LETTERKENNY ARMY DEPOT, Chambersburg, Pennsylvania (Reuters) - Linda Woodford spent the last 15 years of her career inserting phony numbers in the U.S. Department of Defense's accounts.

Every month until she retired in 2011, she says, the day came when the Navy would start dumping numbers on the Cleveland, Ohio, office of the Defense Finance and Accounting Service, the Pentagon's main accounting agency. Using the data they received, Woodford and her fellow DFAS accountants there set about preparing monthly reports to square the Navy's books with the U.S. Treasury's - a balancing-the-checkbook maneuver required of all the military services and other Pentagon agencies.

And every month, they encountered the same problem. Numbers were missing. Numbers were clearly wrong. Numbers came with no explanation of how the money had been spent or which congressional appropriation it came from. "A lot of times there were issues of numbers being inaccurate," Woodford says. "We didn't have the detail … for a lot of it."

The data flooded in just two days before deadline. As the clock ticked down, Woodford says, staff were able to resolve a lot of the false entries through hurried calls and emails to Navy personnel, but many mystery numbers remained. For those, Woodford and her colleagues were told by superiors to take "unsubstantiated change actions" - in other words, enter false numbers, commonly called "plugs," to make the Navy's totals match the Treasury's.

Jeff Yokel, who spent 17 years in senior positions in DFAS's Cleveland office before retiring in 2009, says supervisors were required to approve every "plug" - thousands a month. "If the amounts didn't balance, Treasury would hit it back to you," he says.

After the monthly reports were sent to the Treasury, the accountants continued to seek accurate information to correct the entries. In some instances, they succeeded. In others, they didn't, and the unresolved numbers stood on the books. …

STANDARD PROCEDURE

At the DFAS offices that handle accounting for the Army, Navy, Air Force and other defense agencies, fudging the accounts with false entries is standard operating procedure, Reuters has found. And plugging isn't confined to DFAS (pronounced DEE-fass). Former military service officials say record-keeping at the operational level throughout the services is rife with made-up numbers to cover lost or missing information.

A review of multiple reports from oversight agencies in recent years shows that the Pentagon also has systematically ignored warnings about its accounting practices. "These types of adjustments, made without supporting documentation … can mask much larger problems in the original accounting data," the Government Accountability Office, the investigative arm of Congress, said in a December 2011 report.

Plugs also are symptomatic of one very large problem: the Pentagon's chronic failure to keep track of its money - how much it has, how much it pays out and how much is wasted or stolen.

This is the second installment in a series in which Reuters delves into the Defense Department's inability to account for itself. The first article examined how the Pentagon's record-keeping dysfunction results in widespread pay errors that inflict financial hardship on soldiers and sap morale. This account is based on interviews with scores of current and former Defense Department officials, as well as Reuters analyses of Pentagon logistics practices, bookkeeping methods, court cases and reports by federal agencies.

As the use of plugs indicates, pay errors are only a small part of the sums that annually disappear into the vast bureaucracy that manages more than half of all annual government outlays approved by Congress. The Defense Department's 2012 budget totaled $565.8 billion, more than the annual defense budgets of the 10 next largest military spenders combined, including Russia and China. How much of that money is spent as intended is impossible to determine.

In its investigation, Reuters has found that the Pentagon is largely incapable of keeping track of its vast stores of weapons, ammunition and other supplies; thus it continues to spend money on new supplies it doesn't need and on storing others long out of date. It has amassed a backlog of more than half a trillion dollars in unaudited contracts with outside vendors; how much of that money paid for actual goods and services delivered isn't known. And it repeatedly falls prey to fraud and theft that can go undiscovered for years, often eventually detected by external law enforcement agencies.

The consequences aren't only financial; bad bookkeeping can affect the nation's defense. In one example of many, the Army lost track of $5.8 billion of supplies between 2003 and 2011 as it shuffled equipment between reserve and regular units. Affected units "may experience equipment shortages that could hinder their ability to train soldiers and respond to emergencies," the Pentagon inspector general said in a September 2012 report.

