Wednesday, October 17, 2018

DCAA's Annual Report to Congress - Part II

This is Part II of our series on DCAA’s (Defense Contract Audit Agency’s) latest annual performance report to Congress. If you missed Part I, click here. Yesterday we discussed the overall ROI (return on investment) that DCAA achieved – DCAA returned more than $5 for ever dollar it spent. Today we will cover sections of the report that deal with staffing and what it cost to conduct the average audit.

DCAA has probably the most educated and professional staff of any major Governmental organization. The Agency employs more than 4,100 auditors. All of them have at least a bachelor’s degree. More than 40 percent have advanced degrees and nearly a quarter of them are Certified Public Accountants.  These are very impressive and enviable stats. However, one thing the report does not assess is employee turnover. Based on our interactions with the Agency, DCAA experiences significant turnover which means that its rank and file staff, on average, do not have a whole lot of experience to go along with their educational and professional backgrounds.

DCAA reported that it cost nearly $114 thousand on average to evaluate a forward pricing proposal and $297 thousand to complete an audit of incurred costs. This works out to somewhere around 70 hours and 185 hours respectively. Of course, these are only averages. At major contractors, auditors will spend many thousands of hours to complete an incurred cost audit and at smaller contractors, audits might be knocked off in just a few hours with a desk review. These two audit areas by the way represent the preponderance of DCAA’s workload.

One troubling statistic is the sustention rate for incurred cost. Sustention rate is measured by comparing audit exceptions identified in audit reports against what the contracting officers were able to sustain when negotiating or settling audit exceptions. That ratio was only 28.6 percent in fiscal year 2017. It seems to us that that ratio should be much higher. Something is going on. Perhaps auditors are not adequately supporting their positions. Perhaps auditors can’t decide on a particular issue and simply throw it over the transom for someone else to decide. Perhaps contracting officers are not aggressively supporting audit positions. Perhaps contracting officers are not taking the time necessary to understand the issues. Every audit issue raised by an auditor require time and effort to respond. Contractors usually need to make multiple responses, one to the auditor and another to the contracting officer. With only a 25 percent sustention rate, it seems like contractors are wasting a lot of time and money to fight what are ultimately unsupported Government positions. DCAA really needs to do a better job of vetting their positions before publishing reports of findings.

Tomorrow, we will look into other aspects of DCAA’s annual performance report to Congress – namely how DCAA is clearing out its incurred cost backlog. If you wish to read the full performance report yourself, it can be accessed here from DCAA’s public website.

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