DCAA Takes on Firm Full of Statisticians, with Statistically Predictable Results
Recently, DCAA has had its troubles supporting cost disallowances associated with executive compensation. In February, we wrote about the appeal of J.F. Taylor, Inc. before the Armed Services Board of Contract Appeals (ASBCA). More recently, the ASBCA heard another executive compensation appeal. Slightly different facts and issues; same result. As was the case with the first claim, DCAA’s audit methodology was sharply criticized and found lacking, and the contractor’s appeal was sustained.
In J.F. Taylor, Inc., we reported that testimony from the Government’s expert witness was given “little or no weight” by the ASBCA Judges. In contrast, the contractor’s expert witness was able to convince the Judges that DCAA’s methodology for evaluating the reasonableness of the contractor’s executive compensation suffered from nine separate errors. The presiding Judge wrote that DCAA’s methodology was “fatally flawed.” The majority of the costs questioned and disallowed by the Government were found to be reasonable and, hence, allowable.
In the current case, Metron, Inc., DCAA had not only found some of the company’s executive compensation to be unreasonably high, but it had issued Form 1 cost disallowances in the amount of roughly $1.1 Million. The cognizant Administrative Contracting Officer (ACO) issued demand letters for about $700,000 representing the DOD portion of Metron’s “unallowable” compensation costs.
As readers know, when a contractor’s cost is challenged as being unreasonable, the contractor bears the burden to show that the cost is, in fact, reasonable in amount. It is not enough to show that DCAA’s methodology was flawed; the contractor must convince the Judges that the costs in question meet the FAR 31.2 definition of “reasonableness”. That was Metron’s challenge. Fortunately for Metron, it had a number of statisticians and mathematicians on staff who could not only show where DCAA erred, but also show why the company’s position was correct. Metron met its burden of proof and its appeal was sustained.
It is fairly axiomatic that independent salary surveys are used to support the reasonableness of contractor salaries. Metron only used one survey (the “Radford Survey”) to benchmark its executive salaries. In contrast, DCAA used other surveys in addition to the Radford Survey. Metron provided DCAA with an extensive justification regarding why use of the single Radford Survey was appropriate. That justification was written by two Metron executives: one of whom had a B.S in Mathematics, a M.S. in Statistics, and a Ph.D. in Statistics, while the other had a B.S, M.S., and Ph.D. in Mathematics. In contrast to Metron’s well-justified methodology, the ASBCA Judges found that the addition survey data used by DCAA “were not sufficiently comprehensive, reliable, relevant to Metron’s industry, and/or the job matches were not sufficiently similar and representative to warrant material reduction of the results obtained from the use of the Radford Survey data alone …”
DCAA auditors also adjusted the Radford Survey results for various reasons, with the result that the allowable Metron incentive compensation was lower than it otherwise would have been. Metron’s expert witness took issue with DCAA’s adjustments, but so did the Government’s expert witness. Both experts “rejected” DCAA’s adjustments. In addition, Metron’s executives also performed statistical analyses that “persuasively demonstrated” to the Judges that the Radford Survey data would not support the kind of regression analysis used by the Government expert to support DCAA’s findings.
The parties also disputed whether Metron’s Senior Engineers were executives, or whether they were mid-level project managers. Apparently, because the Senior Engineers lacked the title of Vice President, DCAA believed they were not executives—but Metron’s expert noted that DCAA auditors “conducted no substantive interviews of any of the executives … and failed to understand Metron’s needs for executive talent or how it accomplished its business mission.” The Judges found that, based on their duties and responsibilities, the Senior Engineers were, in fact, executives—even though they lacked an executive-like title.
When evaluating Metron’s financial performance, DCAA auditors ignored a $950,000 “voluntary contribution” to its profit-sharing plan. (The contribution was treated as an unallowable cost by Metron.) Had Metron not made the payment, its corporate profits would have been that much higher. However, DCAA auditors refused to increase corporate profits by the contribution, which had the effect of lowering the company’s financial performance. This was an error on DCAA”s part, according to both Metron’s and the Government’s expert witnesses.
