Saturday, November 18, 2006

War on Terror + Enron Accounting = Massive Fraud: Bonddad

Nov 18, 2006

By Bonddad

President Bush has asked for more money for the global war on terror.

The Bush administration is preparing its largest spending request yet for the wars in Iraq and Afghanistan, a proposal that could make the conflict the most expensive since World War II.
The Pentagon is considering $127 billion to $160 billion in requests from the armed services for the 2007 fiscal year, which began last month, several lawmakers and congressional staff members said. That's on top of $70 billion already approved for 2007.

The problem is we have no idea how we have spent most of the money Congress has already appropriated.

As a result, neither DOD nor the Congress reliably know how much the war is costing and how appropriated funds are being used or have historical data useful in considering future funding needs.

On July 18 2006, the General Accounting Office released a report titled Global War on Terrorism: Observations on Funding, Costs, and Future Commitments. (See link above) This report indicated the government's accounting of the Global War on Terror (GWOT) is at best shoddy. Let's go through the report's main findings to see exactly what is going on.
DOD has reported incremental costs of about $273 billion for overseas GWOT-related activities through April 2006. This amount includes almost $215 billion for operations in Iraq and almost $58 billion for operations in Afghanistan, the Horn of Africa, the Philippines, and elsewhere.
This is not chump change - it's a sizeable amount of money.

However, our prior work [the GAO's] has found numerous problems with DOD's processes for recording and reporting costs for GWOT, including longstanding deficiencies in DOD's financial management systems and business processes, the use of estimates instead of actual costs, and the lack of adequate supporting documentation.

The GAO has found major problems. Let me translate the business jargon. "Financial management systems and business processes" is business lingo for how the inner-workings of the Pentagon deal with costs. For example, suppose department A is responsible for buying ammunition. That department would either have an accounting section to deal with the costs or there would be a central accounting section of a larger department that would perform the same function. All of these accounting departments are overseen at some level to make sure all the departments comply with Generally Accepted Accounting Principles (GAAP), communicate with each other using similar terminology etc... The GAO found that the internal account departments of the DOD had "longstanding deficiencies". This is business talk for "there are REALLY BIG PROBLEMS IN THE WAY WE PERFORM ACCOUNTING". In other words, the DOD is ripe for accounting abuse. Think Enron and you'll get the idea.

[T]he use of estimates instead of actual costs. This is a classic government problem. An agency will usually overestimate costs to allow for a financial cushion in projects. Now - this is not in and of itself fraudulent. Businesses do this all the time. It gives them financial wiggle room, especially when they are developing new products. However, once a business knows the actual cost of a product, they use the actual cost. The GAO found the Pentagon is continuing to use the estimated costs - even if they know the actual cost - in a variety projects. This means the Pentagon is probably overestimating the cost of many things - again, a situation ripe for abuse.
[T]he lack of adequate supporting documentation. This is great. We don't even have documents to understand the internal cost structures of the Pentagon. Let's just say -- NOT GOOD, BOYS. NOT GOOD AT ALL.

Ladies and gentlemen - I bring you Enron style accounting, courtesy of the GWOT, Donald Rumsfeld and the Republican's "we're the party of business" leadership. If the GWOT were a private, ongoing business concern, they would have to declare bankruptcy to reorganize this mess they have created. This is the result of Republican style rule.

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