Monday, December 21, 2009

The State of Federal Contracting

The U.S House Committee on Oversight and Government Reform, Subcommittee on Management, Organization, and Procurement recently held a hearing on "The State of Federal Contracting: Opportunities and Challenges for Strengthening Government Procurement and Acquisition Policies". There were witnesses from the Government and from industry including law firms specializing in Government procurement. One consistent theme from all of the witness concerned the Government's acquisition workforce. Witnesses from DoD, GSA, and OMB highlighted reforms already underway while industry witnesses testified that additional reforms are needed - reforms like more people, more training, and more appreciation. To read all of the prepared testimonies, go here.

One of the law firm witnesses discussed a topic that resonated with us. She identified three of what she believed were the three most significant challenges facing procurement. This first of the three, and the one she spent the most time discussing was the Defense Contract Audit Agency. She testified that:

"Over the past several months, ...(DCAA) ... has adopted aggressive new audit policies that are wreaking havoc on the Government procurement world.... DCAA has strayed far a field of its primary mission, and appears to be focusing its efforts on 'systems' audits that are time-consuming and disruptive and often have little if anything to do with actually protecting the Government against unallowable costs."

The attorney was referring to a policy that DCAA revised in December 2008 that significantly altered the manner in which DCAA reports on contractor internal control systems. Prior to December 2008, DCAA reported significant deficiencies or material weaknesses in a contractor's internal control system only when the deficiency adversely affected the contractor's ability to initiate, authorize, record, process, or report on Government contract costs in accordance with applicable laws and regulations and the deficiency resulted in a reasonable possibility that unallowable costs will be charged to the and Government and the potential unallowable cost is not clearly immaterial. Under the new guidance, auditors are required to report significant deficiency/material weakness whenever the contractor fails to accomplish any control objective tested, regardless of whether the control objective is directly related to charging costs to Government contracts and even when the deficiency has not resulted in nor will unlikely result in any questioned costs.

Of course, no contractor could want or afford an "inadequate" opinion on one or more of its internal control systems. The consequences are too great including ineligibility for award of contract if the accounting system is inadequate or the loss of direct bill authority is the billing system is inadequate. The attorney noted that there is no statutory, regulatory or contractual basis for many of the control objectives that DCAA uses to conduct its audits. She also stated that many of the control objectives are subjective, and reasonable minds can differ about what is or is not adequate. Not only are some of the control objective very subjective but we would add that some auditors do not consider "materiality" before asserting a contractor's failure to comply nor do they assess whether such a failure might result in unallowable costs ending up on a Government contract.

The attorney concluded by stating that the net result of this new audit policy is that systems audits are consuming a tremendous amount of time and resources for both DCAA and contractors. We can attest to that. Sadly however, taxpayers are not being well-served by these efforts. While DCAA has a very important mission in helping to ensure the propriety of costs charged to Government contracts, focusing on system audits is not an effective or efficient method for protecting the Government against unallowable costs.

To read DCAA's new audit guidance, go here. To read the attorney's full written testimony, go here.

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