Senator Pushes DCAA To Complete More Incurred Cost Audits

By Nick Schwellenbach

Senator Scott Brown (R-MA) prodded the Defense Contract Audit Agency (DCAA) to finish more incurred cost audits and decrease its backlog at the Senate Homeland Security and Government Affairs Subcommittee on Contract Oversight hearing on Tuesday. Incurred cost audits are used by a contracting officer before he or she closes out cost-reimbursement or other flexibly priced contracts to ensure the government is paying reasonable, allowable, and allocable costs.

“The current system is not working the way it was intended and this is evidenced by the backlog in audits that prevents contracts from being closed on in a timely manner,” Brown said. “This delay in closing out contracts increases cost to contractors and to the government.”

DCAA Director Patrick Fitzgerald said the backlog of incurred cost audits has quadrupled over the last ten years. Fitzgerald, however, said he did not know the actual amount of the backlog at the hearing—a bit shocking considering how significant the problem is.

As Brown pressed the issue, asking why the backlog has grown despite the addition of 500 new DCAA auditors, Chairwoman Claire McCaskill (D-MO) jumped in to Fitzgerald’s defense (find  the exchange further below, along with transcripts for the first and second panels).

But Brown has a point. Take a look at the numbers:

 

Sources: FY 2004, FY 2005, FY 2006, FY 2007, FY 2008, FY 2009, FY 2010.

If DCAA was conducting two to four times as many incurred cost audits in years prior to FY 2010, then the slowdown to only $34 billion in incurred cost audits in FY 2010 means the backlog is getting bigger at a faster clip. Why? Because DoD contracting hasn’t slowed down, whereas DCAA has put the brakes on doing audits. In FY 2010, the DoD alone awarded $104 billion in cost-reimbursement contracts, and $162 billion was awarded government-wide, according to USAspending.gov.

According to Shay Assad, a high-level DoD acquisition official, a huge backlog and untimely incurred cost audits are a bad thing because it gets harder to do the audit well. “An incurred cost review that is not completed in a reasonable period after the costs are incurred loses contemporaneous support—employees of the contractor and the Government leave, some records are lost or are placed in deep storage,” Assad said in written testimony in 2009 (see page 45 of the 101 of this House Armed Services Committee hearing transcript).

Despite its name, DCAA is the primary contract auditor for the entire government, as McCaskill’s subcommittee made clear in a fact sheet released Tuesday. At the Department of Energy (DOE), DOE Director of Management Ingrid Kolb said DCAA’s growing timeliness problems have led to problems with contract close-outs. The problems are so bad, she said, that DOE is turning to private firms to do the audits instead, even though private firms cost significantly more on an hourly basis than DCAA auditors.

“Over the past few years, as DCAA has experienced challenges with an increasing workload and fewer resources, which have caused some concern for the Department of Energy, our ability to obtain cost-incurred audits in a timely manner has diminished,” Kolb said. “In some instances at some procurement sites this has caused a backlog of closeouts for our contracts.”

Both Kolb and Fitzgerald said threshold increases are being considered to focus away auditing from contracts with smaller dollar figures. With a stroke of the pen, the backlog might be reduced by a significant percentage. The problem is this means more taxpayer dollars will go out the door faster with less scrutiny.  There will be even less assurance that taxpayers are not getting ripped off.

But to go back to Brown’s earlier points, why is the backlog getting worse as DCAA expands its workforce?

It’s a good question. Clearly DCAA has been reeling from two very critical Government Accountability Office reports and two Senate hearings that slammed the DCAA for emphasizing quantity over quality. But has the pendulum swung too far the other way? Any DCAA folks out there want to chime in? Please do.

Here’s the exchange between DCAA Director Patrick Fitzgerald and Senators Brown and McCaskill:

MR. FITZGERALD: Well, Senator Brown, to be very upfront with you, our cost-incurred audits, which are the audits that we do at the end of the contract and many times they're needed to do to close out the contract, that workload -- that backlog has quadrupled over the last 10 years. So, again, that's why we're using a --

SEN. BROWN: Quadrupled from what to what just in rough numbers so everyone knows? Approximately. You don't need an exact number. I mean, has it come from like one to, you know four?

