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Apogee Consulting Inc

Goodbye SOP 81-1 and SAB 104 and Topic 605: Hello Topic 606

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We suspect that many readers will find the headline of this blog article more than a little difficult to decipher. The title discusses changes to Generally Accepted Accounting Principles (GAAP) in the area of revenue recognition. Revenue recognition doesn't often factor into government contract accounting, since the primary focus tends to be on contract cost accounting rather than the measurement of revenue (and project margin) during contract performance. Nevertheless, government contractors and their accountants (both internal and external) spend a lot of time thinking about revenue recognition on government contracts.

For example, if you have a firm, fixed-price contract to deliver 20 widgets over a 36-month period of performance, do you recognize revenue as each widget is delivered (say, at 1/20th of the contract price for each delivery) or do you recognize revenue based on the percentage of completion of the entire contract? What about if you believe you planned profit won't materialize because of unplanned cost growth? How does that knowledge factor in to the picture? What's the impact on revenue recognition when you file a Request for Equitable Adjustment (REA) that you believe will lead to a contract modification that will cover the cost growth? What happens if you file the REA but the government customer rejects it?

These are just some of the questions involved in government contractor revenue recognition. And we didn't even touch on issues such as providing services at fixed hourly rates, accounting for repairs and warranty expense, and contracts that involve multiple CLINS, each with a different contract type. Suffice to say, for those accountants who deal with the matter, proper measurement of revenue at a government contractor is far from easy.

And things just got more complicated. It's called "convergence".

Convergence is the elimination of differences between U.S. GAAP and International Financial Reporting Standards (IFRS). It has been in process since 2000 and is nearing a significant milestone: the merging of revenue recognition standards. In May 2013, the Financial Accounting Standard Board (FASB) issued Topic 606, entitled, "Revenue from Contracts with Customers." At the same time, the International Accounting Standards Board (IASB) is issuing IFRS 15 with the same title.

According to the FASB, Topic 606 establishes the following broad process steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The FASB believes that the new revrec principles will make it easier on companies, because they are more broad-based than previous GAAP and some industry-specific topics (e.g., SOP 81-1) are being discontinued.

There's more - far more - to the new Topic than we've glossed-over here. For instance, our initial reading seems to confirm that percentage of completion, cost to cost, revrec will still be permissible under Cost-Type contracts. But you will need to read the Topic closely if you are one of the affected companies.

You are one of the affected companies if you are a public entity, in which case you have until December 2016 to implement any required revrec changes. If you are a nonpublic entity, you have an extra year. But make no mistake, Topic 606 is the new Standard for revenue recognition and you had better prepare for it.

 

Admiral William McRaven Discusses "10 Life Lessons from Navy SEAL Training"

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Admiral William McRaven is the Commander of the United States Special Operations Command (USSOCOM). In mid-May, he spoke to some 8,000 new graduates at the University of Texas commencement ceremony.

We here at Apogee Consulting, Inc. like to post thoughts about leadership and what it means to lead a workforce through challenging times, balancing near-term expectations with long-term success. We've often thought that the military services are a great place to learn and practice leadership skills. Thus, we are very pleased to offer Admiral McRaven's commencement speech to our readers, edited for space.

It matters not your gender, your ethnic or religious background, your orientation, or your social status. Our struggles in this world are similar and the lessons to overcome those struggles and to move forward-changing ourselves and the world around us-will apply equally to all.

I have been a Navy SEAL for 36 years. But it all began when I left UT for Basic SEAL training in Coronado, California. Basic SEAL training is six months of long torturous runs in the soft sand, midnight swims in the cold water off San Diego, obstacles courses, unending calisthenics, days without sleep and always being cold, wet and miserable. It is six months of being constantly harassed by professionally trained warriors who seek to find the weak of mind and body and eliminate them from ever becoming a Navy SEAL. But, the training also seeks to find those students who can lead in an environment of constant stress, chaos, failure and hardships. To me basic SEAL training was a life time of challenges crammed into six months.

So, here are the ten lesson's I learned from basic SEAL training that hopefully will be of value to you as you move forward in life.

