Friday, February 18, 2011

More Auditors means More Auditing

Earlier this month, the Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Contracting Oversight, held a hearing on how to improve Federal contract auditing. This hearing focused on the role played by DCAA in performing contract audits for agencies other than the Defense Department. For many of these agencies, there is no significant role because either i) those agencies do not feel audits are necessary or ii) have contracted audit services by outside firms. A video archive of the hearing as well as copies of the prepared testimonies by witnesses are available online.

In his prepared comments, DCAA Director Patrick Fitzgerald indicated that the audit agency has added 500 new audit positions in the past two years, representing a 12 percent increase in professional staffing. Senator Brown expressed incredulity that this hiring binge was going to improve contract audits. He stated that 500 more auditors was an indication that "something is broken". He asked why can't we hire 500 new workers, construction workers or regular private sector employees instead?

So, we ask, what do 500 more auditors mean to Government contractors? Couple this significant staffing increase with the diminishing role of DCAA in pricing, forward pricing indirect rates, purchasing system reviews, and financial capability reviews (see our earlier post on the new Defense policy for shifting work from DCAA to DCAA) and there will be more auditors performing fewer audits meaning, they'll be spending more time per audit.

DCAA audits will become more in-depth that what contractor's might be accustomed to. The trend over the past few years to more "desk" audits will reverse itself and auditors will spend more time at contractor locations and less time at their desks. There is already a marked increase in the level of testing being performed on contractor assertions and representations. There has always been a requirement for auditors to gather sufficient, competent, evidential matter to support his/her conclusions and recommendations but auditors will be taking fewer risks and instead of taking things at face value, will dig deeper and probably look at corroborating data (do employee timesheets agree with the stated purpose of a trip?) There will certainly be more attention focused on contractor internal control systems based on the premise that good internal control systems will reduce the chance that unallowable, unallocable, or unreasonable costs get charged to Government contracts.

Look for more floorchecks. In the past few years, the frequencies of floorchecks and numbers of employees interviewed have fallen to laughably low levels. Many contractors do not even consider floorchecks to be a likely occurrence except when the auditor is performing another type of audit. However, there is a renewed realization and understanding that a contractor's timekeeping system is the primary "source document" for one of the largest cost elements charged to contracts. We've heard of instances where auditors have conducted employees interviews like an inquisition.
Many contractors have been complaining to their elected officials, contracting officers, trade group representatives, and anyone else that will listen about DCAA's inability to complete incurred cost audits in a timely manner, and the resulting impact on their cash flows. As a stop-gap measure, DCAA is increasing its efforts to ensure that contractor provisional billing rates are appropriate. One method of doing this is to ensure the timeliness of contractor incurred cost submissions. Although on one hand it is bemusing to watch the ferocity with which DCAA goes after contractors who are late in submitting their incurred cost claims, knowing they won't be audited for several years, the claims do provide a level of assurance as to the propriety of the provisional billing rates. Once those submissions are turned in, contractors can "true up" their billings for that year. In theory, under cost type contracts, contractors should recover all of the costs that are booked to the contract(s), no more and no less.
While on one hand, the types of audits that DCAA performs are fewer, the ones that remain will be more in-depth than they were in the past. The most significant audit activities in the coming months will be on incurred cost audits and internal control reviews.

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