The agency in charge of keeping the Pentagon’s financial house in order might be sweeping tax dollars under the rug while its auditor looks the other way.

The Defense Department’s flagship accounting agency, Defense Finance and Accounting Service (DFAS) - which is in charge of DOD’s $560 billion budget - has allegedly been falsifying financial records and making deals with its inspector general to look the other way, according to a new report from Senator Chuck Grassley’s (R-IA) office.

Related: How the Pentagon Cooks the Books to Hide Massive Waste

Whistleblowers interviewed for the investigation allege that DFAS officials routinely instruct employees to “sanitize and alter” audit work papers to “remove anything contentious, including all references to fraud.”

DFAS have also hired an outside auditing firm - Urbach, Kahn and Werlin (UKW) – which has awarded the agency “clean” opinions on their financial statements every year since 2002, despite the work being sub-standard or in some cases, incomplete. Still, UKW’s opinions have all curiously received the stamp of approval from DOD’s IG.

Though not always because the IG agreed with the assessment.

In fact, one year the IG was poised to issue a “non-endorsement” on UKW’s opinion, but it was quickly scrapped after DOD Chief Financial officer Robert Hale “cut a deal” with a top IG official to reverse impending IG budget and staff cuts in exchange for suppressing the non-endorsement.

"It looks like the Defense Finance and Accounting Service may be trying to hide its own problems by pretending their books are in order,” Grassley said. “And to make matters worse, the institution that exists to root out fraud, waste and abuse – appears to have played the role of silent enabler in the alleged misconduct… It’s a disgrace to the Inspector General community.”

Related: Pentagon’s Failure to Audit Contracts Wastes Billions

DFAS is also accused of making improper payments to UKW for hours that it wasn’t on the job. And even though DFAS and IG officials both knew the payments were improper, they “elected” not to formally report them, according to whistleblowers.

The report comes just as DOD is preparing to absorb more budget cuts under the second wave of sequestration mandated under the Budget Control Act. And while top defense officials warn that the impending cuts could spell trouble for military readiness and national security, the department’s top auditing agency and its IG don’t seem to be too worried about finances, since they’re allegedly covering up abusive auditing practices.

“Sequestration cuts should be guided by hard-hitting, rock-solid audits, but rock-solid audits performed by the DOD IG are scarce,” Grassley said in a letter to Defense Secretary Chuck Hagel. So long as DOD isn’t able to accurately report on how it spends taxpayers money, and audits remain weak and ineffective, the probability of rooting out fraud and waste during sequestration remains very low.”

Related: Pentagon Mocks Sequester with New Millions Wasted

Indeed, the Pentagon has never successfully been audited since at least 1996 - the year federal agencies were first required by law to be audited. But now, DOD is under pressure to balance its books before 2017, in order to comply with the Chief Financial Officers Act.

Meeting that deadline, however, is going to be a challenge, since the department’s auditing agency tasked with leading the effort is the same agency being accused of cooking its books.

“DFAS’ apparent inability to accurately report on its own internal “housekeeping” accounts of $1.5 billion, casts doubt on its ability to accurately report on the hundreds of billions DOD spends each year, as it is required to do under the law,” Grassley said. “If DFAS can’t pass the CFO audit test then who in the department can?”

Follow Brianna Ehley on Twitter @BriannaEhley

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