1. Every morning in basic SEAL training, my instructors … would show up in my barracks room and the first thing they would inspect was your bed. If you did it right, the corners would be square, the covers pulled tight, the pillow centered just under the headboard and the extra blanket folded neatly at the foot of the rack-rack-that's Navy talk for bed. It was a simple task-mundane at best. But every morning we were required to make our bed to perfection. It seemed a little ridiculous at the time, particularly in light of the fact that were aspiring to be real warriors, tough battle hardened SEALs-but the wisdom of this simple act has been proven to me many times over.

If you make your bed every morning you will have accomplished the first task of the day. It will give you a small sense of pride and it will encourage you to do another task and another and another. By the end of the day, that one task completed will have turned into many tasks completed. Making your bed will also reinforce the fact that little things in life matter. If you can't do the little things right, you will never do the big things right. And, if by chance you have a miserable day, you will come home to a bed that is made-that you made-and a made bed gives you encouragement that tomorrow will be better.

If you want to change the world, start off by making your bed.

2. During SEAL training the students are broken down into boat crews. Each crew is seven students-three on each side of a small rubber boat and one coxswain to help guide the dingy. Every day your boat crew forms up on the beach and is instructed to get through the surfzone and paddle several miles down the coast. In the winter, the surf off San Diego can get to be 8 to 10 feet high and it is exceedingly difficult to paddle through the plunging surf unless everyone digs in. Every paddle must be synchronized to the stroke count of the coxswain. Everyone must exert equal effort or the boat will turn against the wave and be unceremoniously tossed back on the beach. For the boat to make it to its destination, everyone must paddle.

You can't change the world alone-you will need some help- and to truly get from your starting point to your destination takes friends, colleagues, the good will of strangers and a strong coxswain to guide them.

If you want to change the world, find someone to help you paddle.

3. Over a few weeks of difficult training my SEAL class which started with 150 men was down to just 35. There were now six boat crews of seven men each. [ Ed. Note: Do not question the Admiral's math.] I was in the boat with the tall guys, but the best boat crew we had was made up of the little guys-the munchkin crew we called them-no one was over about 5-foot five.

The munchkin boat crew had one American Indian, one African American, one Polish America, one Greek American, one Italian American, and two tough kids from the mid-west. They out paddled, out-ran, and out swam all the other boat crews. The big men in the other boat crews would always make good natured fun of the tiny little flippers the munchkins put on their tiny little feet prior to every swim. But somehow these little guys, from every corner of the Nation and the world, always had the last laugh- swimming faster than everyone and reaching the shore long before the rest of us.

SEAL training was a great equalizer. Nothing mattered but your will to succeed. Not your color, not your ethnic background, not your education and not your social status.

If you want to change the world, measure a person by the size of their heart, not the size of their flippers.

4. Several times a week, the instructors would line up the class and do a uniform inspection. It was exceptionally thorough. Your hat had to be perfectly starched, your uniform immaculately pressed and your belt buckle shiny and void of any smudges. But it seemed that no matter how much effort you put into starching your hat, or pressing your uniform or polishing your belt buckle-- it just wasn't good enough. The instructors would fine "something" wrong.

For failing the uniform inspection, the student had to run, fully clothed into the surfzone and then, wet from head to toe, roll around on the beach until every part of your body was covered with sand. The effect was known as a "sugar cookie." You stayed in that uniform the rest of the day-cold, wet and sandy. There were many a student who just couldn't accept the fact that all their effort was in vain. That no matter how hard they tried to get the uniform right-it was unappreciated. Those students didn't make it through training.

Those students didn't understand the purpose of the drill. You were never going to succeed. You were never going to have a perfect uniform. Sometimes no matter how well you prepare or how well you perform you still end up as a sugar cookie. It's just the way life is sometimes.

If you want to change the world get over being a sugar cookie and keep moving forward.

5. Every day during training you were challenged with multiple physical events-long runs, long swims, obstacle courses, hours of calisthenics-something designed to test your mettle. Every event had standards-times you had to meet. If you failed to meet those standards your name was posted on a list and at the end of the day those on the list were invited to-a "circus." A circus was two hours of additional calisthenics-designed to wear you down, to break your spirit, to force you to quit. No one wanted a circus.