The Judges also found that DCAA’s “fragmenting” of the contractor’s total revenue in order to apportion it to various organizational “divisions” (which allegedly would help assess the reasonableness of the compensation of the executive in charge of the division) was unsupportable.
The ASBCA Judges found that Metron had supported the reasonableness of the compensation of its executives, even though the compensation was above the 50 percentile in the Radford Survey. It rejected nearly every aspect of DCAA’s comparison methodology.
To conclude, many contractors have suffered over the years at the hands of DCAA’s compensation analysts. Bu it is the rare contractor who has both the backbone and expertise to litigate the matter. Metron was in the enviable position of having several high-powered mathematicians and statisticians on staff, which helped the contractor immensely in its battle with the Government.
As the two recent ASBCA cases show, DCAA’s compensation evaluation methodology is generally flawed and does not lead to correct assessments of compensation reasonableness. However, as we noted above, it is not enough to show the flaws in DCAA’s methodology; contractors must also have strong support to demonstrate why their compensation is reasonable. For those contractors who feel strongly that their position is in the right, the battle is difficult, but it can be won.
Adjusting Provisional Indirect Rates—Contractor Beware
A recent discussion thread on LinkedIn concerned the timing of the adjustment of provisional billing rates on cost-reimbursement contract types. This is an important topic for a number of reasons, including managing cash flow and complying with regulatory requirements. In our experience, it’s a topic that a lot of people have trouble with, so we thought it would be a good topic for a blog article.
The LinkedIn posters generally agreed that billing rates could be adjusted after year-end (when the books closed) and again after the contractor’s final indirect rates were certified and submitted for audit (generally, six months later). These positions were consistent with our understanding of the regulations (e.g., FAR 42.7). But there was less consensus regarding the timing of adjusting provisional billing rates as the work was performed, during the contractor’s fiscal year. So that’s what we are going to focus on here.
Before we get too deep into the discussion, let’s review the requirements of the FAR contract clause 52.216-7 (“Allowable Cost and Payment”). It’s a mandatory contract clause on flexibly priced contracts, meaning that it must be included in any such contract. If you have a cost-reimbursement type contract, it’s almost 100% certain that you have the Allowable Cost and Payment Clause in it, and therefore you have a lot of requirements to comply with. It’s a critical clause to understand, and (unfortunately) it’s also a long and complex clause. But we want to deal with just one specific part of it today because it establishes the regulatory requirements regarding how to set provisional billing rates and when to adjust them during contract performance. Here’s the pertinent quote from 52.216-7:
(e) Billing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established. These billing rates—
(1) Shall be the anticipated final rates; and
(2) May be prospectively or retroactively revised by mutual agreement, at either party’s request, to prevent substantial overpayment or underpayment.
So that portion tells us that the provisional billing rates “shall be” the anticipated final rates for the year, and that either party “may” request that the provisional rates be adjusted during performance to better anticipate the final rates, in order “to prevent substantial overpayment or underpayment.” In other words, whenever the contractor knows that its provisional billing rates are varying, to a significant degree, from its currently anticipated final indirect rates for the year, it should request an appropriate adjustment. If the contracting officer declines to adjust the billing rates, then s/he needs to be able to justify why not—since the clause mandates that the provisional billing rates “shall be” the anticipated final rates. Bottom-line: while there may be some discretion with respect to notification, there is no discretion once notification has been made—the billing rates must be adjusted.
That’s how we parse the requirements, in any event.
