Relax DCAA, You Can't be Sued for Defective Auditing

Last September, KBR (Kellog Brown & Root Services, Inc.) created quite a stir in the Government contracting community when it filed a suit against the Government to recover $12 million in legal fees incurred in defending against Government claims based on what it considered to be defective auditing by DCAA (Defense Contract Audit Agency). KBR claimed that DCAA was negligent in performing its audit work and did not follow a number of Generally Accepted Auditing Standards (GAGAS). Click here for a recap of the initial filing.

Late last month, a Federal Judge for the US District Court (Delaware), granted a motion by the Government to dismiss the suit because DCAA was acting within the Government's discretionary authority and therefore immune from prosecution.

Sovereign immunity not only protects the US from liability, it deprives a court of subject matter jurisdiction over claims against the US. While the FTCA (Federal Tort Claims Act) waives the federal government's sovereign immunity with respect to tort claims for money damages, the "discretionary function" exception limits that waiver, eliminating jurisdiction for claims based on the exercise of a discretionary function on the part of the employee of the government.

The Supreme Court has established a two-part test to determine whether the discretionary function exception applies. First, the court must consider whether the action involves an element of judgement or choice. Second the court must determine whether the judgment exercised is of the kind that the discretionary function exception was designed to shield. In other words, the discretionary function exception protects only governmental actions and decisions based on considerations of public policy. If a regulation allows the employee discretion, the very existence of the regulation creates a strong presumption that a discretionary act authorized by the regulation involves consideration of the same policies which led to the promulgation of the regulations. The focus of the inquiry is not on the agent's subjective intent in exercising the discretion conferred by statute or regulation, but on the nature of the actions taken on whether they are susceptible to policy analysis.

In this case, the Judge ruled that DCAA performed functions with significant discretionary elements. KBR argued that DCAA's audit did not involve discretionary judgment because the Agency failed to comply with mandatory auditing standards and procedures such as the Contract Audit Manual (CAM) and Generally Accepted Government Auditing Standards (GAGAS). However, the Judge sided with the Government in its contention that CAM and GAGAS both require auditors to exercise professional judgment when conducting audits. Regardless, DCAA's alleged failure to meet certain standards set by CAM and GAGAS does not eliminate the discretionary nature of DCAA's audits. Government auditing standards leave ample room for the exercise of professional judgment. Therefore, as the Judge explained, DCAA audits involve professional judgment and constitutes a discretionary action.

You can read the entire decision by clicking here.