Defense Audits Kept Behind Closed Doors

Times Staff Writer

A Pentagon inspector general’s report made headlines this summer by slamming the Air Force’s purchase of 50 transport planes that jumped in price and remained unfit for combat duty five years after delivery of the first aircraft.

But the findings were old news to the Defense Department’s own contract auditors. Internal Pentagon memos show that the auditors raised many of the same concerns about the plane, Lockheed Martin Corp.'s C-130J, in the late 1990s.

The memos on the rising costs had scant effect within the Defense Department, but “would have made a difference if they had been public,” said a veteran auditor familiar with the C-130J.

In nearly all Pentagon acquisition programs, however, the auditors’ work is routinely shielded from the public. Despite spending scandals that seem to afflict the military like a recurring virus, a fraction of the 40,000 audits performed annually faces outside scrutiny.

Officials say the procurement business requires confidentiality, but watchdog groups, whistle-blowers and some congressional critics don’t buy it. They say the lack of disclosure at the little-known Defense Contract Audit Agency can allow millions in cost overruns, waste and fraud to fester for years before any corrective action is taken.


The auditors pore over acquisition proposals before contracts are awarded. They later examine billings and payments. If they discover evidence of fraud, they are required to report it to the inspector general. The auditors themselves have no enforcement power.

Other federal agencies, though not all, publicize most of their audits. They include the Government Accountability Office, which conducts audits for Congress.

The advocates for more disclosure say that the 3,500 defense auditors form a front line of resistance against rip-offs, and examine the full range of military contracts in the greatest detail. They also say the need for public access to the audits has become urgent because of the billions of dollars flowing to Iraq. But ferreting out the documents is harder under the Bush administration’s post-Sept. 11 restrictions on access to defense-related material, they say.

And they contend that a decade-long push to streamline procurement has allowed contractors to undermine the auditors’ mission.

“Things are much worse,” said Dina Rasor, an investigator for the Military Money Project, a watchdog organization.

She said publicizing audit summaries might have prevented or reduced cost overruns on numerous weapons systems and military spare-parts acquisitions since the 1980s, when she began advising Pentagon whistle-blowers.

The Defense Department apparently has released just a handful of Iraq-related audits. The Times asked the Army for a precise count two months ago, but had not received an answer as of last week.

Even audits that have been discussed in open congressional hearings are kept from the public. One found that San Diego-based Titan Corp. had deficient payroll records for private translators working for the Army in Iraq, which prompted the Defense Department to withhold payments.

In a Freedom of Information Act request filed about four months ago, The Times sought that audit and others involving Titan in recent years. As of last week, the Pentagon had yet to release even a list of the audits.

Sen. Charles E. Grassley (R-Iowa), in a written statement, said that audits frequently “disappear into a black hole, never to be seen again.”

Peter W. Singer, a national security fellow at the Brookings Institution, said taxpayers had no way of knowing if they were getting their money’s worth. “That’s really where you’re going to catch cost overruns in real time -- in time to do something about it,” Singer said of the audits.

Pentagon managers and defense industry representatives say audits like those on the C-130J must stay locked away to safeguard the government’s negotiating strategies and contractors’ private data. They add that audits can contain errors that might unfairly tarnish contractors if publicized.

“The biggest fear that any company has is that their proprietary information would be made public,” said Larry Allen, executive vice president of the Coalition for Government Procurement, a contractors lobby association.

William Reed, director of the Defense Contract Audit Agency, declined to be interviewed, but in written answers to questions said that many audits were “part of the deliberative process.... Hence, disclosing even the name of the program or contractor could impair the negotiation.”

The agency does publicize the annual savings the auditors net for taxpayers. Last year, the figure was $2.2 billion, down from $2.5 billion in 2002 and $3.2 billion in 2001.

Proponents of increased oversight say they take little comfort in those numbers because the auditors’ hush-hush culture makes it impossible to determine whether many instances of reckless spending go undetected. They also say contractors can use the proprietary exemption as a smoke screen.

The Pentagon could publicize audit summaries without compromising the government or contractors, said Steven Aftergood, who monitors government secrecy for the nonprofit Federation of American Scientists. He faulted Congress for preserving the status quo by not requiring disclosure.

“Whenever an agency operates behind closed doors, it fosters suspicion,” he said.

Rasor, who has worked with whistle-blowers on the C-130J acquisition and the Pentagon’s purchase of spare parts for Lockheed’s C-5 cargo plane, said auditors “save taxpayers a lot of money, but they could save more.”

In the early 1980s, Rasor counseled auditor George Spanton, who alleged that his superiors had punished him for challenging billings by Pratt & Whitney, a jet engine manufacturer. Spanton’s audits were leaked to the media, and his whistle-blower case led to the firing of the audit agency’s director, Charles O. Starrett. The dismissal was reversed on appeal, but Starrett chose not to return.