In the case where a contractor’s provisional billing rates are running higher than it expects to see at year-end, there is usually very little discussion. If the billing rate is set at 100% and the contractor requests it be lowered to 90%, the customer is almost always happy to pay less. However, where a contractor’s billing rates are running lower than it expects to see at year end—meaning that the rates should be increased so as to avoid a substantial underpayment—then our experience has been that the customer is more than somewhat reluctant to increase the billing rates. For example, if the billing rate is set at 90% and the contractor requests it be increased to 100%, then the customer typically is loath to take action, since doing so will burn funding that much faster. In such cases, see the paragraph above and discuss with the customer the use of the word “shall” and what the imperative tense means in government contracting. (Hint: See FAR 2.101, Definitions.)
What about the situation where a contractor knows (or should know) that its provisional billing rates are set too high and that they should be lowered so as to prevent a significant overpayment from being received from its government customer—but the contractor chooses not to notify the contracting officer and request an adjustment? After all, a strict reading of 52.216-7(e), quoted above, seems to say that there is some discretion involved in choosing whether to submit a notification.
Contractors wishing to reap the increased cash flow associated with provisional billing rates that have been set higher than the contractor’s anticipated final rates need to be aware of the requirements associated with another mandatory contract clause—52.232-25 (“Prompt Payment”). Down at the bottom of the clause is this little gem—
(d) Overpayments. If the Contractor becomes aware of a duplicate contract financing or invoice payment or that the Government has otherwise overpaid on a contract financing or invoice payment, the Contractor shall—
(1) Remit the overpayment amount to the payment office cited in the contract along with a description of the overpayment including the—
(i) Circumstances of the overpayment (e.g., duplicate payment, erroneous payment, liquidation errors, date(s) of overpayment);
(ii) Affected contract number and delivery order number if applicable;
(iii) Affected contract line item or subline item, if applicable; and
(iv) Contractor point of contact.
[Emphasis added.]
So the question becomes, if the provisional billing rates have been set higher than they should be, is the contractor generating an improper billing and thus receiving an overpayment for which it must refund the money and provide a description of the “circumstances of the overpayment”? The answer, provided by the FAR Councils, appears to be yes.
In October, 2003, Federal Acquisition Circular (FAC) 2001-16 implemented as a Final Rule FAR Case 2001-005 (“Notification of Overpayment, Contract Financing Payments”). In the promulgating comments, the FAR Council discussed overpayments and a commenter’s concerns that certain routine contractual actions might be “misconstrued as overpayments because they may result in a need for the contractor to pay a sum back to the Government as a result of the normal and expected operation of contractual terms and conditions.” The commenter recommended that the term “overpayment” be defined in the regulations, so as to prevent any misunderstandings between the contracting parties. The FAR Councils did not agree. Here’s the comment and their response—
Comment: There is concern that credit invoices, due to a revision of indirect billing rates, contractual actions impacting negotiated price, adjustments to progress payments as a result of change in the contract's estimated cost at completion, and authorized borrow-payback transfers will all be potentially misconstrued as overpayments because they may result in a need for the contractor to pay a sum back to the Government as a result of the normal and expected operation of contractual terms and conditions. Therefore, the following definition should be added at the beginning of each of the proposed paragraphs imposing a notification requirement:
An overpayment is a payment of an amount greater than the value the contractor is entitled to receive at the time of the payment.
Councils' response: Do not concur. The intent of the rule is to require contractors to notify the Government when they become aware that an incorrect payment has been made. The Councils do not believe there is a demonstrated need for such a definition. First, the term ‘overpayment’ is used in Government contracting in a variety of contexts, and we are concerned that establishing a definition in the payment clauses could have unintended consequences. Second, when a contract is modified to reflect the incorporation of new billing rates, or some other contract administration action, the contract modification should identify whether a credit is due the Government. The Councils do not anticipate that a contracting officer would issue a notification of overpayment in these instances. If, in the future, it becomes apparent that, in practice, contracting officers are taking an overly broad and needlessly burdensome interpretation of what constitutes an overpayment for the purposes of this notification requirement, then the Councils will revisit this issue.
[Emphasis added.]
