DCAA's Fiscal Year 2016 Report to Congress

DCAA (Defense Contract Audit Agency) recently made its fiscal year 2016 Report to Congress available on its public website. You can download it here.   This is the sixth annual report published by DCAA which is required by Statute and began during the time that DCAA was under intense scrutiny over the quality of its audits. This report, and all of the reports, highlights DCAA's audit performance, recommendations to improve its audit processes, industry outreach activities, and key accomplishments.

This year's report  offers a glimpse into DCAA's now organizational structure which had basically remained unchanged since the Agency was formed in 1965. There is still a Headquarters. The number of Regional Offices has been reduced from five to four. The most significant change however is the establishment of four Corporate Audit Directorates (CADs). CAD are responsible for overseeing the audits of select major contractors. Formerly, these major contractors were covered by many different branch and sub-offices throughout the country.

The report focuses heavily on DCAA's successes during the year which include reducing the incurred cost audit backlog from 21,000 in 2011 to 4,700 in 2016., achieving net savings of $3.6 billion and returning $5.70 to the Government for every dollar it spends.

The section of the report that we and most contractors are interested is recommendations to improve the audit process. This year, the Agency expressed a desire to become more involved in the legislative processes impacting the Agency. Also, they Agency yearned for assistance in maintaining a steady level of staffing. It takes a long time to recruit, train, and develop audit staff but the on-again off-again nature of hiring freezes presented a major barrier and hindered its ability to accomplish its mission. There is no sense of self-reflection in DCAA "recommendations". Apart from Congress's muddling, everything is fine.

DCAA's conclusion is this:

DCAA is an important member of the acquisition community with a unique and valuable mission. Our new organization structure will increase communication and coordination with major defense contractors while allowing our regional directors to focus on small and mid-sized contractors. We will continue to develop innovative ways to improve the audit process and make our services more responsive to the needs of acquisition community. We are ready for the challenges of the future and look forward to continuing to serve the warfighter and taxpayer.

DCAA to Undergo Another Peer Review

The Department of Defense Office of Inspector General recently announced that it is initiating a new peer review on the quality and adequacy of DCAA (Defense Contract Audit Agency's) audit work. The last quality control report was issued back in August 2014 and covered DCAA's system of quality controls in effect as of June 30, 2013. Federal audit organizations can receive a rating of pass, pass with deficiencies, or fail. DCAA received a rating of "pass with deficiencies". The deficiencies related to lack of sufficient documentation where the peer review team could not discern the judgment and conclusions drawn by DCAA auditors. Additionally there were instances where the documentation did not support information in the audit report.

The objective of the peer review, according to the OIG's engagement letter includes the following:

Our objective is to determine whether the DCAA’s system of quality control was suitably designed and whether the audit organization is complying with its quality control system to provide it with reasonable assurance of conformity with the applicable professional standards. Government Auditing Standards require that an audit organization performing audits in accordance with Government Auditing Standards have an appropriate internal quality control system and undergo an external quality control review every three years by an organization that is independent of the organization being reviewed. We will review individual audits from DCAA headquarters and field offices, as well as internal quality assessment activities necessary to meet the review objectives. We will use the CIGIE Guide for Conducting Peer Reviews of Audit Organizations of Federal offices of Inspector General. 

DCAA is, of course, hoping the next peer review will result in an improvement from its last peer review. The Agency has certainly worked hard to improve its quality control systems and compliance with applicable policies and procedures. Perhaps now that a lot of the adverse publicity that has tailed DCAA for the past few years has diminished, the OIG can be more objective in its peer review.

DoD Database Contains Inaccurate Information on Audits of Contractors

The Department of Defense (DoD) Instruction 7640.02 establishes record-keeping and reporting requirements for"reportable" contract audits. In support of the record-keeping requirements, DCMA (Defense Contract Management Agency) maintains a database that DoD components use to track and record the action taken to resolve and disposition "reportable" contract audits. Contracting officers (including DCMA contracting officers) are required to promptly update the status of their actions of "reportable" audit reports assigned to them.

"Reportable" contract audits include business systems (e.g. accounting, billing, estimating, etc.), claims, equitable adjustments, defective pricing, Cost Accounting Standards, operations (efficiency, effectiveness, economy), incurred cost, preaward, terminations, and EVMS (earned-value management system) where some form of exception or recommendation has been rendered.

Each month, DCAA (Defense Contract Audit Agency) sends DCMA a list of new reportable audit reports to include in its database. The database includes 20 or so data elements including contractor name (of course), audit report number and date, amount of questioned costs and amount subject to penalty, and qualifications, to name a few.

DoD Instruction 7640.02 requires contracting officers to promptly update the status of their actions. Once they complete certain actions, contracting officers must enter the amount of questioned costs they sustain, the date they resolve the audit report, and the date they disposition the audit report. Eventually, the data gets rolled up into the DoD-IG's semi-annual report to Congress.

This accuracy of this CAFU (Contract Audit Followup) database should be of concern to contractors. We know that years ago, it was consulted for purposes of responsibility determinations. That practice may still go on. In any event, the database is "out there" and available to the DoD procurement community. Obviously, contractors included in the database have or have had significant audit findings leveled at them.

