Outsourcing Contract Audits

DCAA (Defense Contract Audit Agency) is not the only organization capable of performing audits of incurred costs and other types of audits designed to support Government procurement. DCAA's activities are not an inherently governmental function - a function so intimately related to the public interest as to require performance by Federal Government employees. Consider the Energy Department and to a lesser extent NASA who routinely outsource their contract audit requirements.

Recommendation #9 from the Section 809 Panel's recently released report wants DCAA to use IPAs (Independent Public Accountants, i.e. CPA Firms) to manage resources to meet time limits - to augment their current staffing with non-Governmental firms.

Here's why.

DCAA cannot eliminate its current backlog of unaudited final indirect cost rate proposals (i.e. incurred cost audits) while providing timely financial oversight and advisory services to contracting officers. DCAA needs additional resources to get and stay current with its oversight responsibilities.

Although DCAA has reduced the backlog of incurred cost audits from more than 20,000 to around 4,500, the Agency still has a sizable number of current incurred cost audits in its inventory. According to a recent GAO report, DCAA possesses nearly 10,000 unaudited final indirect cost rate proposals that are not currently included in its backlog, many of which will be subject to an audit in accordance with DCAA's risk assessment approach.

It currently takes DCAA an average of 747 days to begin its work on a final indirect cost rate proposal once it is received. GAO concluded in its report that “the primary reason for the delay is due to the availability of DCAA staff to begin the audit work.” Because DCAA lacks sufficient capacity to perform the current needs of DoD contracting officers and eliminate its backlog of unaudited final indirect cost rate proposals, the time it is taking for DCAA to start its nonbacklogged incurred cost audits is growing. Due to the backlog and previous legislation that prohibited DCAA’s provision of audit services to nondefense agencies, NASA now allows its contracting officers to use IPAs to conduct incurred cost audits as well as other financial services.

The Section 809 Panel concluded that DCAA should use IPAs to provide timely audit and advisory services in accordance with statutory time limits (discussed yesterday). This approach will assist DCAA in eliminating its final indirect cost rate proposal backlog and provide better coverage and more responsiveness in other audits and advisory services. The contracting community will benefit from increased use of IPAs by DCAA to perform oversight functions. Timely performance of necessary risk management activities allows oversight professionals and contracting officers to gain insights into current contractor operations. This insight facilitates faster corrective actions (if necessary), which, in turn, reduces risks of noncompliance and DoD’s oversight burden.

The Panel foresees a time when IPAs will no longer be necessary to augment DCAA resources. For that to happen, DCAA must first:

• embrace a more robust risk assessment process,
• adopt commercial engagement management and materiality approaches, and
• focus on the contracting officer as its customer.