The Pentagon Has Never Passed an Audit, and Conservatives Should Mind

Suppose a small business owner in your town told the bank he could not account for his inventory, did not know the value of his equipment and could not say with confidence where last year's money went. Suppose he added that you should not worry, because he was doing important work. The bank would nod politely and decline the loan. The IRS would do something less polite.

The Department of Defense has been in roughly that position for decades. It is the largest agency in the federal discretionary budget, and it has never produced financial statements that an independent auditor could certify. Conservatives who spend their days demanding accountability from the Department of Education, the Environmental Protection Agency and the welfare office should find that fact uncomfortable. Here is the argument for why we should be more than uncomfortable.

The thesis

The claim is simple. A movement that believes in limited, accountable government cannot grant the largest discretionary agency a permanent exemption from the accountability it demands of every other agency. And a government that wants a strong defense needs books it can trust, because a force that cannot count what it owns cannot be sure it can use it.

Let us define the terms and then number the premises.

Defining an audit

A financial statement audit is an examination by an independent auditor of whether an organization's financial statements fairly present its assets, liabilities, revenues and expenses. The auditor tests records, inspects property, confirms balances and tests the controls the organization uses to produce its numbers. The result is an opinion.

There are four kinds. An unmodified opinion, popularly called a clean opinion, says the statements are fairly presented. A qualified opinion says they are fairly presented except for specified problems. An adverse opinion says they are materially misstated. A disclaimer of opinion says the auditor could not gather enough evidence to form an opinion at all. A disclaimer is among the most serious outcomes an audit can produce, and it is the outcome the Department of Defense has received on its department-wide statements every year since it began.

The statutory history

The obligation is not new, and neither is the failure. Congress passed the Chief Financial Officers Act in 1990, signed in November of that year, to require the major federal agencies to prepare audited financial statements and to appoint chief financial officers. A 1994 law extended the requirement to department-wide statements. For many agencies, the reform took hold within a few years.

Defense did not. Congress set deadlines, and the department missed them. The Defense authorization act for fiscal 2010 set the goal of audit readiness for the department's financial statements by September 30, 2017, and when that date came the department was not ready. The Government Accountability Office has kept Defense financial management on its list of high-risk federal programs since 1995, and it has said repeatedly that the department's financial systems are a barrier to a clean opinion.

The first audit and what followed

In fiscal 2018, for the first time, the department underwent a comprehensive audit of the whole enterprise, with the military services, the Defense agencies and the department-wide statements all examined by independent public accountants and by the Inspector General. The department had said in advance that it expected to fail, and it did. The auditors issued a disclaimer of opinion.

They have issued a disclaimer every year since, eight in a row through fiscal 2025. Each year, the department has reported progress: fewer material weaknesses, more of its components receiving clean opinions on their own statements, more property records reconciled. Some components, among them the Army Corps of Engineers and several funds, have earned clean opinions. But the department-wide statements have not, and the pace of improvement has been slow enough that officials have long described the goal of a clean opinion in terms of years and decades.

I want to be fair to the people doing the work. The Department of Defense is enormous, with millions of people, many thousands of locations, and a property list that includes ships, aircraft, ammunition, real estate and spare parts at a scale no corporation approaches. Auditing it is hard. The department has legacy computer systems that were built separately and do not talk to one another. These are real obstacles, and the officials who work on them are not villains.

What a failed audit means, and what it does not

Here is where careless commentary does damage, in both directions.

What it does not mean. A disclaimer of opinion does not mean that money has been stolen. It does not mean that trillions of dollars have vanished, a claim that circulates now and then and that confuses accounting problems with missing cash. It does not mean the force is unready. Nobody should say a disclaimer proves fraud. It says the auditors could not verify the numbers, and that is a different thing.

What it does mean. The department cannot reliably say how much it owns, where it is, what it costs to maintain and whether the money Congress appropriated was spent on what Congress intended. A manager who lacks that information decides blind. Waste is invisible if you cannot count. Fraud is easier to commit and harder to catch in a system that cannot reconcile its own records. And Congress, which holds the power of the purse, is asked to vote on numbers that no outside party has validated.

Number the consequences.

One. Weak inventory control means the department may buy what it already has and lack what it needs. Spare parts that sit unrecorded in one warehouse are purchased again for another.

Two. Weak cost data means the department cannot reliably compare what a program really costs against what was promised. The programs discussed in Zumwalt, the Littoral Combat Ship and the Lessons of Procurement Failure are the kind of thing a better accounting system might have flagged earlier.

Three. Weak controls raise the risk of improper payments and fraud, and make them harder to detect.

Four. Lost public trust. The taxpayer has been asked to support a very large budget by a department that cannot show him the receipts.

A hypothetical warehouse

A picture helps, so here is one, labelled as invented. Imagine two supply depots, one in the east and one in the west, each stocking a part for a helicopter. The eastern depot's records say it holds 400 of the part. The western depot's records say it holds 20 and is nearly out. In fact the eastern depot holds 600, because deliveries were logged late, and 150 of them are an obsolete version that no longer fits the current aircraft.

A manager who trusts the records orders 380 more of the part for the west, and pays for them. A manager who can see the real count ships 100 from the east to the west and spends nothing. The first manager spent money to create a surplus and still failed to fix the real shortage of the current version. Now multiply the two depots by thousands of locations, and the part by millions of line items. Nobody has to steal a dime for the taxpayer to lose a fortune.

