exposing the pentagon’s massive accounting fraud

On november 15, ernst & young and the other private firms hired to audit the pentagon announced that they couldn’t complete the job. Congress had ordered an independent audit of the Department of Defense, the government’s largest discretionary-cost center—which receives 54 cents out of every dollar in federal appropriations—because the Pentagon had failed for decades to audit itself. The firms concluded, however, that the DOD’s financial records were so riddled with bookkeeping deficiencies, irregularities, and errors that a reliable audit was simply impossible. Deputy Secretary of Defense Patrick Shanahan tried to put the best face on things, telling reporters, “We failed the audit, but we never expected to pass it.” Shanahan suggested that the department should get credit for the effort, saying, “It was an audit on a $2.7 trillion organization, so the fact that we did the audit is substantial.” The truth, however, is that the DOD was dragged kicking and screaming to this audit by bipartisan frustration in Congress—and had this been a major corporation, the result likely would have been a crashed stock.

As Republican Senator Charles Grassley of iowa, a frequent critic of the Defense Department’s financial practices, said on the Senate floor in September 2017, the long-standing failure to conduct a proper audit reflects “26 years of hard-core foot-dragging” on the part of the DOD, where “internal resistance to auditing the books runs deep.” In 1990, Congress passed the Chief Financial Officers Act, which required all departments and agencies of the federal government to develop auditable accounting systems and to submit to audits annually. Since then, every department and agency has come into compliance—except the Pentagon. Now, an investigation by The Nation has uncovered an explanation for this foot-dragging: For decades, the DOD’s leaders and accountants have been perpetrating a gigantic, unconstitutional accounting fraud, deliberately cooking the books to mislead Congress and drive the department’s budgets ever higher, regardless of military necessity. The Defense Department has literally been making up numbers in its annual financial reports to Congress— representing trillions of dollars’ worth of seemingly nonexistent transactions—knowing that Congress would rely on those misleading reports when deciding how much money to give it the following year, according to government records and interviews with current and former Defense Department officials, congressional sources, and independent experts. “If the DOD were being honest, they would go to Congress and say, ‘All these proposed budgets we’ve been presenting to you are a bunch of garbage,’” says Jack Armstrong, who spent more than five years in the department’s Office of the Inspector General as a supervisory director of audits before retiring in 2011. As a result of the Pentagon’s accounting shenanigans, some $21 trillion—yes, trillion—worth of financial transactions cannot be accounted for.

“We never expected to pass”: Deputy Secretary of Defense Patrick Shanahan.
“We never expected to pass”: Deputy Secretary of Defense Patrick Shanahan.

That number caught the eye of Representative-elect Alexandria Ocasio-Cortez after this article originally appeared on vikilix.com. On December 27, she tweeted to her 1.47 million followers that the missing $21 trillion could have been used to help fund a Medicare for All program. However, that isn’t really the case: As this exposé made clear (and as articles in The Washington Post and Vox soon reiterated), there is no $21 trillion pot of money hidden inside the Pentagon. What there has been instead is a systematic, long-standing, unconstitutional effort by the Department of Defense to feed Congress phony numbers and thereby inflate the DOD’s budget by billions of dollars each year. How many billions? No one knows for sure, though informed estimates put it as high as $100 billion— not enough to fund Medicare for All, but a good down payment on the Green New Deal that Ocasio- Cortez is championing to fight climate change. The Pentagon’s accounting scam works like this: When the DOD submits its annual budget requests to Congress, it sends along the prior year’s financial reports, which contain fabricated numbers. These numbers disguise the fact that the DOD doesn’t always spend all of the money that Congress allocates in a given year. However, instead of returning such unspent funds to the US Treasury, as the law requires, the Pentagon sometimes launders and shifts this money to other parts of its budget.

Veteran Pentagon staffers say that this practice violates Article I, Section 9, of the US Constitution, 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.” Among the laundering tactics that the Pentagon uses is moving “one-year money”—funds that Congress intends to be spent in a single year—into a pool of five-year money, because unspent money in this pool doesn’t have to be returned during the five-year allocation period.

The phony numbers are referred to inside the pentagon as “plugs,” as in plugging a hole, said current and former officials. “Nippering,” a reference to a sharp-nosed tool used to snip off bits of wire or metal, is Pentagon slang for shifting money from its congressionally authorized purpose to a different one. Such nippering can be repeated multiple times “until the funds become virtually untraceable,” says one Pentagon budgeting veteran, who insisted on anonymity in order to keep his job as a defense lobbyist. The plugs can be staggering in size. In fiscal year 2015, for example, Congress appropriated $122 billion for the US Army. Yet Defense Department records for the Army’s 2015 budget included a whopping $6.5 trillion in plugs. Most of these plugs “lack[ed] supporting documentation,” in the bland phrasing of the department’s internal watchdog, the Office of the Inspector General. In other words, there were no ledger entries or receipts to back up how that $6.5 trillion was supposedly spent. Indeed, more than 16,000 records that might reveal either the source or the destination of some of that $6.5 trillion had been “removed,” the inspector general’s office reported. In this way, the Defense Department propels US military spending higher year after year, even when the country isn’t fighting any major wars, says Franklin “Chuck” Spinney, a former Pentagon whistle-blower.

