Section 809 Panel - Recommendation to Enhance Risk Assessments

Yesterday we began a discussion on the recently released Volume 3 report published by the Section  809 Panel. For now, we are focusing on recommendations 71 through 73 which share the common theme of adopting a Professional Practice Guide (PPG) to assist oversight agencies and independent public accountants (IPAs) contracted to perform oversight activities, to better meet the needs of contracting officers who rely on oversight activities.

One of the primary areas of focus that the Panel hopes to clarify is that of the concept of "materiality". The draft (or, proposed) PPG (professional practice guide) correctly notes that "materiality" is paramount when considering risk. The PPG then sets forth clear materiality guidelines that help oversight professionals (i.e. DCAA, DCMA, and IPA (independent public accountants) plan their work and provide the information contracting officers need in order to make reasonable business decisions. We will discuss those guidelines later. The reports itself states:

What may be material to a particular business decision will be influenced by a variety of qualitative and quantitative considerations, recognizing that the contracting officer's role is to manage DoD's risk, rather than avoid it. The cost of DoD's oversight including adverse effects on the timeliness of decision making, must be balanced with the expected benefits of that oversight.

One of the knocks against oversight agencies is the "in for a penny in for a pound" mentality where once an audit begins, it must adhere to the totality of professional auditing standards or else it is considered deficient. There is little room for the exercise of professional judgment when assessing risk and for reassessing risk during the course of audit. This ends up squandering a tremendous amount of resources that could be better spent on audits where risk is assessed higher.

The PPG provides a risk model that should be employed by DCAA. Although DCAA has historically used a risk-based approach to determine which contractors are subject to incurred cost audits, as part of the PPG working group, DCAA has embraced an expanded risk model to include additional risk factors that further refine and improve the process. We will be discussing the new risk model in a later posting but for now, just note that the model is intended to "incentivize" contractor compliance.