The Department of Defense Office of Inspector General (DoD-IG) recently published a report on its assessment of the accuracy of this CAFU database. The results were not encouraging. Of the 50 CAFU audit records tested, the DoD-IG found that 41 (or 82 percent) included inaccurate information in one or more data fields. In fact, the errors overstated the amount of questioned costs for those 50 records by $2.6 million.

We suggest that contractors contact their contracting officer for a listing of audits in the database and the status of each. Contractors should also validate the accuracy of the information contained therein. Contractors are not going to be able to change the results of an audit at this point but can at least ensure that it is current, complete, and accurate.

You can read the entire DoD-IG report here.

DCAA Updates its Strategic Plan

DCAA (Defense Contract Audit Agency) recently published an updated strategic plan. The document addresses steps to create an ideal audit environment through 2020.

The new strategic plan has five overarching goals that focus on people, products and customers. These goals include:

• Embody a culture of one Agency, one team, one direction
• Support the acquisition community by providing quality audits and advisory services
• Foster a diverse workforce of highly motivated and valued professionals
• Enhance working relationships with DCAA external stakeholders
• Provide the workforce with the right information, business processes, and capabilities to successful accomplish the mission.

At heart, these goals are not so different than any of DCAA's previous strategic plans or the strategic plans of dozens of other federal, state, and local agencies and commercial customers. It seems like these five-year updates is simply a matter of rephrasing the language. Certainly every entity wants to support their customers and be a good place to work. Why not?

The agencies that rely on DCAA's audit work might be most interested in Goal 2, supporting the acquisition community by providing quality audits and advisory services. DCAA listed three objectives to support this goal;

1. Be responsive to the acquisition community
2. Perform the right services with the greatest value
3. Deliver quality products and services on time.

DCAA is wise to focus on this area and mend fences with it acquisition community customers. Sometimes the Agency's view of "right services" is vastly different than that of its customers.

You can read the new Strategic Plan here.

DCAA's Fifth Annual Report to Congress

Each March for the past five years, DCAA has prepared a report to Congress summarizing its activities for the most recently completed fiscal year. This reporting requirement was mandated by Section 805 of the Fiscal Year 2012 National Defense Authorization Act (NDAA) and came about at a time when the Agency was under intense Congressional, GAO, DoD-IG and media scrutiny over the conduct of its contract audits.

The first item called out in the 2012 NDAA for inclusion in DCAA's Report to Congress was for a section describing significant problems, abuses, and deficiencies encountered during the conduct of contractor audits. From the beginning, DCAA has not made this topic the premier lead-in to its annual report. Instead, it appears almost at the end of the report. And, the Agency never uses the term "abuse" in its report.

In 2011, the section was entitled "Significant Deficiencies and Recommended Actions to Improve the Audit Process. That year, DCAA was looking to improve the adequacy of contractors' forward pricing proposals, defining contractor business system rules, improving audit access to contractor records and the need to add additional resources to reduce the incurred cost audit backlog.

In 2012, the Agency was still concerned about the adequacy of contractor forward pricing proposals and access to records. There was no mention of business system rules or staffing levels.

In 2013, the same story; adequacy of forward pricing proposals and access to records.

In 2014, DCAA again cited forward pricing proposal adequacy and access to records including access to contractor internal audit reports and unfettered access to contractor employees.

In the latest report, 2015, the focus changed. The section is no longer entitled "Significant Deficiencies and Recommended Actions to Improve the Audit Process". Gone is the term "Significant Deficiencies". The section heading now reads "Summary of Recommended Actions or Resources to Improve the Audit Process". So, in five years, the Agency has evolved out the terms (i) significant problems, (ii) abuses, and (iii) deficiencies. Now it is simply a listing of things DCAA thinks will improve its audit processes.

 For 2015, gone are the concerns about access to contractor records and adequacy of forward pricing proposals. In their places is a plea for more auditors, auditors to perform business system reviews (including floorchecks) and defective pricing (i.e. compliance with the Truth in Negotiations Act or TINA) audits. The Agency stated that it should be conducting 675 business system audits per year but only performed 22. Similarly, DCAA completed only 26 defective pricing audits during the year which it considers woefully short of the number of audits it needs to perform.

Nice though, to see that there are no longer any abuses, significant problems, or deficiencies within the Agency.

You can read the entire Annual Report here.

DCAA Set to Undergo Significant Reorganization

You may have heard rumblings about an impending reorganization of the Defense Contract Audit Agency (DCAA). There is plenty of chatter but DCAA has not publicly announced anything yet (that we know of). Here's what we've been able to gleen.

DCAA is currently comprised of five regional offices; Northeastern, Eastern, Mid-Atlantic, Central, and Western - and a Field Detachment specializing in audits related to sensitive compartmented information and special access programs.

Under the reorganization, the number of regional offices will be reduced from five to three - Eastern, Central, and Western. But these three remaining Regions will not have cognizance over the Government's largest defense contractors. Those will form their own "special" regions and report to the Director, just like the Regional Directors do now. There will be five new special regions including:

• General Dynamics/Raytheon/BAE
• Lockheed Martin
• Boeing/Honeywell
• Northrup Grumman
• L-3

Any audit activity at any of the segments of these contractors will report to the Director of the respective Contractor regions.

What will this mean for contractors? Well, if you're one of the major contractors listed above, you should see improved consistency in audit positions. One major contractor frustration is auditors at a plant in Seattle taking different positions than auditors at the same contractor's plant in St. Louis. Since all of the segments will be reporting to the same director, consistency should be improved.