MR. FITZGERALD: No, no. It's been -- it's a significant backlog that we have to work. I could give you the --

SEN. BROWN: The reason I -- the reason I'm kind of zeroing in on this particular area because, you know, we have a lot of Massachusetts companies that deal in this type of work and not only are they waiting for (cause of it ?) it's costing them real money -- real dollars. So in addition to the -- you know, the health care bill and the taxes they're paying and the regulations that they're dealing with and now they have audits. So it's like, what's next? You know, they need closure and they need certainty and they need closure, and is there a way -- is there something that we can provide you or is there -- is there -- is there something that we can -- that you need that we're not giving you to get these things done? They've been going on, some of them, for years.

MR. FITZGERALD: Senator, we have to get after that backlog. Hiring 500 new auditors over the -- over the last two years will be helpful in that and I would add -- not to mitigate that at all but we do work closely with the contracting officers to make sure that their billing rates are appropriate so that there's no overages or shortages so that the contractors get the money that they need to be paid as we monitor the billing throughout the contract before we do a final cost- incurred audit.

SEN. BROWN: You know --

MR. FITZGERALD: We work closely to try to make sure that's a minimum amount.

SEN. BROWN: Sure. You know, it's interesting. You're saying you're hiring 500 new auditors. Can you believe it, folks? We're doing 500 new auditors in addition to the thousands of other new auditors in various agencies, and I mean, at what point do we actually just like hire new workers like new construction folks, new -- you know, just a regular, you know, private sector employee? The fact that we're hiring 500 new auditors just smacks to me as saying wow, something's broken somewhere. We -- there's a disconnect somewhere. So we're hiring 500 new auditors to deal with a backlog that's been quadripled -- quadrupled, sorry -- after, you know, a period of time. Some of these audits have gone on for years. So I guess at what point do we -- do we say my gosh, there's -- something's broken. We're -- are we auditing the proper folks that need to be audited -- the entities that need to be audited? Where's the breakdown? It's just -- it's not kind of working for me really.

MR. FITZGERALD: Senator, just to try to put it a little in perspective, you know, the DOD procurement budget just exploded from 2000 to 2010. DCAA's workload was flat throughout that period. In the early 90s, the Defense Contract Audit Agency was about 7,000 folks. So steadily went down and then stayed flat. We're working to get -- to both adjust to workload requirements and build the workforce capacity to get a good balance there so that we can effectively provide a quality product which is, in my opinion, a timely product -- is a quality product.

SEN. BROWN: Any --

SEN. : Is there a next round?

SEN. MCCASKILL: Well, and I wanted to point out that Senator Brown was not yet a senator when all hell broke loose at DCAA. To say that Mr. Fitzgerald had a challenge is an understatement. Then it was determined that DCAA was not meeting Yellow Book standards for government auditing. There was some real management challenges. Not that there aren't -- and I want to say this on the record -- thousands of wonderful auditors at DCAA. I don't mean to disparage the wonderful people that work at DCAA because literally we wouldn't have known about the problems if somebody at DCAA hadn't come forward. But they had some real management issues and Mr. Fitzgerald was drafted to take over an agency which had -- traditionally only had people move up in the organization to head the organization. I think it may have been -- I don't know, was it the first time, Mr. Fitzgerald, that somebody came from outside the organization to head it?

MR. FITZGERALD: Yes. Yes, Senator.

SEN. MCCASKILL: Yeah. So they never had anybody come from outside in a management capacity. So I don't mean to -- I'm usually not the one making -- and I don't mean to sound like I'm making excuses but I know the challenges that he faced and while I don't think they're there yet they have made significant progress in, I think, turning around the management capacity at DCAA since his arrival. So for what's that worth --

SEN. BROWN: May I just make a note on that?

SEN. MCCASKILL: Sure.

SEN. BROWN: And listen, I don't disagree and I'm aware. I've obviously done my homework and aware of your challenges. I just want to make sure that we're auditing the right entities and that we're not wasting our money and that the audits that are -- you know, that we're participating in, you know, it affects real people, real jobs, real companies, not only in my state but in yours and, you know, that's why I asked is there something that we can do to --

SEN. MCCASKILL: Right.