A circus meant that for that day you didn't measure up. A circus meant more fatigue-and more fatigue meant that the following day would be more difficult-and more circuses were likely. But at some time during SEAL training, everyone-everyone-made the circus list. But an interesting thing happened to those who were constantly on the list. Over time those students--who did two hours of extra calisthenics-got stronger and stronger. The pain of the circuses built inner strength-built physical resiliency.

Life is filled with circuses.

You will fail. You will likely fail often. It will be painful. It will be discouraging. At times it will test you to your very core.

But if you want to change the world, don't be afraid of the circuses.

6. At least twice a week, the trainees were required to run the obstacle course. The obstacle course contained 25 obstacles including a 10-foot high wall, a 30-foot cargo net, and a barbed wire crawl to name a few. But the most challenging obstacle was the slide for life. It had a three level 30 foot tower at one end and a one level tower at the other. In between was a 200-foot long rope. You had to climb the three tiered tower and once at the top, you grabbed the rope, swung underneath the rope and pulled yourself hand over hand until you got to the other end.

The record for the obstacle course had stood for years when my class began training in 1977. The record seemed unbeatable, until one day, a student decided to go down the slide for life-head first. Instead of swinging his body underneath the rope and inching his way down, he bravely mounted the TOP of the rope and thrust himself forward.

It was a dangerous move-seemingly foolish, and fraught with risk. Failure could mean injury and being dropped from the training. Without hesitation-the student slid down the rope-perilously fast, instead of several minutes, it only took him half that time and by the end of the course he had broken the record.

If you want to change the world sometimes you have to slide down the obstacle head first.

7. During the land warfare phase of training, the students are flown out to San Clemente Island which lies off the coast of San Diego. The waters off San Clemente are a breeding ground for the great white sharks. To pass SEAL training there are a series of long swims that must be completed. One-is the night swim. Before the swim the instructors joyfully brief the trainees on all the species of sharks that inhabit the waters off San Clemente. They assure you, however, that no student has ever been eaten by a shark-at least not recently.

But, you are also taught that if a shark begins to circle your position-stand your ground. Do not swim away. Do not act afraid. And if the shark, hungry for a midnight snack, darts towards you-then summons up all your strength and punch him in the snout and he will turn and swim away.

There are a lot of sharks in the world. If you hope to complete the swim you will have to deal with them.

So, If you want to change the world, don't back down from the sharks.

8. As Navy SEALs one of our jobs is to conduct underwater attacks against enemy shipping. We practiced this technique extensively during basic training. The ship attack mission is where a pair of SEAL divers is dropped off outside an enemy harbor and then swims well over two miles-underwater-using nothing but a depth gauge and a compass to get to their target. During the entire swim, even well below the surface there is some light that comes through. It is comforting to know that there is open water above you. But as you approach the ship, which is tied to a pier, the light begins to fade. The steel structure of the ship blocks the moonlight-it blocks the surrounding street lamps-it blocks all ambient light.

To be successful in your mission, you have to swim under the ship and find the keel-the centerline and the deepest part of the ship. This is your objective. But the keel is also the darkest part of the ship-where you cannot see your hand in front of your face, where the noise from the ship's machinery is deafening and where it is easy to get disoriented and fail.

Every SEAL knows that under the keel, at the darkest moment of the mission-is the time when you must be calm, composed-when all your tactical skills, your physical power and all your inner strength must be brought to bear.

If you want to change the world, you must be your very best in the darkest moment.

9. The ninth week of training is referred to as "Hell Week." It is six days of no sleep, constant physical and mental harassment and-one special day at the Mud Flats-the Mud Flats are area between San Diego and Tijuana where the water runs off and creates the Tijuana slue's-a swampy patch of terrain where the mud will engulf you.