Spinney’s revelations to Congress and the news media about wildly inflated Pentagon spending helped spark public outrage in the 1980s. “They’re making up the numbers and then just asking for more money each year,” Spinney tells The Nation. The funds that the Pentagon has been amassing over the years through its bogus bookkeeping maneuvers “could easily be as much as $100 billion,” he estimates. Indeed, Congress appropriated a record amount— $716 billion—for the Department of Defense in fiscal year 2019. That was up $24 billion from FY 2018’s $692 billion, which itself was up $6 billion from FY 2017’s $686 billion. Such largesse is what drives US military spending higher than that of the next 10 highestspending countries combined, Spinney adds. Meanwhile, the closest thing to a full-scale war the United States is currently fighting is in Afghanistan, where approximately 15,000 US troops are deployed—only 2.8 percent as many as were in Vietnam at the height of that war. The Pentagon’s accounting practices appear to be an intentional effort to avoid accountability, Armstrong says. “A lot of the plugs—not all, but a substantial portion—are used to force general-ledger receipts to agree with the general budget reports, so what’s in the budget reports is basically left up to people’s imagination,” Armstrong says, adding: “Did the DOD improperly spend funds from one appropriated purpose on another? Who can tell?” “The Defense Department remains the only federal agency in America that hasn’t been able to pass an independent audit—28 years after Congress required it to do so,” says Vermont Senator Bernie Sanders. “That is unacceptable.

Deadly deceit: The Pentagon’s accounting fraud may fund secret activities like those of the Special Forces unit that was ambushed in Niger in 2017.
Deadly deceit: The Pentagon’s accounting fraud may fund secret activities like those of the Special Forces unit
that was ambushed in Niger in 2017.

The time is long overdue for us to take a hard look at the enormous amount of waste, at the cost overruns, at the fraud, and at the financial mismanagement that has plagued the Pentagon for decades.” “The United States government collects trillions of dollars each year for the purpose of funding essential functions, including national-security efforts at the Defense Department,” Senator Grassley tells The Nation. “When unelected bureaucrats misuse, mismanage, and misallocate taxpayer funds, it not only takes resources away from vital government functions, it weakens citizens’ faith and trust in their government.” For Spinney, this Pentagon accounting fraud is déjà vu all over again. Back in the 1980s, he and a handful of reform-minded colleagues exposed how the Defense Department used a similar accounting trick to inflate its spending—and to accumulate money for “off-the-books” programs. “DOD routinely overestimated inflation rates for weapons systems,” Spinney recalls. “When actual inflation turned out to be lower than the estimates, they did not return the excess funds to the Treasury, as required by law, but slipped them into something called a ‘merged surplus account.’ “In that way, the Pentagon was able to build up a slush fund of almost $50 billion,” Spinney adds—about $120 billion in today’s money. He believes that similar tricks are being used today to fund secret programs, possibly including US Special Forces activity in Niger. That program appears to have been undertaken without Congress’s knowledge of its true nature, which only came to light when a Special Forces unit was ambushed last year, resulting in the deaths of four US soldiers. “Because of the plugs, there is no auditable way to track Pentagon funding and spending,” explains Asif Khan, who heads the National Security Asset Management unit at the Government Accountability Office, Congress’s watchdog on the federal bureaucracy. “It’s crucial in auditing to have a reliable financial record for prior years in order to audit the books for a current year.” Plugs and other irregularities help explain why the Pentagon has long been at or near the top of the GAO’s list of “high-risk” agencies prone to significant fraud, waste, and abuse, he adds.

The Nation submitted detailed questions and requested interviews with senior officials in the Defense Department before publishing this article. Only public-affairs staffers would speak on the record. In an e-mailed response, Christopher Sherwood of the DOD’s Public Affairs Office denied any accounting impropriety. Any transfer of funds between one budgetary account and another “requires a reprogramming action” by Congress, Sherwood wrote, adding that any such transfers amounting to more than 1 percent of the official DOD budget would require approval by “all four defense congressional committees.”