Nick Schwellenbach is POGO’s Director of Investigations.

Related: 

• Transcript from the first panel
• Transcript from the second panel
• 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

Comments

[Nino R. Pereira]

Could I add another perspective? To me it makes little sense to do comprehensive audits on small research contracts such as the ones I work under. Those are almost all labor. When the contracts are fixed price it's easy: almost no auditing is needed. However, the same type of work can also be done under a T&M or CPFF contract. Then, accounting becomes substantially more complicated, and is subjected to the same type of detailed audits that apply to much larger contracts.

In my view, these detailed audits waste lots of time.
In preparation I have to fill out forms that consist of multiple spreadsheets that may be appropriate for larger companies, but not to a small one: in my case a single spreadsheet should suffice. In addition, it is easy to check that the hourly rate(s) charged are appropriate since they are basically identical to the rates charged by Government employees for the same type of work. Likewise, smaller Companies that have a single indirect charge can be told which percentages would be accepted as being reasonable, without the Contractor having to guess what each little cost that is allowable may have as an individual limit.

With such explicit guidance from the DCAA, I would expect Companies
to do their utmost to stay within the guidelines because this minimizes the amount of unproductive administration they have to do to stay in business.

Such a system works well for Government travel. Here, the Government establishes allowable rates for hotel, and for per diem and incidentals. Travelers tend to stay at or below these limits: and, when they go over they will have to show proof that their higher costs are justified and reasonable before they can be reimbursed. Few people are so audited.

If the DCAA start its audits this way, from the bottom up with the smaller contracts first, I'd be surprised if the backlog would last long.

[500 Auditors]

I'm re-reading the discussion between Senator Brown and Director Fitzgerald and seeing the disconnect that doesn't seem to be addressed. Yes, 500 new auditors may have been hired, but our type of auditing is unique, and these new auditors will not be beneficial or proficient for another 2 years. That is why hiring auditors, supervisors and managers from outside the agency is not the solution. You may have an advanced degree or a CPA, but it will take sometime to learn Government contract auditing. Ask the old dog auditors; what we do is unique. And when large amounts of new auditors are hired, it is a dual decline in productivity, because not only are there new auditors that are learning their craft and are not productive, but the skilled GS-12s are training them, and this takes time from their audits.

[Hands Tied]

The Auditors are just as frustrated as the contractors and ACOs with the backlog of unaudited incurred cost submissions. We want to be able to perform them because they provide us insight into the contractor's systems, identify risk areas, and assist in testing accounts; however, our agency is currently not funded with the resources to perform these audits. Before the beginning of each GFY, each DCAA office submits a requirements plan to the regions and HQs with details of all the work we need to perform (including the incurred cost backlog and current incurred cost), and based on the funding DCAA receives, HQs assigns resources to high-risk audits. In our current environment, high-risk audits are high-dollar proposals, most specifically, proposals supporting the war effort. We are not allowed to touch the incurred cost submissions. Unfortunately, contractors are unable to collect their full profit on contracts; the Government is at risk because unallowable, unallocable, or unreasonable costs have not been identified and recovered, and the auditors need to spend additional time testing in proposal audits, because we cannot rely on the unaudited incurred cost submissions.

If someone is really concerned about this, they should look at our funding and staffing level. We've been through this before in the '90s. All of a sudden the incurred cost backlog took center stage and special teams were created to tackle the backlog. Afterwards, the agency had strict goals to audit incurred cost submissions within a certain time. I'm sure the pendulum will sway again and incurred costs will be a priority again. Let's hope the auditors who have experience auditing them and the contractor personnel who are familiar with the submissions are still around.