Rasor said hoped-for reforms did not occur after the Spanton episode, and that the ranks of whistle-blowers had steadily declined, especially since Sept. 11. “There is a level of fear I have never seen in the Pentagon bureaucracy before,” she said.


Audits generally don’t become public unless they are sought under the Freedom of Information Act, formally requested by a congressional committee or subpoenaed in a lawsuit. The audits that do surface often contain substantial deletions. The Pentagon invites contractors to suggest deletions in audits released under the Freedom of the Information Act. Critics say the edited audits often are worthless for oversight purposes.

“They’re worse than a piece of Swiss cheese,” said a procurement official, who spoke on condition of anonymity because he worried about retaliation. “It’s impossible for anyone to evaluate whether the auditors are doing a good job.”

The audit agency, headquartered at Ft. Belvoir, Va., describes itself as independent from the Defense Department’s acquisition branch. But the auditors answer to the Pentagon’s comptroller, whose boss is Defense Secretary Donald H. Rumsfeld.

“That’s weird,” said Danielle Brian, executive director of the nonprofit Project on Government Oversight. “Where’s the checks and balances?”

The audit agency has been in the news this year because of its criticism of Halliburton, the Houston oil services giant that’s been the target of inquiries into its billings. But prying Halliburton audits loose hasn’t been easy.

Rep. Henry A. Waxman (D-Los Angeles), the leading Democrat on the House Government Reform Committee, asked for a Halliburton audit in January. Ten days later, the Pentagon told Waxman’s staff he needed a letter from the committee’s Republican chairman, Virginia Rep. Thomas M. Davis.

A relentless critic of contracting decisions on Iraq, Waxman persuaded Davis to send the letter. Six weeks after Waxman’s original request, the audit and a related memo arrived.

In March, Waxman and Davis asked for all the Halliburton audits performed since Jan. 1. They received a batch in June.

“A lot of bad things could be prevented if there were greater accountability and transparency,” said Waxman, who favors publicizing audit summaries.


As the C-130J purchase suggests, potential problems that auditors spot can stay buried for years in documents whose existence may be inscrutable beyond the circles of government weapons buyers and contractors.

The C-130J audit memos had been sent up the chain of command as the cost of each plane, an updated model of a military workhorse, climbed from $33.9 million to $49.7 million. The Air Force has contracted for 117 planes, including more-expensive stretch versions, at a total cost of $7.45 billion through 2008.

Under a streamlining program started by the Clinton administration, the Pentagon classified the C-130J acquisition as “commercial.”

The commercial label freed Lockheed, the nation’s largest defense contractor, from the normal audit regimen that verifies prices, even though the C-130J had no competitor. Lockheed spokespersons said the commercial approach saved taxpayers more than $2 billion by simplifying oversight, reducing paperwork and the like, while the company invested in upgrades.

During the late 1990s, however, auditors and employees of the Defense Contract Management Agency had expressed strong doubts about the purported savings on the planes, according to the memos, which were recently obtained by The Times.

A 1999 memo said Lockheed had “provided no verifiable data” to support its claim that the higher C-130J price reflected technological improvements in the aircraft. It said that “in a competitive commercial environment, one would expect to see continuous product improvements without any significant increases in the price.”

The inspector general’s report in July concluded that the Air Force had failed to fully protect the government against overpricing.

Dollars aside, faulty computer systems and mechanical flaws have beset the C-130J.

Maj. Gen. William W. Hodges, an Air Force acquisitions director, said the C-130J’s costs are now audited more closely, and that the plane would be ready to fly troops and supplies into combat by year’s end.

“This airplane is already flying and doing a lot of great things,” Hodges said.

That’s no solace to Ken Pedeleose, an engineer for the contract management agency, which relies on the auditors’ findings. The whistle-blower said he asked the inspector general’s office to investigate the C-130J acquisition in 2000, but nothing happened until he and several colleagues went public with their complaints two years later.

“There’s zero doubt in my mind that the taxpayers got ripped off,” said Pedeleose, who works at Lockheed’s Marietta, Ga., plant.

Meanwhile, the veteran auditor who is knowledgeable about the C-130J and who spoke anonymously to protect his job, said summaries of his work could easily be made public. “If I went into an audit knowing that my report would be released to the public, I could make sure that no proprietary information was included,” he said.

Contractor lobby groups maintain that it would be almost impossible to remove all sensitive material from summaries.

“I don’t think it could be done,” said Stan Soloway, a former Clinton administration procurement official who is president of a lobby organization. “I’m not sure what we’d gain.”

Brian, of the Project on Government Oversight, sees it differently.

“They’ve become almost a stealth agency,” she said of the auditors. “Anything that they’re finding -- if they are finding anything -- isn’t going anywhere because no one knows about it.”