DCAA is in the process of publishing new audit guidance that we can’t wait to share with you. But in the meantime, the Pentagon is facing renewed criticism, including allegations of oversight failures by the DOD Inspector General (IG). As readers may recall, the DOD IG has not hesitated to point a finger at the failings of the DCAA—so it seems apt justice that they start to feel some of the heat as well.

DOD Inspector General “Does Less with More”

On September 9, 2010, Robert Brodsky reported at GovExec.com that Senator Charles Grassley (R-Iowa) released a report that was highly critical of the DOD IG. Mr. Brodsky reported that Senator Grassley accused the DOD IG of failing to pursue any oversight reviews of any major weapon system or contractor in FY 2009, “leaving that mission to the DCAA.” As the GovExec article reported—

‘As the [Office of Inspector General] has drifted away from its core mission of conducting contract audits, it chose to move in an ill-advised direction,’ the 73-page report said. ‘Today, the majority of audits appear to be nothing more than quasi-academic reviews of DoD policies and procedures. The DoD OIG has become the department's 'policy police.' ‘ …

Overall, the 765-person audit office issued just 113 reports in fiscal 2009, its lowest total in two decades. In 1995, when the office had 717 auditors, the IG published 264 reports, the Senate staffers said. …

And despite conducting less labor-intensive contract audits, the office is averaging 18 months to issue reports, Grassley's staff found. Some audits have dragged on longer than three years, and others have taken so long the IG eventually scrapped them.

Not content with issuing the report, Senator Grassley also sent a letter to Secretary of Defense Gates, calling for “significant audit reforms” to the Office of the IG, according to Brodsky.

We spent some time looking at the Grassley report. There was plenty of criticism for all facets of DOD IG operations, ranging from an inability to audit DOD accounting data because of system limitations, to poor morale, to looming problems with financial statement audits of DOD components. But to us, the most interesting portion of the report was the portion devoted to “Acquisition and Contract Management (ACM).”

The Grassley report stated, “ACM has 162 auditors assigned to 26 branches spread across 9 divisions. There are an additional 11 persons assigned to the Front Office, including one SES executive, three senior auditors, one contract specialist, and 6 administrative personnel.” In Government Fiscal Year 2009, ACM’s auditors “produced a total of 28 reports.” According to Senator Grassley’s staff, that worked out to “an average of .173 audits per auditor per year.”

The Grassley report noted that, given the name and mission, one might think the ACM auditors focused on auditing contract payments. According to the report, one would be wrong to make that assumption.

ACM senior management repeatedly stated that ‘we don’t examine contract payments, and we don’t rely on DCAA to do it, either.’ They also said: ‘it’s impossible to audit contracts … We can’t do it …..It’s too hard to find transaction-level data, or it just doesn’t exist.’ They can’t do contracts, they said, because of ‘missing documentation and no audit trails.’ They indicated that ‘we used to do big weapons contracts but we lack the right skill sets – or experienced staff – to do it today.’ A top Audit Office official said they could ‘cobble together such an audit team to look at one of the big Category I weapons systems,’ but doing that would ‘deplete resources needed to meet other priorities.’

The Grassley report opined that, “De-coupling payments from contracts, as is the ACM practice, greatly reduces the probability of detecting and reporting fraud. In fact, it just about eliminates that possibility altogether.”

The Grassley report focused on one audit performed by the DOD IG ACM staff in FY 2009 as an example of what worked and didn’t work. The report (D-2009-108) was entitled ““U.S. Air Forces Central War Reserve Material Contract” and it documented the audit of a cost-plus-award-fee contract awarded to DynCorp for managing pre-positioned war reserve materials (WRM) at storage sites in Southwest Asia. The Grassley report summarizes the DOD IG audit report as follows—

The most troublesome findings were buried deep in the body of the report. These are as follows:

• The contract arrangement with DynCorp was prohibited by 10USC2306[a];

• Once Operation Enduring Freedom caused a major surge in WRM requirements far beyond the scope of the existing contract, that contract should have been terminated in FY 2002-03 and re-competed;

• Missing documentation resulted in either no audit trail or one so complex that accountability was questionable; The lack of internal controls created an environment with “high risk” for fraud;

• DynCorp was authorized to submit vouchers directly to DFAS under the Direct Billing program; DCAA was required to test and sample those transactions periodically but failed to do so;

• $161.1 million was obligated without a written, binding agreement in violation of 31USC1501…

The Grassley report continued—

The [DOD IG audit] report appears to imply that the vouchers, for the most part, could not be matched with the contract modification documents because the language in those documents did not specify what goods and services had to be delivered. If a payment/contract match-up was not feasible, this could be a violation of 31 USC § 1501. That law requires that a financial obligation be supported by a written, binding agreement (contractual document) that specifies what goods and services are to be delivered. Without that kind of specificity, a contract would be the equivalent of a blank check. The report stated: the “government did not know what it was paying for … The government may have paid for services DynCorp did not perform. … It may have overpaid for services.” In other words, the government did not know what it had ordered, what was delivered, or what it was actually buying or paying for.

To conclude, Grassley’s staffers offered the following summary—

All of this taken together appears to suggest that DynCorp may have received $161.1 million in unauthorized and/or improper or even fraudulent payments. But the report’s findings are inconclusive.

The OIG recommended that DCAA go back and examine this DynCorp contract. However, bucking this audit back to DCAA made no sense whatsoever. To begin with, the report gave DCAA very poor grades for failing to watchdog DynCorp on this contract from the get-go. The DOD IG should finish the audit that it started.

Whew. That sounds bad.

What did the DOD Inspector General say in response to such criticism?

On September 13, 2010, DOD Inspector General Gordon S. Heddell issued a response to Senator Grassley’s criticisms. In his letter to Senator Grassley, Mr. Heddell stated—

I believe that your report presents valid concerns and is an opportunity to enhance the mission of the Department of Defense Inspector General (DoD IG) in regard to detecting and reporting fraud. Therefore, I have directed the Deputy Inspector General for Auditing and her staff to make concrete and specific proposals on how your report can be used to improve the timeliness, focus, and relevance of audit reports. Furthermore, I have directed that these proposals, to be completed no later than October 15, 2010, are supplemented by a detailed plan listing specific initiatives to be implemented at the earliest possible date. The recommendations in your report will be an important tool in the transformation I have initiated since being confirmed as Inspector General.

The letter included more detailed responses to each of the 12 criticisms found in the Grassley report. And by “more detailed responses” we mean such detailed responses as the following—

As noted in the response to recommendation 2, "end-to-end" contract performance and payout audits involve an extensive amount of resources and time to complete and which, by the very nature of their wide scope, could exacerbate the very issues the report highlights involving timeliness. Instead, we provide audit coverage of the contract process through a series of audits based on the risks associated with the specific contract segment.

To further strengthen this approach, the DoD IG focus on finance and accounting systems has been expanded to include oversight of plans and programs to acquire new accounting systems and efforts to modernize the existing systems.

Well, that response really ought to placate Senator Grassley and his staffers, who think the DOD IG is failing at its oversight mission. Right?

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