Monday, June 20, 2011

Audits - Return on Investment

Government auditing organizations love to tell everyone how much money they return to the U.S. Treasury. They all do it; the GAO, the Offices of Inspector Generals (IGs), Defense Contract Audit Agency (DCAA), the Army, Navy, and Air Force Audit Agencies, down to state and local audit agencies. Get one of them in front of a Congressional committee and invariably, as part of their introductory comments, some high-ranking agency official will proclaim what a great job they do as evidenced by the "return on investment". It goes something like this; "In fiscal year 2010, our Agency returned $15 to the Treasury for every dollar incurred." The problem is that most of these figures have not been independently verified.

DCAA has been pretty quiet on its savings statistics as of late because it has watched its returns drop precipitously over the last few years. There are a number of reasons for this but essentially, it is because the Agency now issues significantly fewer audit reports than it once did - fewer reports means less cost savings. For this particular audit agency, the trend will only continue as it has abandoned most of its pricing activities

DCAA recently announced a plan to reverse the trend. In a June 2, 2011 memorandum, DCAA instructed its staff to project cost savings from operations audits over a six year period, rather than one year. That is a six-fold increase in reported savings with the "stroke of a pen".

Operations audits are those that assess the efficiency, effectiveness, and economy of a contractors operations. If DCAA makes a recommendation and the contractor agrees and implements the recommended change, DCAA would calculate and report the cost savings for a one year period. Under this new guidance, DCAA will be calculating and reporting the cost savings for a six year period - presto, improved statistics.

The next time you hear someone brag about his/her agency's return on investment, don't be impressed.

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