Congress has told the Defense Department to get itself ready to pass a full audit of its consolidated financial statements by the end of 2017. Now, Defense Secretary Leon Panetta is laying out a deadline of his own, directing that at least one part of DoD’s books be auditable several years earlier.

In a memo to Pentagon comptroller Robert Hale, Panetta ordered an update to DoD’s Financial Improvement and Audit Readiness plan to incorporate a new requirement that the department’s statement of budgetary resources (SBR) — one piece of the audit pie — be ready for an audit no later than 2014.

“This focused approach prioritizes the information that we use in managing the department, and will give our financial managers the key tools they need to track spending, identify waste, and improve the way the Pentagon does business as soon as possible,” Panetta told the House Armed Services Committee Thursday. “I have also directed increased emphasis on accountability and a full review of the department’s financial controls, with improvements put in place where needed.”

The SBR is only one component of a clean audit of all DoD’s consolidated financial statements. The overall deadline of 2017 for complete audit readiness remains in place, Panetta said.

The statement of budgetary resources is an accounting of the funds available to DoD in a given year, tracking inflows and outflows from the Pentagon’s accounts. It’s an area the Pentagon comptroller has already prioritized: DoD is hoping the Marine Corps will pass an SBR audit for 2011-paving the way for successful audits in other parts of DoD.

Each of the military services would have to have a clean SBR audit before DoD could pass a departmentwide version, a Pentagon spokeswoman said. That could be a challenge for some services. The Army, for example, testifiedlast month that it didn’t expect its statement of budgetary resources to be ready until the end of 2015.

No more budget cuts

Panetta’s audit announcement came in wide-ranging testimony Thursday that revolved almost entirely around DoD budget cuts. He again called on Congress to find ways to reduce the deficit without letting the sequestration process kick in, triggering around a trillion dollars in cuts to DoD. He called sequestration a blind, mindless formula, but said he understands it.

“When I was in Congress, serving on the budget committee, I served on the conference that developed the Graham-Rudman approach to dealing with these kinds of problems. But even then, every time the cuts were to take place, the Congress postponed them because it was mindless. It was across the board,” Panetta said. “It was designed as a gun to be put to the head of the Congress so it would do the right thing. So I guess what I’m urging is that Congress do the right thing, especially on the two-thirds of the budget that is still yet to be considered for deficit reduction. You’re dealing with one-third discretionary spending, and it’s taking a trillion dollar hit. Defense is already paying half of that. If you’re going to be responsible, you’ve got to consider mandatory programs and you’ve got to consider revenue spending.”

Under the debt ceiling deal the President and Congress reached this summer, DoD is already required to reduce its previously-planned spending by an estimated $450 billion over the next 10 years. Panetta said those cuts push DoD “to the edge,” and that both he and the president believe the Pentagon can’t withstand further reductions.

He said the department can manage the $450 billion dollar cut, but it won’t be easy, especially given the fact that Congress and the President haven’t told DoD to do fewer things.

“Neither Congress nor the President did away with terrorism. We still have two wars that we’re in. We’ve got threats from Iran and North Korea. We’ve got cyber attacks coming at us left and right, we’ve got to deal with that threat, it’s the battlefield of the future. We’ve got rising powers in the world that constitute a challenge to us, we have to deal with that,” Panetta said. “There are going to be risks here. I’m not kidding you. When you cut the budget by $450 billion, there are going to be risks, and we need to know that.”

Panetta said everything has to be on the table as DoD looks for areas to find savings, including military compensation and retirement. He said no decisions have been made on pay and benefits, except for the fact that existing military members would be grandfathered in under current programs.

But Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, sought to poke holes in a recent report by a DoD advisory panel. The Defense Business Board had recommended that the military convert its 20-year pension system into something more like private-sector retirement plan in order to tackle ballooning personnel costs.

“I reject the characterization of our military retirement program today as gilt-edged and the comparison to civilian retirement programs,” he said. “Look, it might turn out that our current plan is unaffordable and we’ll have to do something about it. But when we put a retirement program together, it’s because these young men and women who become old men and women serve for 20 years and put themselves in harm’s way. They move 10 or 15 times. Some of them can buy homes, some can’t. Their spouses rarely can have employment because we move them around involuntarily. That retirement program needs to be fundamentally different from anything we find in the civilian sector. We can figure it out, and we need the time to do so. If it’s unaffordable, we’ll react.”

In his proposal to the deficit reduction super committee, Obama suggested the creation of a special commission to study military retirement. The panel would make recommendations for changes; the President could accept them or reject them. If he accepted them, Congress would have to adopt them or decline them in an up-or-or down vote.

Personnel would suffer

Dempsey said personnel is an area that would particularly suffer if DoD has to make further budget cuts.

“If some of the cuts occur in the magnitude, and with the targets that are described right now in sequestration, and it causes us to RIF, we lose that core,” he said. “We saw this right after Desert Storm, when we had a bathtub of captains and majors who exited the service. When we had to regrow the Army, where we suffered was not in the basic rifle infantrymen. We can grow them in 20 to 30 weeks. You can’t grow a captain, a major, a lieutenant colonel or a sergeant major in 20 to 30 weeks. If we’re not careful with this and we have a migration of that talent outside the military, that’s irrevocable for probably 10 or 15 years.”

Panetta and Dempsey had a largely friendly audience among members of the House committee. Both the chairman and the ranking member agreed that Congress cannot allow the sequestration cuts to happen.

Several members of the public audience were less friendly. Panetta’s testimony was interrupted at least four times by anti-war demonstrators in the hearing room. Capitol Police arrested seven people for disrupting Congress and one for assault.

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