Access to Internal Audit Reports

Yesterday, we informed you that the Senate unanimously (98-0) passed the fiscal year 2013 National Defense Authorization Act that included caps on employee compensation. That same bill included a provision that will require defense contractors to provide not only their internal audit reports but also the supporting working papers to Government auditors.

Specifically, Section 843 will ensure that the Defense Contract Audit Agency has sufficient access to contractor internal audit reports and supporting materials in order to

1. evaluate and test the efficacy of contractor internal controls and the reliability of associated contractor business systems, and
2. assess the amount of risk and level of testing required in connection with specific audits to be conducted by the Agency.

Contractors who fail to provide access, risk having one or more of their business systems determined to be inadequate (or disapproved) and would result in billing withholds.

Last August, we wrote a three-part series on internal audits and their value in reducing the amount of audit testing by DCAA (hint: not much). You can read those postings here: Part I, Part II, and Part III. But, the GAO thinks it is important and DCAA cited the general lack of access as one of the issues causing inefficiencies in its audits.

The Senate bill must be reconciled with the House version. It is unknown whether this provision will survive the conference committee.