As we’ve noted before, DCAA’s publication of audit guidance via Memoranda for Regional Directors (MRDs) has fallen off precipitously in the last couple of years. We are not sure why that would be the case, but it does seem to be that way.
One thing that’s new is the Selected Area of Cost Guidebook, 75 “Chapters” of audit guidance intended to replace Chapter 7 of the Contract Audit Manual. We first noted publication about six month ago, in this article. Since then, DCAA has filled in many of the Chapters, but there are some that are not yet published.
Reader ERMan wanted us to know that DCAA just added some more Chapters on 31 March 2017. So now you know.
One thing DCAA has not yet done is published its GFY 2016 Annual Report to Congress. You know, the one that is required by statute? Yeah, that one. Over the past five years the official publication date has been sometime in the last two weeks of March. Yet here we are in mid-April, and nothing has yet been published. One might argue that there is a just a lag in publication, but DCAA found sufficient time and resources to update its Selected Area of Cost Guidebook at the end of March—so we fail to see why the Report to Congress couldn’t have been published at that time as well.
While DCAA was busy not publishing MRDs or publicly complying with statutory requirements, the audit agency did update several audit programs. Audit programs updated since the beginning of 2017 include:
Audit Program for Incurred Costs—Post Year-End Audit
Audit Program for Consultant and Professional Service Costs
Audit Program for Non-Major Contractors Floorchecks
Audit Program for MAAR 13—Purchase Existence and Consumption
Testing of Paid Vouchers
Audit Program for EDP General Controls
Audit Program for MMAS Controls
Audit Program for Major Contractors Labor Floorchecks/Interviews
Audit Program for Termination, Cost Contracts
Audit Program for Termination, Fixed Inventory Basis
Audit Program for Termination, Total Cost Basis
Audit Program for Claim Audit, Delay – Disruption
Audit Program for Claim Audit, Other
Audit Program for Progress Payments Based on Costs Incurred
Audit Program for Progress Payments Based on Percentage or Stage of Completion
Preaward Survey of Prospective Contractor Accounting System
Post Award Accounting System Audit at Nonmajor Contractors
Agreed Upon Procedures, Other than Price Proposals
Defense Security Cooperation Agency (DSCA)
Audit Program for Compliance of Initial Disclosure Statement
Audit Program for Compliance of Revised Disclosure Statement
Audit Programs for (Various) Cost Accounting Standards
Audit Program for Price Proposal
Audit Program for Audit of Forward Pricing Rate Proposals
Audit Program for Estimating System Controls
Audit Program for Evaluation of Cost Realism in Proposals
Audit Program for Application of Agreed Upon Procedures
Audit Program for Truth in Negotiations Audits
Thus, as one can see, DCAA has in fact been busy—just not in the traditional ways we measure busyness. Still, we can’t help but hope that the GFY 2016 Annual Report to Congress is published soon.
Evaluating the Defense Contract Auditing Process, Part 2
Last Updated on Thursday, 13 April 2017 17:18
Continuing our discussion of recent testimony before the House Armed Services Committee (HASC) Subcommittee on Oversight and Investigations. Part 1 of this two-part discussion focused on DCAA Director Bale's testimony, in which we asserted that DCAA continues to be in denial that its management decisions over the past decade have in any way led to a problematic status quo in desperate need of change. Instead, DCAA continued its hoary tradition of requesting more—more budget, more auditors—to meet the workload that it has already significantly reduced through bureaucratic tricks, such as pushing work that it used to perform to the Defense Contract Management Agency (DCMA), as well as arbitrarily deciding which assignments it will actually audit and which assignments it will not.
In this Part 2, we are going to discuss testimony from three industry representatives, one from the Professional Services Council (PSC), one from Finance Executives International (FEI), and the other from the National Defense Industrial Association (NDIA). Their written testimony painted an entirely different picture of DCAA than Ms. Bale’s written testimony did—a picture in which significant reforms were urgently needed to address the mess that DCAA mismanagement has gotten the defense acquisition system into.