That is the practical meaning of weak inventory control, and it is why accountants are not the enemies of the warfighter. An audit does not exist to catch a villain. It exists to produce a count that you can believe, and a count you can believe is how an organization stops buying what it already owns.

There is also a joke in the situation, though a rueful one. The Pentagon can track a single package across the planet to a forward base, and it can plot the position of an aircraft carrier to the meter. Somewhere there is a spreadsheet that cannot tell you what a warehouse holds. The department's genius for logistics in the field is plain, and it is a puzzle that the same talent has not reached the ledger.

The Constitution already requires it

This is a constitutional matter, and the text is blunt. Article I, Section 9, Clause 7 of the Constitution says: "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."

Read the second half. A regular statement and account of receipts and expenditures of all public money. The Framers did not exempt the army. They wrote that sentence into the original Constitution, because they had spent years watching how governments hide their expenses from the governed.

The principle is the one that animates the whole conservative case for limited government. The power of the purse belongs to the people's representatives, and a representative who votes money to an agency that cannot account for it has not exercised the power of the purse. He has surrendered it. The Founders believed that liberty depends on knowing where the money goes. We should not decide that this wisdom lapsed when the agency in question wears a uniform.

The strongest objection

Let us give the other side its best argument. The objection says that an audit is a bookkeeping exercise, and that the Department of Defense exists to deter and win wars. Every hour and dollar spent on audit readiness is spent on paperwork instead of readiness. Commercial companies do not fight wars. The military's assets are unlike a business's assets: battlefield losses, classified programs, equipment in motion across the globe. Insisting on a clean opinion risks turning a fighting force into an accounting firm.

It is a real point, and the reply has four parts.

One. Readiness and accounting are not rivals. A unit that cannot tell whether the parts it needs are in the warehouse is less ready. Clean records are part of logistics, and logistics is part of readiness. The services that run supply chains well tend to know what they own.

Two. The cost is not the compliance, it is the systems. The expensive step is replacing the incompatible legacy systems with ones that produce reliable data. That investment improves operations as well as audits, and a department that is going to spend money on information technology anyway should spend it on systems that can be audited.

Three. Other fighting organizations pass. The Army Corps of Engineers has a clean opinion, and so do several large funds and agencies in the department. A clean audit is achievable in an organization with a military mission.

Four. The objection proves too much. If an agency's important mission excuses it from accountability, every agency may say the same. The Department of Education could argue that educating children matters more than reconciling grants. The principle of limited government rests on the idea that no mission is too important to be accountable. A conservative who accepts the defense exception has given away the argument he makes everywhere else.

That is the center of it. We are not asking the Pentagon to stop being a military. We are asking it to be a military that can count.

What conservatives should demand

A demand is more useful than a complaint. Here is a short list.

• A date and a plan. Congress should require a published, dated plan for a clean department-wide opinion, with interim milestones by component, and review it every year in public hearings.
• Consequences in the budget. Components that fail their audits should lose flexibility, and those that pass should earn it. Appropriators have leverage and should use it.
• Systems before slogans. Money for new business systems should be tied to measurable audit results, not to promises, and legacy systems should be retired on a schedule.
• Honest reporting. The department should report the number of material weaknesses and the status of each, in plain English, so that a citizen can follow the progress without a degree in accounting.
• Congressional oversight that persists. Hearings that happen once, after a scandal, do not change behavior. A standing, annual accountability hearing does.

None of this reduces the military. It protects it, because a defense budget that the public trusts is a defense budget that survives.

How this fits the larger fiscal argument

A reader may ask whether this contradicts the point made in Defense Spending as a Share of the Economy, From Korea to the 2010s, which shows that the Pentagon is not what drives the debt. It does not. Both things are true. The size of the defense budget relative to the economy is modest by historical standards, and the quality of its accounting is poor by any standard. The first is an argument against the notion that cutting defense is the way to fix the debt. The second is an argument that whatever defense spends, it should account for.

The same logic applies to the larger machinery described in Follow the Defense Bill From Markup to Signing, a Citizen's Guide. Congress writes the bill, so Congress can ask for the receipts. And for the wider pattern of weapons programs that outran their plans, The Shipbuilding Gap with China Is an Industrial Story Before a Navy Story shows what happens when accountability for an industrial base is weak. A reader can also see how Washington tracks the red tape that surrounds these agencies on the red tape page.

The case in brief

1. A government of limited, accountable power cannot exempt its largest discretionary agency from the audits it demands of every other agency, and Article I, Section 9, Clause 7 requires a regular account of all public money.
2. The Chief Financial Officers Act of 1990 required audited statements, the Defense authorization act for fiscal 2010 set a 2017 readiness goal, and the department first underwent a full audit in fiscal 2018.
3. The result has been a disclaimer of opinion every year since, which means the auditors could not verify the numbers. It does not mean the money was stolen, and it does not mean the force is unready.
4. The objection that audits distract from readiness fails, because clean records are part of logistics, other military organizations have passed, and the objection would excuse every agency.
5. Conservatives should demand a dated plan, budget consequences, auditable systems, plain reporting and standing oversight.

What you can do: read the Department of Defense's most recent agency financial report and the Inspector General's audit summary, and ask your representative's office which committee hearing each year examines the audit result.