By Nick Schwellenbach
Today we issued a press release stating POGO’s opposition to the reduction of the Defense Contract Audit Agency’s (DCAA) role in the Defense Department.
POGO has obtained a January memo signed by Shay Assad, the Director of Defense Procurement and Acquisition Policy (DPAP), stating that DCAA will, in various areas, yield to the Defense Contract Management Agency (DCMA), an agency considered less aggressive than DCAA in rooting out problems. DCAA Director Patrick Fitzgerald issued a memo to all DCAA employees a few weeks ago informing them of the changes.
“It really makes me angry that DPAP, DCMA and most of all, DCAA, are so willing to increase the risk to the government and the taxpayer who ultimately foots the bill,” said one experienced former DCAA auditor. “Some of us have fought for years to protect the Government and in a few months, it is wasted away. I bet contractors are very happy.”
Last month's DPAP memo states that DCAA plans to withdraw from performing audits in two key areas: 1) Financial Capability Reviews and Audits, and 2) Purchasing System Audits. The memo also restates that the threshold for triggering DCAA's pre-award review of contractor proposals has increased ten-fold, with some exceptions. We opposed that change last fall, and I also addressed it during my testimony before the Senate last week.
On DCAA’s Withdrawal From Financial Capability Audits
DCAA’s withdrawal from auditing the financial capability of contractors is a huge mistake, especially in a bad economy. It places the government at increased risk of default for nonperformance due to bankruptcy or other financial issues affecting the contractor.
Auditing financial capability has always been a turf battle between agencies. However, DCMA is not as skilled at analyzing the financial condition of contractors. For instance, DCMA relies too much on financial ratios, which have proven over time to be poor predictors of future financial conditions. There are a couple of other major differences between DCMA and DCAA in this area:
- DCMA analyzes historical costs, whereas DCAA examines prospective conditions with a heavy emphasis on future cash flow. The purpose of a prospective review is to examine whether the contractor has the financial resources to perform future government contracts. Projecting future cash flows is much more useful than looking at last year’s financials, especially when considering a major contract award.
- DCMA only performs the review once at the pre-award stage, whereas DCAA conducts annual assessments. A contractor's financial condition may be acceptable at the beginning of a contract, but it can easily decline during contract performance, especially for multi-year contracts. Many of DCAA's financial capability audits are conducted after the contract has already been awarded, as financial problems start to take their toll on the contractor. Case in point: the contract for the Anthrax vaccine where DoD gave a bailout to the company in 1999 due to its poor financial condition.
On DCAA’s Withdrawal From Purchasing Audits
DCAA has typically been tougher than DCMA in its assessments of contractor purchasing systems. Case in point: KBR. DCMA spent four days reviewing KBR’s system and approved it as adequate. DCAA spent six months and found it inadequate due to a number of issues including inflated subcontract prices (i.e., more profit for KBR).
DCAA and DCMA reviewed the same KBR purchase orders and subcontracts issued against the Army logistics civil augmentation program (LOGCAP III) contract from the period January 1 through December 31, 2007, and identified the same deficiencies, but came to different conclusions on the adequacy of KBR’s purchasing system. Despite the DCAA inadequacy recommendation, DCMA approved the system. Consistent assessment and reliability of contractors’ purchasing systems are especially important because subcontractors provide more than 70 percent of the LOGCAP III services in theater.
“Contractors have noticed—and openly discussed—the disagreements and inconsistent approaches between DCAA and DCMA,” the Commission report added. “This creates an environment in which contractors can exploit the agencies’ mixed messages and game the system to their advantage.”
According to Assad’s memo, the DoD has sided with DCMA over DCAA in this and other key areas.
Nick Schwellenbach is POGO's Director of Investigations.
Photo credit: the Pentagon.