More concerns about DCAA audit opinions


Earlier today I previewed reports the Government Accountability Office and the Defense Department Inspector General will release tomorrow highlighting the depth of auditing problems at the Defense Contract Audit Agency.

But these watchdogs are not the only ones with concerns about DCAA’s audit management. The Wartime Contracting Commission — a bipartisan, congressionally chartered panel tasked with making recommendations to improve contingency contracting — released this report today calling on DCAA to abandon the all-or-nothing approach it takes when rendering opinions on contractor business systems.

In December, DCAA scrapped its opinion that allowed business systems with minor deficiencies to be deemed “inadequate in part.”  A prior GAO report that found the auditors in DCAA’s western region were pressured by supervisors to change the middle-ground opinions to “adequate” in order to please contractors. Contractors can only directly bill the government for work if their systems are deemed fully “adequate,” or reliable. If a contractor can directly bill the government, it doesn’t have to go through a lengthy invoice approval process.

But the commission, which has held a series of hearings about the adequacy of contractors’ cost estimating and accounting systems, found the new pass-fail policy increases the government’s risk of wasting money because it diminishes the importance of an inadequate audit finding.

Under the new rules, a system is deemed “inadequate,” or unreliable, if even one minor aspect of the accounting system is broken. Such a blanket finding is “not informative enough to help contracting officers make effective decisions” about how to hold the contractor accountable for fixing problems, according to the commission report.

The report went on to say:

Rather than giving system deficiencies more importance, it seems to have the opposite effect — undermining the significance of the audit findings and weakening their effectiveness…Without any reasonable provision for more accurately describing systems that are less than perfect, contractors and contracting officers find the ‘adequate/inadequate’ options too restrictive.”

A graduated grading system is needed to give contracting officers clear information about the monetary losses that could result from a system deficiency and the level of risk that deficiency poses, so contracting officers can decide how to hold contractors accountable, the report said.

While DCAA needs to do more to make its reports useful to contracting officers, the Defense Contract Management Agency, which is charged with enforcing DCAA audit opinions, needs to be more aggressive in ensuring contractors correct the problems DCAA uncovers, the commission found.

DCMA allows contractors to continue to use their broken systems when contractors promise they will make corrections, but DCMA does not use any incentives to ensure contractors fulfill those promises. DCMA has the power to withhold portions of payments until inadequate systems are fixed, but chooses not to. Because DCMA does not enforce the penalties to encourage fixes, contractors are not motivated to make the changes, the commission found.

DCMA should enact an aggressive compliance enforcement program that encourages contractors to make system corrections promptly and ensures DCMA follows up with contractors to validate the system fixes, the commission said.


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