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DoD Inspector General Issues Two Reports on DCAA Quality Control

On August 27, 2014, the Defense Contract Audit Agency (“DCAA”) issued Memorandum for Regional Directors (MRD) 14-PAS-014(R), captioned ”Audit Guidance on Removal of Modified GAGAS Statement in Audit Reports”. As background for this MRD, Generally Accepted Government Auditing Standards (GAGAS) require audit organizations to obtain an external peer review at least once every three years. For DCAA, the external reviews are performed by the Department of Defense’s (“DoD”) Inspector General. In August 2009, the Inspector General revoked its previous approval of DCAA’s quality control program. As a consequence, since August 2009, DCAA has been unable to state that it performed its audits in accordance with GAGAS. However, in August 2014, the Inspector General issued a report finding DCAA’s quality control program adequate but with deficiencies. Therefore, DCAA audit reports can now state that they were conducted in accordance with GAGAS.

Although it was determined DCAA’s quality control program is adequate, on September 8, 2014, the IG issued report number DODIG-2014-109 in which it detailed numerous shortcomings in DCAA audits. For this project, the Inspector General evaluated a cross section of 16 DCAA audits completed between October 2011 and February 2013, including five audits of forward-pricing proposals and 11 audits of incurred cost proposals, and other audit types. At the conclusion of each review, the Inspector General issued a memorandum that identified the findings and recommendations associated with that review. Overall, the Inspector General identified one or more significant inadequacies associated with 13 of the 16 DCAA audits. Specifically, the Inspector General identified deficiencies with GAGAS in the areas of audit planning, evidence, working paper documentation and supervision. In addition, the Inspector General’s review disclosed instances of auditors not obtaining adequate cost or pricing data. As a result of these reviews, the Inspector General made 87 recommendations to improve DCAA’s audits. Of the 87 recommendations, DCAA agreed with 63, but disagreed with 24. The Inspector General accepted DCAA’s rejection of three of its recommendations, but requested DCAA to reconsider its position on the other 21.

Significant findings from this report indicate that DCAA still has significant problems in regard to performing audits. For example, in one of the audits examined by the Inspector General, a DCAA office audited all invoices submitted by a subcontractor to a prime contractor for allowability. However, 63 percent of the costs claimed by the subcontractor had been audited previously by another DCAA office, with 59 percent of those costs being questioned and negotiated by the contracting officer. As a result, the office conducting the second audit, questioned over $8 million in costs, $6 million of which had already been dispositioned. As a result, costs questioned in DCAA’s annual report were overstated by $6 million as a result of this one mistake. Interestingly, DCAA spent 899 hours on the second assignment, which was obviously a waste of time.

In another instance, the contractor had completed the contract before submitting its proposal to establish the final cost of the contract. However, the contractor did not base its proposal on the actual costs of performing the contract, but on estimated costs. Despite this, DCAA determined that the proposal was adequate and audited the estimated costs instead of actual costs.

Finally, another office spent over 7,900 hours conducting a billing system audit of a contractor. However, the contractor was transitioning from one system to another before the audit started and completed that transition six months before DCAA completed transaction testing. Despite the fact that the old system would no longer be used, DCAA decided to devote approximately half of the audit to a review of the legacy system. As a result, the Inspector Generalestimated that DCAA spent about 3,560 hours auditing a system that was no longer in use. While the Inspector General agreed that some testing of the legacy system was warranted, the extent of the testing done in this case was deemed excessive.

The lesson to be learned from this is that although the Inspector General has determined that DCAA has an adequate quality control program, DCAA still has many problems in regard to its audits. Therefore, you should examine each DCAA audit report carefully and be prepared to pushback when there are mistakes. Cherry Bekaert’s Government Contractors industry group will be glad to assist you in these endeavors.

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