Follow up on Yesterday's DoD IG report on DoD's Iraq procurement screwups

Here is a CBS news transcript based upon an AP article about the US Congressional Oversight Committee hearing on Iraq procurement fraud. Yesterday I posted the initial reports on the DoD Inspector General testimony and report provided at the committee hearing.

Now I have read the entire DoD IG verbal transcripts and some of the actual report. Here is the link to the House Oversight Committee page for this hearing and transcripts:
http://oversight.house.gov/story.asp?ID=1965

The DoD IG audited procurement process systems that were separate from the one I dealt with for Iraq Reconstruction spending. They focused on military run procurement systems for Iraq police (Ministry of Interior) and other programs.

In my opinion, the DoD IG white washed a major cause for the lack of spending documentation they described.

Additionally, the "audit" followed a 1950's CPA derived format, not the modern audit approach used by Certified Internal Auditors, thus they 1) didn't walk through any of the actual work processes to find the actual reasons for the lack of documentation, and 2) they didn't describe the "cause" for the problems, which is a major part of audit reports provided by Certified Internal Auditors (CIA - I am one).

See my 5 detailed comments, and the CBS article at the link below.
vj

Read this article, then see my comments below it.

Link: CBSNews.com: Print This Story.

Audit: Iraq Contracts Skirted Fraud Rules WASHINGTON, May 23, 2008(AP) An internal audit of some $8 billion paid to U.S. and Iraqi contractors found that nearly every transaction failed to comply with federal laws or regulations aimed at preventing fraud, in some cases lacking even basic invoices explaining how the money was spent.

Of the money paid during a five-year period - from 2001 through 2006 - $7.8 billion in payments skirted billing rules with some violations egregious enough to invite potential fraud, warned the Defense Department's inspector general.

The findings provided fresh fodder for anti-war Democrats, who say President Bush's administration has turned a blind eye to the problem of corruption and fraud by relying too heavily on contractors to manage the war.

"There is something very wrong when our wounded troops have to fill out forms in triplicate for meal money while billions of dollars in cash are handed out in Iraq with no accountability," said Rep. Henry Waxman, chairman of the House Oversight and Government Reform Committee.

Results of the investigation were released at a committee hearing on Thursday, the same day the House approved legislation by Waxman intended to strengthen anti-fraud measures and increase transparency in contracting. Waxman's bill was passed as part of a major military policy bill, which authorizes $601.4 billion in defense spending.

In its report, the IG estimated the Army made more than 180,000 commercial payments from stations in Iraq, Kuwait and Egypt in the five-year period. The payments were made for various supplies and services, including bottled water, food and trucks.

In one example, $11 million was paid to a U.S. company without any record of what goods or services were provided, the IG wrote.

Overall, investigators estimated that the Army made some $1.4 billion in commercial payments that lacked even minimum supporting documentation, such as a certified voucher or invoice.

"Payments that are not properly supported do not provide the necessary assurance that funds were used as intended," the IG concluded.

© MMVIII The Associated Press. All Rights Reserved.

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My comments:

1. The DoD IG minimized a major control failure that caused lost shipments to Iraq. They mentioned problems with enforcing the Federal "Prompt Pay" act, but described it in two pages of gobbledegook text without explaining what problems the Prompt Pay Act created. As I mentioned in my prior post, in my experience, the end customer usually should sign a receiving report they received a purchased item which was sent to finance BEFORE the vendor was paid. This acted as an incentive for the vendor to ensure their shipped item was received by the customer who was paying from their budget account. However, the Prompt Pay act requires paying vendors within 30 days, or paying late penalties to the vendor. It was impossible to order an item and get it delivered to a customer in Iraq in 30 days, so SOMEONE WAIVED THE REQUIREMENT FOR A RECEIVING REPORT before paying vendors in 30 days. Thus the vendor was off the hook and not held accountable to make sure the ordered items actually got to the ordering customer in Iraq. As a consequence, in my experience, numerous orders were shipped up to six months late to wrong addresses or not received at all, because the vendor was ALREADY PAID, and didn't have any incentive to ensure prompt, correct delivery to the customer. This practice was not disclosed in the report. My guess is the IG found it, but the DoD management resisted any clear description of what they did, thus they used gobbledegook wording.

2. The DoD IG audit was a "desk audit" where they looked at documents. They did not go out and visit the work process sites and describe process failures, either in Iraq or the US.

3. This was an after the fact audit that resulted in big findings. However, if they followed modern audit practices from corporations and Certified Internal Auditors, they would have walked through the initial procurement processing systems in Iraq and the US and fixed control problems then, and not wait four years to audit "after the fact". I have earlier made the same comments about SIGIR - they also did not do front end control reviews of work processes in Iraq. Instead they waiting until after the fact, did document reviews and then could report big dollar findings. These old "after the fact" audit practices are no longer acceptable.

4. There was NO mention of any sanctions or penalties for DoD manaqers or staff for failing to include or adhere to required control procedures. Even the head "CFO" was mentioned, and that he did not develop any "contingency" procedures for work processes in Iraq even though a regulation required them.

5. A BIG difference between CPA or IG audits and those conducted by Certified Internal Auditors is that the CIA reporting standards require a description of the "cause" of the problem, and then a resulting recommendation would always describe what process improvement was needed. Compare this to the IG report which only said documentation was missing, and that meetings were held to develop new forms and maybe some new processes. They did not describe the original cause, so we don't know if the recommendations will actually fix what really caused the control failures.

vj