The scale and methods of the pentagon’s accounting fraud began to be ferreted out last year by a dogged research team led by Mark Skidmore, a professor of economics specializing in state and local government finance at Michigan State University. Skidmore and two graduate students spent months poring over the financial-statement reviews done by the Defense Department’s Office of the Inspector General. Digging deep into the OIG’s report on the Army’s 2015 financial statement, the researchers found some peculiar information. Appendix C, page 27, reported that Congress had appropriated $122 billion for the US Army that year. But the appendix also appears to report that the Army had received a cash deposit from the US Treasury of $794.8 billion. That sum was more than six times what Congress had appropriated—indeed, it was larger than the entire Pentagon budget for the year. The same appendix showed that the Army had accounts payable (accounting lingo for bills due) totaling $929.3 billion. “I wondered how you could possibly get those kinds of adjustments out of a $122 billion budget,” Skidmore says. “I thought, initially, ‘This is absurd!’ And yet all the [Office of the Inspector General] seemed to do was say, ‘Here are these plugs.’ Then, nothing—even though this kind of thing should be a red flag, it just died. So we decided to look further into it.” To make sure that fiscal year 2015 wasn’t an anomaly, Skidmore and his graduate students expanded their inquiry, examining OIG reports stretching back to 1998. Time and again, they found that the amounts of money reported as having flowed into and out of the Defense Department were gargantuan, often dwarfing the amounts Congress had appropriated: $1.7 trillion in 1998, $2.3 trillion in 1999, $1.1 trillion in 2000, $1.1 trillion in 2007, $875 billion in 2010, and $1.7 trillion in 2012, plus amounts in the hundreds of billions in other years. In all, a mind-boggling $21 trillion (at a minimum) in financial transactions between 1998 and 2015 could not be traced, documented, or explained, Skidmore concluded. To convey the vastness of that sum, $21 trillion is roughly five times more than the entire federal government spends in a year. It is greater than the US gross national product, the world’s largest at an estimated $18.8 trillion. And that $21 trillion includes only the plugs that were disclosed in reports by the Office of the Inspector General, which doesn’t review all of the Pentagon’s spending.

To be clear, skidmore, in a report coauthored with Catherine Austin Fitts—a former assistant secretary at the Department of Housing and Urban Development, who complained about similar plugs in HUD’s financial statements—does not contend that all of this $21 trillion was secret or misused funding. And, indeed, plugs are found on both the positive and negative sides of the ledger, potentially netting each other out. But the Pentagon’s bookkeeping is so obtuse, Skidmore and Fitts add, that it’s impossible to trace the actual sources and destinations of the $21 trillion. The disappearance of those thousands of records adds further uncertainty. The upshot is that no one can know for sure how much of that $21 trillion was being spent legitimately. This may even include the Pentagon’s senior leadership. A good example is Donald Rumsfeld, the notoriously micromanaging secretary of defense during the George W. Bush administration. On September 10, 2001, Rumsfeld called a press conference to make a startling announcement.

Referring to the huge military budget that was his official responsibility, he said: “According to some estimates, we cannot track $2.3 trillion in transactions.” This shocking news—that an amount more than five times as large as the Pentagon’s FY 2001 budget (an estimated $313 billion) was lost or even just “untrackable”—became a huge national story. So did Rumsfeld’s comment that America’s adversary wasn’t China or Russia, but “closer to home: It’s the Pentagon bureaucracy.” Equally stunning was Rumsfeld’s warning that tracking down those missing transactions “could be…a matter of life and death.” No Pentagon leader had ever before said such a thing, nor has any done so since. But Rumsfeld’s announcement quickly faded from the headlines when, the following morning, four hijacked airliners plowed full speed into the World Trade Center, the Pentagon, and a field in Pennsylvania. Since that time, there has been no follow-up, no effort made to find that missing money.

Recalling his decades at the Pentagon, Spinney emphasizes that the slippery bookkeeping and the resulting fraudulent financial statements are not a result of lazy DOD accountants. “You can’t look at this as an aberration,” he says. “It’s business as usual. The goal is to paralyze Congress.” That has certainly been the effect. As one congressional staffer with extensive experience investigating Pentagon budgets—speaking on the condition of anonymity because of the need to continue working with DOD officials—told The Nation, “We don’t know how the Pentagon’s money is being spent. We know what the total appropriated funding is for each year, but we don’t know how much of that funding gets spent on the intended programs, what things actually cost, whether payments are going to the proper accounts. If this kind of stuff were happening in the private sector, people would be fired and prosecuted.”

