Four years ago, lawmakers ordered Pentagon officials to overhaul how their auditors review contracts to make sure costs are reasonable. Their chief complaint: Auditors were more concerned with being speedy than thorough.
In response, the Pentagon agency that audits contractors — the Defense Contract Audit Agency (DCAA) — vowed to hired more staff to more deeply scrutinize contracts.
Now the problem is that DCAA auditors are being thorough to a fault. They are devoting more attention to each audit, but performing dramatically fewer audits. And that is even after the agency hired 615 additional staff members since 2008 for a total of 4,876 as of last year.
In that time, contractor costs audited by DCAA have plummeted by more than two-thirds — from $458 billion in 2008 to $128 billion last year. Those figures reflect costs claimed by contractors and paid by the Pentagon, as well as those proposed by contractors during negotiations.
Another big problem: The backlog of contracts paid for but still awaiting audit exploded nearly fourfold during that same timeframe, to $573 billion.
In short, a far smaller portion of transactions conducted between the Pentagon and its contractors is getting any scrutiny, despite a huge DCAA staffing increase and skyrocketing costs.
Huge dollar amounts are at stake here for the Pentagon and the taxpayer.
Experts estimate that between 1 percent and 2 percent of contractor costs are deemed to be improper, and thus recoverable — but only if they are audited and discovered. So when so much contractor activity escapes auditors’ attention, there is a big cost.
DCAA officials say they are taking steps to fix the problem, including hiring 1,000 more staff by 2015 and offloading some work to other agencies. These steps will help, but they will add significantly to costs and will need time to show results. More is needed.
Experts say it takes about five years to get new auditors trained and able to spot contracting discrepancies. In addition, there is a six-year statute of limitations on DCAA audits. After that, improper costs no longer can be recovered. And many contracts in DCAA’s $573 billion backlog are approaching that six-year mark. The value of improper costs in that backlog could be as much as $11 billion — money that could be left on the table if DCAA cannot audit those contracts in time.
DCAA must find a better balance between quantity and quality in its auditing operation. Quality is great, but a quest for perfection is impractical, slows the process and costs the taxpayers large sums.
DCAA should enlist trained federal auditors from other agencies and even contractor help, if necessary. It also must take a more effective risk-based approach to its mission — streamline audits of contracts and contractors deemed to be low risk, and focus the more intense audits on higher-risk cases.
And DCAA must act fast: As the backlog swells even more, billions of dollars of improper payments will be lost and unrecoverable.