Why the Pentagon Fails Audits Year After Year After Year

Joe Weisenthal (0:00)

Hello, Odd Lots listeners. I'm Joe Weisenthal.

Tracy Alloway (0:02)

And I'm Tracy Alloway.

Joe Weisenthal (0:03)

Obviously, mostly we've been talking a lot about the trade war lately, the tariffs, but there are other things going on in the world. And in fact, there are some episodes that we've recorded prior to all this that we still want to publish.

Tracy Alloway (0:18)

That's right. So what you are about to hear is an episode we recorded way back on March 18th. It feels like it was a lot longer ago, but it's been basically a month. And with everything that was happening in markets, all the trade announcements, the tariffs, we've had to put this one on hold. But we want you to listen to it. It's a really interesting topic and still very, very worthwhile to hear about it.

Joe Weisenthal (0:43)

Right. We're going to be talking about the Pentagon budget and things like that. If it feels a little dated, the conversation, that's because it is dated, but take a listen. I still think that you'll find, you know, there's still no world in which the nature of defense spending is not an important question, is not something interesting. So even with everything else going on in the world, you should take a listen.

Tracy Alloway (1:06)

Here we go.

SPEAKER_3 (1:09)

Bloomberg Audio Studios, podcasts, radio, news.

Joe Weisenthal (1:25)

Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway (1:30)

And I'm Tracy Alloway.

Joe Weisenthal (1:31)

Tracy, we've hinted on the podcast a few times over the last several months, who want to do more on defense, and we're gonna start ramping that up.

Tracy Alloway (1:38)

I don't think it's a hint, Joe. I think you've said it pretty explicitly.

Joe Weisenthal (1:41)

But it is interesting, right? Like it is a good, it does seem like it should be a good topic for us, right?

Tracy Alloway (1:46)

It's a huge chunk of the economy. I think it's like the US government's biggest line item in terms of expenditure is either defense or interest rate payments on its bonds.

Joe Weisenthal (1:56)

Yeah, that's right.

Tracy Alloway (1:56)

It's definitely number one or number two. And so it is worthy of additional study. I agree.

Joe Weisenthal (2:03)

And you know, I think it's actually really important for us because, you know, we talk about industrial policy a lot. In defense is the one area where that is never wavered, right? Like it's always been the government is the primary buyer purchaser, but there are these private companies and they also sell overseas and stuff. And it's always been about staying at the leading edge of tech. And probably if you're like thinking about like industrial policy in other areas, like whether it's cars or batteries or semiconductors, I just assume there must be a lot that we can learn from how it works in the defense world.

Tracy Alloway (2:39)

As a military brat, I feel comfortable saying as well that it's kind of also connected to a social safety net. You have health care tied to military service. You've got cheap groceries tied to military service. I used to love that. So it's interesting from a number of perspectives. What blows me away though is you hear that statistic every once in a while, that the Pentagon has never passed an audit, which raises all these big questions about if this is the biggest expenditure, one of the biggest expenditures for the US, how is it possible that we don't actually seem to know where the money is going?

Joe Weisenthal (3:19)

No, I think this is a great question, and I think that what you articulated there is just a great way of sort of entryway to understanding defense with a simple question. Because I've seen those headlines, so late last year, headlines, Pentagon failed seventh audit in a row, and then I read the headline, but I don't know what that means. I don't know what it means to like, it's not like a private company. I don't know what audits really mean in the government. I don't know if there are any consequences. I don't know why it is. Is it because of malfeasance, or is it just because of its sheer size? I mean, the Pentagon, absolutely enormous. So I think like, yeah, we should sort of like, what does that mean that they just keep failing all these audits?

Tracy Alloway (3:56)

Well, it also raises an existential question of why are we even bothering to do audits if we keep getting the same result? That too. Nothing seems to change.

Joe Weisenthal (4:05)