DOD officials have long insisted that their accounting and financial practices are proper. For example, the Office of the Inspector General has attempted to explain away the absurdly huge plugs in the department’s financial statements as being a common, widely accepted accounting practice in the private sector. In 2016, this reporter asked Bridget Serchak—at the time, a press spokesperson for the inspector general’s office—about the Army’s $6.5 trillion in plugs for fiscal year 2015. Serchak replied by e-mail: “Adjustments are made to the Army General Fund financial statement data…for various reasons such as correcting errors, reclassifying amounts and reconciling balances between systems…. For example, there was a net unsupported adjustment of $99.8 billion made to the $0.2 billion balance reported for Accounts Receivable.” There was a grain of truth in Serchak’s explanation, but only a grain. As an expert in government budgeting, Skidmore confirms that it’s accepted practice to insert adjustments into budget reports to make both sides of a ledger agree. Such adjustments can be used in cases where the receipts have been lost—in a fire, for example—or where funds were incorrectly classified as belonging to one division within a company rather than another. “But those kinds of adjustments should be the exception, not the rule, and should amount to only a small percentage of the overall budget,” Skidmore adds. For its part, the inspector general’s office has blamed the fake numbers found in many of the DOD’s financial statements on the Defense Finance and Accounting Service, a huge DOD accounting operation based in Indianapolis. In review after review, the inspector general’s office has charged that the DFAS has been making up “unsupported” figures to plug into the Pentagon’s financial statements, inventing ledger entries to back up those invented numbers, and sometimes even “removing” transaction records that could document such entries. Nevertheless, the inspector general has never advocated punitive steps against DFAS officials—which suggests that higher-ups at the Pentagon tacitly approve of the deceptions.

Guns vs. butter: Dwight D. Eisenhower warned that excessive military spending is “theft from those who hunger.”
Guns vs. butter: Dwight D. Eisenhower warned that excessive
military spending is “theft from those who hunger.”

Skidmore repeatedly requested explanations for these accounting practices, he says, but the Pentagon’s response was stonewalling and concealment. Even the inspector general’s office, whose publicly available reports have criticized these practices for years, refused to answer Skidmore’s questions; instead, it began removing the archived reports from its website. (Skidmore and his graduate students, anticipating this possibility, had already downloaded the documents, which were eventually restored to public access under different URLs.) The Nation’s inquiries have met with similar resistance. Case in point: A recent report by the Office of the Inspector General on a US Navy financial statement for fiscal year 2017. Although OIG audit reports in previous years were always made available online without restriction or censorship, this particular report suddenly appeared in heavily redacted form—not just the numbers it contained, but even its title was obscured. Only bureaucratic sloppiness enabled an outside reader to see what the report was about: Censors missed some of the references to the Navy in the body of the document.

A request to the Office of the Inspector General to have the document unredacted was met with this response: “It was the Navy’s decision to censor it, and we can’t do anything about that.” At The Nation’s request, Senator Grassley’s office asked the OIG to uncensor the report. Again, the OIG refused. A Freedom of Information Act request by The Nation to obtain the uncensored document awaits a response.The GAO’s Khan wasn’t surprised by the failure of this year’s independent audit of the Pentagon. Success, he points out, would have required “a good-faith effort from DOD officials, but to date that has not been forthcoming.” He added, “As a result of partial audits that were done in 2016, the Army, Navy, Air Force, and Marines have over 1,000 findings from auditors about things requiring remediation. The partial audits of the 2017 budget were pretty much a repeat. So far, hardly anything has been fixed.”

Let that sink in for a moment: as things stand, no one knows for sure how the single biggest line item in the US government’s discretionary budget is actually being spent. What’s more, Congress as a whole has shown little interest in investigating this epic scandal. The ridiculously huge plugs in the Defense Department’s budgets are never even questioned at Armed Services or Budget Committee hearings. One interested party has taken action—but in this case, it’s action likely to perpetuate the fraud. The normally obscure Federal Accounting Standards Advisory Board sets the accounting standards for all federal agencies. Earlier this year, the board proposed a new guideline allowing agencies that operate classified programs to falsify figures in financial statements and shift the accounting of funds in order to conceal classified operations. (No government agency operates more classified programs than the Department of Defense, which includes the National Security Agency.) The new guideline went into effect on October 4, just in time for this year’s end-of-year financial statements. So here’s the situation: We have a Pentagon budget that a former DOD internal-audit supervisor, Jack Armstrong, bluntly labels “garbage.” We have a Congress unable to evaluate the Pentagon’s proposed budget for each new fiscal year, because it cannot know how much money the DOD actually spent in prior years. And we have a Department of Defense that only pays lip service to fixing any of this. Why should it? The status quo has been generating ever-higher DOD budgets for decades, not to mention bigger profits for Boeing, Lockheed Martin, and other military contractors. The losers in this situation are everyone else.

The Pentagon’s accounting fraud diverts many billions of dollars each year that could be devoted to other national needs: health care, education, job creation, climate action, infrastructure modernization, and more. Indeed, the Pentagon’s accounting fraud amounts to theft on a grand scale—not only from America’s taxpayers, but also from the nation’s well-being and its future. As President Dwight D. Eisenhower, who retired from the military as a five-star general after leading the Allied forces to victory in World War II, said in a 1953 speech: “Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.” What would Eisenhower say today about a Pentagon that deliberately misleads the people’s representatives in Congress in order to grab more money for itself while hunger, want, climate breakdown, and other ills increasingly afflict the nation?