We recently told you about brand-new audit guidance (MRD 10-PSP-023(R)) that encouraged DCAA auditors to support DCMA contracting officer negotiations with contractors—but placed limits on that interaction. We asserted that some of those limits would leave “the contracting officer and buying commands stuck in limbo” for perhaps 90 days, “awaiting a supplemental report in order to have DCAA officially alter its original opinion based on receipt of new facts” provided by the contractors during negotiations. We liked the idea that DCAA HQ was encouraging its auditors to get back in the role of providing financial advisory services to DCMA, but we didn’t much care for the stringent limits and narrow-minded approach the audit agency placed on its auditors.

Thus, we were very interested in receiving an official DCAA PowerPoint presentation used to train auditors on the “’Rules of Engagement’ for Auditor Communications.” The presentation we received included the speaker’s notes in addition to the slides themselves. The presentation was undated; however, we believe it to be contemporaneous with the September 9, 2010 MRD discussed in the link above. If you are a site member, you can find the entire presentation here. For the rest of you, here’s a brief overview.

The presentation did more than encourage auditors to communicate with both requestors of audits and those being audited—it actually stated that such communications were required. The notes stated—

While GAGAS specifically addresses communication at the planning and reporting stages, communicating with the contractor and requestor throughout all phases of an audit is necessary to comply with other GAGAS requirements. For example, GAGAS 6.04b requires the auditor to obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report. To obtain sufficient evidence, it is essential for auditors to communicate with the contractor to ensure that conclusions are based on a full understanding of all relevant facts. In addition, discussions with the requestor may disclose information relevant to the audit. Such discussions are a normal part of an audit and can be conducted without impairing an auditor’s independence.

As we’ve previously noted, the U.S. Air Force recently implemented a new process designed to facilitate the negotiation and final price agreement for Undefinitized Contract Actions (UCAs). We also noted that the DCAA issued audit guidance regarding the auditors’ roles in that process, which included attending the mandatory “proposal walk-through” for Government personnel. Tellingly, the presentation treated the Air Force’s focused UCA definitization process as the norm for all contractor proposals, including proposals to establish final indirect cost rates. The presentation stated—

At the commencement of the audit the contractor should provide Government representatives (e.g., DCAA, ACO, and PCO) with a ‘walk-through’ of its assertion (e.g., forward pricing proposal, incurred cost submission). The walk-through should generally take place after the auditor performs an initial adequacy review of the contractor’s assertion and may occur either before or during the entrance conference. At these meetings, the contractor should fully explain its assertion and allow the audit team to ask questions to fully understand the contractor’s assertion. This process will facilitate the early identification of any inadequacies with the contractor’s assertion that needs to be addressed.

Yikes! How did an Air Force process designed to expedite proposal negotiations with the contracting officer, in order to meet specific statutory deadlines, morph into this? Apparently, the walk-through is now hosted by DCAA “either before or during the entrance conference,” and not the contracting officer. It is now to be expected for all proposals, not just those for large sole-source procurements and for definitization of UCAs. And it is now to be used by DCAA to identify inadequacies, instead of to facilitate negotiations. How did we get from there to here? (Note: that was a rhetorical question.)

Much criticism has been leveled at DCAA—by us and many others—regarding the lack of communication with those being audited. In fact, we recently wrote—

[Audit] reports that have been issued, generally have been riddled with factual errors and other quality shortcomings, because (a) auditors are afraid to openly communicate with those they are auditing (as well as those agency customers requesting the audits), and (b) once the auditors reach a preliminary finding, everybody (from the auditor to the supervisory auditor to the branch manager to the regional audit manager) is afraid to change it—even when confronted by facts that would lead a reasonable person to a different conclusion.

So we were pleased to see the presentation emphasize that it’s perfectly okay for auditors to actually communicate with contractors during an audit. Moreover, preliminary findings should be discussed with the contractor so as to see if there are any facts that would tend to lead a reasonable person to a different conclusion. The presentation stated—

Discuss matters as needed for a full understanding of contractor’s basis for each item in submission or aspect of area being audited. Discuss preliminary audit findings (potential system deficiencies, FAR/CAS noncompliances, etc.) so that conclusions are based on a complete understanding of all pertinent facts. Through-out the audit, the auditor should discuss matters with the contractor as needed to obtain a full understanding of the contractor’s basis for each item in the submission, or each aspect of the area subject to audit. The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential FAR/CAS noncompliances, etc.) with the contractor to ensure conclusions are based on a complete understanding of all pertinent facts. These types of discussions do not impair auditor independence and are generally necessary to obtain sufficient evidence to support audit conclusions.

We were also pleased to see that an exit conference should be held promptly “after completion of field work.” But despite that very helpful language, the presentation also contradicted that statement, saying that exit conferences were to be held “upon completion of field work and after supervisory review and FAO manager approval (or all management reviews if RAM/DAM review is required).” So which is it? We’ll post the exact language below and let you decide—

Upon completion of the field work, the auditor should hold the exit conference to discuss the audit results and obtain the contractor’s views concerning the findings, conclusions, and recommendations for inclusion in the audit report as required by GAGAS. Except for audits requiring RAM/DAM review, the exit conference may be held after the supervisor completes his/her review of the working paper and draft report but before the FAO manager completes the final review if the FAO manager believes it is appropriate based on his/her involvement with the audit, and/or the complexity of the audit and the experience of the audit team. In such cases, the auditor should inform the contractor that the results are subject to management review. For audits requiring RAM/DAM review, all applicable management reviews must be completed prior to holding the exit conference. The auditor should invite the requestor/contracting officer to the exit conference, especially if there are major or complex audit issues.

We want to be excited about this, we really do. But we think it’s more likely that the requirement for supervisory review of the draft report, and potential FAO manager review of the working papers and draft report, will mean that the contractor won’t hear about the auditor’s findings/conclusions until it is too late to affect them with explanations and facts. Yes, it’s true that “preliminary audit findings” are to be discussed with the contractor, but that really doesn’t happen very often. It’s great when it does happen, but the exit conference is also an opportunity to hear and rebut preliminary findings—or at least it used to be. Not so much anymore, apparently.

Moreover, the presentation included guidance that—

The information provided to the contractor at or in anticipation of the exit conference (i.e., draft report/results or, in the case of forecasted costs subject to negotiations, factual information) should be provided concurrently to the requestor/contracting officer.

So by the time the contractor learns about the auditor’s official findings/conclusions—but has not yet submitted a written response to those findings/conclusions—so has the customer. The customer gets an unrebutted audit report, one that lacks the contractor’s official response. That’s nice. (Note: that was sarcasm.)

To sum up, we expect to use this presentation in our interactions with DCAA, to try to force more open communication, especially to try to learn about preliminary audit issues before they get into draft audit reports. But we know from experience that the strategy will not always work. And now we know that if we don’t learn about those issues before the exit conference, then it will be too late—because the DCMA contracting officer will be receiving a one-sided report at about the same time we’re hearing the auditor’s findings for the first time.

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