DCAA Gets Cut Off at the Pass - Again

We're beginning to think that Congress believes that the Defense Contract Audit Agency (DCAA) has become a stumbling block to efficient and effective Government contracting practices. Last week in discussing Sec. 820 of the 2017 NDAA (National Defense Authorization Act), we noted a provision that will effectively eliminate DCAA from auditing indirect costs in favor of privatization. DCAA can still audit the direct costs but will have no role in auditing indirect costs. We're not sure how that will work out in practice however. One cannot develop indirect expense rates without auditing both direct and indirect costs. Someone, either the independent public accountant or DCAA is going to have to marry up the two sides to come up with final rates. And, most likely, the two organizations will be on different auditing cycles which may be the undoing of the entire concept.

The 2017 NDAA has another provision that effectively prevents DCAA from sticking their noses into Performance Based Contract Payments. Sec 831 establishes a preference for performance-based payments to contractors as the preferred Government financing mechanism. The Senate version of the bill added the following:

1. Performance-based payments shall not be conditioned upon costs incurred in contract performance but on the achievement of performance outcomes.
2. The Secretary of Defense shall ensure that nontraditional defense contractors and other private sector companies are eligible for performance-based payments, consistent with best commercial practices.
3. In order to receive performance-based payments, a contractor's accounting system shall be in compliance with Generally Accepted Accounting Principles, and there shall be no requirement for a contractor to develop Government-unique accounting systems or practices as a prerequisite for agreeing to receive performance-based payments.

The House version of the NDAA did not contain a similar provision. During conference, the House agreed to the Senate provision with the added provision that reads as follows: "Nothing is this section shall be construed to grant the Defense Contract Audit Agency the authority to audit compliance with Generally Accepted Accounting Principles (GAAP).

How will a contracting officer determine that a contractor is GAAP compliant? If the contractor has "audited" or "reviewed" financial statements, there is independent assurance that the accounting system complies with GAAP. However, the majority of Government contractors will not have audited or reviewed financial statements so then it becomes problematic for the Government to ensure that a contractor's accounting system is GAAP compliant. Perhaps the Government can rely on self-certification as it now does with any number of contractual requirements. However GAAP compliance is to be determined however, don't expect that DCAA will have any role in the assessment.