Let’s start with David Berteau, President and CEO of the PSC. His written testimony can be found here. He offered some thoughts and recommendations regarding DCAA, including—
As one of our member companies characterized it, DCAA should focus on being an auditing agency, not a collection agency. This is reflected, in part, in DCAA’s annual Report to Congress on its Fiscal Year 2015 Activities which focuses on its ‘return on investment’ – for every dollar spent by DCAA, some significant amount of government spending was avoided and a portion of contractor spending was ‘questioned’ – leaving the impression that the agency’s work is essential to fiscal responsibility. While it is easy for an auditor to ‘question’ a contractor’s cost, as we see time and time again, ‘questioned’ costs never equal ‘sustained’ costs. Contractors will even agree to a ‘sustained’ cost number simply because it is too expensive to continue to dispute it and to forego additional, undisputed payments on invoices for work already performed. … PSC believes that we need to restore the authority and confidence of the contracting officers and program managers to make the decisions that they believe are in the best interest of the government, based on the advice they receive from the multiple resources available to them, including DCAA.
(As always, we are adding emphasis unless otherwise noted.)
With respect to DCAA’s recent initiatives to perform “incurred cost” audits more quickly, Mr. Berteau testified that—
For too many of our member companies, including those who have DCAA resident auditors in their facilities, auditing of multiple years has only multiplied the annual request by the number of years to be covered. Rather than drawing a single sample from three years, for example, DCAA has been drawing the same sample size for each of the three years. It should not be surprising that such an approach is not yielding any acceleration in the audit or the closing of open years. But it does add significantly to the amount of ‘questioned costs’ because of the cumulative effect of the multi-year review. PSC believes that DCAA could dramatically streamline and accelerate their multi-year reviews, and we’d be happy to work with them on ways to do that.
He also attempted to smooth any ruffled feathers by stating—
There is a concern raised by some that using the private sector to help reduce the backlog of incurred costs means that DCAA workload will drop and that auditors might have to be terminated. PSC does not share that view; we have no objective of reducing the size of the DCAA audit workforce. Given other backlogs and of the vital nature of making the right initial contract award decisions, we believe there are other areas of work where these experienced incumbent DCAA auditors can be used. As we noted earlier, these experienced staff can be assigned to high visibility proposal audits or to the more complex cases. They can also supervise and mentor junior DCAA staff and manage the work being performed by third parties.
In essence, then, he told Congress that if DCAA were properly managed and the workload had been properly prioritized, then DCAA’s workload could be handled with available staff—leaving senior staff available to both supervise and mentor the junior staff. This would be especially true if DCAA focused its attentions on where it could add value to the acquisition lifecycle, and allowed independent third-parties to perform some of the existing workload. He testified that—
In our view, expanding third-party audits will do more than free up experienced staff for more important functions. It will also help the government become a smarter buyer and will improve acquisition outcomes. No one benefits from unnecessary delays in any phase of the acquisition lifecycle. …
It makes good sense to expand the appropriate use of independent auditors, as an effective and efficient solution that can be implemented quickly and seamlessly to address not only the current incurred cost audit backlog, but also other aspects of government accounting. Here are some of those other aspects. PSC remains concerned regarding the workforce turnover at DCAA, and the stability, experience, and morale of the workforce as a result. … Private sector contract support can help address the demand for timely incurred cost reviews and contract closeouts without hiring, training and increasing federal staff. A benefit to using a strong independent contractor base is the ability to increase or decrease staff levels to address spikes and shortfalls and to respond quickly to auditing needs. Contractors can dial up as needed and dial down once the issue is addressed; many well-seasoned government accounting firms have an experienced and available workforce – often former DCAA staff – that can respond quickly. This way, the government only pays for what it needs, not for a permanent workforce.