Don't expect a whole new cadre of auditors however. That will stay the same. Don't expect shifts in audit focus. There is only so many type of contract audits that can be performed. Do expect better access to top management. The special regional directors are only one level below the Director for all of DCAA.

If you're not one of the eight top defense contractors, you probably shouldn't expect to see any significant changes when interacting with contract auditors.

DCAA Has its Own Office of Inspector General (OIG)

The Defense Contract Audit Agency (DCAA) Office of Inspector General (OIG) was established about a year ago. The DoD OIG began encouraging the establishment of independent OIGs with Defense Agencies and DCAA was one of the first to do so. According to DCAA, the function of the independent OIG is critical because federal employees within the Executive Branch are required to report fraud, waste, abuse and gross mismanagement, which can come in may forms.

Previously, while DCAA has always had an internal review directorate set up to receive similar-type complaints, the process was not governed by statute. Converting the internal review practice to an OIG provides DCAA employees with processes governed by law, as opposed to internal regulatory requirements. DCAA employees can now disclose incidents of fraud, waste, abuse or gross mismanagement without fear of reprisal or retaliation.

Contractors should be aware that the DCAA OIG, besides matter relating to inter-Agency fraud, waste, and abuse, will also investigate contract related fraud, waste, and abuse. These include

• contract and procurement irregularities
• cost/labor mischarging
• defective pricing
• defective parts
• bid rigging
• bribery and acceptance of gratuities

DCAA's new OIG organization is comprised of auditors and investigating officers previously assigned to internal review responsibilities and are located throughout the continental United States. The organization now has its own hotline as well where "private citizens" are encouraged to report incidents of fraud, waste, and abuse.

It seems to us that this new organization is a duplication of the functions already performed by the DoD-IG. It seems like there might be some confusion over which hotline someone should call - the DoD-OIG hotline or the DCAA-OIG hotline. Additionally, it moves DCAA from a purely audit organization to one with investigative responsibilities. Contractors might want to clarify which arm of DCAA they're talking to - maybe legal counsel should be present.

You can read more about the new DCAA-OIG here.

DCAA Bails on non Non-DoD Audits

Section 893 of the 2016 National Defense Authorization Act prohibits DCAA (Defense Contract Audit Agency) from providing audit support for non-Defense Agencies (e.g. NASA, Department of Energy) until the Agency becomes "current" on its audits annual incurred cost submissions. Current is defined as less than 18 months of inventory. See further details here.

DCAA's extraction process has now begun and evidently, this prohibition includes in-process audits as the following email extract from a DCAA auditor to a contracting officer demonstrates:

We received some recent guidance that informed that we cannot continue working on non-DoD assignments. We are going to issue a formal memo to you stating why we can't work on the assignment. But basically, the NDAA requires us to not work on reimbursable non-DoD audits until our incurred cost audit backlog is less than 18 months, which the agency's backlog is currently not. Therefore, it looks like we can't continue work on non-DoD work until the NDAA language is updated for 2017 or we meet the requirement.

We can send you our current audit work and contractor supporting documents if you would like. When I stopped work I did not have many working papers completed but has a lot of supporting documents from <deleted> and its subcontractor <deleted>. I had not yet made it out to the other major subcontractor <deleted>. A few areas where we can still provide support for non-DoD customers are negotiation support, litigation support, and requests for cost/rate information. This will all be in the memo. Please contact me if you have any questions.

The guidance referred to in the email exchange is probably DCAA Audit Guidance Memorandum 16-PPD-001(R) discussing the impact of the NDAA on DCAA's audit support to non-Defense agencies. This guidance has yet to be published on DCAA's public website and we haven't seen a copy. If you have a copy and care to send it along it would be appreciated.

This new policy and guidance is going to impact a lot of DCAA's "customers" who have no internal contract audit function and will need to go out into the private sector to fill their audit requirements. Agencies that have privatized their contract audit needs already are experiencing mixed results. One official informed us that compared to Government auditors, independent CPA firms performing audits under contract have fewer findings but produce more timely audit reports. Also, the cost of an audit tends to be higher for private firms.

This temporary prohibition could become irreversible. If the private firms do good work, non-DoD agencies may find that they prefer privatization to audits conducted by Government auditors.

Former DCAA Director Hits the Revolving Door

One of our very first postings when we started this blog back in 2009 was to announce that DCAA had selected a new Director to replace the one that was dethroned after running afoul of Senator McCaskill. Patrick Fitzgerald with 30 years of Army Audit experience stepped in amid turbulence and ran the Agency for the next five years, retiring last Fall.

It was announced yesterday on Business Wire that Mr. Fitzgerald has joined the accounting and advisory firm of Baker Tilly Virchow Krause, LLP (Baker Tilly) in their specialized government contractor advisory services practice.

Meanwhile, the Director he deposed toils away as the COO (Chief Operating Officer) of DOE's Loan Programs Office.

Fitzgerald was succeeded by Ms. Anita Bales, who was previously DCAA's Deputy Director.

