Odd Lots Podcast Summary: "Why the Pentagon Fails Audits Year After Year After Year"

Release Date: April 19, 2025
Host/Author: Bloomberg's Odd Lots with Joe Weisenthal and Tracy Alloway

Introduction

In the April 19, 2025 episode of Bloomberg's Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway delve into a persistent and critical issue: the Pentagon's annual failure to pass federal audits. Recorded on March 18th, amidst a period dominated by discussions on trade wars and tariffs, this episode shifts focus to defense spending—a subject of immense importance given its substantial share of the U.S. federal budget.

The Persistent Audit Failures

Joe Weisenthal opens the discussion by highlighting the perplexing headlines: "Pentagon fails seventh audit in a row." He expresses confusion over the implications of these failures, questioning, "What does that mean that they just keep filling out all these audits?" (04:49).

Tracey Alloway reinforces this confusion, pondering the existential value of recurring audits that yield the same unfavorable results: "Nothing seems to change that too." (04:55).

Understanding Pentagon Audits

To shed light on the issue, the podcast features Julia Gledhill, a researcher at the Stimson Center and an expert on defense spending.

Julia Gledhill explains that the Pentagon audit assesses how effectively the Department of Defense (DoD) manages taxpayer dollars. Unlike private companies, where stakeholders can react to audit results by altering investment decisions or ownership, the Pentagon's failures mean that the agency cannot simply correct course by losing funding—a unique challenge in governmental audits (05:36).

What Constitutes an Audit Failure?

When the Pentagon "fails" an audit, it receives a disclaimer of opinion, meaning auditors cannot verify the accuracy of the DoD's financial statements. Julia Gledhill elaborates:

"The agency-wide consolidated audit of the Department of Defense looks at DoD financial statements, but also internal controls over financial reporting, as well as compliance with relevant laws and regulations." (06:38)

This failure indicates significant weaknesses in financial reporting and internal controls across various DoD components.

Examples of Audit Failures

One striking example discussed is the Navy's inability to track property and inventory records accurately. In 2019, the Pentagon Inspector General flagged errors that led to the discovery of a missing warehouse containing $126 million worth of spare parts (11:12). Despite being a small fraction of the Pentagon's vast budget, such discrepancies highlight systemic issues in financial management.

Furthermore, the F-35 fighter jet program, the most expensive weapons program in U.S. history, suffers from understated spare parts inventories. Gledhill notes:

"The Department of Defense Inspector General has expressed concern that spare parts in the possession of contractors are likely significantly understated." (12:00)

This kind of mismanagement not only leads to financial inefficiencies but also impacts operational readiness, as missing parts can delay maintenance and repairs during critical times.

Impact on Defense Spending and Operational Readiness

The inability to accurately track financial and inventory data has tangible consequences. Tracey Alloway points out that in emergencies, the inability to locate necessary spare parts can jeopardize military operations. Gledhill shares anecdotes from veterans who had to improvise part storage due to unreliable inventory systems, underscoring the real-world implications of audit failures (13:59).

Influence of Defense Contractors

A significant barrier to resolving these audit issues is the influence of defense contractors. Gledhill explains that contractors like Lockheed Martin resist transparency, often citing the high costs of compliance:

"They say, oh well, what are you paying us to provide you with information about government-owned property?" (16:32)

This resistance contributes to the Pentagon's ongoing audit failures, as contractors hold crucial data that the DoD struggles to obtain and verify.

Political and Legislative Battles

The episode also touches on the political dynamics that perpetuate the Pentagon's financial mismanagement. Gledhill highlights how defense contractors wield significant influence in Congress through job creation across all 50 states, making it politically challenging to implement stringent oversight reforms (17:29).

Current legislative efforts, such as the Budget Reconciliation process and the National Defense Authorization Act (NDAA), are battlegrounds where debates over military spending and audit reforms unfold. Gledhill expresses skepticism about meaningful changes, noting:

"Even if the DoD passes an audit, that doesn't justify the money that the DoD is spending because we should be able to achieve more for less." (21:51)

Recommendations for Reform

When asked for recommendations, Gledhill advocates for tangible budgetary reforms, particularly in nuclear spending:

"If I could say one thing, I would probably say cancel the Sentinel program, which would save a lot of money." (36:41)

She argues for reducing unnecessary expansions within the nuclear triad to alleviate financial burdens and restore accountability.

Future Prospects

Despite ongoing discussions and some administrative support for audit improvements, Gledhill remains pessimistic about the Pentagon passing a comprehensive audit in the near future:

"I'm not optimistic, no." (38:50)

She attributes this to the slow progress in rectifying systemic issues and the entrenched interests of defense contractors.

Conclusion

The episode concludes with the hosts reflecting on the complexity and urgency of addressing the Pentagon's financial mismanagement. They underscore the critical need for accountability and transparency to ensure that defense spending serves the nation's best interests without unnecessary waste or inefficiency.

Tracey Alloway summarizes:

"It's kind of crazy... Julia explained everything really well, but I still find it slightly unbelievable that there's all this money going in and out of the Pentagon and we seem unable to track it." (40:35)

Joe Weisenthal adds:

"It's just very interesting, too, the sort of interplay with all that and just the incredible infrastructure around lobbying." (40:46)

The discussion leaves listeners with a profound understanding of why the Pentagon's audit failures matter and the multifaceted challenges in overcoming them.

Notable Quotes:

• Julia Gledhill [05:36]:
  "What's the point of doing the same thing over and over and expecting a different result? That is, in fact, the definition of insanity."

• Julia Gledhill [11:12]:
  "The Department of Defense Inspector General flagged errors in the Navy's property and inventory records. They found a warehouse that was mysteriously absent from its property record."

• Julia Gledhill [16:32]:
  "Contractors like Lockheed Martin resist transparency, often citing the high costs of compliance."

• Julia Gledhill [38:56]:
  "They have 11 components of the DoD that have received unmodified opinions and it has been a painstakingly slow process. I am not terribly optimistic that they're going to bring that number to 100% of components audited."

Key Takeaways:

• The Pentagon has consistently failed federal audits due to systemic issues in financial management and accountability.
• Audit failures stem from difficulties in tracking property and inventory, exacerbated by defense contractors' resistance to transparency.
• Political influence and defense contractors' lobbying efforts hinder meaningful reforms.
• There is a critical need for structural changes to ensure accountability and efficient use of defense spending.
• Resolving these audit issues is essential for both financial integrity and operational readiness of the U.S. military.

For more insights and detailed discussions on finance, markets, and economics, tune into Odd Lots every Monday and Thursday on Bloomberg.