While Americans worry about the disastrous effects on our economy of the accounting scandals at Enron, WorldCom and elsewhere, an even larger accounting scandal has somehow escaped the public consciousness. According to estimates, the Department of Defense and the Department of Housing and Urban Development cannot account for over $3 trillion allotted to them by Congress, amounting to thousands of dollars of missing money for every man, woman and child in the country.

This story hasn' gone completely unreported. In a Jan. 29 article titled "The War on Waste," CBS News quoted Secretary of Defense Donald Rumsfeld as saying, "according to some estimates we cannot track $2.3 trillion in transactions." The article went on to quote retired Vice Admiral Jack Shanahan, former commander of the Navy's 2nd Fleet, as saying that while President George W. Bush's 2003 budget proposal calls for $48 billion in new Pentagon spending, "with good financial oversight we could find $48 billion in loose change in that building, without having to hit the taxpayers."

One of the most knowledgeable and effective critics of this epidemic of fiscal mismanagement by our government is Catherine Austin Fitts, former managing director of Wall Street investment bank Dillon, Read and former HUD assistant secretary in the first Bush administration. At HUD, Fitts worked to improve accounting practices before leaving the government to start Hamilton Securities, a firm which saved taxpayers billions by efficiently handling HUD mortgages. Now a resident of Hickory Valley, Tenn., and president of Solari, Inc., a community-based investment firm, Fitts writes in her article "The Missing Money Why the Citizens of Tennessee Are Working Harder and Getting Less"

"In June 2001 the Senate Governmental Affairs Committee, under the leadership of Senator Fred Thompson (R- Tenn.), published its study, "Government at the Brink." The study describes the failure of federal government agencies to maintain reliable financial systems and/or to publish required independent annual audited financial statements. The President's initial 2002 budget (before increases for 9/11) proposed that approximately 85% of all federal appropriations be awarded to the very same agencies the Thompson study states either (1) fail to maintain reliable financial systems, (2) fail to publish trustworthy or, in some cases, any, independent certified financial statements (as required by law), or both." (Source Solari.com)

Later in that same article, Fitts's estimates of total financial adjustments by DOD to date make the story even worse. "Total undocumented accounting adjustments for reported periods for the Department of Defense [and HUD for fiscal 1998-2000] amount to a whopping $3.3 trillion, or $11,700 for every American. The Department of Defense has failed to produce independent audited financial statements since the requirement went into effect in 1995. HUD's Inspector General refused to certify HUD's fiscal 1999 financial statements."

Fitts added in an interview by email that the HUD inspector also cited $59 billion missing from HUD for fiscal 1999, but said that this is only the tip of the iceberg of mismanagement at HUD. "That report also indicated $17 billion missing from the opening balance; so that would be for fiscal 1998," said Fitts. "My understanding was that the $59 billion only referred to undocumented adjustments on the liabilities side of the balance sheet, and in fact the problems were greater on the asset side. HUD refused to disclose the undocumentable adjustments for fiscal 2000."

Investigative reporter Kelly Patricia O'Meara wrote about the scandal in the Aug. 10, 2001 issue of Insight Magazine. She quoted DOD Deputy Inspector General Robert Lieberman making the following remark before Congress "The extensive DOD efforts to compile and audit the FY [fiscal year] 2000 financial statements for the department as a whole and for the 10 subsidiary reporting entities like the Army, Navy and Air Force General Funds, could not overcome the impediments caused by poor systems and unreliable documentation of transactions and assets." (Source InsightMag.com)

O'Meara's article also quoted the January 2001 report "DOD Major Management Challenges and Program Risks" by the General Accounting Office (GAO), the investigative arm of Congress, saying "[The Pentagon] continues to confront pervasive and complex financial management problems⤠and has been on our list of high-risk areas vulnerable to waste, fraud, abuse and mismanagement since 1995. To date, no major part of the department's operations has passed the test of an independent financial audit because of pervasive weaknesses in the department's financial management systems, operations and controls."

An additional problem with making the Pentagon fiscally accountable was exposed in a July 22, 1999 article in the New York Times by Tim Weiner, titled "Pentagon Defied Laws and Misused Funds, Panel Reports." Wrote Weiner "Congress says in a new report that the Pentagon defied the law and the Constitution by spending hundreds of millions of dollars on military projects that lawmakers never approved." Weiner quoted Rep. Jerry Lewis (R- Cal.) as saying that the Pentagon apparently believes "that it can even move money to a program Congress has closed down, maybe presuming, 'Oh, well, nobody will know.'"

"The Constitution is pretty clear on this," continued Lewis later in the article. "It says 'No money shall be drawn from the Treasury but in consequence of appropriations made by law.'" Added Weiner "The law and Pentagon procedures allow military officials to shift funds from one account to another, but not without telling Congress. They cannot finance programs Congress never approved, or use money for a purpose that lawmakers never intended. But they have done so for years, the committee's report and its staff members said." So what is being done to improve the accounting practices in the Pentagon?

According to Fitts and an April 18 item in the Potomac Tech Journal, the company credited with the $59 billion loss at HUD has been awarded the contract to redesign DoD's current business processes. Wrote Taylor Lincoln for the Potomac Tech Journal "Potomac-area firms American Management Systems and DynCorp have won slices of a $50 million to $100 million Defense Department financial management project for which IBM Corp. is the lead contractor, Fairfax, Va.-based AMS said today." AMS, along with subcontractors DynCorp and Lockheed, developed the faulty "HUDCAPS" financial software used by HUD.

It remains to be seen whether AMS and its partners will recover the missing money by installing new financial architecture for the Pentagon, or whether the missing money will be written off due to faults in the older system. However, Fitts says there are possible avenues through which we might recover the missing funds. "We need to identify where it went and get it back," said Fitts, "either through seizures or the creation of set aside claims. Unless we do so, we will find ourselves at the mercy of a group of creditors who are our creditors because they are financing us with the money they stole from our public and private pension funds."

Fitts⤠writings on the subject indicate she has little confidence in our government's ability to correct itself, without a complete overhaul of the way funds are collected and appropriated in this country. "I believe that the only way to ensure fiscal accountability is to create legal and/or trust or escrow mechanisms at the state and local level to condition payment of tax monies on compliance with the law," said Fitts. "The federal government is breaking the law as a matter of intentional ongoing policy. At this point, there needs to be a way to place sufficient control on the cash payments to require compliance with the law."