It is on Wednesday of Hell Week that you paddle down to the mud flats and spend the next 15 hours trying to survive the freezing cold mud, the howling wind and the incessant pressure to quit from the instructors. As the sun began to set that Wednesday evening, my training class, having committed some "egregious infraction of the rules" was ordered into the mud. The mud consumed each man till there was nothing visible but our heads. The instructors told us we could leave the mud if only five men would quit-just five men and we could get out of the oppressive cold.

Looking around the mud flat it was apparent that some students were about to give up. It was still over eight hours till the sun came up-eight more hours of bone chilling cold. The chattering teeth and shivering moans of the trainees were so loud it was hard to hear anything and then, one voice began to echo through the night-one voice raised in song. The song was terribly out of tune, but sung with great enthusiasm.

One voice became two and two became three and before long everyone in the class was singing. We knew that if one man could rise above the misery then others could as well. The instructors threatened us with more time in the mud if we kept up the singing-but the singing persisted. And somehow-the mud seemed a little warmer, the wind a little tamer and the dawn not so far away.

If I have learned anything in my time traveling the world, it is the power of hope. The power of one person-Washington, Lincoln, King, Mandela and even a young girl from Pakistan-Malala-one person can change the world by giving people hope.

So, if you want to change the world, start singing when you're up to your neck in mud.

10. Finally, in SEAL training there is a bell. A brass bell that hangs in the center of the compound for all the students to see. All you have to do to quit-is ring the bell. Ring the bell and you no longer have to wake up at 5 o'clock. Ring the bell and you no longer have to do the freezing cold swims. Ring the bell and you no longer have to do the runs, the obstacle course, the PT-and you no longer have to endure the hardships of training.

Just ring the bell.

If you want to change the world don't ever, ever ring the bell.

Start each day with a task completed.

Find someone to help you through life.

Respect everyone.

Know that life is not fair and that you will fail often, but if you take some risks, step up when the times are toughest, face down the bullies, lift up the downtrodden and never, ever give up-if you do these things, then next generation and the generations that follow will live in a world far better than the one we have today and-what started here will indeed have changed the world-for the better.

Thank you very much. Hook 'em horns.

 

Counterfeit Parts, Supply Chain Management, and Purchasing System Adequacy

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This is one of those articles where we say, "Told you so!" and "You should have listened" and suchlike and so forth. We almost didn't write it because of all the smugness in the air over at the vast cavernous spaces that are the Apogee Consulting, Inc., conference rooms. The smugness is so thick it might as well be the souplike fog of Victorian London; you know what we're saying? But then we thought, "Who's gonna know? It's not like these rants get much notice … so let's go for it!" And thus here we are with yet another polemic railing about secure supply chains and avoidance of counterfeit parts.

You may recall the prior discussion of same, right here, in which we tsk'd-tsk'd at our negligent readership, who had been hearing from Apogee Consulting, Inc. since April 2010 that it was time to jump aboard the "secure supply chain" bandwagon, and to circle those bandwagons to protect program supply chains from "the risk that an adversary may sabotage, maliciously introduce unwanted function, or otherwise subvert the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of a covered system so as to surveil, deny, disrupt, or otherwise degrade the function, use, or operation of such system."

We wrote "Contractors who have already created secure supply chain management systems, including not only policies and procedures, but also actual practices, will have an undeniable competitive advantage in evaluations where supply chain risk is a factor. Those who have not, will not. If you have been a long time reader, you have had more than three years to prepare for this day. Not that you took advantage of that advance notice, mind you. But the opportunity was there…."

Thus, while our November 2013 article pointed to the competitive advantage of a secure supply chain, now-six months later-we point to potential unallowable costs and a disapproved/inadequate Contractor Purchasing System as the price to be paid for failing to secure one's supply chain when required to do so. What happened? Well, the DFARS was revised via Final Rule that implemented aspects of the FY 2012 and FY 2013 National Defense Authorization Act (NDAA).

The DFARS revision establishes criteria for a system to "detect and avoid counterfeit electronic parts." It also establishes that those criteria will be evaluated as part of the Contractor Purchasing System Review CPSR). It established applicability and flow-down requirements. It is, in a nutshell, a very big deal.