So, based on the foregoing, the FAR Councils appeared to link provisional billing rate adjustments to making proper payments; thus, they may well have intended to link a failure to adjust billing rates (when required to make an adjustment) to “incorrect” or “improper” payments that would generate overpayments. It may well be the case that, any discretion found in 52.216-7(e) would be trumped by the mandatory language of 52.232-25(d).
While our interpretation is admittedly tenuous and based on some speculation, do you really want to take a chance that some auditor or contracting officer is going to accuse your company of making improper payments because you intentionally let the provisional billing rate be set too high, thus generating excess cash for your company?
The point is far from academic. Recently, the Department of Justice announced that Calnet, Inc. agreed to pay $18.1 million in order to resolve allegations that it had submitted false claims to the Defense Department. Calnet’s issue was that it allegedly “overstated its provisional overhead or indirect rates” on each of its three contracts to provide translation services for the DOD. The Government alleged that the overstated indirect rates created “inflated claims for payment”—i.e., false claims.
The litigation was the result of a qui tam suit filed under the False Claims Act by a former Calnet employee (who will receive $2.7 million from the settlement). While we don’t know many details of the allegation, we do know that the DOJ press release included the following statement—
‘Contractors are expected to comply with their statutory obligations and act in good faith when dealing with the United States government,’ said Stuart F. Delery, Acting Assistant Attorney General for the Department of Justice’s Civil Division. ‘We will not tolerate false statements and failure to disclose information that is important to the government’s contracting processes.’
Again, we don’t have the facts of the situation. But the quote above makes us think that Calnet was alleged to have knowingly failed to notify its contracting officer that its provisional billing rates needed to be adjusted downwards. That failure created incorrect invoices that allegedly amounted to false claims.
So this is an issue that can and will be taken seriously by Federal law enforcement officials. So we ask you again—is this an issue you want to take a chance on? We think not. Our advice is to periodically monitor indirect rates and compare year-to-date actuals and at-year-end forecasts with provisional billing rates; promptly notify the cognizant contracting officer if provisional rates should be adjusted downward (or upward).
One more thing before we leave this topic. What about making Disclosures in accordance with the requirements of the contract clause 52.203-13 (“Contractor Code of Business Ethics and Conduct”)? That clause states (in part)—
(b)(3)(i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed—
(A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or
(B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733).
In the LinkedIn discussion thread one poster wrote that, “One of my clients was recently threatened by DCAA with the sanctions of 52.203-13 saying that failure to revise rates that would result in over-recovery of indirect costs would constitute a ‘knowing failure to timely disclose’ an overpayment.”
There are a couple of things wrong with DCAA’s assertion. As the poster noted, the situation is not as black-and-white as DCAA would assert. The FAR regulations discussing the 52.203-13 clause state—
3.1003 Requirements.
(a) Contractor requirements.
*****
(2) Whether or not the clause at 52.203-13 is applicable, a contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose to the Government, in connection with the award, performance, or closeout of a Government contract performed by the contractor or a subcontract awarded thereunder, credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the civil False Claims Act. Knowing failure to timely disclose credible evidence of any of the above violations remains a cause for suspension and/or debarment until 3 years after final payment on a contract (see 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).
(3) The Payment clauses at FAR 52.212-4(i)(5), 52.232-25(d), 52.232-26(c), and 52.232-27(l) require that, if the contractor becomes aware that the Government has overpaid on a contract financing or invoice payment, the contractor shall remit the overpayment amount to the Government. A contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose credible evidence of a significant overpayment, other than overpayments resulting from contract financing payments as defined in 32.001 (see 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).
[Emphasis added.]
Looking at FAR 32.001, we see the following definition of “contract financing payments”—
“Contract financing payment” means an authorized Government disbursement of monies to a contractor prior to acceptance of supplies or services by the Government.