Because of its persistent inability to tally its accounts, the Pentagon is the only federal agency that has not complied with a law that requires annual audits of all government departments. That means that the $8.5 trillion in taxpayer money doled out by Congress to the Pentagon since 1996, the first year it was supposed to be audited, has never been accounted for. That sum exceeds the value of China's economic output last year.

Congress in 2009 passed a law requiring that the Defense Department be audit-ready by 2017. Then-Defense Secretary Leon Panetta in 2011 tightened the screws when ordered that the department make a key part of its books audit-ready in 2014.

Reuters has found that the Pentagon probably won't meet its deadlines. (See related article [ID:nL2N0J00PX].) The main reason is rooted in the Pentagon's continuing reliance on a tangle of thousands of disparate, obsolete, largely incompatible accounting and business-management systems. Many of these systems were built in the 1970s and use outmoded computer languages such as COBOL on old mainframes. They use antiquated file systems that make it difficult or impossible to search for data. Much of their data is corrupted and erroneous.

"It's like if every electrical socket in the Pentagon had a different shape and voltage," says a former defense official who until recently led efforts to modernize defense accounting.

"AMALGAM OF FIEFDOMS"

No one can even agree on how many of these accounting and business systems are in use. The Pentagon itself puts the number at 2,200 spread throughout the military services and other defense agencies. A January 2012 report by a task force of the Defense Business Board, an advisory group of business leaders appointed by the secretary of defense, put the number at around 5,000.

"There are thousands and thousands of systems," former Deputy Secretary of Defense Gordon England said in an interview. "I'm not sure anybody knows how many systems there are."

In a May 2011 speech, then-Secretary of Defense Robert Gates described the Pentagon's business operations as "an amalgam of fiefdoms without centralized mechanisms to allocate resources, track expenditures, and measure results. ... My staff and I learned that it was nearly impossible to get accurate information and answers to questions such as ‘How much money did you spend' and ‘How many people do you have?' "

The Pentagon has spent tens of billions of dollars to upgrade to new, more efficient technology in order to become audit-ready. But many of these new systems have failed, either unable to perform all the jobs they were meant to do or scrapped altogether - only adding to the waste they were meant to stop.

Mired in a mess largely of its own making, the Pentagon is left to make do with old technology and plugs - lots of them. In the Cleveland DFAS office where Woodford worked, for example, "unsupported adjustments" to "make balances agree" totaled $1.03 billion in 2010 alone, according to a December 2011 GAO report.

In its annual report of department-wide finances for 2012, the Pentagon reported $9.22 billion in "reconciling amounts" to make its own numbers match the Treasury's, up from $7.41 billion a year earlier. It said that $585.6 million of the 2012 figure was attributable to missing records. The remaining $8 billion-plus represented what Pentagon officials say are legitimate discrepancies. However, a source with knowledge of the Pentagon's accounting processes said that because the report and others like it aren't audited, they may conceal large amounts of additional plugs and other accounting problems.

The secretary of defense's office and the heads of the military and DFAS have for years knowingly signed off on false entries. "I don't think they're lying and cheating and stealing necessarily, but it's not the right thing to do," Pentagon Comptroller Robert Hale said in an interview. "We've got to fix the processes so we don't have to do that."

Congress has been much more lenient on the Defense Department than on publicly traded corporations. The Sarbanes-Oxley Act of 2002, a response to the Enron Corp and other turn-of-the-century accounting scandals, imposes criminal penalties on corporate managers who certify false financial reports. "The concept of Sarbanes-Oxley is completely foreign" to the Pentagon, says Mike Young, a former Air Force logistics officer who for years has been a consultant on, and written about, Defense Department logistics.