DCAA Under the Microscope Again

The Senate has finished its version of the Fiscal Year 2016 National Defense Authorization Act (NDAA) and, as usual and as expected, there are some differences from the House version. One of those differences impacts the Defense Contract Audit Agency (DCAA) and, if passed, will result in more of DCAA's work being performed by other groups.  The Senate Committee on Armed Services made the following statement:

The committee recommends a provision that would authorize the Defense Contract Audit Agency (DCAA) to provide outside audit support to non-Defense Agencies upon certification that the backlog for incurred cost audits is less than 12 months of incurred cost inventory. The committee understands that DCAA has made progress in reducing its incurred cost audit backlog but this has come at the expense of a reduction in the number of audits and increased backlogs in other areas of its responsibilities. The committee believes that DCAA management should not be distracted by directing and managing the audit responsibilities of other agencies until its own house is completely in order. The provision would require the Secretary of Defense to use up to 5 percent of the auditing staff of the Office of the Inspector General of the Department of Defense and the service audit agencies and, if necessary, augmented by private audit firms to help address DCAA's audit backlog. The provision would also require the Secretary to review the oversight and audit structure of the Department of Defense with the goal of improving productivity, avoiding duplicative program and contract audits, and streamlining oversight reviews.

The actual bill contains the following provisions:

Beginning October 1, 2016, DCAA may provide audit support for non-Defense Agencies once the Secretary of Defense certifies that the backlog for incurred cost audits is less than 12 months of incurred cost inventory.

 Adjustment in funding for reimbursements from non-Defense agencies. The amount appropriated and otherwise available to DCAA for a fiscal year beginning after September 30, 2016 shall be reduced by an amount equivalent to any reimbursements received by the Agency from non-Defense agencies for support provided in violation of the limitation under paragraph (1)

Use of Third Party Audits. The secretary of Defense shall use up to 5 percent of the auditing staff of the service audit agencies augmented by private sector auditors to help eliminate the audit backlog in incurred cost, pre-award accounting systems audits and to reduce the time to complete pre-award audits.

Use of Inspector General Auditing Staff - The Office of the Inspector General of the DoD shall make available 5 percent of its auditing staff to DCAA to help eliminate the audit backlog in incurred cost,  pre-award accounting systems audits and to reduce the time to complete pre-award audits.

DCAA's annual report to Congress will be expanded to include two new topics;

1. A description of actions taken to ensure alignment of policies and practices across the DCAA regional organizations, offices, and individual auditors
2. A description of outreach actions toward industry to promote more effective use of audit resources

Acquisition Oversight and Audits - The Secretary of Defense shall review the oversight and audit structure of the Department of Defense with the goal of enhancing the productivity of oversight and program and contract auditing to avoid duplicative audits and the streamlining of oversight reviews. The Secretary shall take all necessary measures to streamline oversight reviews and avoid duplicative audits and make recommendation for any necessary changes in law

Report - Not later than one year after the date of the enactment of this Act, the Secretary of Defense shall submit to the congressional defense committees a report on actions taken to avoid duplicative audits and streamline oversight reviews. The report will include:

1. A description of actions taken to avoid duplicative audits and streamline oversight reviews based on the review conducted.
2. A comparison of commercial industry accounting practices, including requirements under the Sarbanes-Oxley Act, with the Cost Accounting Standards (CAS) to determine if some portions of CAS compliance can be met through such practices or requirements.
3. A description of standards of materiality used by DCAA and the DoD-IG for defense contract audits (this will be very interesting)
4. An estimate of average delay and range of delays in contract awards due to time necessary for DCAA to complete pre-award audits.

Improving the Efficiency of the Defense Contract Audit Agency

The Chairman of the House Armed Services Committee, Rep Thornberry, yesterday released the FY16 NDAA (National Defense Authorization Act), The full committee will meet tomorrow to consider the proposal. Someone in Congress is listening to the cries of contractors who, at the minimum, are suffering cash flow disruptions because of DCAA's inability to complete audits in a timely manner. The proposal contains a provision designed to improve the efficiency of the Defense Contract Audit Agency (DCAA). Here is the provision, in full, without comment:

The committee continues to believe that more must be done to improve the efficiency of the Defense Contract Audit Agency (DCAA). In 2012, the committee learned that DCAA had not been subject to a peer review since 2006, despite the fact that according to generally accepted government auditing standards (GAGAS), a peer review of government audit agencies should be conducted at least every 3 years. As a result, the committee included section 1614 in the National Defense Authorization Act for Fiscal Year 2013 (Public Law 112-239), which assigned responsibility to the Inspector General of the Department of Defense for conducting peer reviews of Department of Defense audit agencies, including DCAA, in 2014.

As a result of that peer review, the Inspector General released a report on August 21, 2014, which found that 11 of 92 DCAA engagements reviewed during a 6 month period did not contain sufficient evidence for Inspector General reviewers to understand DCAA's auditing decisions. The Inspector General attributed these findings to an "absence of effective control measures in DCAA’s policies and procedures” for compliance with GAGAS. Additionally, the Inspector General found that DCAA had yet to correct its performance despite being aware of issues identified in a September 2009 Government Accountability Office report (GAO-09- 468) and, previously, by DCAA’s own quality assurance procedures. 

