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Home News Archive Commission Hears Testimony Blaming Contractors' Internal Control Systems

Commission Hears Testimony Blaming Contractors' Internal Control Systems

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Commission on Wartime ContractingFederal Times reported on August 11, 2009 that in testimony before the Commission on Wartime Contracting, DCAA Director April Stephenson blamed "faulty accounting, cost-estimating, purchasing and other business systems" for "millions of dollars" of contractor overbillings to the Department of Defense (DOD). The Federal Times article quotes Director Stephenon's testimony: "When a contractor’s business system and related internal controls are inadequate, the data generated by the contractor’s system is unreliable, which in turn, results in the risk of noncompliances with government laws and regulations, mischarging, fraudulent acts and contract overpayments."

We have previously noted the Commission's focus on contractor business systems. Thus, we were not especially surprised by Director Stephenson's testimony. What was surprising was the testimony of DCMA Executive Director David Ricci, who reportedly admitted that his agency has allowed contractors to continue using faulty and unreliable business systems. Federal Times quotes Mr. Ricci as saying, "We've not disapproved any of the systems with these contractors." (In context, it is clear that Mr. Ricci was referring to the systems of the three LOGCAP IV contractors that support troops in the battlefield, but the quote could (and likely will) be taken out of context as referring to the business systems of DOD contractors in general.) According to the Federal Times, "Ricci said that if a contractor submits an action plan to correct problems with a faulty business system, such as a cost-estimating system, DCMA cannot disapprove the system unless there is no progress made to fix the problems."

Predictably, the Commissioners piled on DCMA, accusing it of "caving to the contractors and not acting properly on the Defense Department’s behalf," according to the Federal Times article, which quotes Co-Chair Shays (a former member of Congress) as accusing DCMA of being "on the contractor's side." According to Federal Times, "Other commissioners also were outraged by DCMA’s failure to halt use of faulty contractor business systems and its failure to withhold payments to them, if necessary."

It is well-known that DCAA has come under fire for inadequacies in its audits. Almost immediately after being on the receiving end of intense criticism related to its alleged audit failures, DCAA began a campaign seemingly designed to deflect attention from itself and onto the contractors it audits, as well as the other DOD agency involved in contract management, DCMA. The Federal Times article indicates that the strategy may be working.

It is easy to predict a continued DCAA focus on "inadequate" business systems because, so long as the spotlight is turned on the contractors, DCAA can hide in the darkness. Consequently, contractors must invest in their operational control systems in order to avoid the draconian penalties that Director Stephenson advocates. Although one can take issue with DCAA's concepts of "internal control systems" and "system adequacy" it will not be as easy to fight the unpalatable combination of an aggressive DCAA coupled with a hobbled DCMA that is unwilling to disagree with any DCAA recommendation because of the fear of being labeled as being "on the contractors' side."

See the Federal Times article here.



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.