Next, we’ll discuss the testimony of Mr. James Thomas, Assistant Vice President of Policy, NDIA. His testimony was consistent with that offered by Mr. Bertreau, so we’ll focus on the “nuggets” that leapt out at us. (All points that follow are exact quotes from written testimony.) He wrote—
Industry is concerned that DCAA has lost focus of their purpose within the Defense Acquisition System over the past decade and has become much more closely tied with the Inspector General function than needed or desired to fulfill their statutory oversight role. DCAA is not a profit center, but their Annual Reports to Congress highlight that the measure of mission success is that their audit activities provide a large return on investment (ROI) by identifying a large number of adverse audit findings rather than on executing their primary advisory functions. We also question whether the agency can inherently be truly independent and objective in their audit responsibilities (both Generally Accepted Government Accounting Standards [GAGAS] requirements) while continuing to emphasize success based upon ROI.
NDIA believes that a lack of professionalism, as defined by GAGAS, from DCAA auditors, has borne costs on government and industry through a lack of incorporation of materiality in their judgments. Our members’ perception of DCAA’s standard of perfection with respect to internal controls (e.g., to avoid allegation of business system significant deficiencies) vs. controls that provide reasonable assurance for business systems, is that it is the enemy of timeliness and affordability. While perfection is admirable, often the high costs involved with achieving a level of perfection to avoid DCAA’s allegations outweigh the associated benefits of having a perfect internal control for an issue that may never be a catalyst for increased costs to the government. Audits should be based on risk and ultimately a reasonable assurance for reliance. Further, there should be clarity on the materiality of potential identified deficiencies and whether they are in fact significant relative to the ultimate effect on Contractor Business Systems in order to avoid this perceived ‘perfection’ standard that we contend is currently in place.
Industry is concerned that DCAA’s reporting on the backlog is not telling the full story. The fact that many of our larger members have open rates dating back four to five years suggests that DCAA may have simply closed out the lower risk, lower dollar value contractor ICPs, which had the effect of reducing the number of audits in its backlog. Additionally, although DCAA recently indicated that the backlog is under 18 months in order to perform non-DoD audit services, we understand that the Agency does not count submissions until they are two years old since DCAA audits two years concurrently, so it considers within two years as the ‘current year.’
Although we acknowledge that performance data provided by DCAA and DoD IG provides an incomplete picture, and it does not adequately measure DCAA performance, by DCAA’s own standards, the agency is not performing well. … Its sustention rate on post-award DoD audits dropped from 50.2% to 31.6% over that time as well. The FY 2013 report noted that its percentage of 9.8 of questioned costs as a total of dollars examined was ‘[a]n indicator of DCAA’s effectiveness in using its risk-based approach.’ Fast-forwarding to the FY 2015 version of the report, that metric was no longer highlighted, and was only 4.5%.
Industry is also concerned by the insular nature of DCAA’s training, which appears to shun outside views. Less experienced auditors lack professional judgment, and instead are highly proficient in DCAA policies and procedures, or in other words, know what the words say, but not what they mean or the spirit of why they were created. Further, on-the-job training is undermined by the aforementioned autonomy of individual auditors, making it difficult for supervisors to mentor. Greater engagement with industry through external training (both personal and technical) would also be beneficial to foster professionalism and enhance technical capabilities.
Mr. Thomas concluded by making specific, actionable, recommendations that were summarized in one concluding sentence: “DCAA should place greater emphasis on improving its customer service role, and be held accountable to improve the quality and timeliness of its audit services for the benefit of government procurement and the warfighter.” We couldn’t agree more.
Turning now to the written testimony of Mr. John Panetta, National Secretary of FEI and member of FEI’s Committee on Government Business (CGB) (and Sr. Director of Government Accounting for Raytheon) (and a former boss of mine—Hi John!), we find many of the same themes as expressed by the other two industry representatives. However, we were struck by the clarity, detail, and knowledge expressed by his testimony. We urge readers to download and review it in its entirety. As with Mr. Thomas’ testimony, we’ll pull some bullet points out and quote them, adding emphasis as we think appropriate.