First, the rule applies to CAS-covered prime contractors in which the applicable DFARS clauses are incorporated into their contracts. It does not apply to small business prime contractors, since those contractors are exempt from CAS. However, when a small business is a subcontractor to a prime that is subject to the new rules, then that small business subcontractor is also subject to the requirements and system criteria. According to the promulgating comments: "Suppliers, including small entities, will need to be able to trace the source of the electronic parts they are supplying to the original source if they are not the original manufacturer or current design activity, including an authorized aftermarket manufacturer."

So yeah, you small businesses may need to think about your supply chains as well. Our advice? Think hard.

With that out of the way, let's dig into the meat, shall we?

Counterfeit electronic part means an unlawful or unauthorized reproduction, substitution, or alteration that has been knowingly mismarked, misidentified, or otherwise misrepresented to be an authentic, unmodified electronic part from the original manufacturer, or a source with the express written authority of the original manufacturer or current design activity, including an authorized aftermarket manufacturer. Unlawful or unauthorized substitution includes used electronic parts represented as new, or the false identification of grade, serial number, lot number, date code, or performance characteristics.

Electronic part means an integrated circuit, a discrete electronic component (including, but not limited to, a transistor, capacitor, resistor, or diode), or a circuit assembly (section 818(f)(2) of Pub. L. 112-81). The term ''electronic part'' includes any embedded software or firmware.

Obsolete electronic part means an electronic part that is no longer in production by the original manufacturer or an aftermarket manufacturer that has been provided express written authorization from the current design activity or original manufacturer.

Suspect counterfeit electronic part means an electronic part for which credible evidence (including, but not limited to, visual inspection or testing) provides reasonable doubt that the electronic part is authentic.

More stuff from DFARS (Subpart 246.870, to be specific):

Contractors that are subject to the Cost Accounting Standards (CAS) and that supply electronic parts or products that include electronic parts and their subcontractors that supply electronic parts or products that include electronic parts, are required to establish and maintain an acceptable counterfeit electronic part detection and avoidance system. Failure to do so may result in disapproval of the purchasing system by the contracting officer and/or withholding of payments (see 252.244-7001, Contractor Purchasing System Administration).

Did you see that part above, the sentence we emphasized with italics? Did you see what happens to your Purchasing System if the DCMA reviewers don't think your Counterfeit Electronic Part Detection and Avoidance System is up to snuff? Yeah, go read that paragraph again, why don't you?

Okay, so the next step is to understand the criteria that determine whether your CEPDAS is up to snuff, or not. Here are the DFARS criteria associated with an adequate system:

A counterfeit electronic part detection and avoidance system shall include risk-based policies and procedures that address, at a minimum, the following areas (see 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System):

(1) The training of personnel.

(2) The inspection and testing of electronic parts, including criteria for acceptance and rejection.

(3) Processes to abolish counterfeit parts proliferation.

(4) Processes for maintaining electronic part traceability.

(5) Use of suppliers that are the original manufacturer, sources with the express written authority of the original manufacturer or current design activity, including an authorized aftermarket manufacturer or suppliers that obtain parts exclusively from one or more of these sources.

(6) The reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts.

(7) Methodologies to identify suspect counterfeit electronic parts and to rapidly determine if a suspect counterfeit electronic part is, in fact, counterfeit.

(8) Design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts.

(9) Flow down of counterfeit detection and avoidance requirements.

(10) Process for keeping continually informed of current counterfeiting information and trends.

(11) Process for screening the Government-Industry Data Exchange Program (GIDEP) reports and other credible sources of counterfeiting information.

(12) Control of obsolete electronic parts.

Piece of cake, right? No problemo!

So now you know how to establish an adequate CEPDAS and get it through a CPSR review. You might think you're home free. But wait a second; there's a bit more over in the DFARS Supplement Cost Principles. We now have a new Supplemental Cost Principle (231.205-71, entitled "Cost of remedy for use or inclusion of counterfeit electronic parts and suspect counterfeit electronic parts." That new Cost Principle states:

The costs of counterfeit electronic parts or suspect counterfeit electronic parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts are unallowable, unless-

(1) The contractor has an operational system to detect and avoid counterfeit parts and suspect counterfeit electronic parts that has been reviewed and approved by DoD pursuant to 244.303;

(2) The counterfeit electronic parts or suspect counterfeit electronic parts are Government-furnished property as defined in FAR 45.101; and

(3) The contractor provides timely (i.e., within 60 days after the contractor becomes aware) notice to the Government.

