Pentagon Forced-Balance Accounting Practices Deserve Greater Scrutiny

The Department of the Defense (DoD) has engaged in a long and difficult campaign to improve its internal accounting. From reckless end-of-year expenses to its failure to complete a department-wide audit, the DoD has substantial room for improving its financial health. Contributing to the DoD’s systemic financial murkiness is the use of questionable accounting adjustments that simply paper over accounting problems. A new Government Accountability Office (GAO) report calls out the Pentagon for the number of adjustments made in its financial reports and for failure to provide documentation for many of the non-routine adjustments. 

Each month, quarter, and year, agencies within the DoD report their financial transactions to the Defense Finance and Accounting Service (DFAS). DFAS consolidates this information into a department-wide accounting statement. During this process, accounting adjustments are commonplace in order to record corrections or to account for transactions between agencies within DoD. For example, if the Army purchases material from the Defense Logistics Agency, these intra-departmental expenses and revenues are reconciled.

However, GAO raises concerns about the large volume of these corrections: there were over 200,000 adjustments made in the fourth quarter of 2018. GAO further warns that DoD relies “on a large volume of nonroutine adjustments to prepare its financial statements” including “forced-balance adjustments.”

Each month, agencies are required to reconcile their account balances with the balances reported by Treasury. When DFAS finds a mismatch in an account balance compared with Treasury’s total, it often uses a forced-balance adjustment: DFAS simply adjusts their own figure by plugging in Treasury’s numbers instead of engaging in further research, examination, or providing documentation about the source of the discrepancy. Clearly this is not a healthy accounting practice, puting untold taxpayer dollars at risk due to insufficient accounting information. 

The DoD’s own Financial Management Regulation states that a forced-balance adjustment does not represent an adequate reconciliation between DFSA and the Treasury. The DoD requires detailed reconciliation documents and a complete audit trail, with differences explained, accountability assigned, and appropriate adjustments made. Forced-balance adjustments circumvent this process, and despite explicit DoD policy against this accounting practice, the GAO found that DFAS recorded 36,000 forced adjustments over fiscal year 2018. This represents over 17 percent of the total accounting adjustments made by DFAS over fiscal year 2018. 

The DoD blames some of these problems on old and outdated accounting metrics in use throughout various agencies, as well as timing issues. To address this problem the DoD is implementing “enterprise resource planning” (ERP) to attempt to standardize accounting practices across the DoD. While this is a step in the right direction, a full transition will take another five years, projected to finalize in 2025. 

DFAS should make certain that forced-balanced reconciliations are performed in a timely manner, properly documented, and used less frequently. While their occasional use could be necessary, systematic forced-balance adjustments are deeply irresponsible and could result in wanton waste at taxpayer expense. When handling hundreds of millions of taxpayer dollars, the DoD should have adequate standards for tracking the spending of public funds, rather than simply forcing a balance on their checkbooks.