Defense officials point out that most plugs represent pending transactions - like checks waiting to clear with a bank - and other legitimate maneuvers, many of which are eventually resolved. The dollar amounts, too, don't necessarily represent actual money lost, but multiple accounting entries for money in and money out, often duplicated across several ledgers. That's how, for example, a single DFAS office in Columbus, Ohio, made at least $1.59 trillion - yes, trillion - in errors, including $538 billion in plugs, in financial reports for the Air Force in 2009, according to a December 2011 Pentagon inspector general report. Those amounts far exceeded the Air Force's total budget for that year.

Defense Secretary Chuck Hagel declined to comment for this article. In an August 2013 video message to the entire Defense Department, he said: "The Department of Defense is the only federal agency that has not produced audit-ready financial statements, which are required by law. That's unacceptable."

DFAS Director Teresa McKay declined to be interviewed for this article.

In an email response to questions from Reuters, a Treasury spokesman said: "The Department of Defense is continuing to take steps to strengthen its financial reporting. ... We're supportive of those efforts and will continue to work with DOD as they make additional progress." While the Treasury knowingly accepts false entries, it rejects accounts containing blank spaces for unknown numbers and totals that don't match its own.

Senators Tom Coburn, an Oklahoma Republican, and Joe Manchin, a West Virginia Democrat, introduced legislation earlier this year that would penalize the Pentagon if it isn't audit-ready by 2017. Under the proposed Audit the Pentagon Act of 2013, failure to meet the deadline will result in restrictions on funding for new acquisition programs, prohibit purchases of any information-technology systems that would take more than three years to install, and transfer all DFAS functions to the Treasury.

"The Pentagon can't manage what it can't measure, and Congress can't effectively perform its constitutional oversight role if it doesn't know how the Pentagon is spending taxpayer dollars," Coburn said in an email response to questions. "Until the Pentagon produces a viable financial audit, it won't be able to effectively prioritize its spending, and it will continue to violate the Constitution and put our national security at risk."

TOO MUCH STUFF

The practical impact of the Pentagon's accounting dysfunction is evident at the Defense Logistics Agency, which buys, stores and ships much of the Defense Department's supplies - everything from airplane parts to zippers for uniforms.

It has way too much stuff.

"We have about $14 billion of inventory for lots of reasons, and probably half of that is excess to what we need," Navy Vice Admiral Mark Harnitchek, the director of the DLA, said at an August 7, 2013, meeting with aviation industry executives, as reported on the agency's web site.

And the DLA keeps buying more of what it already has too much of. A document the Pentagon supplied to Congress shows that as of September 30, 2012, the DLA and the military services had $733 million worth of supplies and equipment on order that was already stocked in excess amounts on warehouse shelves. That figure was up 21% from $609 million a year earlier. The Defense Department defines "excess inventory" as anything more than a three-year supply.

Consider the "vehicular control arm," part of the front suspension on the military's ubiquitous High Mobility Multipurpose Vehicles, or Humvees. As of November 2008, the DLA had 15,000 of the parts in stock, equal to a 14-year supply, according to an April 2013 Pentagon inspector general's report.

And yet, from 2010 through 2012, the agency bought 7,437 more of them - at prices considerably higher than it paid for the thousands sitting on its shelves. The DLA was making the new purchases as demand plunged by nearly half with the winding down of the Iraq and Afghanistan wars. The inspector general's report said the DLA's buyers hadn't checked current inventory when they signed a contract to acquire more.

Just outside Harrisburg, Pennsylvania, the DLA operates its Eastern Distribution Center, the Defense Department's biggest storage facility. In one of its warehouses, millions of small replacement parts for military equipment and other supplies are stored in hundreds of thousands of breadbox-size bins, stacked floor to ceiling on metal shelves in the 1.7 million-square-foot building.

Sonya Gish, director of the DLA's process and planning directorate, works at the complex. She says no system tracks whether newly received items are put in the correct bins, and she confirmed that because of the vast quantities of material stored, comprehensive inventories are impossible. The DLA makes do with intermittent sampling to see if items are missing or stored in the wrong place. Gish also says the distribution center does not attempt to track or estimate losses from employee theft.

