Financial Mismanagement at the Pentagon

President Joe Biden and the 117th US Congress have taken office at a precipitous moment in American history. The worst pandemic in a century, accompanied by an unprecedented economic crisis, has spurred the federal government into action. With the passage of the $1.9 trillion American Rescue Plan, total pandemic relief spending will equal 27.1% of US GDP, a staggering sum. On the foreign policy front, intensified competition with near-peer nations such as Russia and China has opened a furious debate within policy making circles over proper American military posture as well as how to balance defense spending with other domestic and foreign policy priorities—including pandemic relief.

The Pentagon is the US government’s largest discretionary investment. Defense spending has increased in recent years from $513 billion in 2009 to $730 billion in 2019, when it represented over 53% of federal discretionary spending. Debates over the bloated defense budget often center on overarching questions regarding America’s overall military goals—the costly “forever wars” in Iraq and Afghanistan, the merits of a confrontational approach in the South China Sea, and the value of a sprawling military deployed over hundreds of bases worldwide. However, these discussions rest on the assumption that policymakers have access to unambiguous information about where tax dollars appropriated for military use actually end up and can make adjustments accordingly.

​The Pentagon’s accounting and financial bookkeeping are famously inscrutable, making it extremely difficult for policymakers to accurately keep track of military readiness and inventory. Therefore, it is a challenge to ensure that appropriations are being used for their intended purposes. 

Despite a 1990 federal law mandating that all government agencies must undergo audits, the Department of Defense dragged its feet and did not complete a full audit until 2018. The Pentagon’s first-ever comprehensive audit, which itself cost taxpayers $400 million and required 1,200 auditors, resulted in DOD receiving a “disclaimer of opinion”—meaning the military’s financial statements were unreliable enough that auditors were unable to even issue a formal opinion after examination. The Pentagon received an identical “disclaimer of opinion” on subsequent audits in 2019 and 2020. After the most recent audit, the Pentagon announced that it expects at least seven more years of work will be required before it can produce a satisfactory result. In other words, the military’s accounting systems, in their current state, are so jumbled that regulators are almost unable to determine the full extent of their disarray.

The Department of Defense’s lack of accurate financial management is further demonstrated through its use of “accounting adjustments,” colloquially known as “plugs.” Military services and Pentagon agencies are required to prepare monthly accounting reports to ensure military bookkeeping aligns with the Department of the Treasury’s own records. However, if records are lost or incomplete, Pentagon accountants frequently “plug” the resulting gaps by entering false or fabricated numbers. These adjustments add up—in 2019, the Department of Defense made $35 trillion worth of accounting adjustments.

These adjustments do not by themselves necessarily indicate fraudulent transactions—the auditors found no evidence of fraud as the trillions of dollars in adjustments include sums of money counted multiple times while being (appropriately) moved between different accounts. However, the underlying documentation issues that the “plugs” work around make it difficult, if not impossible, for congressional policymakers and Pentagon officials to identify wasteful expenditures and theft.

Without accurate record-keeping and reasonable confidence that appropriated funds are being used as intended, policymakers cannot accurately assess the effectiveness of defense programs and make needed adjustments. This constrains overall military readiness, ties down funds that could be better spent on other priorities, and undercuts any realistic effort to reform or curb the staggering growth of already-enormous military spending.

Reforming the Pentagon’s money mismanagement is a rare bipartisan effort, bringing together voices as disparate as Senators Chuck Grassley and Bernie Sanders. One potential avenue for reform involves greater pressure on the military bureaucracy to keep up with audit recommendations (the Department of Defense has not implemented more than half of the recommended improvements submitted to it by the Government Accountability Office since 2014). A 2019 law, the Good Accounting Obligation In Government Act, requires agencies, including the Pentagon, to explain themselves when they refuse to act on recommendations. However, experts say continual congressional pressure—including potential withholding of funds—is key to ensure this law produces its desired effects.

Policymakers can, and should, also pursue aggressive modernization of the Pentagon’s computer systems, financial management softwares, and cybersecurity to make spending across the various DOD divisions more easily trackable. This must be done in a manner that prevents bad actors from exploiting vulnerabilities in DOD’s patchwork, often outdated, contract and equipment management software.

Campaign finance reform may also be necessary. A “Costs of War” study put out by Brown and Boston Universities found that in 2019, the Department of Defense spent $370 billion—more than half of all defense-related discretionary spending—on contracting services from companies such as Raytheon, Lockheed Martin, and General Dynamics. Individuals and Political Action Committees associated with these defense contractors spend millions of dollars on lobbying and campaign contributions to influence legislators on defense-related committees. This corporate influence creates powerful pressure for larger Pentagon budgets and reduces the possibility of congressional oversight that could threaten the existing amount of loosely monitored defense contracts.

​More effective control of Pentagon expenditures will also allow policymakers and the public to meaningfully consider a broader range of non-militarized national security initiatives as well. All in all, mindlessly pumping ever more cash into the Department of Defense won’t make the United States more secure. With more stringent accounting controls and oversight structures in place, policymakers would be able to tell where taxpayer money is actually going, identify what works and what doesn’t, and make adjustments as necessary. Policymakers would be able to utilize these new, more accurate financial statements to trim ineffective or wasteful Pentagon programs. This would free up additional funds to invest in effective nonmilitary conflict resolution solutions, such as a dynamic diplomatic corps and robust foreign development aid, to protect America’s long-term national security.

Rand Perry

Rand Perry is a third-year undergraduate from Williamsburg, Virginia, double majoring in Public Policy and Foreign Affairs, with a minor in Chinese. His main interests include education, labor, and foreign policy. As a constituent services and policy intern in the Virginia Senate he saw firsthand how the policymaking process can meaningfully improve people's lives, and he is excited to expand his understanding of today's toughest policy challenges with VPR. He is looking forward to working with VPR's writers and staff to publish valuable policy discussion and analysis for readers.

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