Furthermore, the committee is aware that the Inspector General released a report on September 8, 2014, on its review of audits issued by DCAA in fiscal years 2012-13. In conducting this review, the Inspector General examined a cross section of 16 DCAA audits completed between October 2011 and February 2013, including 5 audits of forward-pricing proposals and 11 audits of incurred costs and other audit types. The Inspector General identified 1 or more significant inadequacies on 13 of the 16 selected DCAA audits and found deficiencies in compliance with GAGAS in the areas of audit planning, evidence, working paper documentation, and supervision. Furthermore, the Inspector General review uncovered instances of auditors not obtaining adequate cost or pricing data. In addition to these findings, the committee continues to be concerned by the slow audit processes and extensive backlog at DCAA, which, according to the DCAA’s annual Report to Congress dated March 24, 2014, included roughly 23,000 incurred cost submissions at the end of fiscal year 2013. 

The committee recognizes that the DCAA has taken steps to improve its performance. However, the committee believes that its substandard performance impairs the defense acquisition process by incurring avoidable delays and by raising costs for the Government. The committee believes that much work remains to be done to ensure that DCAA is capable of fully meeting applicable standards and of promoting the smooth and transparent functioning of the defense acquisition system. 

Therefore, the committee directs the Secretary of Defense to take immediate steps to address substandard performance by DCAA, to reduce its audit backlog, and to minimize costs and other harmful consequences for the Federal Government and defense industry contractors that are the result of DCAA delays. The committee further directs the Secretary to provide a briefing to the House Committee on Armed Services not later than March 1, 2016, on the steps taken to address DCAA deficiencies, along with recommendations for any changes to statutory or regulatory guidance that may enable the DCAA to satisfy all applicable Federal and professional audit standards, to complete audits within a reasonable period of time, and to avoid placing unnecessary burdens on the Government or industry.

The Privacy Act of 1974

Have you ever wondered about the security of the information you provide the Government - Information such as tax returns, proposals, cost or pricing data, or data and records in support of an audit? How safe is it, really? Is it accessible by a competitor? By a news organization?

For the most part, contracting records given to contracting officers, contract auditors, GAO, Inspector Generals, etc are safe from further dissemination within the Government and from public disclosure. Such records are protected by the Privacy Act of 1974. Briefly, the Privacy Act states that no agency shall disclose any record which is contained in a system of records by any means of communication to any person, or to another agency, except pursuant to a written request by, or with the prior written consent of, the individual (or company) to whom the record pertains.

There are some exceptions to this general rule including

• For statistical purposes by the Census Bureau and the Bureau of Labor Statistics
• For routine uses with a U.S. government agency
• For archival purposes "as a record which has sufficient historical or other value to warrant its continued preservation by the United States Government
• For law enforcement purposes
• For congressional investigations
• Other administrative purposes.

The Privacy Act also requires that each Agency have administrative and physical security systems to prevent the unauthorized release of personal records. These administrative procedures include frequent training on unauthorized use or disclosure of personal information and criteria for disposing information that is no longer needed. So, for example, audit files that have no continuing relevance are boxed and sent to a federal records center where, after a few years, are destroyed. Similar procedures apply to electronic files. 

Notwithstanding the Privacy Act, there have been public (and not so public) disclosures of private information from time to time though it does not seem to be a significant problem. Back in the early 80s when the Government was buying $640 toilet seats, $7,600 coffee makers, and $436 hammers, a lot of contractor proprietary information was exposed. These disclosures came not from the Defense Department but through Congress who had gathered the information through one of the exceptions granted by the Privacy Act.

Generally, contractors need not worry about the security or public disclosure of routine information provided to Governmental agencies. There are sufficient protections in place to prevent that from happening.

Defense Contractor Sues DCAA for Defective Auditing

There are probably some contractors thinking to themselves right now: "Its about time" - perhaps even some of those are ready to file Amicus Curiae briefs.  Yesterday, Kellog Brown & Root Services Inc. (KBR) filed a suit against the U.S. Government acting through its agent, the Defense Contract Audit Agency (DCAA) in Federal Court (the U.S. District Court for the District of Delaware). The lawsuit seeks to recover $12.5 million in legal fees incurred by KBR in defending against what were ultimately determined to be "defective" DCAA audits.

There are many facets to this lawsuit but the underlying complaint is that DCAA was negligent in performing its audit work and did not follow a number of Generally Accepted Government Auditing Standards (GAGAS). Which standards? Oh, some of the basic ones including qualifications, independence, planning, risk assessment, written audit program, briefing the contract, field work, supervision, and sufficient evidence to support conclusions.

Take the lack of "independence" for example. The complaint uses harsh language in alleging that DCAA was more concerned about how they would look before Congress than in gathering and understanding the facts:

... in an act intended to pander to an investigating Congressional committee, and at the behest of a similarly-minded PCO, DCAA took steps to enable the Army to recapture costs incurred by KBR ...

...amid persistent political pressure from Congress, DCAA issued an audit report in which it concluded that KBR had billed approximately $99.6 million in allegedly "unallowable" costs ... But the conclusions in the audit report were demonstrably false, and it is now clear DCAA performed this audit in a negligent manner...

The contract, known as LOGCAP III required KBR to perform a wide variety of functions, including construction and operation of military dining facilities, laundry, welfare and recreation services, facilities maintenance, power generation and distribution, waste management, water supply, vector control, fire protection, billeting, and equipment maintenance.

