office, then we have a BIG problem.

In a nutshell, this is what I found:

A CPA firm, Urbach, Kahn, & Werlin (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 two-year snapshot for FY 2008-09.

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 2008-09 fiasco, it was cancelled, allowing DFAS to rack up another string of clean opinions through 2012.

Altogether, this work probably cost the taxpayers in excess of 20 million dollars.

The work performed by DFAS in 2008-09 was sub-standard.  The outside audit firm rubberstamped DFAS' flawed practices using defective audit methods.

For its part, the IG was prepared to call foul on the CPA firm for sub-standard work but got side-tracked 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 non-endorsement 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 allege that top management "ordered" them to endorse the 2008 opinion with this caveat.

If known deficiencies were not corrected in the 2009 opinion, a non-endorsement was guaranteed.  Well, when the very same deficiencies popped up again, the auditors prepared a hard-hitting non-endorsement report as promised.  It was signed.  The transmittal letter was ready to go out the door.

The non-endorsement 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 payments to the CPA firm, based on advice of the IG's Legal Counsel.

The next step was to issue the non-endorsement report.  But this is where the IG chickened out.  In a power vacuum, DFAS moved swiftly to block the report with a blatant end-run maneuver to by-pass independent oversight.

DFAS neutered independent oversight by the IG with two bold moves:

-- On the same day the IG's Office notified DFAS in writing that a non-endorsement 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, Mr. President, you heard me right.  The agency being audited literally kicked the IG - 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 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 IG would have stood up to the offending agency and held its ground and protected and defended it oversight prerogatives.  But not the DoD IG.

Instead, the IG's knees buckled under the 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.

And 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 or taken.

The Inspector General's silence appeared to signal total acquiescence to a series of actions that undermined the integrity of the audit process.

For a Senator who watches the watchdogs, what I see here is a disgrace to the entire IG community.  The IG allowed DFAS to run rough shod over the contract, the IG Act, audit standards, and independent oversight.  And the audit firm probably got paid for 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 CPA firm, the OIG allowed sacred principles to be trampled.  It just kept quiet, turned a blind eye to what was going on, hunkered down, and 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 an Assistant IG who spoke out at the time.

To address this issue, a fragile "waiver" arrangement was crafted.  It was supposed to address the legal issue and protect OIG interests under the DFAS contract.  All the parties involved agreed to abide by this questionable set-up.

But being nothing more than an informal trust, it came unglued under the pressure and controversy generated by the non-endorsement decision.

Even the OIG Legal Counsel voiced grave concerns about the fragile waiver arrangement.  In his opinion, the terms of contract "transferred" the OIG oversight function to DFAS, the very component whose financial data were being subjected to the oversight.  In his words, the contract terms will leave the OIG "open to criticism on the Hill . . . In two years some Senator will yell at us [for doing this]. If I had known about the arrangement," he said, "I would have advised against it."

The Counsel's concerns were well-founded, and like a modern day Nostradamus, his 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 a final nail into the 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.  And here it is in my hand.

Once the Deputy IG had smothered the report, DFAS knew it had the green light to bypass oversight with impunity.

All 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's so bad now the myth is an inside joke.  It's laughable, according to one former accountant.  Here's what he said on the record to McClatchy News on November 22, 2013.  I quote: "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 dollars 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 for putting the Secretary of Defense's audit readiness initiative in jeopardy.  DFAS' apparent inability to accurately report on its own internal "housekeeping" accounts of 1.5 billion dollars 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 two cases.

And if that did, indeed happen, then it probably happened with the knowledge and silent acquiescence 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 and 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.  But senior IG officials must bear primary responsibility for this unacceptable and inexplicable failure of oversight.  They could have stopped it.

To address and resolve these issues, I made four recommendations in a recent letter to Secretary Hagel and IG Rymer:

First, the DoD CFO should "pull" the DFAS financial statements for FY's 2008 and 2009 and remove those audit opinions from official records.

Second, the OIG needs to undertake an independent audit of DFAS' financial statements for FY 2012 and determine whether those statements and the CPA firm's opinion meet prescribed audit standards. The FY 2012 beginning account balances must also be verified. In response to my oversight, the Inspector General has initiated a "Post Audit Review" of DFAS' FY 2012 financial statements. This is a good move. But to ensure that it is done right this time, I asked the U.S. Government Accountability Office (GAO) to watch-dog the Inspector General's work. I want independent verification cause 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, Mr. President, 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.  And I hope Mr. Rymer will take a long, hard look at what happened here 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.  Mr. Rymer, my door is open to you.

I yield the floor.

