Wednesday, November 15, 2017

DCAA to Share Audit Function With Commercial Firms - Part 3

This is the third part in our series on Section 803 of the 2018 NDAA (National Defense Authorization Act) which will require the Defense Department to begin utilizing private audit firms to augment the ability of DCAA (Defense Contract Audit Agency) to complete incurred cost audits in a timely manner. Though some may see it differently, this provision is not a rebuke of DCAA's performance in completing incurred cost audits in a timely manner. It is more a recognition that DCAA is not sufficiently staffed to conduct the full range of audits that the are required by procurement regulations.

Incidentally, the 2018 NDAA has now passed the House and its on to the Senate where passage is also expected.

Today we will focus on the implementation schedule for this new provision.

In Fiscal Year 2018, the Defense Department has to come up with a plan. The plan needs to include a description of the incurred cost audits that are appropriate to be conducted by qualified private auditors including the approximate number and dollar value of such incurred cost audits. Although not specifically prohibited, the large Defense contractors such as Boeing, Lockheed, Raytheon, United Technologies, General Dynamics, and Northrup Grumman will not be part of this list. DCAA will retain those contractors for itself. The plan must also include the number and dollar value of incurred cost audits for each of the following six fiscal years (fiscal years 2019 through 2025). By April 1, 2019, private audit firms must be under contract.

In order to improve the quality of incurred cost audits (and reduce duplication), the Defense Department is authorized to provide qualified private auditors with information on past or ongoing audit results or other relevant information on the entities the qualified private auditor is auditing.

The working papers generated by qualified private auditors will become the property of DoD except the qualified private auditor will be allowed to retain complete copies.

DoD is also required by Section 803 to implement numeric materiality standards for incurred cost audits to be used by auditors that are consistent with commercially accepted standards of risk and materiality. In developing such standards, DoD must consult with commercial auditors that conduct incurred cost audits, the Section 809 Panel, and other governmental and nongovernmental entities with relevant expertise. Whatever the outcome of this study, it is almost certain that the materiality and risk factors used by DCAA now, will change. Maybe that's good, maybe not.

So, who would you rather have come in and conduct your audits? Are you comfortable with the status quo (i.e. DCAA) or would you rather take your chances with a QPA (Qualified Private Auditor).

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