The contract included a clause that required the Army to provide "force protection" to KBR and its subcontractors commensurate with that provided to DoD civilians. By 2003, however, KBR was performing work in a hostile environment where insurgent attacks were frequent. In fact, KBR and its subcontractors lost 75 employees as a result of hostile actions and almost 500 more injured. As a result of the hostilities and the Government's failure to provide force protection, KRB hired some private security contractors and charged those costs to the Government.

DCAA decided that since the contract provided for Army protection, the cost of the private security contractors was not allowable and disallowed an estimate of those costs. Ultimately, KBR appealed this action before the ASBCA (Armed Services Board of Contract Appeals) and won. The ASBCA ruled that the private security costs were indeed allowable under the contract. Simultaneously, the Government filed a false claims act violation against KBR for violations of the civil False Claims Act for billing costs associated with the use of armed private security. A short time later, the Government voluntarily dismissed the FCA case. In both cases, according to the current complaint, the Government's case was jeopardized by DCAA's defective auditing.

Keep in mind that this complaint presents only one side of the story. Ultimately KBR is going to have to prove its case in court. But, its going to be interesting to watch and the outcome, if favorable to KBR, may embarrass DCAA. It is important to note however, that many of the criticisms levied at DCAA in this lawsuit have already been addressed and rectified by that Agency. The latest peer quality review conducted by one of its loudest critics, the DoD Office of Inspector General, was rated a "pass".

If you would like to read the full complaint, you can download a copy here.

DoD Inspector General Rips Missile Defense For Disregarding DCAA Audit

In what could be construed a sad commentary on how contracting officers value the input of DCAA (Defense Contract Audit Agency) when negotiating contracts, the DoD-IG (Inspector General) released an audit report last week criticizing the Missile Defense Agency (MDA) for awarding a $1 billion contract without an audit.

The IG undertook the audit as a result of a hotline call, probably from someone within DCAA who took umbrage with MDA's actions. It wasn't as if MDA had failed to request an audit - they dutifully requested DCAA to audit the contractors proposal. But they didn't wait for the audit before concluding negotiations. As a result of failing to wait for DCAA input, the IG estimated that MDA could have negotiated a significantly lower contract price and saved "millions of dollars in reduced contract fees".

During the course of the audit, DCAA had requested additional time to issue its final report because it wanted to include the results of an assist audit of a major subcontractor. MDA granted a one month extension even though it knew the revised audit due date was beyond its deadline for negotiating the contract. MDA didn't bother to inform DCAA as to the negotiation deadline. Neither did MDA notify DCAA that the scope of the contract had been cut in half due to budget constraints. So DCAA was going merrily on its way auditing a proposal that was already obsolete and ultimately useless because it was timed to be issued after contract negotiation.

It was pretty obvious that MDA didn't care about an audit nor did they value DCAA enough to even inform the Agency of the negotiation deadline or that the proposed scope of work had been cut in half. What did they intend to do with the audit results - paper their files? It would seem that MDA has not bought in to DCAA's vision statement: "Dedicated professionals working together to deliver top-quality audit services to support the Department and the warfighter, and to protect the taxpayer's interest."

What were the recommendations and corrective actions as a result of the IG review? More training! (Training solves every ill, no?) The IG was happy with that corrective action.

You can read the full IG report here.

DCAA Passes Peer Review of Quality Control Practices

The other day, we alluded to the recent peer review report issued by the DoD-IG (Inspector General) on the quality, adequacy, and sufficiency of the contract audits performed by DCAA's (Defense Contract Audit Agency). DCAA passed - sort of. The actual rating was "Pass with Deficiency". But, it was a "pass" nevertheless and DCAA, though not entirely pleased, can at least hold out that they have now passed a peer review.

A triennial peer review is required for any Government agency or private firm that conducts audits in accordance with Generally Accepted Government Auditing Standards (GAGAS). Entities are required to develop policies and procedures that will provide it with reasonable assurance of conforming with GAGAS.

Except for a lack of documentation in 11 of 92 audits reviewed, the IG peer review concluded that DCAA's system of quality control has been in compliance and suitably designed to provide the Agency with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.

What does this mean for the contractor's that DCAA audits? As a practical matter, not much. Their audit reports will no longer contain a qualification that the Agency does not have a current peer review but that fact never seemed to bother the contracting officers to whom reports were addressed nor contractors who were the subject of audit reports.

You can read the entire Peer Review report by clicking here.

DCAA to Get New Leadership

It doesn't seem that long ago that Patrick Fitzgerald moved over from Army Audit to sit in the Director's chair at the Defense Contract Audit Agency. Yet, its been about five years already. Now he's retiring at the end of the August (this week) after 35 years of Government service. He was brought in to DCAA at a particularly stormy period of the Agency's existence where everyone - Congress, the GAO, the Inspector General, a number of so-called "watch-dog" organizations, and the press - were piling on stories of inadequate audits, internal strife, and whistle-blower retaliation. One thing Fitzgerald did was calm the waters a bit - you don't hear or read much about DCAA's ills these days. But this came at a cost - DCAA jettisoned a significant amount of its work - audits of proposals under $100 million, most incurred cost audits, contractor financial viability, many internal control audits, to name a few. At the same time, the Agency became less responsive and failed to meet contracting officer needs and expectations. As a result, the Agency which was once the go-to guys for financial advisory services has become the millstone of the procurement community. The latest External Peer Review of the Agency's work, issued earlier this month, downgraded DCAA's work from "Pass" in 2006 to "Pass with Deficiency" in 2014. So it seems that there will be something for Fitzgerald's successor to work on.

