Thursday, December 18, 2014

Who's Watching the Purse? Turns Out No One Is

NASA spent $15.6 billion in fiscal year 2013, more than half of that on cost-type contracts. Cost-type contracts pose a financial risk to NASA (and the Government, and the taxpayer) because they do not promise delivery of goods and services at set prices. To mitigate the risk associated with the use of cost-type contract, FAR requires contractors to submit annual incurred cost submissions. These submissions are then audited (or should be audited) to assess whether costs are properly applied to contracts, sufficiently supported, and allowable.

NASA (and all Government agencies) generally has six years to recover any unallowable costs from the date an adequate incurred cost proposal is submitted. Heretofore, the Defense Contract Audit Agency (DCAA) has been performing the incurred cost audits under a reimbursable agreement. According to NASA estimates, there are 1,153 incurred cost proposals waiting to be audited, 39 percent of which predate 2009.

Yesterday, the NASA Office of Inspector General (NASA-IG) issued a report on an audit intended to assess whether NASA had adequate procedures to ensure that costs passed on to the Agency are supportable, allowable, reasonable, and allocable. The report disclosed that NASA is at increased risk of paying unallowable, unreasonable, and unallocable incurred costs and of losing the opportunity to recoup improper costs because NASA contracting officer rely too heavily on DCAA's incurred cost audit process. Under DCAA's new risk-based methodology, DCAA has significantly decreased the number of contractor proposals it audits in an effort to reduce its six-year backlog of incurred cost proposals awaiting review.

The NASA-IG determined that NASA had not strengthened its internal controls to account for the significant reduction in DCAA oversight of NASA cost-type contracts. The IG also concluded that NASA's reliance on DCAA is inhibiting the Agency's efforts to timely close out contracts.

To remedy these deficiencies, the IG recommended that NASA revise its FAR Supplement to allow independent public accounting firms to provide supplemental audit coverage for NASA contracts where DCAA cannot be responsive to NASA's need for an audit. This change would be consistent with what other Agencies have done recently - i.e. rely on independent CPA firms to perform incurred cost audits. NASA agreed with the recommendation and provided a plan to revise the NASA FAR Supplement so as to allow outside firms to supplement DCAA audits.

It seems that not every Agency is enamored with DCAA's new risk-based approach to auditing - an approach that pretty much ignores any proposal under $5 million. That high of a threshold is too much in the eyes of some for protecting the Government's interests. This new plan of NASA's heralds yet more diminution of DCAA's workload and influence in the contract audit environment.

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