(1) Contract financing payments include—
(i) Advance payments;
(ii) Performance-based payments;
(iii) Commercial advance and interim payments;
(iv) Progress payments based on cost under the clause at 52.232-16, Progress Payments;
(v) Progress payments based on a percentage or stage of completion (see 32.102(e)), except those made under the clause at 52.232-5, Payments Under Fixed-Price Construction Contracts, or the clause at 52.232-10, Payments Under Fixed-Price Architect-Engineer Contracts; and
(vi) Interim payments under a cost reimbursement contract, except for a cost reimbursement contract for services when Alternate I of the clause at 52.232-25, Prompt Payment, is used.
(2) Contract financing payments do not include—
(i) Invoice payments;
(ii) Payments for partial deliveries; or
(iii) Lease and rental payments.
[Emphasis added.]
Based on the foregoing, it seems fairly clear that interim payments under cost reimbursement contract types cannot generate overpayments, as that term is used by the 52.203-13 clause (except for cost reimbursement contracts for services that use Alternate I of the 52.232-25 clause). Accordingly, it’s unlikely that a contractor would be subject to suspension or debarment for submitting interim vouchers that included too-high provisional billing rates.
But remember that the FAR Councils deliberately avoided defining the term “overpayment,” because that term was used “in a variety of contexts.” So while it seems clear (to us) that such interim payments using provisional billing rates under cost reimbursement contracts cannot create overpayments for purposes of complying (or not complying) with the 52.203-13 requirements—and thus cannot create a situation where a contractor could be suspended or debarred—that’s as far as we can go. As Calnet learned, such interim payments might create overpayments/false claims for purposes of complying with the False Claims Act.
As we noted twice before, is this something you really want to take a chance on?
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More Government Employee Misconduct
From time to time we like to write about the misconduct of Federal employees. We do this because we want to remind readers—especially readers who work for the Federal government—that not all contractors are crooks and there is probably no more contractor misconduct than there is Federal civilian service employee misconduct or military serviceperson misconduct. Wherever you find lax internal controls and people with lax consciences, you’ll find corruption and self-dealing.
Today’s story starts with Michael Strayer and his wife, Karen Earle, both of Lovettsville, Virginia. Mr. Strayer was a member of the Senior Executive Service at the Department of Energy (DoE). According to this DOJ press release, Mr. Strayer and his wife were indicted by a Federal grand jury on 13 counts “arising from a conspiracy to defraud the government of $1,263,330 by causing government contracts to be awarded which secretly benefitted the defendants personally.”
Allegedly, in 2004 Mr. Strayer “used program funds he controlled” to start publication of a magazine (“SciDAC Review”), which was intended “to promote his division’s advanced computing work with the DoE and academic communities.” We’ll let the DoJ tell the rest of the story—
Strayer used a foreign publishing company to put issues of the Review together on a no-bid, non-competitive contract, whereby the publisher was reimbursed for all its costs in producing the Review by the DoE. In mid-2006, Strayer directed the Review’s publisher to hire Earle as a consultant for $60,000 per year, despite the fact that she had no scientific computing or publishing background and lived in Tennessee, ostensibly to obtain articles for the SciDAC Review to publish. Shortly thereafter, Strayer began a romantic relationship with her, and directed that the publisher later increase her consulting fees.
In late 2006, Strayer reorganized the publication’s editorial board and notified the board members that Earle was assuming charge of the SciDAC Review’s editorial duties. Unbeknownst to the publisher, Strayer allegedly imposed a new requirement that board members, computing directors at DoE’s national laboratories who received substantial funding from Strayer’s office, provide Earle articles for publication in the SciDAC Review at no cost to the publication. In the summer of 2007, Strayer directed the publisher to contract with Earle’s company, KJE Science Consultants, to pay her nearly $100,000 for each quarterly issue to obtain articles for the magazine and to gain his approval for each issue, knowing that he had arranged that she be provided those articles at no cost by laboratory employees he exercised funding authority over. The indictment alleges that in September 2008, Strayer threatened to terminate Corporation A’s contract to publish SciDAC Review if it did not renew Earle’s contract for a second full year.
