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Home News Archive Backlash from Changes to Proposal Audit Thresholds

Backlash from Changes to Proposal Audit Thresholds

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We first told you about changes to the DFARS PGI—changes that limited DCAA’s audits of contractor cost proposals—in this article. We are proud to claim to be one of the early reporters of the story, breaking it two weeks before other outlets reported it. To recap, we reported (with approval)—

What we see in the foregoing is a movement towards limiting DCAA’s role in DCMA proposal analysis. Fixed-price proposals valued at less than $10 million normally should not be reviewed by DCAA. Similarly, cost-type proposals valued at less than $100 million normally should not be reviewed by DCAA.

Well, other outlets finally caught up with the story, and they did not exhibit the same approval as we did.

First, the Project on Government Oversight (POGO) published an “alert”—or what might also be termed a “rant”—with the inflammatory title, “Pentagon Radically Reducing Oversight of Contracts Worth Tens of Billions”. The POGO rant linked to an October 18, 2010 MRD from DCAA (MRD 10-PSP-030(R)) that transmitted news of the PGI revisions to the agency’s auditors. There was nothing new in the DCAA audit guidance, but POGO made it sound like an insidious conspiracy was at work. POGO rhetorically asked its readers—

POGO has long feared contractors and their government allies would block DCAA from exposing contractor ripoffs,’ said Nick Schwellenbach, POGO’s director of investigations.  ‘Why are billions of dollars being put at risk when Secretary Gates is demanding cost savings?’

In addition, POGO reported—

The reason for this new restriction is DCAA’s attempt to perfectly comply with Generally Accepted Government Auditing Standards (GAGAS). With this standard, which requires meticulous documentation of findings, DCAA is unable to cover as much ground as they used to, thus the need to restrict ‘audits’ as defined by GAGAS.  The number of DCAA reports produced annually has plunged: 33,801 in FY 2007 to 30,352 in FY 2008 to 21,276 reports in FY 2009.

Rather than subjecting reviews of cost or pricing data to GAGAS, DCAA should consider these reviews as financial advisory services, which are not subject to all GAGAS requirements.  This would better protect taxpayers and warfighters by allowing DCAA to review cost data and deliver advice to contracting officers in a timely fashion.

We have a couple of thoughts on POGO’s rant. First, it is absolutely misleading to assert that oversight over DOD contracts is being reduced. That is not the case. In fact, what is being reduced is DCAA’s review of bids submitted to DOD. Some of those bids might become future contracts, in which case they will be subject to the full panoply of the Pentagon oversight regime. Until that time, DCAA’s review is simply to assist the DCMA Contracting Officer is preparing for negotiations. DCMA is the customer and it can request (or not request) DCAA review. In this case, the two DOD agencies are mutually agreeing that certain proposals will not be subject to DCAA review—which frees up audit resources to focus on larger and/or higher risk proposals. This is a good thing, though POGO makes it sound as if the criminals are being freed from jail.

Second, we actually agree with POGO that DCAA should exempt certain of its activities from GAGAS. In fact, we recommended that nearly a year ago, in this open letter to DCAA Director Pat Fitzgerald. So (to reword a bit) we are pleased to see that POGO agrees with our recommendation.

Robert Brodsky at GovExec.com was more restrained in his reporting (as we have come to expect from him). He reported—

In a statement, a Defense Department spokeswoman said the change will allow DCAA to focus on the highest-risk areas, and ‘actually increase savings to the department and warfighter.’ … The redistribution of audit assistance work came as no surprise to observers who have tracked DCAA's response to a stinging 2008 Government Accountability Office report. The watchdog found DCAA auditors often failed to comply with generally accepted government auditing standards, documented their audit opinions improperly and submitted sloppy working papers.

But, some auditors suggested DCAA managers overreacted to the report, and they now have embraced the time-consuming GAGAS process for all audits and reviews of cost data in contractor proposals. The result has been that reports take longer and require a field office manager's approval. Often contracts are issued before the DCAA reviews are complete.

Once again, we are pleased to see our position(s) agreed-with. In this article, we asserted, “So perhaps it’s not really the workload that’s causing ‘lingering audit problems,’ but might be instead the process by which audits are being executed?“

As always, comments on the GovExec.com site, from purported DCAA auditors, are brutal but illustrative. Here are a few of them for your edification:

  • Every audit takes longer to complete and then do over after the rules on what the agency expects change every other week. We don't audit really, we access risk for weeks, document sampling plans that are crazy and document work papers to a level of insanity. Once an audit is actually complete, the rules on how to do an audit change again. Then after four levels of review, no one wants to issue it anyway. But don't worry, by this point the contract has been awarded and we can cancel the assignment so no one gets Gigged. I have to believe that the people writing the audit guidance for proposal audits have never actually done one of these audits. Forward pricing proposals, should not be audited to GAGAS!!!!! Does anyone know how insane it is to tell a contractor that your unsupporting all their out year indirect rates for lack of budgetary data but by the way I want to test your pool and base amounts anyway for the current year? It will take me two weeks to document that sample plan and then you can pull the 750 transactions I need to look at. But don't worry by the time I'm done the contract will be awarded and most likely the assignment canceled. The report will never leave the DCAA family. Has anyone requested a basic assist audit from another DCAA office in the past nine months? Am I the only one who has noticed that basic requests for audit assistance, do not even get acknowledged anymore? How can they be acknowledged when the agency is in melt down mode? People are too busy documenting work papers to ever acknowledge a basic request for an audit. Why acknowledge it, when you know you never will issue it anyway?

  • All I can say to this is...What the #$%^? I don't even have a clue when I will get an audit back from DCAA...now they tell me that they will not look at a cost proposal under $100M.. We might as well terminate DCAA's charter and desolve their workforce because I'm lost on their utility for the majority of DOD actions.

In response to the foregoing (unwarranted and uneducated) criticism, DOD is trying to explain itself. This article at WashingtonTechnology.com reported—

The Project on Government Oversight watchdog group called it a “radical” reduction in the contracts to be reviewed, saying about $92 billion a year in contracts would be affected.

But defense officials believe the change will focus resources on high-risk areas and increase savings to the department.

Defense Procurement Acquisition Policy, in coordination with the acquisition community and DCAA, made the change to the Defense Federal Acquisition Regulation Supplement,’ reads a statement distributed by a DOD spokeswoman on Nov. 1.

DCAA is working with the acquisition community to align our resources with the highest risk areas. DCAA believes this change will allow them to focus on audit areas with the greatest payback to the taxpayer and will actually increase savings to the Department and warfighter. Finally, DCAA has coordinated this change with DCMA, and are confident that they will be able to provide the necessary pricing coverage for the procurements below the threshold,’ the DOD statement said.

To sum up, the inflammatory and highly misleading tack taken by POGO is being picked up by other media outlets, and generating utterly unwarranted criticism aimed at the DOD. While there are some good points being made (i.e., those that agree with our previously published positions and recommendations), there is much nonsense being spouted as well.

As educated and experienced readers of this site, you know better.



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.