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DoD contract audits plunge in quest for thoroughness

Jun. 11, 2012 - 08:08AM   |  
By SARAH CHACKO   |   Comments
The Defense Contract Audit Agency conducted 7,390 audits in 2011. That number is less than a third performed six years ago.
The Defense Contract Audit Agency conducted 7,390 audits in 2011. That number is less than a third performed six years ago. (File photo / Air Force)

Pentagon audits of its contractor costs have slowed to a trickle in recent years, prompting critics to charge that billions of dollars in questionable costs are likely being paid but not flagged by auditors.

The Defense Contract Audit Agency (DCAA) last year conducted 7,390 audits, which is less than a third of the number — 26,623 — performed six years ago. The dramatic slowdown occurred even as the agency has ramped up hiring in the same period by about 20 percent.

One result of the slowdown: a daunting $573 billion backlog of contracts stretching back six years that have already been paid but still await auditing. Six years ago, the backlog figure was $110 billion, less than one-fifth of the current size.

Critics fear the agency will never catch up on that backlog because, by law, paid contracts more than six years old cannot be reviewed. Since auditors typically identify between 1 percent and 2 percent of contract costs as improper, that means the department may miss out on between $6 billion and $11 billion that could be recovered.

DCAA officials say they slowed down their auditing operations to focus more on the quality and thoroughness of audits — and less on the quantity — following criticism from Congress in 2008 and 2009 that DCAA’s management was too concerned with getting audits done quickly.

They say DCAA has a plan to pick up speed and eliminate the backlog by October 2014. The agency will:

• Expand the auditing staff. It has already added 615 employees since 2008 and plans to add another 1,000 by 2015 to bring its auditor workforce to more than 5,000.

• Dedicate teams of auditors entirely to the backlog of incurred cost audits, which are audits of contracts that have already been paid.

• Conduct less stringent audits on low-risk contractors.

• Farm out some work to the Defense Contract Management Agency (DCMA). Specifically, it is asking DCMA to conduct more forward-pricing audits, which are audits performed on contractors’ proposed prices and terms of service prior to the award of a contract. Doing this should free up more DCAA auditors to work on the backlog of incurred-cost audits.

Contract lawyers and former DCAA auditors say that won’t be enough.

“It’s a quality and quantity issue,” said Richard Loeb, a former federal procurement official who now is an adjunct professor of government contract law at the University of Baltimore law school. “There’s got to be balance between the two.”

DCAA should consider using third-party auditors or auditors from other agencies to work on the backlog, some experts say. Or the agency could set a minimum-value threshold for contracts in the backlog, under which the agency simply would not conduct full audits.

DCAA’s new approach

DCAA’s problems today stem from concerns raised four years ago by the Government Accountability Office and lawmakers. GAO audits found that DCAA auditors were cutting corners when it came to auditing contractors, in part because managers were pressing them to prize speed over thoroughness. Lawmakers pushed DCAA for changes, even suggesting that the agency become independent of the Defense Department.

In response, the agency retrained auditors in how to produce quality audits and judged their performance on how well they adhered to auditing standards, not how quickly they produced audits.

More recent changes show that DCAA is attempting to balance quality with speed.

DCAA revised its policy in late 2010 so that it conducts fewer pre-award audits: The agency now audits fixed-price contract proposals valued at more than $10 million, up from $1 million, and cost-reimbursement contract proposals valued at $100 million, up from $10 million. The rest go to DCMA for a review but not a full audit.

This year, DCAA started measuring how quickly forward-pricing audits are completed based on due dates established with the contracting officer before the audit starts.

DCAA officials say the steps are already showing promise. DCAA completed about 1,000 incurred-cost audits so far this year, more than twice the number in each of the two previous years, Pentagon spokeswoman Army Lt. Col. Elizabeth Robbins said.

Auditors also are questioning more costs and finding greater savings for the government, she said. For example, in 2003, DCAA issued 29,780 reports, questioned $8 billion in costs and realized a savings of $2.2 billion. Last year, the agency issued only 7,390 reports, but it questioned almost $12 billion in costs and realized a savings of $3.5 billion, she said.

Former DCAA auditors say it will take time for the agency’s new auditors to have an impact. It takes about two years to train new hires, and three to five years before an auditor can reliably identify inappropriate charges, former auditors said.

“It’s more than just accounting,” said Michael Thibault, a former DCAA deputy director. “It’s judgment that goes into these risks.”

Share the load

DCAA is trying to stay ahead of a six-year deadline that starts when a contractor’s cost submissions are accepted by the government. After six years, agencies cannot dispute a contractor’s costs.

Contractors have increased their own staffs to help the growing number of DCAA auditors locate records and receipts.

The number of DCAA auditors looking at DynCorp’s records quadrupled in the last three years: from about 15 in 2009 to 60 today, said Thibault, who is now DynCorp International’s vice president of government finance and compliance. In response, DynCorp doubled its staff to about 24 to help, he said. Those additional staffing costs of contractors end up being paid by the government since they are passed off as overhead costs when they perform contracted work.

DCAA, which typically covers contractors by region, is exploring ways to consolidate audit oversight for major contractors. Under a pilot project with Raytheon, all of the company’s audits fall under one group of auditors and support staff.

Others say the agency should look to outside audit firms or even share auditors across government to help clear the backlog.

“DCAA, in the area of costs, is one of the few government agencies that trusts no one else,” said Alan Chvotkin, executive vice president of the Professional Services Council trade association. “There are clearly companies that have the capability of auditing to the government’s standard.”

And Chvotkin said he doubts there is any appetite on Capitol Hill for letting DCAA conduct abbreviated audits of contractors because lawmakers believe improper payments must be curtailed, regardless of cost.

“We want somebody at every intersection, so if you run a red light you’re going to get caught,” he said. “Can it be done? Of course. But that contributes to the cost and the time.”

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