Contractors possess a lot of Defense Department property, but no one knows how much

For various reasons, defense contractors have quite a bit of Defense Department property in their possession. But DoD can only guesstimate how much it’s all worth. That figure isn’t small. Like, $220 billion worth. The Government Accountability Office found Defense officials don’t have a good plan for figuring it out. For more, the Federal Drive with Tom spoke with Kristen Kociolek, the director of GAO’s financial management and assurance team.

Interview transcript:

Tom Temin
Let’s begin with the nature of the stuff that contractors hold for the Defense Department. It’s not like they loan them tanks. Or do they?

Kristen Kociolek
They have lots of different types of assets, actually. So as most folks probably know, the government does do quite a bit of contracting at the Department of Defense, for various types of property and assets and things. So it’s very common that contractors hold assets for the government. So as part of the contracting, the government can acquire assets, but they’re really kept in the possession of contractors who are working on various government contracts for building assets for the government. And so as part of that, it’s very common that the contractors are holding these assets, that’s not uncommon at all, not in any way improper. But the issue has been that the government, exactly like you said, doesn’t have a good handle on the full list of assets so that the contractors have the full value. And so maintaining accountability over those assets is problematic, because they just don’t have a handle on what they are attempting to maintain accountability over.

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Tom Temin
It sounds like it might be more of an internal integration problem. I’m thinking, suppose the Navy is having a ship built. Well, that ship is in the possession of the ship builder until such time as it’s delivered to the Navy. And so the Navy could tell you, yeah, we have three submarines and five ships. And here’s where they are. But it doesn’t all add up at the departmental level?

Kristen Kociolek
That’s correct. That’s exactly what we found. So the contractor is maintaining lists of the assets that they have. But the problem is the government is really dependent on those lists, they’re not really great at keeping their own independent records to verify that information. And so when we’re coming in together, to take a look and attempt to understand the nature of those assets and understand how the department is financially reporting those assets. And maintaining accountability, like you said, it’s really important for the government to understand what assets it has, where they are, so that they can remain ready to fulfill their mission. If they don’t have a good handle on where things are, they could be buying more things that they don’t actually need. They could think they have an asset at a position, but they actually don’t. And so everybody being on the same page about where all of these assets are, all of the time, is really critical.

Tom Temin
And you also report too, that it ultimately adds up to — it’s a component anyway — in the DoD inability to get a clean financial statement, the last Department to hold out in this whole thing.

Kristen Kociolek
Absolutely. And so that’s certainly one of the big issues that has caused this particular issue to come to light. They’re numerous material weaknesses that are preventing the department from having auditable financial statements. But there are many related to their accountability of assets and inability to properly reflect on the financial statements, the full and complete list of assets that it has. And so this has been a particularly tricky issue for the department to get it’s arms around and correct. As you noted, I think they’ve been working on it for well over 20 years now. It is complicated. The department is huge. There are many contractors that play, they struggle with having good automated systems to help them in doing this. So to try to do this manually, which they have been trying to do, is a massive undertaking. So in no way is something simple or easy to fix. But it’s really important for them to be able to get their arms around.

Tom Temin
They really sound like a library that doesn’t know who has their books.

Kristen Kociolek
Yes, that’s a great analogy for describing this situation.

Tom Temin
We’re speaking with Kristen Kociolek, she is director of the Financial Management and Assurance team at the Government Accountability Office. And DoD was directed a couple of years ago, about three years ago, to get its arms around this. There was a memorandum generated within the department. And interesting, you said one of the problems with that being carried out is, it wasn’t distributed properly. Did they tape it on every door? Did they put it in the cafeteria? Or what happened there?

Kristen Kociolek
Yeah. So really, they were instructing folks to attempt to create a baseline of these assets. And to do that they were instructing the various components and departments to submit various information to the department overall. And they did have a lot of trouble with the memorandum getting into the right hand. So it was distributed to the various secretaries of the department, but not specifically addressed to the folks who were actually going to be responsible for carrying this out. And obviously, the services and various components are very large. And so not properly addressing it quickly to the right folks created some concern and they acknowledged that. Making sure they have the correct POC so this information can get to who it needs to go, is really critical to being able to be successful in this.

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Tom Temin
If a memo falls in the Pentagon, does it really make a noise, I guess is the question there. Lots of bad analogies on this one. And let’s go over your main recommendations, because you had three, but they’re big ones.

Kristen Kociolek
They are. So the first is really getting their arms around how they go about issuing memorandum. So they have a history of trying to resolve these things through these types of memorandums. And so, to the extent they’re going to continue down that path, like you said, making sure the memorandums are being addressed to who they need to go through, they’re getting into the right hands. But also that they are reaching out to these point of contacts, while they are distributing the memos or while they are developing the memos, rather, before they are issued. Because we also found some challenges, with just the logistics of what the components were being instructed to do.

The timeframes were really unrealistic, they really didn’t have availability to get some of the information that was being requested. So to the extent that the people who are going to carry out these memos are involved in the process of distributing them, they would have a much higher likelihood of success, because the requests are going to be reasonable. The other issue that we found was a lack of oversight for these initiatives. And so we did recommend that, to the extent they are assigning these oversight boards — and in this case, they had assigned the property functional council — that there’s really some direction to these councils, some expectations that are set up through a charter or other mechanisms for establishing meeting frequency. Making sure the right people are at these meetings to do proper oversight, to make sure these memorandums are being followed. To the extent they’re not, that there’s some communication back and forth with the responsible parties, to understand what challenges are being faced so that these memos going forward have a chance of being successful. And someone’s overseeing that, that the memo doesn’t fly into the components office, just to be forgotten and never followed up on.

Tom Temin
And this is a never ending process, because it’s constantly shifting level of material that is in contractors hands. Probably by this day, certainly by the year.

Kristen Kociolek
Absolutely. And so having readily available information and proper mechanisms to be able to track it, is really critical. And then our third recommendation, related to really taking a step back and understanding, what kind of strategy do they have in place for this? Over the years, they’ve issued numerous memorandums and really have been unsuccessful in making really any sufficient progress to resolve this. And so, our third recommendation is really for them to develop an overarching strategy that’s going to look at, really what are the root causes here? And put some things in place to address the fundamental root causes, set up some realistic timeframes. And have plans to go back and reassess what’s working, what’s not, so that you can make pivots as needed to be successful in this area.

Tom Temin
And fair to say if they were to get around this one, then they would eliminate one of their principal material weaknesses, towards a good financial audit?

Kristen Kociolek
That would be the hope, yes.

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