The Pentagon in 2004 ordered the entire Defense Department to adopt a modern labeling system that would allow all the military branches to see quickly and accurately what supplies are on hand at the DLA and each of the services. To date, the DLA has ignored the directive to use the system. William Budden, deputy director of distribution, said in an interview that the cost would have exceeded the potential benefits, and that the DLA's existing systems are adequate.

A "Clean Out the Attic" program to jettison obsolete inventory is making progress, DLA Director Harnitchek said in an interview. But the effort is hindered because the lack of reliable information on what's in storage makes it hard to figure out what can be thrown out.

The DLA also has run into resistance among warehouse supervisors who for years have been in charge of a handful of warehouse aisles and jealously husband their inventory. "I believe that the biggest challenge is helping item managers identify things we have in our warehouses that they can just let go of," Budden said in an interview published in an undated in-house DLA magazine.

OLD AND DANGEROUS

A few miles away, amid the gently rolling hills of south central Pennsylvania, a series of 14 explosions interrupt the stillness of a spring afternoon, shooting fountains of dirt more than 100 feet into the air. Staff at the Letterkenny Army Depot - one of eight Army Joint Munitions Command depots in the United States - are disposing of 480 pounds of C4 plastic explosive manufactured in 1979 and at risk of becoming dangerously unstable.

If Woody Pike could have his way, the soldiers would be destroying a lot more of the old, unused munitions stored in scores of turf-covered concrete "igloos" ranged across the Letterkenny compound.

There are runway flares from the 1940s, and warheads for Sparrow missiles that the military hasn't fielded since the 1990s. Most irksome, because they take up a lot of space, are rocket-launch systems that were retired in the 1980s. "It will be years before they're gone," says Pike, a logistics management specialist and planner at Letterkenny.

More than one-third of the weapons and munitions the Joint Munitions Command stores at Letterkenny and its other depots are obsolete, according to Stephen Abney, command spokesman. Keeping all those useless bullets, explosives, missiles, rifles, rocket launchers and other munitions costs tens of millions of dollars a year.

The munitions sit, year after year, because in the short term, "it's cheaper for the military to store it than to get rid of it," said Keith Byers, Letterkenny's ammunition manager. "What's counterproductive is that what you're looking at is stocks that are going to be destroyed eventually anyway."

Also, an Army spokesman said, the Pentagon requires the Army to store munitions reserves free of charge for the other military services, which thus have no incentive to pay for destroying useless stock.

To access ammunition and other inventory still in use, depot staff often must move old explosives, much of which is stored in flimsy, thin-slatted crates. "Continuing to store unneeded ammunition creates potential safety, security and environmental concerns," Brigadier General Gustave Perna said in a 2012 military logistics newsletter, when he was in charge of the Joint Munitions Command. The cost and danger of storing old munitions "frustrates me as a taxpayer," he said. Perna declined requests for an interview.

Sometimes the danger leads to action, as when the C4 was detonated. And the depot recently received funding to destroy 15,000 recoilless rifles last used during World War II, Pike says.

Yet, on the day of the C4 blasts, piles of Phoenix air-to-air missiles - used on Navy F-14 fighter jets that last flew for the U.S. in 2006 - had just been offloaded from rail cars and were waiting to be put into storage.

In 2010, as part of the Defense Department's modernization effort , the Joint Munitions Command scrapped a computer system that kept track of inventory and automatically generated required shipping documents. It was replaced with one that Pike says doesn't do either.

His staff now must guess how much inventory and space Letterkenny has. The Army built at additional cost a second system to create shipping documents and an interface between the two systems. "We're having problems with the interface," Pike says.

COSTLY REPAIRS

Media reports of Defense Department waste tend to focus on outrageous line items: $604 toilet seats for the Navy, $7,600 coffee makers for the Air Force. These headline-grabbing outliers amount to little next to the billions the Pentagon has spent on repeated efforts to fix its bookkeeping, with little to show for it.