DCAA Still Pushing for Expanded Subpoena Authority

Every year, DCAA (Defense Contract Audit Agency) prepares a report to Congress on its activities. The fiscal year 2014 report was issued on March 25, 2013 but just recently became publicly available. (Click here to download a copy). The feature we turn to first is Section 4, Significant Deficiencies and Recommended Actions to Improve the Audit Process. This is where DCAA lays out its views of deficiencies within the acquisition process and recommends changes to the ongoing challenges.

One of the challenges DCAA faces is the lack of express authority to review "data other than certified cost or pricing data". This lack of authority, according to DCAA, hampers its ability to obtain sufficient contractor data to conduct timely, quality audits, especially audits of commercial item procurement. To resolve this problem, DCAA wants authority to review and subpoena "data other than certified cost or pricing data". In its own words:

The DCAA 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 a 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 a fair and reasonable price determination. Contractors have been reluctant to provide this information to DoD, including DCAA. While the FAR allows contracting officers to request data, there is currently no authority to compel production of that data. This problem is likely to get worse. Even as the Department's Better Buying Power Initiative and Industry groups continue to promote the use of commercial procurements, there has been no improvement in the Department's ability to obtain adequate supporting data from contractors to support the proposed commercial prices. 

DCAA plans to submit a legislative proposal for the next NDAA (National Defense Authorization Act). The Agency believes that with this authority, it will be able to provide contracting officers timelier audit support and better-supported negotiation positions for commercial procurements, which will, in turn, improve their effectiveness and reduce the risk of paying excessive commercial prices.

 It may well be that the Department of Defense is not in favor of granting expanded subpoena authority to DCAA. In fiscal year 2014, it took DCAA an average of 95 days to turn out a forward pricing proposal audit report. If DoD can avoid procurements based "certified cost or pricing data", it can award contracts significantly quicker. They've got a pretty good process going with commercial item procurement - why would they want DCAA to come in and muddle up the situation?

More on DCAA's Subpoena Authority

Much ado has been made of DCAA's (Defense Contract Audit Agency's) subpoena authority. We've been in meetings where auditors threatened to subpoena records. However, DCAA has been very reluctant to use its subpoena authority and as far as we know, DCAA has never been successful in issuing a subpoena. We could be wrong but it seems we would have heard about it if the Agency was successful.

DCAA tried once. DCAA issued a subpoena to force Newport News Shipbuilding to turn over internal audits and other records of management "reviews". Newport News appealed and in 1988, the United States Court of Appeals, Fourth Circuit shot the Agency down on the basis that the records it sought were not those covered by the statute that authorizes DCAA's subpoena authority.

So, what is the extent of DCAA's subpoena authority?

Public Law 99-145 (codified into 10 USC Section 2313) authorizes the Director of DCAA to issue subpoenas when a contractor refuses to grant DCAA access to records relating to negotiations, pricing, or performance of a particular contract. DCAA takes a very broad view of what records relate to negotiation, pricing and performance. Insofar as internal audit reports are concerned, an identified internal control deficiency could impact the propriety of costs charged to Government contracts. Identified internal control deficiencies could help the auditor perform better risk assessments when auditing incurred costs. The Court however, took a much narrower view. The Court could not find a nexus between negotiations, pricing, and performance of a contract and internal audit reports. That case was pretty substantial as contractors have used it over and over again to deny access to whatever it is they don't want the auditors to see.

Records in the context of 10 USC 2313 includes books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or any other form. Those records however must pertain to the negotiations, pricing, and performance of a contract. Obviously, certified cost or pricing data submitted in response to a solicitation would meet this definition. Also, historical costs upon which billings or progress payments are based would fall into this category. There is usually no reluctance among contractors to provide this information. After all, there is an incentive; contractors want the contract and they want to be paid. Controversies arises when the auditors begin to request documentation that does not bear directly on pricing or billings. Internal audits are one example. Other examples might include audit reports from the independent public accountants, internal control reviews and reports required by the Sarbanes-Oxley Act, investigative reports, profitability information, data related solely to commercial sales, and cash flow forecasts, to name a few.

DCAA is seeking to broaden its subpoena authority. It has a powerful ally in GAO (Government Accountability Office). Should their efforts fail, DCAA may take another run at a court to see if they can elicit a more favorable ruling than the Newport News case.

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.