GAO Reports Widespread Audit Quality Problems at DCAA

Thursday, 01 October 2009 00:00 administrator

Before getting into the September 23, 2009 hearing by the Senate Committee on Homeland Security and Governmental Affairs (which will be the subject of an upcoming article), we want to spend some time on the 148-page GAO audit report on which most of the testimony centered—GAO Audit Report GAO-09-468 (September 23, 2009) entitled “DCAA Audits: Widespread Problems with Audit Quality Require Significant Reform.” This was a follow-up report to last year’s now-infamous GAO report (GAO-08-857), and was designed to (1) conduct a “broad assessment of DCAA’s management environment and quality assurance structure,” (2) evaluate corrective actions taken in response to last year’s report (as well as internal reports by the Defense Business Board and other DOD stakeholders), and (3) identify potentials actions that might be taken by Congress (and others) that “could improve DCAA’s effectiveness and independence.”  As the title of the report indicates (and as was previously leaked), DCAA did not fare well in the GAO’s investigation.

The GAO looked at DCAA Contract Audit Manual (“CAM”) guidance and DCAA’s quality assurance program.  It examined internal quality assurance reviews. It examined the 2007 DOD Inspector General external quality “peer review” of DCAA audit quality (but did not review any DOD IG working papers). And it also reviewed 69 audit assignments from the period Government Fiscal Years (GFYs) 2004 through 2006, focusing on reports issued by “DCAA offices that reported predominantly adequate (‘clean’) opinions on contractor systems and related internal controls ….”  The 69 audit assignments that GAO reviewed were comprised of 37 audits of contractor internal controls and 32 “cost-related audits” issued from seven “geographically disperse DCAA field offices within the 5 DCAA regions.”  Notably, the GAO did not review assignments from DCAA’s Field Detachment (which audits classified contracts) nor did GAO review assignments from offices that issued reports with predominantly adverse contractor findings.  Consequently, GAO’s findings are admittedly “not statistical” in nature; the review covered less than 10 percent of the 76 offices in which contractor internal control-related audit reports were issued during the review period.

To summarize, the GAO examined a biased sample of reports from a small fraction of DCAA’s offices, issued in historical periods prior to the July 2008 GAO report (and thus prior to implementation of any DCAA corrective actions in response to that report).  Moreover, the management activities the GAO examined were issued prior to the issuance of Defense Business Board recommendations on changes to DCAA organizational strategy (and implementation of same).  Further (and more to the point with respect to certain Senators’ angry and pointed questions during the recent hearing), all of the audit reports and activities, and related findings, in the GAO report occurred prior to Ms. Stephenson assuming her current position as Director of DCAA.  These limitations didn’t stop GAO from generalizing from the findings, nor did they stop GAO from making sweeping generalizations and major policy recommendations for the Department of Defense and Congress. For example, the GAO report concluded “[we] found DCAA’s management environment and quality assurance structure were based on a production-oriented mission that put DCAA in the role of facilitating DOD contracting without also protecting the public interest.”

Notwithstanding the foregoing caveats, the GAO report was rife with damning anecdotes and findings. It is hard to dispute the overall conclusions of the report, which were summarized thusly:  “we found audit quality problems at DCAA offices nationwide, as demonstrated by serious quality problems in the 69 audits … we reviewed, DCAA’s ineffective audit quality assurance program, and DCAA’s rescission of 80 audit reports in response to our work.”

The GAO report stated that “we found audit quality problems … with all 37 audits of contractor internal controls and the 4 incurred cost and the 2 request for equitable adjustment audits we reviewed at 7 FAOs across the 5 DCAA regions ….”  Detailed findings included:




Findings such as those summarized above were used to support broad, generalized conclusions such as:


As a result, the GAO recommended several actions that it asserted would “improve DCAA’s effectiveness and independence.”  Among these recommendations were the following:


In addition, the GAO made 15 “recommendations for executive action” to the Secretary of Defense designed to “improve the quality of the agency’s audits and strengthen auditor integrity, objectivity, and independence ….”  Notable among these was the recommendation to “ensure that auditors who make direct bill [authority] decisions are independent of DCAA employees who perform a DOD management function … thereby reducing situations where DCAA auditors are encouraged to reduce their office workload by approving contractors for the direct-bill program.”


In conclusion, the GAO report included sensational, headline-grabbing findings that seemed to support the assertion that DCAA audit reports were poorly planned, poorly supervised, and were the result of an assembly-line production environment where quantity was valued more highly than quality.  However, as we noted above, the GAO review sample was biased and of insufficient size to support an agency-wide indictment of management inadequacy.  As many contractors would willingly agree, DCAA has considerable room for improvement with respect to audit planning and quality, and is badly in need of a cultural transformation.  We’re not necessarily convinced that the audit quality problems are as terrible (or as endemic) as the GAO asserts.


Next up:  what the Senators heard and how they reacted to the GAO report findings.