Is This the Pot Calling the Kettle Black?

As many of you know, the interim rules on contractor business systems became final last week. There were a few changes made to the interim rules and we will discuss those in a subsequent posting. We didn't see any substantive changes - the rules still apply only to covered DoD contracts. Covered contracts are those subject to CAS (Cost Accounting Standards). Small businesses are exempt from CAS. So are many other types of contracts. All said, these rules will primarily affect the big boys.


In reading the public comments and DoD's responses, the following sequence caught our eye. Someone essentially asked how DCAA (Defense Contract Audit Agency) could effectively assess the adequacy of a contractor business system when the quality of their audits cannot pass peer reviews. Here's the comment:

A respondent stated that DCAA does not have a clean audit opinion on the integrity of the audits they perform; reliance is being placed on an audit agency that must qualify its own audit reports. According to the respondent, the GAO audit reports cited the DCAA for many deficiencies that bring into question the validity of audit reports issued against contractors' business systems. The respondent stated that DCAA should not be viewed as the experts and withholds should not be based on audit reports or audit report quality control systems of questionable validity. The respondent asserted that the Government is attempting to hold contractors to a level of perfection that their own audit agency is unable to maintain. Consequently, the respondent suggested that the audit report should not be used as the sole foundation for a contracting officer's determination of system adequacy, particularly if regulatory withholding of payment will be the result.

Well, that's a pretty good question (and no, we were not the ones who posed it). DoD however, sees it a different way. In DoD's view, there is no issue with the qualify of DCAA's audits. The previous peer review assessment of the quality of DCAA's auditing has simply expired and has not yet been updated. Here is DoD's specific response to the question.

Currently, DCAA reports for audits performed in accordance with Generally Accepted Government Auditing Standards (GAGAS) must be qualified because the current external opinion has expired. This qualification solely states that the time frame required by GAGAS for an external peer review has expired. Outside of this exception, all of DCAA's audits are being performed in accordance with GAGAS. Furthermore, the objective of the rule is to ensure that contractor business systems provide timely, reliable information for the management of DoD programs. Contracting personnel will make appropriate determinations in accordance with this rule.