So not only is your Purchasing System at risk; not only do you face potential payment withholds; but you also face potential cost disallowance for what might otherwise be perfectly allowable direct and/or indirect costs. You best get on this right away.

Don't take our word for it. Here's a client advisory from the deeply knowledgeable attorneys over at McKenna Long & Aldridge. The advisory concludes with the following advice: "Contractors should immediately begin the process of comparing their existing systems to the counterfeit part detection and avoidance requirements to ensure that they are in compliance with these new requirements."

Yeah, what they said.

 

DCAA Audits of Contractor Mandatory Disclosures

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After a tortuous journey lasting nearly two years, I published a new article in the May edition of West's Government Contracts Costs, Pricing & Accounting Report (edited by Karen Manos, Esq.). It addressed challenges posed by DCAA's approach to auditing contractor disclosures made pursuant to the requirements of the 52.203-13 contract clause. You can find the article under "knowledge resources" on this site.

But of course you must be a member in order to access that part of the site. Membership has privileges, after all.

Thank God the article was published in mid-May, because just a couple of weeks later the DCAA website was updated with new audit guidance that mooted much if not all of my points.

The new audit approach outlined in the MRD (link above) triages contractor disclosures based on risk and creates a more efficient audit process for those contractor disclosures that are risky enough to warrant an audit.

The first step in the new audit approach is for the Justice Liaison Auditor (JLA) at Fort Belvoir to evaluate each contractor disclosure received from the DOD Inspector General. The JLA will classify each contractor disclosure into an "Information Notification" or an "Action Required Notification." The JLA will consider "the nature of the violation being disclosed; the impact or damage to the Government; the impact on current or future audit planning; and the potential that an audit or an assessment could impact ongoing criminal or civil investigations."

When formal action is requested via an Action Required Notification then the FAO "will not be required to conduct a GAGAS compliant examination of the disclosure as an immediate response. Instead, the FAO will establish an assignment using DMIS Activity Code 17920 and conduct a disposition analysis to determine the best course of action to address the disclosure. Follow the guidance discussed in CAM 4-707 for general procedures for a disposition analysis. The FAO will (generally) have 60 days to disposition each Notification it receives from the JLA.

The FAO can disposition the ARN without too much in the way of follow-up activity. The CAM states:

An auditor may conclude that a contractor disclosure is other than high risk only after the completion of a disposition analysis. A documented disposition analysis will ensure our audit resources are efficiently used while fulfilling our audit responsibilities under the program.

a. Some examples of criteria for assessing the risk of a contractor's disclosure while performing a disposition analysis may include:

(1) the nature of the subject matter disclosed,

(2) financial or monetary degree of damage to the Government,

(3) prior significant deficiencies noted on the relevant control environment, and

(4) the contractor's degree of compliance with the Contractor's Code of Business

Ethics and Conduct Program (see CAM 5-306)

There are more details in the CAM (now). If you are dealing with a contractor disclosure, you really need to read that new section in the CAM to understand the new DCAA audit approach.

 

DCAA's Year in Review, 2013 Edition

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DCAA recently published another Year in Review for its workforce, this time focusing on GFY 2013 accomplishments. Bill Keating discussed it at the recent Executive Seminar on DCAA Audits (hosted by BDO and the Public Contracting Institute. I (Nick Sanders) was an invited speaker and I suppose I should translate my semi ex tempore remarks into something coherent at a future point in time. Anyway Bill did an excellent job of pointing out concerns with the metrics reported by DCAA without actually criticizing anything. It was a very good job of dancing that fine line between shrilly criticizing and calmly accepting; a line that I have a very hard time finding most of the time.