A replacement for Fitzgerald has not yet been named.

DCAA's Third Annual Report to Congress

DCAA's (Defense Contract Audit Agency) Third Annual Report to Congress, dated March 24, 2014 was recently posted on DCAA's website. This annual report is required under the National Defense Authorization Act (NDAA) for Fiscal Year 2012 and provides an overview of DCAA's mission, audit performance and recommendations to address significant deficiencies identified by DCAA during the conduct of its audits. The first and second annual reports are also available on DCAA's public website.

Sections 1 and 2 are boilerplate background information on what the Agency does and the staffing structure (did you know that almost 27 percent of the audit staff are CPAs (Certified Public Accountants)? These sections haven't changed much from earlier reports. Section 3 recaps the Agency's audit performance during the year (fiscal year ended September 30, 2013) and shows some evidence the the Agency is reducing the backlog of incurred cost audits that have piled up in recent years. And, while there was marginal improvement in the time it took to complete an audit of a price proposal, the average of 97 days is far too long for contracting officers' needs.

Section 4 is probably the most interesting part of the report from a contractor's perspective. In this section, Significant Deficiencies and Recommended Actions to Improve the Audit Process, DCAA tells Congress what statutes or regulations need changing in order for them to do their job better. Following is a recap of some of those issues. Many are carried over from the previous year which illustrates how slowly things move in the Government.

1. DCAA believes that there needs to be additional clarification to the regulations concerning commercial pricing at the subcontract level that outlines prime contractor management responsibilities related to its subcontracts. Without changes, documentation supporting commercial prices at the subcontract level will continue to be inconsistent and, in many cases, insufficient.
2. A carryover from the prior year is a recommendation that Congress expand DCAA's subpoena authority to include "data other than certified cost or pricing data." Currently, DCAA's subpoena authority (which has never been used successfully to our knowledge) is limited to cost or pricing data. DCAA noted that DoD has submitted a legislative proposal to that effect.
3. The lack of access to contractor internal audit reports continue to befuddle DCAA's ability to audit. Reading between the lines, DCAA is not pleased with the current state of affairs where justification and documentation and training and limiting access is the norm.
4. The lack of access to contractor online data is another area of significant concern. Read-only access would greatly assist DCAA in effectively planning and performing its audits. Last year, DCAA stated that it was contemplating a legislative proposal that would require contractors to provide online access to electronic data.  This year, DCAA downgraded its action plan and will now merely seek regulatory clarification.
5. Finally, DCAA submitted a legislative proposal for FY15 to support DCAA's right of access to contractor employees and to avoid any future confusion on DCAA's ability to interview employees. This legislative change will ensure DCAA has access to employees, which will allow DCAA to conduct audits in accordance with professional standards. 

It is fairly obvious from the foregoing that DCAA wants more and more access to contractor data, information, and employees.

DCAA Issues Its Annual Performance Report

The Defense Contract Audit Agency (DCAA)* recently issued its third annual Year in Review report. This report highlights DCAA's activities during the year from its own unique perspective. This year's report, which can be downloaded and/or read here , provides the following summary of last year's activities.

In Fiscal Year 2013 (the 12-month period ended September 30, 2013), DCAA (Defense Contract Audit Agency) examined $160 billion in contractor costs, conducted 13,600 reviews, and produced over 6,200 audit reports. Overall, DCAA's efforts resulted in $4.4 billion in net savings to the government - the highest in Agency history and nearly 75 percent higher than the average savings achieved during Fiscal Years 2003 - 2009. Based on these net savings, the return on taxpayers' investment in DCAA was approximately $7.30 for each dollar invested.

The report details nine specific examples of how the savings were achieved. Most of these related to evaluations of price proposals and termination settlement proposals. The report includes a section dealing with reaching out to small businesses. DCAA cannot advise contractors on how to comply with Government rules and regulations nor can they advise them on how to set up their accounting and timekeeping systems. What they can do and have been doing is participating in a series of seminars throughout the US helping to educate those small businesses on the role of DCAA in the acquisition process and helping them understand the importance of implementing adequate estimating, accounting, billing, and timekeeping systems, among others. The Agency also makes available on its website reference material designed to help small businesses understand the basics of accounting for costs under government contracts.

Perhaps the most interesting piece in this report is not what DCAA has done in the past but its priorities for the coming year. The report lists four priorities:

• Increase momentum to reduce the backlog of incurred cost audits
• Increased priority on performing high-risk, time-sensitive labor and material reviews (floorchecks)
• More emphasis on disclosure statements (descriptions of accounting policies, procedures, and practices)
• More responsive to demand work from contracting officers

Reducing the incurred cost backlog is good news for contractors who are waiting to close out old contracts. Increasing the number of floorchecks should be of some concern to contractors - more auditors kicking around taking valuable time by interviewing employees. The disclosure statement emphasis only impacts CAS covered contractors required to maintain CAS Disclosure Statements.
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* The Defense Contract Audit Agency (DCAA) provides audit and financial advisory services to Department of Defense (DoD) and other federal entities responsible for acquisition and contract administration. It helps ensure DoD gets the best value for every dollar spent on defense contracting by conducting contract audits and related financial advisory services. Contract audits are independent, professional reviews of financial representations made by defense contractors. Specifically, DCAA assists in determining whether contract costs are allowable, allocable, and reasonable. The type and extent of DCAA's audit work varies based on the type of contract awarded, but its audit services are generally limited to acquisitions under Federal Acquisition Regulation Part 15 (Contracting by Negotiation). DCAA audits only contractors - it has no internal audit responsibilities in DoD.