… contractors want incurred cost proposals to be audited in a timely fashion upon submission to enable the determination of final indirect cost rates ‘as promptly as practical’ as is required under current contract clauses and Federal Acquisition Regulations (FAR) [FAR 52.216-7(d)((2)(ii)]. While direct contract costs are billed as incurred, Contracting Officers (COs) most often will decrement indirect cost billing rates (e.g., overhead and G&A rates) so full reimbursement of these costs will not occur until audits are completed, rates are finalized and contracts are closed. Not only does this situation impact contractor cash flow for years, it generates non value added administrative cost and inefficiency in the acquisition system (i.e. continued maintenance of old systems, records, and documentation needed for untimely audits and the final negotiation of rates).
From our perspective, DCAA had difficulty determining how to measure audit quality. How much testing was needed and how much documentation was required for the audit to be ‘perfect’? The standards of quality seemed to be constantly changing and auditors often didn’t know what was expected. They started an audit using one audit program, but before completing the assignment, a revised audit program would be issued causing audits to be sent back for rework. Working grade auditors (many of whom needed additional training and oversight) were increasingly empowered at this time while managers were correspondingly hindered in their efforts to supervise staff so that individual auditors would not be ‘stifled’ from reporting ‘findings’ that they perceived to be issues. Any semblance of considerations for materiality vanished from within the agency. Audit time and budgets became seemingly unlimited, due dates virtually disappeared, and basic program/schedule management practices were abandoned. Coupled with the constantly changing quality standards, very few incurred cost audit reports were issued and the backlog grew to the unmanageable level that we are faced with today. Any reports that were issued were generally incredibly long and packed with minutia.
At the same time that DCAA was experiencing its audit performance difficulties, the FAR Council (at DCAA's urging) expanded the definition of an adequate incurred cost submission in the Allowable Cost and Payment Clause (FAR 52.216-7(d)) by identifying a list of 15 mandatory schedules and 15 supplemental data elements required for audit. Even though many of the schedules were not relevant to the review of the indirect rates, DCAA used the FAR change as a justification to retroactively reject contractors' previously submitted and accepted incurred cost proposals. This action served to further delay the settlement of final rates by causing contractors to needlessly create complicated informational schedules.
DCAA’s excessive implementation and ground rules for ‘reliance on the work of others’ results in the performance of non-value added, redundant steps during incurred cost and other DCAA audits. DCAA asserts that its purpose for evaluating an incurred cost proposal is not identical to that of the external auditor’s evaluation of a company’s financial statements; therefore the audit steps performed will rarely be exactly the same. That does not diminish the fact that the external auditors performed sufficient testing to obtain reasonable assurance that the financial statements were free of material misstatement due to error or fraud.
Due to the age of the incurred cost proposals both under audit and still awaiting audit, contractors are forced to maintain discontinued business systems and store records that are no longer in use. As time passes, individuals who were most knowledgeable of the systems, practices and transactions under review often have left the company. This is also true for the responsible Government auditors and COs. New individuals must conduct research, including retrieving files from off-site storage facilities, to obtain an understanding of the issues at hand before responding to audit inquiries, all of which makes the task of supporting audits more difficult, time consuming and costly. Only through the establishment of a risk-based, time-phased audit process with a firm schedule, milestones and due dates will it be possible for DCAA to be successful addressing the current backlog and preventing a reoccurrence as well.
DCAA attempts to create the basis of a ‘quality’ audit using alternative procedures to compensate for the lost opportunity of having not performed the necessary concurrent steps. All of this leads to unreasonable and unnecessary levels of ‘assurance’ by DCAA (i.e. selecting inflated sample sizes). Additionally, DCAA establishes expectations that contractors will retain extensive non-financial supporting data such as resumes, detailed job descriptions, acquisition approvals, and statements of work, to support their alternative steps, adding to Contractors’ cost to support these untimely audits. … since DCAA has not uniformly performed (and continues to not perform) these real-time reviews at many contractor locations, it now directs its auditors to request contractors to provide the original documents as part of the audit of the old incurred costs proposals. While the rest of the economy is moving to ‘the Cloud’, DCAA is asking for the paper. … If DCAA truly believes that there is significant risk of contractors manipulating or falsifying source records (even after those contractors have completed extensive CPA/SOX audits), then it should perform real-time evaluations so that any issues may be raised, discussed, and resolved while all relevant data and information are readily available.