SPRINGFIELD, IL (12/11/2013)(readMedia)-- Approximately 20 Illinois Army National Guard Soldiers who served in Afghanistan will return to Illinois this week. The homecoming ceremony for the Bilateral Embedded Staff Team (BEST) A11 will be Dec. 12 at 11:45 a.m.at Camp Lincoln, 1301 N. MacArthur Blvd., Springfield.

The BEST A11 Soldiers were mobilized in February and deployed to Afghanistan.

The team served as primary staff officers for Task Force White Eagle, a Polish brigade-sized task force responsible for security and intelligence operations, Afghanistan security force development, and Regional Command-East drawdown operations in Ghazni province. The team supported for more than 3,000 coalition members, contractors, local civilians and Soldiers on the base.

BEST A11 Commander, Col. Chris Lawson of Springfield, said BEST A11 Soldiers/Task Force White Eagle Soldiers and Afghan Security Forces removed more enemy forces from the battlefield than any other area in Afghanistan and the most ever in Ghazni since operations began.

The team defeated a Taliban attack Aug. 28. An Afghan National Army commander indicated this attack was the most resourced and comprehensively planned attack in Eastern and Southern Afghanistan. An active duty Army Soldier was killed in the offensive. Two Soldiers of BEST A11 and two Soldiers from Task Force White Eagle were recognized with awards for their role in defeating the Taliban attack.

The Task Force White Eagle area of responsibility also had the second most direct fire attacks and the task force responded to more than 50 rocket attacks on the base.

Among numerous other accomplishments, the team also assisted with locating 18 tons of hazardous material explosives, the largest in Ghazni history.

All members of the team have been awarded combat action badges for direct enemy contact. Additional decorations included: 12 Bronze Stars Medals, one Bronze Star with V device for valor, one Purple Heart, four Army Commendation Medals, and one Army Commendation Medal with V device for valor. All members of the team were also awarded the Distinctive Unit Insignia of the 25th Air Cavalry Brigade, the first U.S. personnel to be awarded the insignia as members of the 25th.

For more information call the Public Affairs Office at 217-761-3569.

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Tale Illustrates Very Real National Security Threat,
Veteran Says

The worst attacks against the United States have occurred when most people didn't see them coming, but there were some observers who had serious suspicions before such events, says Marshall Chamberlain, a disabled Marine Corp officer.

"After the planes hit on Sept. 11, 2001, then-CIA director George Tenet was reported to have said, 'This has bin Laden all over it,' and later, 'I wonder if it has anything to do with this guy taking pilot training,' referring facetiously to Zacarias Moussaoui and his co-conspirators," says Chamberlain, a veteran who enjoys access to military bases and their facilities worldwide - and who has been profoundly appalled at the lack of security precautions protecting our military bases.

"I fear we may be overlooking a major threat yet again. Terrorist acts can come from any direction - international as well as domestic, and we must be vigilant in all conceivable ways."

Chamberlain - who has also experienced life as a businessman, world traveler, boat dweller, writer and all-around adventurer - recently detailed in short-story format exactly how terrorist might strike a military base on U.S. soil. His narrative, The Gruesome Foursome, a Terrorist Scenario is a nearly hour-by-hour description spanning three days.

"With my disabled-veteran ID card, I can gain access to 99 percent of the more than 1,000 military bases dotting the globe," he says. "According to the Southern Poverty Law Center, '...the number of anti-government groups in the U.S. has increased by some 800 percent since President Barack Obama took office ... and at last count there were 1007 hate groups.' "

Chamberlain adds, "Notwithstanding potential threats from identified terrorist groups outside our borders, these groups have the motive and the means to carry out major attacks."

His story centers on a plausible entity, the True Freedom Coalition, which has been classified as a "patriot group" by the Department of Homeland Security. A detailed, documentary-style series of events unfolds, illustrating what Chamberlain believes to be one of our nation's biggest national-security vulnerabilities.

"The Gruesome Foursome, a Terrorist Scenario" is available at http://www.marshallchamberlain.com/aterroristscenario.html.

About Marshall Chamberlain: Marshall Chamberlain has a master's degree in Resource Development from Michigan State University and a graduate degree in International Management from the Thunderbird School near Phoenix, Ariz. He was an officer in the U.S. Marine Corps and spent many years in investment banking, venture capital and even a stint as a professional waiter. He is obsessed with preparedness, survival and independence. This combination of traits and an unconditional openness to life have led him to all manner of adventure and authoring his first adventure-thriller, The Mountain Place of Knowledge, due for release on December 15, 2013 (www.marshallchamberlain.com).

with U.S. Senator Chuck Grassley

Q:        What's held up the Defense Authorization bill?