In July 2008, Strayer and Earle purchased a $740,000 home together in Lovettsville, Virginia, on which Earle made the entire $120,000 downpayment, in part from funds she obtained on the SciDAC Review contract. Earle also paid over $57,000 in renovations expenses and several mortgage payments on the home while Strayer lived there alone and Earle remained in Tennessee until the couple married in August 2009.
In June 2009, shortly before their marriage, Strayer signed a document with DoE’s Office of the General Counsel recusing himself from participating in ‘any Departmental matter in which Karen Jean Earle or KJE Consultants is a party.’ The indictment alleges that despite this recusal, Strayer continued his involvement with Earle and KJE and concealed this fact from relevant DoE officials who contracted with the publishing company, while falsely leading officials at the publishing company to believe that DoE officials knew of his relationship with Earle and nevertheless had approved the subcontracting arrangement with KJE. It also alleges that despite his formal recusal, Strayer met personally with Earle and officials from the Review’s publisher in August 2009 to plan a significant expansion of SciDAC Review and KJE’s role. As a result of those discussions, Earle and the publisher executed three contracts on September 1, 2009 that would have provided for payments to KJE of over $950,000 over the following 15 months.
On July 20, 2010, DoE investigators met with Strayer and told him that they were investigating allegations of impropriety surrounding the publication of SciDAC Review. The indictment alleges that Strayer stated that he had no part in drafting the subcontract between the publisher and Earle, whereas in fact employees of the publisher and Earle had repeatedly sent draft subcontracts to him for his review and approval. Additionally, Strayer is alleged to have maintained a file folder on his DoE computer named ‘KJE’ that contained multiple draft subcontracts between the publishing company and Earle. Strayer also allegedly told investigators that although he and Earle jointly owned their Virginia home, he alone paid the mortgage. In fact, however, Earle had made at least $23,516.60 in mortgage payments by that date, in addition to the $120,000 down payment on the home and $57,443 in home renovations expenses, primarily paid for from funds derived from her SciDAC Review subcontract.
As a result of the scheme, Strayer caused the publisher to pay Earle consulting fees and subcontract payments totaling more than $1,263,330 from DoE program funds that paid for the SciDAC Review.
We note that Mr. Strayer is now a “former” employee of DoE. If DoJ prosecutors achieve their objectives, he may soon become a member of the SES at a Federal prison.
The second story concerns Dr. Shih Chi Liu, of Silver Spring, Maryland, who was employed by the National Science Foundation (NSF) from 1981 until 2011, as a Program Director. Liu recently pleaded guilty to filing a false financial disclosure report that concealed payments and gifts he had received, according to this DoJ press release. Let’s let DoJ fill in the details—
Liu was required in his official position to submit a yearly financial disclosure report detailing travel-related reimbursements and gifts totaling more than a particular amount that he received during the reporting period. In the years 2006, 2007, 2008, 2009 and 2010, Liu filed false reports that failed to report payments and gifts he had received. In doing so, he concealed that he had arranged for an accredited university to pay false invoices for services that the university did not receive, pocketing the fraudulently obtained money himself. He also concealed that he had received money for international travel from an accredited university, at times simultaneously requesting and receiving reimbursements from NSF for that same travel.
So Liu was a senior, 30-year NSF employee who generated invoices for services he did not perform and who double-billed his travel expenses. Now he’s looking at up to five years in prison and a fine of up to $250,000 for his duplicitous behavior. That’s 30 years down the drain. We doubt it was worth it.
Another Way to Assess DCAA Productivity Metrics
We write this with more than a bit of trepidation. This will be the third article discussing DCAA productivity metrics—the fourth if you count our piece of original reportage on DCAA’s GFY 2011 Report to Congress. That’s kind of overkill, even though our website stats indicate that this is a very popular topic.
