Our old friends at the self-described independent and bipartisan Commission on Wartime Contracting in Iraq and Afghanistan (“CWC”) were back in the news on September 21, 2009, issuing another report on Government oversight of contractors deployed in the battlefields of Southwest Asia, entitled “Defense Agencies Must Improve Their Oversight of Contractor Business Systems to Reduce Waste, Fraud, and Abuse.” We’ve posted several articles on the activities of the CWC, here, here and here.  The first CWC report, entitled “At What Cost? Contingency Contracting in Iraq and Afghanistan," can be found here.

The latest report was a mostly a recap of testimony at prior hearings, summarized and spun to meet the needs of the CWC. The first report focused on Government oversight of contractors in the battlefield, only mentioning contractor “business systems” in passing.  In contrast, the latest report focused almost exclusively on contractor internal control system adequacy, and used that subject to score points on all parties, from the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) to the LOGCAP IV contractors supporting troops in the battlefield.  According to the CWC, there are no heroes in the Department of Defense (DOD) oversight of contractors, only several dysfunctional players struggling to work a poorly designed regulatory regime with inadequate resources.

The report contained five findings, as discussed below.

1. DCAA and DCMA “send mixed messages to contractors” through their “divergent and often contradictory behaviors.”  The CWC discussed the advisory role of DCAA and the regulatory authority of DCMA to “enforce contract terms and conditions.”  From this starting point, the CWC asserted that DCAA auditors “are recognized experts on accounting matters, internal controls, and business systems,” while DCMA contracting officers “are not typically trained in these complex audit and accounting procedures and sometimes make questionable decisions, seemingly ignoring DCAA recommendations.”  According to the CWC, the dysfunctional relationship between the two DOD agencies “creates an environment in which contractors can exploit the agencies’ mixed messages and game the system to their advantage.”
2. The separate lines of authority for each agency “contribute to a lack of interagency cooperation and collaboration, and make it difficult for the oversight process to work as well as it should.”  Exacerbating the problem is the lack of any arbiter between DCAA and DCMA, since “their common point of resolution is the Office of the Secretary of Defense—a level too high in the organization structure to effectively resolve differences that continually occur.”
3. DCAA audit reports “are not informative enough to help contracting officers make effective decisions.”  The CWC noted the December 2008 changes to DCAA audit guidance, in which contractor internal control systems were only to be rated on a pass/fail basis (adequate or inadequate).  According to the CWC—

 

Now, all deficiencies reported by DCAA will render the contractor’s system ‘inadequate,’ resulting in many more adverse audit opinions. But this does not improve matters.  Rather than giving system deficiencies more importance, it seems to have the opposite effect—undermining the significance of the audit findings and weakening their effectiveness. Use of a binary system involving a pass/fail rating does not adequately depict relative degrees of impact.  Without any reasonable provision for more accurately describing systems that are less than perfect, contractors and contracting officers find the ‘adequate/inadequate’ options too restrictive. Moreover, since only significant deficiencies are now reported, there is no provision to report and track recommendations for other desirableimprovements. Contracting officers need audit opinions with clear and quantifiable risk information. They need DCAA’s expert opinion about the relative impact or dollar value (or even an estimated range of risk) of the deficiency in order to consider making a contract award or a contract-incentive determination in the face of an ‘inadequate’ audit opinion.

 

1. DCMA is not “aggressive in motivating contractors to improve business systems.”  The CWC reported that “when confronted with significant audit findings, contractors generally promise to improve their business systems by providing corrective-action plans to contracting officers.  These plans, as opposed to completed corrective actions, are often accepted by contracting officers, thus effectively rendering a[n inadequate] system adequate.”
2. The two agencies “are under-resourced to respond effectively to wartime needs.”  The CWC noted that “as a result of personnel shortfalls, DCAA system reviews and follow-ups are not always timely; therefore, the real-time status of contractor business systems cannot always be determined.”  In addition to personnel shortages at both agencies, “the Commission believes that many of the untimely reviews are due to the failure of both DCAA and DCMA to prioritize their business-system workload in a wartime environment.”  The CWC concluded, with the following (almost plaintive) statement—

 

… the wars in Iraq and Afghanistan have been going on for many years and the Commission is at a loss to understand why leadership has not aggressively pursued additional staffing until recently.  In addition, it is the job of DCMA and DCAA leadership to reallocate existing, albeit limited resources in accordance with mission priorities.  Timely oversight of contingency contractors’ business systems should be a priority for both agencies during wartime.