Mr. Panetta concluded by telling the HASC Subcommittee—
CGB supports initiatives to utilize independent public accounting firms to supplement performance of contract audit requirements, as is currently being done in other Government agencies (e.g., NASA and DOE). These public accounting firms can assist in the elimination of the significant backlog of open incurred cost proposals and ensure that the Government is able to remain current in their required audit activities. CGB also believes that use of independent public accounting firms for the evaluation of contractor business systems will introduce additional efficiencies into the acquisition process and provide an alternative for contractors and Contracting Officers who are currently awaiting DCAA audits. Furthermore, CGB believes that the introduction of competition to perform audit services regarding Government contract costs will serve as a catalyst to motivate DCAA to evolve from a culture of ‘risk avoidance’ to one of ‘risk management’ so that DCAA can fulfill its role as a member of the acquisition team.
Okay, let’s wrap this up. In Part 1, we discussed the written testimony of Ms. Bales, who said things were fine and improving, and nothing needed to change except for adding more auditors because, otherwise, things would go to hell again. In Part 2, we discussed industry’s contrasting viewpoints, in which representatives asserted that things were not fine, that improvement was incremental at best and illusory at worst—but that current initiatives were unsustainable in the long run. They asserted that no more auditors were necessary; and, in fact, with proper resource management and reliance on independent third-party auditors where appropriate, DCAA had sufficient auditors already in place to take care of their workload and even devote senior resources to mentorship and employee development efforts.
So which point of view will the HASC Subcommittee believe? What will the members of Congress (and their staffs) take away from the contradictory viewpoints? That remains to be seen. But given the current anti-regulation, anti-bureaucracy mood within The Beltway, we think the smart money would be on the industry viewpoints.
Here is a link to a video of the testimony:
Expressly Unallowable Costs and Penalties
Last Updated on Monday, 17 April 2017 17:09
It’s not intuitive. It’s not black and white. It’s a bit controversial, actually. But you need to know that there are different “flavors” of unallowable costs.
We’ve written about the situation before. Here’s a link to a quick overview article, for those interested. Two years ago we wrote about some then-recent DCAA audit guidance on the topic. While we generally applauded the guidance, others were not as impressed.
In fact, we’ve written about expressly unallowable costs many times on this blog. Here’s what you need to know:
When submitting the final indirect cost rate proposal (also known as the annual incurred cost submission), FAR 42.703-2 discusses how that proposal is to be certified. The certification is formally required by the contract clause 52.242-4 (“Certification of Final Indirect Costs”). By executing the certification, the contractor represents that all costs being claimed are allowable pursuant to the applicable cost principles, and that “This proposal does not include any costs which are expressly unallowable …”
The contract clause 52.242-3 describes what happens if a contractor includes unallowable costs in its final indirect cost rate proposal, despite its certification to the contrary. Such costs are subject to penalties. The clause prescribes—
If the Contracting Officer determines that a cost submitted by the Contractor in its proposal is expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs, the Contractor shall be assessed a penalty equal to—
(1) The amount of the disallowed cost allocated to this contract; plus
(2) Simple interest, to be computed—
(i) On the amount the Contractor was paid (whether as a progress or billing payment) in excess of the amount to which the Contractor was entitled; and
(ii) Using the applicable rate effective for each six-month interval prescribed by the Secretary of the Treasury pursuant to Pub. L. 92-41 (85 Stat. 97).
If the Contracting Officer determines that a cost submitted by the Contractor in its proposal includes a cost previously determined to be unallowable for that Contractor, then the Contractor will be assessed a penalty in an amount equal to two times the amount of the disallowed cost allocated to this contract.