Before we move on to other topics, though, we want to bring to your attention a very interesting take on the issue—this one sent to us via e-mail from “Cajun CPA.” Our Southern friend is a longtime reader of the site. Cajun CPA is not a current employee of the Federal government, but let’s just say Cajun CPA is no stranger to the bureaucracy of the Executive Branch.
Before we get into Cajun CPA’s take on the issue of DCAA audit productivity, let’s recap a bit. Originally, we looked at DCAA’s productivity metrics in its GFY 2011 Report to Congress. Despite the agency’s view that it had a “successful” year, and despite DOD’s official view that DCAA’s GFY 2011 activity was “clearly more effective for the taxpayer,” we judged GFY 2011 to be a dismal year for DCAA—calling the agency’s performance “pathetic”.
Almost simultaneously, Professor Loeb published his article assessing DCAA’s audit productivity over time—an article that we and many other commenters called “scathing” but which more than a handful of self-identified current and former DCAA auditors called “spot-on”. In a follow-up article, we discussed the viewpoint of “Bill O-5,” who opined that Professor Loeb’s math was somewhat misleading. “Bill O-5” noted that any percentage in excess of 100% is suspect. So when Professor Loeb talked about a 400% decrease in productivity related to issuance of audit reports on contractor’s final indirect rate proposals, and when we noted a 1,148% decrease in productivity related to post-award “defective pricing” audit report output, “Bill O-5” thought we were both off-base. And he was right. (Note that our understanding is that Professor Loeb did not intend to mislead anybody; indeed, his calculations were vetted by several people before publication.)
When we corrected the calculations along the lines that “Bill O-5” had suggested, we told readers that comparing DCAA’s audit report output in GFY 2008 to its GFY 2011 audit report output revealed a 76 percent decrease in productivity related to final indirect cost rate proposals and a 91 percent decrease in productivity related to “defective pricing” audits. And we were satisfied that was the end of the analysis.
And then we received the e-mail from “Cajun CPA” and we were forced to rethink our analysis.
“Cajun CPA’s” view is that the best way to assess auditor productivity is to look at the number of hours spent producing an audit report. Simply looking at the total number of audit reports issued doesn’t tell the whole story because, as Professor Loeb noted, DCAA has actually increased its audit workforce over the past three years. One needs to “normalize” the output to account for the increased audit hours available to the agency, and “Cajun CPA” did so, and sent us the results.
In GFY 2008, DCAA had 4,200 employees and roughly 8,064,000 work hours available (assuming that each auditor had 1,920 audit hours available per year (which may be overstating the situation, but not materially.) That year, DCAA issued 30,352 reports. So DCAA spent an average of 265.7 hours per report and issued about 7.23 reports per employee.
In GFY 2011, DCAA had 4,777 employees, and thus roughly 9,171,840 work hours available. That year, DCAA issued 7,390 reports. So DCAA spent an average of 1,241.1 hours per report and issued about 1.5 reports per employee.
Comparing GFYs 2008 and 2011, DCAA had 577 more staff, but spent nearly 1,000 more hours on every completed audit report (975 more hours per report, to be exact). In GFY 2011, DCAA was only 21 percent as productive as it was in GFY 2008—meaning that the audit agency was 89 percent less efficient.
Or, to use Professor Loeb’s approach to the analysis, DCAA’s productivity dropped by 467 percent.
We can go on picking apart these numbers. (For example, nobody has commented yet on DCAA’s implementation of electronic working papers and the resulting efficiencies that step was supposed to create.) But it doesn’t matter; the end result is the same. Whether you approach things from Professor Loeb’s perspective, or from “Bill O-5’s” perspective—or from “Cajun CPA’s” perspective—the inescapable fact of the matter is that DCAA’s productivity dropped astoundingly between GFY 2008 and GFY 2011.
The numbers speak for themselves, to those who are willing to listen.
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