Accounting System Adequacy - Canadian Company

The DoD-IG (Inspector General) issued a report last week that disclosed deficiencies in a contractor's accounting system that led to over-billings on cost-type contracts.

The contractor was General Dynamics Land Systems (GDLS) - Canada and the Government oversight organizations were DCMA (Defense Contract Management Agency) - Detroit and the Project Management Office Stryker Brigade Combat Team (PMO-Stryker). Because this was a Canadian company, Canada's Public Works and Government Services (PWGSC), not the Defense Contract Audit Agency (DCAA) was the responsible "audit" organization.

The DoD-IG found deficiencies in the way the contract was administered. They found that DCMA and PMO-Stryker officials did not verify that General Dynamics' accounting system was adequate to properly account for costs on a cost-type contract. In fact, the DoD-IG laid the blame on Government officials, not the contractor because the Government officials should have performed some minimal effort to ascertain that GD had a lousy accounting system. The DoD-IG also criticized DCMA for not coordinating with Canada's contract auditors to determine the sufficiency of GD's accounting system.

As a result of the deficiencies noted, GD charged $867 million to the wrong contract line item (and to the wrong fiscal appropriation). This caused violations to the Anti-Deficiency Act (ADA). Moreover, the DoD-IG found that no one in the Government had a clue as to whether $1.5 billion charged to the contract were allowable costs under the contract.

The DoD-IG recommended that the Director of Defense Procurement and Acquisition Policy get on the stick and make sure that Canada's contract auditing arm, the PWGSC, start auditing in a manner that complies with U.S. fiscal laws and auditing standards. Additionally, PWGSC needs to assess whether GD's accounting system is adequate for Government contracting purposes. Finally, the DoD-IG wants the Army to determine whether the extent of ADA violations and report those up the chain.

There is a lesson here for contractors who have or are considering subcontracts with foreign companies. If those subcontract costs require audit or oversight, don't assume that other countries have the same rigorous contracting and accounting standards that we have here. You might need to take a few extra steps to ensure the propriety of their costs and their cost allocation systems.