[Frustrated]

There are some very good points being made by other contributors; however, there isn't a simple fix to the problems that the Agency has and will continue to have under the current leadership. Management has been given orders to program incurred cost audits, that is set the assignments up in our information system, but we are not to do them. All proposals over $100 million are now considered so high risk that everything from the risk assessment until the report is issued must go through the supervisory auditor to headquarters and make stops at every layer of management in between. Many managers are so afraid of getting into trouble if there is one single typo in an audit report that they keep making edits until the report is useless...we call this sitting on reports. What we need is for the people who sit at headquarters making policy to get off their butts and get out here in the field and see how impossible it is to audit in our current environment. The people making the rules and regs for this Agency haven't been in the field for 15 years or more; they don't know what is really going on and they don't want to hear it. Perhaps the congressional committee should talk to some of the auditors and supervisors to get the facts.

[Karen]

The backlog of incurred cost audits at DCAA is not going away for years. In my office, more submissions are being added to the backlog than are being completed. It was a shame that Fitzgerald did not have the data on the backlog at the hearing. It could have been a powerful statement for why DCAA needs to be properly funded by DoD. It is also a shame because as the Director of DCAA, he should always have at least a general idea of the backlog even if to say that at the current pace and funding, it will take XX years to work a backlog of XX years. It shows that Fitzgerald is not concerned about DCAA completing audits. Neither is McCaskill or she would have torn into Fitzgerald. The further behind DCAA becomes, the greater the risk for overpayments. With the current regulations (FAR) permitting contractors to bill 100% of cost type contracts when completed, contractors hold the money until the audits are complete and the contracts are closed. Only then do contractors repay the money. In the end, the risk has shifted to the government for the overpayments and the contractors may hold money for overpayments for years until DCAA completes the audits. The further behind, the more difficult the audits become and in the end, the risk of overpayments increases each year. Fitzgerald does not get this and it shows when he could not give even general numbers on the backlog.

[Mike]

During the hearing, Senator McCaskill made a point to state that Fitzgerald came from outside DCAA and made it seem like a great accomplishment for DCAA. I can attest that there is a reason that prior Directors came-up through the ranks. To be DCAA Director, you need to have a firm understanding of contracting and the role of contract auditing. Fitzgerald only knows performance audits of Army Audit and it shows in his direction of the agency. Fitzgerald is the issue and the reason that DCAA cancelled more assignments than it completed in 2010. Cancelled assignments are a waste of money, money that DCAA needs to get back to the days of auditing proposals in 30 days and having significant net savings. Yes it was production auditing at times Senator McCaskill, but contracting is in a production environment. This country cannot afford to have each DCAA auditor perform one or two audits a year such as the GAO or IG. DCAA needs to be able to get in quickly and get out quickly to save real bucks. But it will not happen under Fitzgerald, who only wants perfect working papers and whoes only goal is a clean peer review. Fitzgerald needs to be replaced and we need a real auditor with real leadership abilities to run the agency. Yet again McCaskill you are wrong. You were wrong about our prior Director and you are wrong about our current Director. When will you get it?

[DCAA Auditor]

People need to realize that it's not easy being an auditor in the field these days. I'm tired of being harrassed by our contractors every single day because we aren't doing their audits. While I understand their frustration, it's beyond our control at our level, yet we are the ones facing the day to day outbursts and frustrations being expressed by the contractors. Our upper management doesn't understand what we are going through every single day and frankly, nobody deserves to be treated unprofessionally by the contractors. Contractor harassment of DCAA auditors needs to stop.

[SoCal Contractor]

I guarantee that this is a huge concern for the contractors. The current "risk-based" approach is leading DCAA to perform fewer audits, on the wrong things, while deferring problem areas.

The snowball of unaudited incurred cost submissions is going to bring the defense acquisition system to a grinding halt in a couple of years....

[What I See]

DCAA will never get to their incurred cost claim backlog as long as we are performing audits to the unrealistic level we are now. DCAA has their little people (auditors) perform risk assessments on each assignmet as though it were a matter of like or death, yet our own senior leadership can't perform a risk assessment of the agency they run and where resources and time should be spent. As a minimum Mr. Fitzgerald needs new leadership in the Policy and Quality divisions of this agency.

Based on the new level of detail we audit to, Incurred Cost audits will take massive levels of manpower to do. When we finally get to doing these audits, they will be ten or more years old.