Thursday, September 18, 2014

Defense Contractor Sues DCAA for Defective Auditing

There are probably some contractors thinking to themselves right now: "Its about time" - perhaps even some of those are ready to file Amicus Curiae briefs.  Yesterday, Kellog Brown & Root Services Inc. (KBR) filed a suit against the U.S. Government acting through its agent, the Defense Contract Audit Agency (DCAA) in Federal Court (the U.S. District Court for the District of Delaware). The lawsuit seeks to recover $12.5 million in legal fees incurred by KBR in defending against what were ultimately determined to be "defective" DCAA audits.

There are many facets to this lawsuit but the underlying complaint is that DCAA was negligent in performing its audit work and did not follow a number of Generally Accepted Government Auditing Standards (GAGAS). Which standards? Oh, some of the basic ones including qualifications, independence, planning, risk assessment, written audit program, briefing the contract, field work, supervision, and sufficient evidence to support conclusions.

Take the lack of "independence" for example. The complaint uses harsh language in alleging that DCAA was more concerned about how they would look before Congress than in gathering and understanding the facts:
... in an act intended to pander to an investigating Congressional committee, and at the behest of a similarly-minded PCO, DCAA took steps to enable the Army to recapture costs incurred by KBR ...
...amid persistent political pressure from Congress, DCAA issued an audit report in which it concluded that KBR had billed approximately $99.6 million in allegedly "unallowable" costs ... But the conclusions in the audit report were demonstrably false, and it is now clear DCAA performed this audit in a negligent manner...
The contract, known as LOGCAP III required KBR to perform a wide variety of functions, including construction and operation of military dining facilities, laundry, welfare and recreation services, facilities maintenance, power generation and distribution, waste management, water supply, vector control, fire protection, billeting, and equipment maintenance.

The contract included a clause that required the Army to provide "force protection" to KBR and its subcontractors commensurate with that provided to DoD civilians. By 2003, however, KBR was performing work in a hostile environment where insurgent attacks were frequent. In fact, KBR and its subcontractors lost 75 employees as a result of hostile actions and almost 500 more injured. As a result of the hostilities and the Government's failure to provide force protection, KRB hired some private security contractors and charged those costs to the Government.

DCAA decided that since the contract provided for Army protection, the cost of the private security contractors was not allowable and disallowed an estimate of those costs. Ultimately, KBR appealed this action before the ASBCA (Armed Services Board of Contract Appeals) and won. The ASBCA ruled that the private security costs were indeed allowable under the contract. Simultaneously, the Government filed a false claims act violation against KBR for violations of the civil False Claims Act for billing costs associated with the use of armed private security. A short time later, the Government voluntarily dismissed the FCA case. In both cases, according to the current complaint, the Government's case was jeopardized by DCAA's defective auditing.

Keep in mind that this complaint presents only one side of the story. Ultimately KBR is going to have to prove its case in court. But, its going to be interesting to watch and the outcome, if favorable to KBR, may embarrass DCAA. It is important to note however, that many of the criticisms levied at DCAA in this lawsuit have already been addressed and rectified by that Agency. The latest peer quality review conducted by one of its loudest critics, the DoD Office of Inspector General, was rated a "pass".

If you would like to read the full complaint, you can download a copy here.

2 comments:

  1. Based in this article:

    http://www.washingtonpost.com/blogs/federal-eye/wp/2014/09/18/rand-paul-chuck-grassley-shine-a-light-on-the-nonprofit-climate-change-group-neon/

    DCAA management does seem to have veto power over audit decisions. If they can remove audit findings from a report improperly, then KBR has a strong argument that they could put improper findings into a report.

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  2. I was with DCAA at KBR in 2007. I do not believe the auditors named in the suit are the real culprits. It was my observation, everything done on KBR audits was fully orchestrated by the DCAA Central Region Deputy Regional Director (DRD).

    It was apparent to me, any auditor or supervisor who attempted to do a real audit or who did not comply immediately and fully with the DRD was removed.

    I once notified the DRD a questioned cost of millions was based on nonfactual information and the facts showed no basis to question the costs. The response I got indirectly from the DRD, was so what we know there are questionable costs we have missed.

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