DCAA Audits vs. Self Reporting

The Defense Contract Audit Agency was created in 1965 to help the Government assure that they are making the best use of taxpayer dollars on the contracts they enter into.  As a result, they have been auditing contractors ever since for the Department of Defense (DoD) and even some other Government Agencies.  Their audit services have grown to include all kinds of business system audits from Floorcheck Audits (timekeeping function) to full financial system audits.  Last year the results of the DCAA were staggering, according to director Pat Fitzgerald:

We examined $163 billion in contracting dollars and issued about 6,200 audit reports. Of special significance is that we completed over 50 percent of the baseline incurred cost backlog (FY 2009 and earlier). This backlog has been building for several years, and it is now coming down. Overall, our audit work led to contracting officials documenting $4.4 billion in net savings during the year—the fourth year in a row with increased savings—which brought back a return on taxpayers’ investment in DCAA of about $7.30 for each dollar invested. This return is the highest achieved by DCAA in the last decade.

The fact that for every dollar spent on the DCAA, they saved the taxpayer $7.30 is a powerful notice for continuing to use this tool on the Federal level.  Other agencies are not as diligent in auditing contractor and/or grantees business systems.  For instance, the DoE and the HHS require contractors to hire an independent CPA to come in and audit their system.  They push the cost of the audit onto the awardee.  A new DoE rule outlined in the DOE Acquisition Letter 2013-11 establishes requirements on DoE contractors to meet guidelines on business systems (accounting, purchasing, EVM, cost estimating, etc) and provide written documentation that they comply with these requirements.  For the accounting piece, this may mean independent audits hired by the contractor.  The DoD is looking at this as well.  The DoD is preparing a proposal to update the DFARS business system rule DFARS Case 2012-D042 to include contractor reporting regarding compliance with business systems criteria. In my mind, this would have several effects that must be weighed:

  • The DoD would save money by not paying the DCAA to audit the contractor
  • The DoD would loose 7X in savings that the DCAA was uncovering.  This may not be a total loss as certainly the independent auditors would turn up many of the discrepancies that the DCAA did. 

This expense is an allowable expense but it is a significant expense to the contractor.  There is also controversy about the consistency of these audits from one auditor to the next as many independent firms will be involved.  At least with the DCAA the audit group belongs to one organization and suppossedly they are all trained the same, have the same goals, direction, supervision, etc.  We have seen with the DCAA that there is still a lot of variability from auditor to auditor even with these controls.  So the self certification route might be paved with inconsistency just by definition. 


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