DCAA Annual Report to Congress

By Craig Stetson CPA, CGMA
Director, Capital Edge Consulting

Summary and Analysis

The Defense Contract Audit Agency (DCAA) issued its fourth Annual Report to Congress in May 2015. The Report illustrates slight improvements in audit timeliness and turnaround as well as regulatory constraints or limitations faced by the DCAA that, in their view, hinders performance.

The key highlights of the Report are summarized below:
1. Net savings (not defined, but presumably dollars sustained by the CO) resulting from total audited dollars was approximately $4.5B. This represents about 2.5% of the total audited dollars ($182.6B). Total questioned costs related to the audited $182.6B were not specifically noted [it is unclear if the $10.7B (pg. 5) claimed as 2014 questioned costs relates only to 2014 dollars or if it includes prior years’ dollars as well].

2. Total claimed return on investment is $6.89 for every $1.00 spent to fund the Agency.

3. Total professional (auditors) headcount increased about 5% from FYE 2013.

4. Total elapsed days (not defined) to complete an incurred cost proposal audit decreased from 1,090 in FY 2013 to 1,006 in FY 2014. These days are measured from the point the incurred cost proposal is received by the DCAA to the date the corresponding report is issued. Therefore, it takes about three years to complete these audits.

5. Focusing solely on external challenges faced by the DCAA during their audits, significant deficiencies and recommended actions to improve the audit process were noted , namely:

  1. Limited contractor cooperation and access to ‘other than certified cost or pricing data’ in conjunction with their audits of commercial items
  2. Expanded subpoena authority
  3. Limited or denied access to contractor internal audit reports and employees

6. An OPM federal employee survey indicates a high level of DCAA employee satisfaction with the Agency. Additionally, DCAA ranked well above other federal agencies and the highest amongst all DoD subcomponent agencies.

Curiously, no internal DCAA or performance matters were noted as potential improvement actions. Stated differently, considering the public criticism of DCAA’s performance over the recent years, as well as my own experience and observations, it would appear several internal opportunities exist to improve performance.

Lastly, the Report indicates significant improvement (i.e., reduction) to the highly publicized DCAA backlog of Incurred Cost Proposal audits. This message is consistent with public (BBNA article) comments from DCAA leadership released just a few days before the issuance of the Report. In the BBNA article, the DCAA attributes its success in reducing the audit backlog to the traditional audit process– conducting audits until they are finished instead of starting and stopping.
Performing multiple audits concurrently is more efficient than doing single audits. As a result, the multiyear approach contributed to the reduction in backlog.

This consistent messaging (Report and BBNA article) regarding the DCAA’s significant improvement to the audit backlog is somewhat misleading and intellectually dishonest. A few observations:
• The DCAA comments do not address the recent rise in the frequency of their determinations of inadequate contractor incurred cost proposal submissions. It is not uncommon today for contractor incurred cost proposals to be deemed inadequate (the reasons vary as do the merits thereof).

• The DCAA comments are silent on the effect of the six year statute of limitations (SOL) and the related ‘last minute’ negotiations that result between the contractor and the contracting officer. It is not uncommon for the six year statute to expire next week, for example, and the corresponding incurred cost proposal to be settled a few days earlier. It is reasonable to expect that had the statute not been as near to the negotiation, the outcome would likely have been different.

• The DCAA comments do not reflect the recent rise in their recommendations to contracting officers to apply DCAA’s internal 16.2% decrement as a means for the government to unilaterally settle relating to either inadequate or delinquent contractor incurred cost proposals.

The DCAA audit backlog has likely been reduced in part due to an increase in their audit efforts and activities–as well as internal recognition of recent performance and quality criticisms the DCAA has received. However, the three items mentioned above also affect the audit backlog as the corresponding incurred cost proposals related to these situations are no longer included in the active inventory. Statistics that support how the audit backlog was reduced (i.e., traditional audit process, inadequate submission, SOL or decrement) are not publically available; however, all factors should be considered to gain a fair look at the process.
Furthermore, as evidenced above, in order to obtain a more complete context and perspective of the overall DCAA audit backlog situation, it would be helpful to understand the various moving pieces that make up the formula to calculate the inventory.

Conclusion
All indications support the idea that the DCAA will continue to be aggressive with regard to further access into contractor records and personnel. It is important in this environment to maintain a professional posture with the government and manage the audit process through designation of limited or specific contractor personnel who are responsible for dealing with the auditors.
Although not noted in the Report (for obvious reasons), it also is critical as a contractor to understand the bases of the DCAA audit positions and mechanics of how questioned costs or potential adjustments are derived and calculated. This may sound somewhat fundamental; however, early identification of mistakes and communication is always a better approach towards enhancing the overall audit experience.

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