The definitions section of FAR Part 31 states—
‘Expressly unallowable cost’ means a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable.
FAR 42.709 provides guidance to contracting officers regarding how to impose the penalties. Importantly, the FAR directs (using the imperative “shall”) contracting officers to waive the penalties if –
The contractor demonstrates, to the cognizant contracting officer’s satisfaction, that—
(1) It has established policies and personnel training and an internal control and review system that provide assurance that unallowable costs subject to penalties are precluded from being included in the contractor’s final indirect cost rate proposals (e.g., the types of controls required for satisfactory participation in the Department of Defense sponsored self-governance programs, specific accounting controls over indirect costs, compliance tests which demonstrate that the controls are effective, and Government audits which have not disclosed recurring instances of expressly unallowable costs); and
(2) The unallowable costs subject to the penalty were inadvertently incorporated into the proposal; i.e., their inclusion resulted from an unintentional error, notwithstanding the exercise of due care.
(See FAR 42.709-5 for more details. Readers wanting to dig deeper into the imposition of penalties should also look at the DCMA’s Guidance to Contracting Officers for negotiating final overhead rates.)
We have written, several times, about small businesses that inadvertently claim expressly unallowable costs as allowable costs, and think the penalties should be waived. (See, for example, the stories of Inframat and TAI.) They seem surprised when the ACOs and Judges don’t act as sympathetic as the contractors think they should.
Today’s story is about a large business that submitted expressly unallowable costs. Today’s story is about Exelis, Inc., and comes to us via the ASBCA. Exelis used to be part of the ITT Corporation, which used to be called ITT Industries, Inc. ITT split itself and its Defense Electronics business became Exelis. Whether you call it Exelis or ITT Defense, the company has been a large defense contractor for a long time.
Exelis established certain executive compensation plans, as many companies do. (It’s an old joke that people aren’t really the No.1 resource these days; the No. 1 resource is the Supplemental Executive Compensation Plan.) Some of Exelis’ executive compensation plans were based (at least to some extent) on the changes in its stock price over time, relative to certain benchmarked peer companies. DCAA audited Exelis’ executive compensation in 2006 and 2007, and found claimed amounts were in excess of the 31.205-6(p) ceilings in place at the time; however, no mention was made of the allowability of the plans themselves. Exelis disagreed with the DCAA audit findings, arguing that some of its executive compensation plans were excluded from calculation of executive compensation under the ceilings. That argument resulted in the ACO finding that, even if the plans should have been excluded under 31-205(p), the costs in question were expressly unallowable under 31.205-6(i), because they were determined (at least in part) based on changes to stock price.
Long story short, Exelis and its Corporate ACO (CACO) agreed that the costs were expressly unallowable under 31.205-6(p) rather than 31.205-6(i), which was fortuitous for the government because now everything matched the DCAA audit report. Exelis paid penalties with respect to older proposals (e.g., 2004); however, by then DCAA had revised its opinion and now believed that the executive compensation was expressly unallowable under 31.205-6(i)—and Exelis disagreed with that opinion. Meanwhile, Exelis included $7,050 in claimed costs for the band at its Christmas party in its 2006 final billing rate proposal, and DCAA found that to be an expressly unallowable cost as well. Exelis did not disagree, but claimed that the cost had been inadvertently claimed through accounting error and was immaterial.
The CACO did not agree and imposed penalties. In the words of Judge Sweet (writing for the Board)—
In assessing a penalty, CACO Rivera rejected Exelis's argument that the penalties for entertainment costs should be waived under FAR 42.709-5(c) on the grounds that it had inadvertently coded the costs. CACO Rivera reasoned that Exelis did not address the requirement under FAR 42.709-5(c) that a contractor demonstrate that it has established policies and personnel training, and an internal control and review system that provide assurance that unallowable costs subject to penalties are precluded from being included in the contractor's final indirect cost rate proposals.
