Thursday, December 4, 2014

New Recommendations for Reforming the Acquisition Process

The NDIA (National Defense Industrial Association) issued a report last month entitled "Pathway to Transformation". It lays out twelve recommendations pertaining to acquisition reform in three broad categories; authority and responsibility, matching requirements to resources, and evidence based decision making. The entire report can be downloaded or read here.

A lot of the recommendations seem old because they have been bandied about for years; more commercial pricing, delegate more authority, get rid of regulations, and improve management of the acquisition workforce. But, being former Government auditors ourselves, the one that caught our eye first concerned DCAA (Defense Contract Audit Agency).

Here's NDIA's recommendations for DCAA.
Problem Description: Inefficient audit practices are delaying the acquisition process and adding unnecessary overhead costs to the government and to industry support of the acquisition process.
Root Cause Analysis: In a compliance-driven process, audits are seen as key to successful system performance, but current audit requirements exceed DCAA's capabilities and resources. Recent statements by DCAA leaders indicate that 40 percent of DCAA personnel have five or fewer years or less experience in government auditing, which, when combined with vigorous assertions of audit independence, can lead to wasteful expensive audit practices. Decentralized DCAA management allows variation in practice and culture among its auditors which can also be unhelpful.
Solution Proposal: Improving the relationship of government auditors with government vendors is one of the greatest challenges in acquisition policy, since auditors must simultaneously look for inaccuracies in vendor reporting or documentation to protect the taxpayer while also avoiding unnecessary waste caused by inefficient audit practices.
Two general principles applied at the level of the individual auditor help to accomplish these goals:
     1.a risk-based approach to auditing that focuses on materiality, and
     2. an advisory approach to auditing that focuses on helping vendors come into full                compliance rather than an adversarial approach that seeks to identify every possible          error in vendor reporting and documentation and penalize them for it.
The law does not specify these practices, nor should it, since individual auditors ultimately need the flexibility to behave toward the vendor in the manner most befitting the given circumstances, which no law could be flexible enough to capture in its entirety. Instead, the problem is ripe for oversight and management, and therefore NDIA recommends an approach that combines the two.
10 USC 2313a which establishes an annual reporting requirement for DCAA, should be amended to include a report of DCAA's efforts to align its audit policies and practices across its various regions. At the organization level, increased commonality will encourage organizational learning as the regions connect with each other to identify and adopt best practices and to learn from mistakes.
Because most audit issues are unique to the company in question, the congressional defense committees should encourage DCAA to create outreach opportunities through meetings with companies, industry trade associations, and other contractor groups, to identify vendor complaints, review the facts, and resolve them effectively for both the vendor and auditors involved. Just as companies should not be treated as adversaries by auditors, neither should auditors be treated as adversaries by companies, and both should approach the audit process with a desire to learn and improve outcomes.
Everyone complains about the auditors and in a few cases, such complaints are justified. But these recommendations display a lot of ignorance on NDIA's part as to the nature and purpose of auditing. First of all, auditing, should never be allowed to degenerate into cozy relationships. One only has to recall the Enron scandal that was revealed in 2001 to see what can happen when clients and auditors blur the standards of independence. The auditors are there to protect the Government's interest, not to join the company's softball league. And, NDIA's comments about materiality are way off base. Materiality, significance, and risk assessments are factored into every audit performed. No audit entity is going to spend time reviewing immaterial items. Audit procedures are designed to provide "absolute" assurance, but "reasonable" assurance.

Its popular to criticize the auditors and perhaps NDIA threw in these recommendations as a bone to its 91,000 members. It is unlikely that such recommendations will contribute to acquisition reform unless one redefines reform as eliminating the auditors.

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