In 2001, Donald Rumsfeld said 'According to some estimates, we cannot track $2.3 trillion in transactions.' This has been misinterpreted by many people as $2.3 trillion actually going missing. However, it's really just about the way the money was accounted for.
Rumsfeld is asking for more money to improve the accounting systems because the DOD is working with very outdated systems. This means transactions can't be tracked to acceptable accounting standards. As an example he says:
From the start we can see this does not make sense as "missing" money. The DoD budget for 1999 was just $0.27 trillion ($270 billion). The entire federal budget in 2000 was $1.8 trillion, so $2.3 trillion going missing is absolutely not something that could be swept under the rug. Where would it even come from? For perspective, Fort Knox "only" holds $0.25 Trillion. So $6.5 trillion is 26 Fort Knoxs.The technology revolution has transformed organizations across the private sector, but not ours, not fully, not yet. We are, as they say, tangled in our anchor chain. Our financial systems are decades old. According to some estimates, we cannot track $2.3 trillion in transactions. We cannot share information from floor to floor in this building because it's stored on dozens of technological systems that are inaccessible or incompatible.
What does "We cannot track" actually mean?
"We cannot track" does not mean that money went missing. It means that their systems are so out of date and not compatible with each other that they can't track (by computer) transactions across departments. In order to do that, they would have to do it manually. The money is not missing, money went into the Pentagon, and products and services came out - it's just too complicated to follow the trail of exactly how that happened up to acceptable accounting practices.
It's like if for a year you write down every financial transaction you made, then add them up. You add up all the numbers on:
- Your pay slip
- Your bank deposit statements
- Your W2 tax statement
- Transfer statements from checking to savings
- ATM Withdrawals
- A new car loan
- Checkbook record
- Credit card receipts
- Actual receipts
- Mortgage statements
- Mortgage payment records
- Mortgage tax statement
- Credit card statements
- Credit card payments
- Monthly Bank statements
- Receipt for a sale of an old car
- Deposit slip for sale of old car
- Title transfer for old car
- Your 1099 tax return
So what did he mean?
He's basically talking about accounting. The money is not missing, just not tracked up to expected accounting standards. In 2002 the amount of improperly tracked transactions was reduced to $900 billion, as they integrated their accounting systems). But that's still not missing, it's just improperly tracked. This is explained in another defense dept publication:
The last paragraph tells the story. The accounts are complicated, with $7.6 trillion transactions for one year. That's not saying they spent $7.6 trillion, they spent far less ($0.27 trillion) , but the transactions are between departments, so get entered multiple times. So about a third of these transactions do not have documentations "adequate for the auditing standards imposed". The transactions are also for things which are not actually expenditures, but are entries for the value of things, like "military pension actuarial liabilities" - often just estimates of the total amount of something over its lifetime.In the current environment, DoD has a serious credibility problem in financial management. On January 11, 2001, in the confirmation hearing of the Secretary of Defense (SECDEF), Senator Byrd questioned the Defense Department’s inability “to receive a clean audit opinion in its financial statements”. He went on to say, “I seriously question an increase in the Pentagon’s budget in the face of the department’s recent (inspector general) report. How can we seriously consider a $50 billion increase in the Defense Department’s budget when the (Department of Defense’s) own auditors–when DoD’s own auditors–say the department cannot account for $2.3 trillion in transactions…”
In subsequent Senate testimony of February 13, 2001, Senator Grassley referenced these questions and continued, “…these reports show that DoD has lost control of the money at the transaction level. With no control at the transaction level, it is physically impossible to roll up the numbers into a top-line financial statement that can stand up to scrutiny and, most importantly, audit.”
While DoD may debate some of the criticisms of its financial statements and the size and components of the $2.3 trillion issue, we think that corrective action requires radical financial management transformation. For the FY 1999 financial statements, the auditors concluded that $2.3 trillion transactions of the $7.6 trillion entries to the financial statements were “unsupported”. DoD notes that many of these entries included end-of- period estimates for such items as military pension actuarial liabilities and contingent liabilities, and manual entries for such items as contract accounts payable and property and equipment values. DoD would further note that the “unsupported” entries are “not necessarily improper” and that documentation does exist in many cases, albeit, not adequate for the auditing standards imposed.
- "Military pension actuarial liabilities" are "The amounts calculated based on actuarial assumptions that represents the present value of the pension benefits accrued in pension plans" - i.e. it's totals that will vary from year to year, but represents an estimate of how much money is needed in the future.
- "Contingent liabilities" are amounts that the department will probably be liable for, things like class action lawsuits or defaulted loan guarantees. These estimates vary, can last for years, and again don't represent spending.
- "Contract accounts payable" are amounts owed to contractors. The DoD pays slowly and the account goes though various stages. Here there are estimates of the totals of these various stages in different departments.
- "Property and equipment values" are estimates of the values of things that the DoD owns. Things like buildings, weapons, fighter jets, fuel, battleships, etc. This is not spending, as they have already spent the money to acquire the asset. It's an estimate for things like depreciation, insurance, and replacement budgeting.
The money was not missing, just not tracked to acceptable accounting standards. Eventually the accountants sorted out how it was spent and they updates their records.
Truth behind the quote?
As it stands the "cannot track" quote was true. But $2.3 trillion was never missing. The interpretation of the quote does of course have some grain of truth in it. Millions, maybe even billions of dollars "go missing" after a fashion due to accounting discrepancies - and perhaps even some illegal actions. But it certainly is not $2,300 Billion.
[Admin: Post update Aug 1 2017 to add graphic. Original post is from 2011]