The Diminishing Role of DCAA in the Pentagon Means Increased Risk to Taxpayers

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:

1. 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.


2. 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).

There was a good discussion of this issue at an August 2009 hearing before the Commission on Wartime Contracting. According to the Commission’s report issued the following month:

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.

Related:

• Senator Pushes DCAA To Complete More Incurred Cost Audits
• Pentagon IG Casts Light on Problems at DCAA
• Is "Resolving" DCAA Findings the Same Thing As Listening to Them?
• Billion Dollar Contract Slips Under DCAA's Radar
• The Voices of DCAA?
• Senator Pushes DCAA To Complete More Incurred Cost Audits

Comments

[jim voigt]

Would love to see POGO look into the Medicare Payment Advisory Group's (MEDPAC) report to the Congress in June, 2010, recommendation for Medicare to hold back $3.5 billion in payments to teaching hospitals, until they can justify receiving this amount. This is found on page 103 of their report, Aligning Incentives in Medicare. They have been recommending for years to have the Indirect Payment Amount reviewed due to their empirical study that indicated the payment was twice as high as it should be. Congress never acts on this and it is obvious to many in the Medicare field of auditing that this is a clear overpayment.

[SoCal Contractor]

Sue,

Well, I'm working through a billing system review right now, so I don't know how out of touch I am. That said, I'm not a fan of DCMA either. Nobody over there can make a decision without four or eight "Board Reviews".

Nick,

I'm flattered that you think my microblog is of any interest. Feel free to send me a response to my blog comments. I promise to publish your response unedited.

[Yes good news in deed]

These idiots took a year to review our contract then insisted we jack our rates up 300% so our client could not afford us. We offered fixed price and they insisted on Cost plus. These are the worst of all government employees!! Finally the waste gets taken out.

[Mike]

I am also angry that Fitzgerald so willingly gave away audits to DCMA. POGO, thank you for exposing the real Fitzgerald, he'll do anything for Shay Assad regardless of whether it is in the best interest of DCAA. DCAA employees no longer have the spirit we once had in the "save the Agency days." The backlog is growing. Contracts are awarded without audits. We cancel more assignments than we complete. We are not performing the right assignments to protect the taxpayers dollars. We have a Director that would rather we issue one perfect audit with no findings than many not so perfect audits with significant findings. The world of DCAA is so twisted that employees do not know what to think. Fitzgerald has no appreciation of the need for DCAA to react quickly to proposals and issue audits BEFORE the contract is awarded. Not to mention the need to close contracts by working on the backlog of incurred cost. Contractors have never had it so good. I bet PSC, NCMA, AIA or some other industry group gives Fitzgerald an award similar to the award Charlie Williams received last year - better known as the "thank you for letting us make more profit than we ever dreamed of award."

[Karl]

First Fitzgerald raises the threshold on proposal audits and then no financial capability or purchasing system audits. What's next; increasing the threshold for desk review incurred cost audits from $15 million to $100 million. Fitzgerald states that in his time as DCAA Director, it has been about quality not quantity. I say it has been about an agency that is too paralyzed to issue a report. Fitzgerald you are right about the a huge reduction in the quantity of audits. But this also means a significant reduction in the oversight of contractors and of net savings. My office cancels more assignments that we issue because the RAM will not approve a report unless he has had it at least 6 months and most of the time, it is of no use when he approves it. He would rather cancel an audit than risk getting gigged by the quality audit police. Fitzgerald, open those "fresh eyes," the agency is going down the tubes and no amount of interviews saying DCAA is doing better will make DCAA better. The fact is that contractors are receiving fewer audits and as a result, taxpayers dollars are at greater risk of overpayments. Great legacy to leave on DCAA Fitzgerald!!

[Sue]

Social contractor - you are out of touch. In my region, we have not completed an ICAPS (internal control audit) since the summer 2009 when GAO issued the draft report concluding that all sampled ICPAS reports did not comply with the auditing standards. The only evaluation of contractor purchasing systems by DCAA in my region have been the audits to DCMA's purchasing system review. It has been a long time since DCMA disapproved a contractor purchasing system based on a DCAA ICAPS audit. POGO, thank you for the post. It is about time that DPAP gets exposed for weakening DCAA.

[Mack]

DCAA financial capability audits are in my opinion the most useless audits DCAA performed. If GE,GD or any other big DoD contractor went belly up (which they never would with the Gov't free cash flow) the Gov't would bail them out. For smaller DoD contractors why perform countless financial capabilty audits on a think tank business that writes reports or computer software? Where is the risk to the governement? If the owner dies he can't bill anymore and DoD will not get the software they don't need or the report no one will read. DCAA has many bigger issues than doing non value added financial capability audits. Incurred cost audits are where DCAA is missing the ball.

[Nick Schwellenbach]

Dearest Nick Sanders,

I'm flattered by the great deal of attention you've lavished on some of my recent work.

Kisses,
Nick Schwellenbach

[SoCal Contractor]

I'm impressed by the headline and sloganeering and reliance on biased sources, Nick.

I'm less impressed by the actual content of the article, which is both misinformed and wrong-headed.

First, you need to understand that DCAA's financial capability audits were not performed with any more diligence than any other audit it performed. That's why DCAA gave Enron a passing grade just months before its collapse in scandal.

Second, you obviously don't understand the difference between a DCAA review of internal controls related to a contractor purchasing system, and a DCMA functional specialist review of, you know, the actual purchasing files for compliance with applicable laws, regulations, and contract flow-down requirements.

Nice try, though.