Exelis appealed the COFD and its appeal was denied.
The Board found that the executive compensation costs were expressly unallowable. Further, because the entertainment costs were added to the compensation costs, the total amount of expressly unallowable costs was in excess of $3 million. Thus, the only way for penalties to be waived was for Exelis to convince its CACO that it met the 42.709-5(c) requirements. However, the documents submitted to the ASBCA did not convince the Judges that Exelis deserved to have the penalties waived. Judge Sweet wrote—
… those documents do not show that, at the time it included the entertainment costs in the 2006 indirect cost proposal, Exelis had established policies, personnel training, and an internal control and review system that provided assurance that entertainment costs were precluded from being included in final indirect cost rate proposals. The other documents submitted by Exelis—namely its code of corporate conduct, presentation on allowability and allocability of home office G&A expenses, and its presentation on current developments in government contracting—pre-date the 2006 indirect cost proposal. However, those documents are general in nature, and do not show that Exelis had established policies, personnel training, and an internal control and review system that provided assurance that entertainment costs were precluded from being included in final indirect cost rate proposals.
The lesson for other contractors—large and small—is clear. If you want to persuade an ACO to waive penalties associated with expressly unallowable costs that may have been inadvertently included in your proposals to establish final billing rates, you need to do several things. You must—
Establish clear policies regarding identification and segregation of unallowable costs.
Establish detailed procedures to assist employees in identifying unallowable costs. These procedures are not simply accounting procedures to help accounting personnel with proper account coding; they must also help other employees to properly identify unallowable costs on expense reports, check requests and other transactions.
Train employees in the policies and procedures. Document the training. Keep a record of who has been trained and when they were trained.
Establish strong internal control systems that provide assurance that unallowable costs are being identified and properly segregated from allowable costs.
Establish periodic reviews—sometimes called “scrubs”—that check how well the internal control systems are working.
Seems like a lot of effort, right? Well, it is a lot of effort. Obviously the efforts listed above need to be proportionate to the company’s size and to the risk of inclusion of expressly unallowable costs. However, often the efforts can pay for themselves, especially when (as in the case of Exelis) there are multiple millions of dollars at stake.
(DCAA Wants) More, More, More!
Last Updated on Saturday, 08 April 2017 21:11
Testimony this week before the House Armed Services Committee (HASC) Subcommittee on Oversight and Investigations indicated that DCAA has learned precious little over the past decade and continues the management approach proven time and time again to be significantly misguided.
Strong words, perhaps. Let’s discuss the basis for our assertion.
As a foundation, let’s all remember that DCAA intentionally created for itself a ginormous backlog of unaudited contractor proposals (called “final billing rate proposals” or sometimes “incurred cost proposals”) by intentionally, willfully, not performing audits on them. The pretext at the time was the audit work that needed to be performed in Southwest Asia as a result of the contractors supporting the Global War on Terror. Indeed, work needed to be done there, but several credible sources have noted that by creating such a backlog, DCAA was also creating a business case for adding more budget and more headcount. They have asserted—and we believe them—that this strategy was the real driver behind the management decision to stop performing audits.
But a couple of things got in the way of that cunning plan. First and foremost was the fact that while DCAA was busy not performing audits, it was revising its interpretation of Generally Accepted Government Auditing Standards (GAGAS)—taking a unique approach that resulted in a dramatic drop in auditor productivity. A huge and unprecedented drop in output that we have documented on this site.
Second, the courts began to enforce the Contract Disputes Act (CDA) statute of limitations (SoL) against the government, finding that if DCAA didn’t perform its audits timely, then the government was prevented from asserting a claim against the contractor for improperly billed costs. While that strict interpretation has devolved in the years since its first establishment (thanks to Judge Dyk), DCMA and DOJ trial attorneys are still dealing with the fact that (generally, with many exceptions) the government has six years—no more—from the time the contractor submits its annual final billing rate proposal to assert a claim for improperly claimed costs. Given DCAA’s ginormous backlog coupled with a dramatic drop in auditor productivity, the government was looking at contractors reaping a potential windfall of improperly claimed costs.
