Defense Acquisition Streamlining and Transparency Act - Commercializing Contract Audits

On May 18th, 2017, Chairman Thornberry of the House Armed Services Committee (HASC) introduced The Defense Acquisition Streamlining and Transparency Act, a bill to (i) empower the Defense Department to use "e-commerce" to purchase commercial off-the-shelf items, (ii) reform the defense contract audit process and (iii) a number of other provisions. For purposes of this article, we want to focus on how the bill intends to reform the contract audit process. According to Thornberry,

Right now, the Defense Contract Audit Agency's audits of incurred costs are slow, time-consuming, and often generate little value to the taxpayer. In 2016, it took an average of 855 days to close out an incurred cost audit and these audits account for only a small amount of DCAA's reported savings to the government. In this proposal, materiality standards for incurred cost audits would be raised to avoid spending time and resources on low-value auditing. Acquisition officials would be able to choose either the Defense Contract Audit Agency or a qualified private auditor to conduct incurred cost audits, which would be required to be completed within one year.

You can read the entire 80 page bill, which will eventually be folded into the 2018 NDAA (National Defense Authorization Act) by clicking here.

The crux of the proposed legislation is that by the year 2020, twenty-five percent of all incurred cost audits now performed by DCAA (Defense Contract Audit Agency) must be performed by commercial auditors. To accomplish this, DCMA (Defense Contract Management Agency) will enter into an ID/IQ (Indefinite Delivery/Indefinite Quantity) contract with two or more private CPA firms (called "Qualified Private Auditors" or QPA in the legislation). Then, DCMA can choose either DCAA or a QPA to audit incurred costs of a particular contractor. The legislation would also prohibit DCAA from further auditing or reviewing audits performed by QPAs.

One oft-heard criticisms of DCAA is that auditors frequently get bogged down by minutiae - spending a lot of hours on costs that are immaterial and have no significant impact on Government spending. The proposed legislation specifies a materiality standard for incurred cost audits based on private sector norms for both DCAA and QPAs. It is not clear to us how the minimum materiality standards specified in the proposed legislation is supposed to work; whether they represent reporting standards or risk assessment thresholds. We'll have to wait for additional clarification on this.

Finally, the proposed legislation requires that incurred cost audits be completed within one year of receipt of an adequate incurred cost submission. If not, the submission will be accepted in their entirety without any form of audit. That's not much different than what DCAA does right now - administratively closing out low-risk contractors without audit.

Lest you think that commercializing the contract audit process represents undue risk to the taxpayer, consider that other non-Defense agencies - notably the Department of Energy - have been successfully using private CPA firms to perform contract audits for several years and have had no problems relying on the results of their audits. The HASC (House Armed Services Committee) noted that commercial auditors used by other Federal agencies cost less and are completed sooner. Well, there is no doubt that commercial auditors complete their incurred cost audits sooner but its not a given that it cost less.