 

The CWC made several recommendations to remedy the findings reported above.  Highlights are summarized below –

• DCAA and DCMA must work together to develop agreed-upon standards and processes that communicate the same message to both the individual contractor and the contracting community and help contractors achieve “adequate” systems.  Ideally, the process should be defined in the FAR (in a way similar to the material-management and accounting system standards called out in the DFARS 252.242.7004) so they are visible to all stakeholders.
• The Department of Defense needs to re-establish control of the oversight process to the government by developing better internal-resolution processes.  The DoD process should ensure that disagreements between DCAA and DCMA are rapidly resolved, with consideration for DCAA’s independent audit expertise as well as for the DCMA contracting officer’s decision-making authority and the operational mission.

• DCAA should revisit its policy with respect to its binary “adequate/inadequate” opinions for business system reports and provide a mechanism for reporting any deficiency that warrants formal notification and tracking.  Also, whenever possible, audit reports should include an assessment of audit risk and cost impact associated with reported deficiencies.  Further, DCAA should re-examine the need to express opinions on the overall adequacy of business system audits beyond those explicitly required by the FAR.

• DCMA, with DCAA advice, should develop a reliable and aggressive process for reaching consistent decisions on business systems and any corrective action needed.  The process should recognize the contracting officer as the final authority but also acknowledge DCAA auditors as the business-system experts chartered to advise government contracting organizations, as noted in the DCAA mission statement. Disagreements with audit recommendations should be discussed at appropriate leadership levels within DCMA and DCAA and documented accordingly.  As part of their decision process, DCMA contracting officers should also consider any risk analysis provided by DCAA and thoroughly address it in documenting their decisions.  Finally, DCMA should ensure timely follow-up on contractor corrective-action plans and validate that the contractor actions actually correct the deficient business system.  If not, the contracting officer should pursue such contractual remedies as withholds, and DCMA leadership should ensure that this occurs.

• The Commission strongly encourages each organization to aggressively pursue additional staff, but also to immediately prioritize its current workload to meet government oversight needs in the contingency-contracting arena. This is imperative to address the risks of waste, fraud, and abuse.

 

There is much that could be said about the latest CWC report. Some of the findings and recommendations—particularly those that would eliminate pass/fail internal control system DCAA audit reports—would be a big step in the right direction.  Other matters seem less helpful. A future article will contrast the CWC characterization of DCAA auditors as “recognized experts on accounting matters, internal controls, and business systems” with recent testimony of GAO and other Government officials before the Senate Homeland Security and Governmental Affairs Committee, at which Senators heard that DCAA had to rescind 80 audit reports after GAO found significant faults with each of them. A GovExec.com article reported the following reactions from the Committee members—

 

‘In the world of auditing, what has been happen[ing] here [at DCAA] is a capital crime,’ said Sen. Claire McCaskill, D-Mo., a former state auditor for Missouri.  ‘There can be no bigger indictment of an agency than this GAO report.’  Sen. Susan Collins, R-Maine, called GAO's findings ‘an epic failure by the agency and the [DCAA],’ while Sen. Tom Coburn, R-Okla., said he ‘got sick’ reading the report. ‘I can't understand why the management of [DCAA] hasn't been completely changed,’ Coburn said.

 

It seems that the Commission on Wartime Contracting is so independent, it is not in touch with GAO report findings or the perceptions of Senate Committee charged with oversight over the DOD oversight agency.  Perhaps they ought to get together and collaborate with each other, before the CWC places too much faith in DCAA’s characterization of contractor internal control systems or forces DCMA to give undue weight to DCAA recommendations.

 

< Prev		Next >