And that’s not the only issue. We’ve documented here the “ripple effects” associated with DCAA’s decision to stop performing audits on contractors’ final billing rate proposals. For example, DCMA’s backlog of contracts awaiting closure has grown. The ability to deobligate excess funds has been hindered, because the contracting officers don’t know final contract prices. The ability of prime contractors to smoothly close-out subcontracts has been hindered. DCAA’s decision to stop performing audits was, effectively, a monkey-wrench thrown deliberately into the machinations of the defense acquisition system.
People began to become concerned. People such as the Under Secretary of Defense. People such as Congress. People whose concern could lead to some changes.
Notably, DCAA management was not among those people. Everything was okey-dokey over at Fort Belvoir. Peachy. Just swell.
To assist DCAA in addressing its management failure, Congress passed a law that prohibited DCAA from performing audits for any non-DoD agency until and unless it reduced its backlog to an “acceptable” number. Somehow, DCAA convinced people that an 18-month backlog was acceptable; we don’t know how that con-job was effectuated. Obviously, any backlog that can’t be performed in the following year should be unacceptable, but somehow we all forgot that obvious fact.
With that statutory prohibition staring it in the face, DCAA got busy. The audit agency got busy “risking-away” audits, claiming assignment completion without performing audits. They got busy deciding contractor proposals were “inadequate” and closing assignments, again without performing audits. These innovative management approaches for not performing audits and claiming assignment completion have been documented on this blog.
Now, back to the April 6, 2017, testimony before the HASC Subcommittee.
Ms. Anita Bales, DCAA Director, offered written testimony.
Ms. Bales’ testimony is congruent with the assertions we’ve made here. Let’s offer some quotes. (All italics have been added.)
First, it is important to understand the root cause of the backlog. Specifically, during 2000-2009, defense contract spending increased in support of the Gulf war, but DCAA resources remained the same … Because we didn’t have sufficient audit staff to perform all the new work, we dedicated our limited resources to high risk defense procurements and deferred incurred cost audits, the only audits that could be postponed without significant risk to the taxpayer or the warfighter.
DCAA’s inability to maintain a steady level of staffing has presented a major barrier and hindered our ability to successfully accomplish our mission. To perform and sustain the full complement of contract audits that pose the greatest risk to the government, DCAA needs to have a stable and well-qualified workforce that can deliver on its mission. … We repeatedly find that these staffing upheavals negatively affect workload projections, delay training plans, and disrupt the professional development pipeline critical for meeting the high risk needs of our customers. For example, based on our trajectory on eliminating the Incurred cost backlog … we were planning to be fully current by 2018. However, the passage of the 2016 NDAA (Section 893), which prohibited DCAA from receiving reimbursements from non-DoD agencies, necessitated a hiring freeze that interrupted our progress. Because of that hiring freeze, together with the additional hiring freeze for FY 2017, we are currently reassessing our projections to determine how these events will impact our target dates [for reducing the backlog of unaudited contractor proposals to an “acceptable” size].
Do you see the implicit threat and business case for adding more budget and auditor headcount? “Give us more funding or we will let the backlog grow back!” Hopefully the HASC Subcommittee staff will have sufficient spine to resist that implied threat.
There was more to Ms. Bales’ testimony but, at its essence, her testimony was a plea to be left alone and to be allowed to continue with the agency’s current strategies. “It ain’t broke and there’s no need to fix it” was the essence of her testimony. Which we think is sad, because it’s a denial of reality. Plus if it ain’t broke, why then does DCAA need more budget and more headcount?
In contrast to Ms. Bales’ call for continuing the status quo at a higher budgetary level, the two industry representatives told a story of historic mismanagement and an urgent need for innovative approaches to change the status quo.
More on that in Part 2, coming up in a couple of days.ÂÂ