Transitioning from Government Auditors to Commercial Auditors for Incurred Cost Audits

The House Armed Services Committee (HASC) submitted its markup of the Fiscal Year 2018 National Defense Authorization Act (NDAA) last week. In the coming days, we will be reporting on some of the procurement related provisions included in the markup.

Section  802 of the 2018 NDAA concerns the performance of incurred cost audits. The 2018 NDAA folds in the proposed Defense Acquisition Streamlining and Transparency Act which we covered last May in three parts (see Part 1, Part 2, and Part 3). It does not include the DoD legislative proposal to repeal the provision in the 2017 NDAA that permits contractors to go out and hire their own auditors and present the results to DoD (see DoD Submits Legislative Proposal to Repeal Auditing Requirements for Commercial Auditors) though its possible that the Senate might consider the proposal in their version of the NDAA.

In brief, Section 802 would require DoD to adhere to commercial standards for risk and materiality when auditing costs incurred under flexibly priced contracts. The HASC is concerned that current incurred cost auditing processes in DoD are too slow, impede effective contract management, and may not provide good value to the taxpayer. The HASC also believes that commercial auditors used by other Federal agencies may cost less and complete incurred cost audits sooner. If we look at the Department of Energy's experience with commercial auditors, we can see that commercial auditors finish incurred cost audits quicker but we don't think there is much to support the idea that they are less costly. The hourly billing rates for commercial auditors are generally higher than that of DCAA (Defense Contract Audit Agency) but there is another variable to consider; hours required to complete the audit. We don't believe there is a good metric for comparing hours.

The section would require contract management to choose either the DCAA or a QPA (Qualified Private Auditor) to perform incurred costs, subject to guidelines of an audit planning committee. The goal is by 2020, to outsource 25 percent of incurred cost audits to QPAs.

The section would require DCAA to pass a peer review by a commercial auditor in order to continue to issue unqualified audit findings after fiscal year 2022. Currently, peer reviews of DCAA audits are conducted by the DoD Office of Inspector General who delights in beating up their brethren for no valid reasons. A commercial peer review might be good for DCAA.

The section would require incurred costs audits to be completed within one year after receipt of contractor incurred cost submissions. That will require some institutional changes in DCAA.

Finally, the section would require GAO (Government Accountability Office) to evaluate how the plan is working (timeliness, costs, and quality) and report back to Congress.

Is the 25 percent threshold for commercial audits achievable? Absolutely. DCAA better worry that it doesn't become 100 percent.