DCAA severely criticized once again for quality of audits
By Michael Smigocki, senior managing director, Federal Strategies Group LLC
For the third time in the past five years, the Defense Contract Audit Agency (“DCAA”) was severely criticized for the quality of the audits it performs on contractors, this time the report coming from the Defense Department’s Inspector General’s Office.
Two previous reports, issued by the Government Accountability Office, were also highly critical of DCAA’s audit work and lead to widespread changes in the performance of their audits and how they interacted with contractors.
This article will address the criticisms of DCAA and the possible impact they may have on your upcoming audits.
GAO Reports
After the receipt of an anonymous call to the DOD’s fraud hotline and at the request of Congress, the GAO investigated the audits of DCAA’s California Region.
The GAO found that in several instances, DCAA had changed the contractor issues identified in its audit report after receiving pressure from both the contractors as well as the contract officers. The relationship between DCAA and the contractor was called into question that led to a fundamental change in how DCAA and contractors interact.
Previously, DCAA had always been a resource to contractors, especially small ones, to answer questions, assist with various matters, etc. After the GAO report was issued, DCAA would no longer assist contractors with issues, thus requiring them to seek assistance from their outside CPAs or government contract consultants.
As a follow-up to this initial report, the GAO then reviewed the audits performed by DCAA throughout the country. A total of 37 audits and their reports were reviewed by GAO with deficiencies found in all 37 audits! It was the consensus of both DCAA and GAO that DCAA was operating under a culture of “quantity” of audits as opposed to “quality”. They were not properly following up and resolving issues identified during their audits, and were issuing reports that did not address these issues in order to meet internal deadlines.
As a result of that second round of reports, it led to DCAA taking significantly longer in performing audits and required contractors to produce additional backup and support for questioned items, regardless of their materiality. It also led to the significant backlog of unaudited incurred cost submissions that contractors are facing, as DCAA does not have the internal resources to address the quantity of audits it is facing while attempting to achieve the “quality” goals it seeks.
DoD Inspector General’s Findings
The DoD IG’s office recently reviewed 50 audit assignments throughout the country. It found that in 37 (74%) of these assignments, the DCAA did not exercise adequate professional judgment.
The audit “found that in 37 (74%) of these assignments, the DCAA did not exercise adequate professional judgment.”
In addition, the quality issues identified included:
- External impairments to independence;
- Inadequate planning;
- Poor communications with the requester and contractor;
- Insufficient evidence;
- Unsupported or untimely reports;
- Poor documentation; and
- Ineffective supervision and quality control.
It was the opinion of the IG’s office that the abundance of non-compliances, as detailed above, evidenced the need for improvements in the area of competence at DCAA.
What to Expect Now
DCAA will be performing audits knowing that its audit reports will continue to receive oversight and scrutiny. This will lead to more painful and thorough audits for contractors. Questioned items will receive more scrutiny and require more support and backup before being deemed a non-issue.
It is also expected that DCAA will include in its reports all findings that are not adequately resolved and defer resolution to the contract officer.
With sequestration kicking in, it is unlikely that DCAA will be able to increase its number of personnel, thus low-priority audits such as incurred cost audits, will continue to accumulate in backlog.
Finally, accounting system audits will also become more thorough and difficult to pass because it is the belief of DCAA that an accounting system that possesses strong internal controls is the best means of preventing contracting audit issues.
While DCAA feels that the corrective actions it has implemented will significantly reduce its audit deficiencies, it is clear that they still have a ways to go and that the audit process will not be getting any easier for contractors.
Michael Smigocki, CPA, CVA, ABV is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. He can be reached via email at MikeS@FedStrat.com.
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