I don't really want to get into it here. I mean, I take issue with DCAA's metrics and have done so many times here on the blog. But I don't want to go into the usual blathering about inflated taxpayer savings and embarrassing QC sustention rates once again. It's just not that interesting to me anymore. I've spoken out (and written out) and my positions are a matter of public record; just check out the blog articles. What more can I say? It's not like anything ever changes over at Fort Belvoir. DCAA, as a bureaucratic organization, continues to play its bureaucratic organizational games and accountability is rarely evident. I don't feel like once again pointing out the abnormal organizational psychology issues evidenced by policy and behavior. The lack of organizational change and a seeming intractable desire to prepare working paper after working paper, regardless of any value to the acquisition process, is too depressing to contemplate, let alone write about.

Moreover, the fact of the matter is that the Year in Review publication is first and foremost an internal publication meant for the DCAA workforce. It's intentionally biased toward positive aspects and that's as it should be. I would no more expect an unbiased, objective, internally focused publication than I would expect an unbiased, objective, annual report from a publicly traded company. So I'm not going to say mean things about the content.

But the metrics in the DOD IG Semiannual Report to Congress and the more recent DCAA Annual Report to Congress are fair game, I think. I spent too much time compiling numbers from each report going back to 2006. It's hard to do much in the way of in-depth analysis, because what's being reported is not always consistent. For example, in the 2009b report to Congress, DCAA/DOD IG reported "assignments completed" instead of audit reports issued, because (as was explained in the footnotes) not every audit assignment concludes with issuance of an audit report. But in the next Report (2010a), DCAA/DOD IG was back reporting audit reports issued (and then noting assignments completed in the footnotes). Also, there are some interesting games being played with "questioned costs" versus "funds that can be put to better use." It was not until recently that DCAA started claiming questioned costs in audits of contractors' proposals; historically those values had been reported as "funds that can be put to better use". Finally, there is some discrepancy between Audit Work Years and Auditor Staffing. So it's tough to do a lot of trend analysis.

Instead, let me report some facts for your amusement.

  • In 2010 and 2011, about one-third of DCAA assignments were completed without issuance of a formal audit report. In 2012 about 40% of all assignments were completed without issuance of an audit report. In 2013, the number had risen to 54%. By 2013, almost 6 out of 10 DCAA assignments were reported as being complete without the issuance of a formal audit report. We've commented on the growing phenomenon several times on the site. Suffice to say, it's hard to get gigged for GAGAS failures when an audit report never gets issued.

  • Much has been written, here and elsewhere, about the dramatic drop in DCAA audit productivity. Because of the reporting legerdemain between audit reports issued and audit assignments completed (as noted above) it's tough to make rigorous and rigorously fair conclusions. But the amount of dollars "examined" (i.e., audited) has not noticeably been monkeyed with. Accordingly, we can say with confidence that while 2013 audit staffing is almost exactly 10% higher than 2006 audit staffing, the 2013 dollars examined are just about 50% lower than 2006 values. (In 2006 DCAA examined $310,591,800; in 2013 DCAA examined $163,075,100.)

  • In 2006, DCAA issued 2,413 CAS-related audit reports, in which $89.2 Million was questioned. In 2013, DCAA issued 725 CAS-related audit reports, in which $157.4 Million was questioned. At first blush, it seems DCAA was more efficient or maybe more productive in 2006; or perhaps DCAA was more rigorous in 2013. But it's not necessarily the quantity of audit reports issued that tells the story, nor it is necessarily the amount of costs questioned. Consider: In 2006, DCAA questioned about 40% of all dollars examined in CAS-related audits. In 2013, DCAA questioned about 44% of all dollars examined in CAS-related audits. Obviously, then, the dollar value of each individual CAS-related assignment in 2013 was much greater than in 2006.

  • In 2006, DCAA issued 485 post-award ("defective pricing") audits, in which $92.7 Million was questioned. In 2013, DCAA issued 31 post-award audits, in which $115.9 Million was questioned. Since DCAA does not report post-award dollars examined, we cannot comment further.

Make of the foregoing what you will.

 


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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.