A:       Action stalled in November on the $625 billion defense bill because the Democratic leader refused to agree on allowing additional amendments, beyond those he supports, to be considered during floor debate.  This time the legislative logjam affects national security and U.S. troops.  In addition to military funding that would be authorized, the bill gives lawmakers an opportunity to legislate policy reforms.  Throughout this year I have laid bipartisan groundwork to advance measures designed to strengthen morale among our men and women in uniform.  A recent Pentagon study surveyed 100,000 active-duty service members.  It found 26,000 members experienced offenses ranging from sexual harassment to sexual assault.  Fewer than 3,400 reported the incidents.  These numbers reflect a failure of leadership among the top brass to address an issue that has raised questions about the culture of the U.S. military since the 1991 Tailhook scandal two decades ago.  The survey suggests the chain of command is unwilling or unable to address this sensitive issue when more than one-quarter of respondents experienced sexual misconduct, but less than four percent stepped forward to report it.  Policymakers can't afford to allow a culture of sexual misconduct to continue harming our troops and the military's reputation.  Doing so would add up to bigger problems that damage recruitment, retention and readiness.

Q:        What are the bipartisan reforms you are championing to combat sexual misconduct within the military?

A: The first is called the Military Whistleblower Protection Act. This amendment would beef up laws intended to protect those who report sexual assault, fraud or other misconduct within the military.  Blowing the whistle on wrongdoing should not result in retaliation and victimization of those who come forward to tell the truth.  It would extend reporting rules from 60 days to one year and require corrective relief to victims and discipline measures for those who retaliate. It would include support for victims as well as witnesses.  This reform would empower service men and women to come forward and report wrongdoing without fear of reprisal.  Victims and witnesses should not have to worry that telling the truth would negatively impact their military careers.

The second is called the Military Justice Improvement Act.  The military has a blemished track record to prevent and prosecute sexual assaults among its ranks that calls for long overdue reforms.  This bill would empower victims to come forward by taking the judicial process for sexual assault cases outside the chain of command.  I'm working to help build bipartisan support from lawmakers to get this reform adopted once and for all.  It would send an important message to the troops.  Sexual predators who prey on their victims within the service branches of the military must stand down.  They disgrace the code of honor upheld by the vast majority of men and women in uniform and must be prosecuted to the fullest extent of the law.  This is a law enforcement issue to help ensure impartial justice.

These reforms would show that the people's branch of the federal government stands up for our brave men and women who put themselves in harm's way to protect the blessings of freedom.

Q:        What other amendments are you working to include in the defense bill?

A: As a longtime watchdog for the taxpaying public, I'm supporting two reforms that would protect tax dollars from wasteful spending, including a bipartisan amendment that would limit taxpayer-reimbursed compensation for defense contractor executives.  Under current law, the compensation reimbursement cap for federal government contractors would automatically increase from $763,029 to $952,308, retroactive to January 2012.  When the Pentagon and other federal bureaucracies are being asked to tighten their belts to stay within the budget caps, it just doesn't square that taxpayers will be on the hook for exorbitant salaries for government contractors.  I can tell you that not one taxpayer, in my thousands of meetings in each of Iowa' 99 counties in the last 33 years, has said this is a reasonable use of tax dollars.  The second reform would improve processes to audit the Pentagon's books.  The Department of Defense needs better tools to ensure that money spent is money owed.

I'm also advancing proposals that would make more effective use of the nation's military arsenals, such as the Rock Island Arsenal, to include a requirement that the military consider arsenals when looking at fulfilling equipment needs.

Finally, I'm throwing my support behind two amendments to improve services for veterans. The first is an amendment that would help recruit the best and brightest medical professionals to the Veterans Administration medical system by allowing VA doctors to access an existing program that provides loan forgiveness and scholarships to doctors working in underserved areas.  The second is an amendment that would protect the integrity of veterans programs that help those returning from active military service to transition to the private sector. The amendment would clarify the term "veteran" as one who served in the Armed Forces.  It would end a loophole that allows individuals to game the system by claiming "veteran status" based solely on attendance of a military prep school.  It would not affect those who attend a military service academy or who enlist in the military after attending a military prep school.  The Support Earned Recognition of Veterans Act would clarify the definition of a veteran to exclude claims made by those who only attended a military prep school from obtaining hiring preferences, "veteran-owned small business status" or lifetime compensation benefits.

Let's hope the Senate Majority Leader will have a change of mind when the Senate resumes consideration of the defense authorization bill and allow these and other amendments to be debated.  These are sensible reforms that would protect the taxpaying public, support the troops and help get the U.S. military get off to a good start in the New Year.

Monday, December 9, 2013