DCAA Once Again Chastised for Poor Auditing - Part 1

Late last year, the Defense Department's Inspector Generals Office (DoD-IG) issued a report on its investigation of a Hotline Complaint regarding the examination of DCAA (Defense Contract Audit Agency) audit of subcontract costs at an unspecified contractor.

In this case, the auditor used a 20 percent decrement factor to question subcontract costs that, in her opinion, were not adequately supported by the contractor. The DoD-IG found that DCAA had not followed Generally Accepted Government Auditing Standards (GAGAS) in performing the audit because the auditor had not obtained sufficient evidence to conclude the costs were unallowable. In addition, the 20 percent decrement factor was arbitrary and unsupported and inconsistent with DCAA policy. The DoD-IG recommended that DCAA withdraw its audit report and consider re-evaluating subcontract costs at this particular contractor. The Director of DCAA concurred with the IG's findings.

The complainant alleged that a DCAA office did not comply with GAGAS or DCAA policy when it questioned $6.6 million of a DoD contractor's claimed fiscal year 2008 subcontract costs. Specifically the complainant alleged that the office failed to comply with GAGAS when the auditor concluded that the contractor did not adequately support its claimed subcontract costs, and inappropriately applied a 20 percent decrement as a basis for questioning subcontract costs.

There was a total of $33 million in subcontract costs incurred during 2008. DCAA sampled 70 subcontractor invoices representing $13.5 million of the claimed amount. DCAA claimed that the contractor did not provide adequate documentation to support the allowability of any of the 70 invoices but rather than question costs based on the statistical sample (which would have been 100 percent of the costs based on DCAA's rationale for not accepting sampled costs), the auditor chose to question 20 percent based on its consideration of "contractor performance and product delivery" (whatever that is supposed to mean).

The IG found DCAA's methodologies fundamentally flawed. The IG reported that DCAA failed to comply with GAGAS by not obtaining adequate evidence to support its conclusion that $33 million in subcontract costs were unsupported. In fact, the IG noted that the audit working papers contained additional evidential matter submitted by the contractor that DCAA didn't even review or at least there was no evidence that DCAA considered it in its opinion.

The IG also noted that DCAA's use of the 20 percent decrement was inappropriate. DCAA guidance clearly states that the 20 percent decrement is advisory in nature (advisory to the contracting officer) when a contractor fails to timely submit required annual incurred cost submissions. In this case, the contractor did not fail to submit timely incurred cost submissions so the factor should not have been applied. The IG also drew the distinction between using the factor to question costs (inappropriate) versus recommending it to the contracting officer as a  tool to spur recalcitrant contractors into submitting their required incurred cost submissions (appropriate).

Click here to read Part 2 of this story.

You can read the entire DoD-IG report by clicking here.