On June 10, 2012, Sarah Chacko wrote an editorial in Federal Times regarding DCAA’s problematic backlog of unperformed and uncompleted audits. Entitled “DCAA Must Balance Quality and Quantity—And Soon,” Ms. Chacko’s editorial took DCAA to task for the lack of audit productivity. She wrote—

Four years ago, lawmakers ordered Pentagon officials to overhaul how their auditors review contracts to make sure costs are reasonable. Their chief complaint: Auditors were more concerned with being speedy than thorough. … Now the problem is that DCAA auditors are being thorough to a fault. They are devoting more attention to each audit, but performing dramatically fewer audits. And that is even after the agency hired 615 additional staff members since 2008 for a total of 4,876 as of last year. … In short, a far smaller portion of transactions conducted between the Pentagon and its contractors is getting any scrutiny, despite a huge DCAA staffing increase and skyrocketing costs. …

DCAA must find a better balance between quantity and quality in its auditing operation. Quality is great, but a quest for perfection is impractical, slows the process and costs the taxpayers large sums. … And DCAA must act fast: As the backlog swells even more, billions of dollars of improper payments will be lost and unrecoverable.

Readers will recognize the issues at the heart of Ms. Chacko’s concerns. After all, we’ve devoted several articles to the topic and spent at least three articles exploring DCAA’s audit productivity metrics, as expressed in its FY 2011 Annual Report to Congress. Suffice to say that we find little in Ms. Chacko’s editorial with which to disagree.

That said, the Director of DCAA, the Honorable Patrick Fitzgerald, wrote a letter to the Federal Times editor to express his disagreement with Ms. Chacko’s concerns about current DCAA policy—a policy that seems to favor audit file working paper documentation over performance of actual audits.

Director Fitzgerald wrote—

In defense of DCAA … you neglected to consider important points that would give a more accurate picture of the Defense Contract Audit Agency’s effectiveness and productivity.

To use the number of audits completed as your basis for evaluation isn’t valid for two reasons. First, you imply that our performance standard should be the number of audits DCAA was completing at the time it was criticized by the Government Accountability Office. This just isn’t where our agency needs to be. Second, doing more audits does not automatically result in more savings. In reality, the amount of net savings is one of the most tangible benefits of our audit work. … Although we issued about 75 percent fewer audit reports and examined fewer dollars, we questioned more costs on a percentage basis. …

We know there is a sizable incurred-cost workload ahead of us, and we are executing a plan to eliminate the backlog as quickly as possible while still addressing the taxpayer’s interest. We are making good progress. …

Well, we could take issue with just about every one of Director Fitzgerald’s points. But instead, let’s approach this from a slightly different vector.

If one were to go back to the 2008/2009 GAO and DOD IG reports that formed the basis of the criticism to which DCAA (over) reacted, one would not find much (if any) criticism regarding the quantity of audits being performed. Instead, one would find two primary criticisms—(1) audit conclusions and opinions that lacked sufficient supporting evidence, and (2) supervisory changes to auditor conclusions and opinions that lacked sufficient supporting evidence. Sure, there were ancillary issues such as allegations of workforce intimidation and attempts to impede the GAO audit. There were unsupported allegations that DOD buying command and contractors improperly influenced the scope of certain audits. But the main thrust of the criticism was that DCAA was not complying with Generally Accepted Government Auditing Standards (GAGAS) because its audits lacked evidentiary support for the conclusions reached. The focus was on poor audit quality, and did not speak to whether the audits were or were not performed too quickly.

The issues regarding an alleged undue focus on audit productivity metrics were raised during testimony before Congress. Then-Director April Stephenson and her Executive leadership team decided—on their own—that a management focus on productivity metrics were a cause of poor audit quality. Then-Director Stephenson and her Executive leadership team decided—on their own—that they would stop measuring audit completion cycle times. Then-Director Stephenson and her Executive leadership team decided—on their own—that they would comply with GAGAS (as they interpreted the Standards) by focusing on working paper documentation. Then-Director Stephenson and her Executive leadership team decided—on their own—to focus on reviews of contractor interim vouchers and contractor internal control “business systems.” This was a course initially charted by Then-Director Stephenson and her Executive leadership team, and subsequently continued by Director Fitzgerald and his Executive leadership team (which is essentially the same Executive leadership team he inherited from Stephenson).

Director Fitzgerald’s letter to the editor noted that “contracting officers are continuing to uphold a majority of [DCAA’s] questioned costs.” Readers should take that statement with a grain of salt, remembering that in March, 2009, DCAA HQ issued policy guidance to its auditors directing them to report uncooperative DCMA contracting officers to the DOD Inspector General. This audit guidance was characterized by one respected government contracting attorney as introducing “a new level of formality in DCAA’s unceasing quest to intimidate and control contracting officers in the exercise of their discretion.”

In addition to the foregoing, it is DOD policy that significant disagreements between DCMA contracting officers and DCAA auditors will be elevated for review and adjudication. No employee wants that level of management scrutiny. So it should be unsurprising that DCMA contracting officers are very, very reluctant to disagree with anything DCAA may have to say, regardless of their personal feelings and regardless of the FAR mandate that they exercise independent business judgment and discretion.

In sum, Director Fitzgerald may think he has the audit agency on the right path. But if so, he may be alone in that regard. We think that most observers are more closely aligned with Ms. Chacko’s concerns about a growing backlog and a seemingly fanatical focus on administrative minutiae at the expense of audit performance. Most observers we know think that DCAA is on the wrong path, has misinterpreted GAGAS, and has focused on the wrong things, at the expense of its fundamental mission.