Proposed Expansion of DCAA's Subpoena Authority

Every year, the Department of Defense packages up a bunch of legislative proposals and sends them over to Congress for consideration and hopeful inclusion in the National Defense Authorization Act. Some make the bill, some don't. Some make it but are are almost unrecognizable in the final bill. For example, last year, one of DoD's proposals was to require contractors to give the auditors unfettered access to internal audit reports. This proposal proved to be very controversial and the provision that finally made it into law was so wattered down as to be inconsequential - it didn't require contractors to turn over internal audit reports - it merely required the auditors to document contractor responses to requests for internal audit reports.

So, with that background, we peruse DoD legislative proposals as they become available to look for issues and areas of concern for Government contractors. One of the proposals sent to the Legislature this year is for an expansion of DCAA's subpoena authority.

Currently, DCAA's subpoena authority, contained in 10 U.S.C. 2313 permits DCAA both access to and the authority to subpoena certified cost or pricing data, but it does not specifically provide similar authority for "data other than certified cost or pricing data" as defined in FAR 2.101. When a contracting officer determines that historical data is insufficient to determine the reasonableness of prices in fixed-price contract for commercial items, FAR 15.403-3 permits the Government to obtain "data other than certified cost or pricing data" to assist in making the determination. Contractors have been reluctant to provide this information. While the FAR allows contracting officers to request data, there is currently no authority to compel production of that data.

The legislative proposal submitted by DoD would amend 10 U.S.C. 2313 to provide DCAA (Defense Contract Audit Agency) the authority to evaluate data other than certified cost or pricing data and would expand DCAA subpoena authority to include such data.

In justifying this enhanced access, DoD reported that in the past 12 months, at least two major contractors have refused to provide the data requested. Because DCAA's subpoena authority includes only certified cost or pricing data, DCAA was unable to compel the production of data other than certified cost or pricing data to determine whether proposed price increases on commercial parts were fair and reasonable. As a result, the contracting officers were left with a decision to withhold award of the contract and develop a second source for a weapon system (impractical in most cases) or negotiate with less than optimal data.  It also significantly delayed the acquisition  process. Additionally, DoD noted that some contractors have also refused to provide data that substantiates sufficient commercial sales to support pricing based on the commercial sales price.

Senator Barry Goldwater said in 1958, "This bill and the foregoing remarks of the majority remind me of an old Arabian proverb. If the camel once gets his nose in the tent, his body will soon follow." DCAA has another proposal in the works that would expand its subpoena authority even more, by compelling contractors to turn over their internal audit reports.

DCAA's Second Annual Report to Congress

DCAA's Second Annual Report to Congress, dated 29 March 2013 was recently posted on DCAA's website. This annual report is a product of the National Defense Authorization Act for Fiscal Year 2012 (now codified at 10 U.S.C. 2313a) and provides an overview of DCAA's mission, audit performance and recommendations to address significant deficiencies identified by DCAA during the conduct of its audits.

The report includes a lot of data, charts and narrative to explain why the Agency feels that fiscal year 2012 "...was a very successful year for DCAA." Among its accomplishments were (i) recommended cost reductions of $12.4 billion and (ii) a return on taxpayer's investments of $6.70 for each dollar spent by the Agency.

From a contractor's perspective, the most interesting thing in the report is Section 4,Significant Deficiencies and Recommended Actions to Improve the Audit Process. In this section, DCAA tells Congress what statutes or regulations need changing in order for them to do their job better. Here are some of those.

1. DCAA continues to face insufficient commercial pricing documentation and the lack of express authority to review "data other than certified cost or pricing data". DCAA wants contracting officers to become better trained on commercial item determinations. DCAA also want authority to review and subpoena "data other than certified cost or pricing data".
2. Access to contractor internal audit reports continues to pose significant challenges to DCAA auditors. DCAA acknowledges that the 2013 NDAA falls short of requiring contractors to fork over their internal audit report. Look for renewed attempts to force contractors to provide them.
3. The lack of access to contractor online data is another area of growing concern to DCAA. Read-only access would greatly assist DCAA to effectively plan and perform its audits. Some contractors have denied such access so DCAA is contemplating a legislative proposal that would require contractors to provide online access to electronic data.
4. DCAA strongly believes that having access to contractor employees to conduct interviews and observations is critical to ensure compliance with GAGAS (Generally Accepted Government Auditing Standards). Because some contractors have denied such access, DCAA believes that changes to FAR (Federal Acquisition Regulations) is necessary to ensure that auditors have timely access to contractor employees. Because there is no specific language in FAR stating DCAA has access to interview employees, DCAA plans to submit a legislative proposal to support DCAA’s right of access to contractor employees and to avoid future confusion on DCAA’s ability to interview employees. 

We might see some of these proposals submitted in connection with the 2014 NDAA (National Defense Authorization Act).