Sequestration Adds Challenges to Meeting Audit Goals

The Bloomberg News is reporting that DCAA (Defense Contract Audit Agency) has frozen hiring and will lose about five percent of its workforce (about 250 employees) as a result of sequestration. The article quotes DCAA's Director (Patrick Fitzgerald) as stating that these reductions will make it more challenging for the Agency to reach its goal of eliminating a $400 billion backlog of unaudited incurred costs from 2009 and earlier by September 2014. Not mentioned in the article is the prospect that furloughs will further reduce Agency resources for incurred costs and other types of audits.

In order to achieve this goal, DCAA is concentrating on what it considers to be high risk contractors, those with more than $250 million of flexibly priced (e.g. cost-reimbursable) contracts, contractors who have not had a previous audit, and contractors where there have been previous significant audit findings. We discussed this new approach when it was first publicized. We've seen the results and benefits of this approach in practice. DCAA audits an initial year of incurred costs, finds no exceptions, and the contracting officer agrees to the proposed rates for all subsequent years. DCAA calls this the "IRS Model" - not every submission gets audited.

One thing is certain with this new model - the audits are much more thorough than they used to be. This has proven frustrating for many Government contractors who are accustomed to lesser scrutiny. However, its possible that on average, the amount of oversight is about the same as it has always been. An intense audit of one year that can be used to close out, say three years of incurred cost, could be about the same effort as performing less detailed auditing steps on each of those three years.

Another certainty is the payback on these audits. DCAA projects that it will uncover $4 billion in overcharges out of the $400 billion backlog. That's not chicken feed and exceeds by a huge margin the cost of the audits.