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It Used to be Called the “Perm File”

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Eventually one learns that the Defense Contract Audit Agency (DCAA)—the auditors with whom most government contractors interact—maintains a file on each contractor, in which Internal Control Questionnaires, CASB Disclosure Statements, audit reports (especially Mandatory Annual Audit Reports), and the like are stored so that they can be reviewed during risk reviews and other activities. It’s like a contractor’s Permanent Record. In fact, it’s called the “Perm File.”

The DCAA Contract Audit Manual states (at 3-204.3)—

When developing the audit scope, review the permanent file (including assessments of internal control system and control risk summarized on the internal control assessment planning summary sheets or internal control questionnaires, and audit lead sheets) and prior audit work packages to determine what data are available, what audit steps were done in the past, and the findings from those steps. This may identify areas where additional audit work is advisable (i.e., areas of high risk) or where audit scope can be reduced (i.e., areas of low risk).

After the revelation that DCAA maintains Perm Files, one soon learns that the Perm File isn’t as permanent, or as comprehensive, as anybody would reasonably think it would be. As a contractor, when DCAA asks for something you already provided a year or two ago, you’d like to say “go pull it from the Perm File.” But then the auditor looks at you funny and shakes their head. It’s not there. Chances are, nobody updated the Perm File when they should have. Or maybe it was updated but the auditor can’t find what they’re looking for. Or maybe they can’t actually find the Perm File. Auditors use judgment to determine what goes into the Perm File; maybe one auditor’s judgment differed from another’s. You don’t know and the auditor probably doesn’t know. The reason doesn’t matter; all you know is that the Perm File isn’t really what you thought it was and it isn’t what reasonable people would reasonably expect it to be.

To be clear, not everything is supposed to go into the Perm Files. The audit working papers (stored electronically via CaseWare) normally do not; they eventually end up at the National Archives and Records Administration (NARA). Which is about as deep as we are going to go into that. A Google search led us to DCAAM 5015.1 (“Files Maintenance and Disposition Manual”) but the document that came up was dated 2001 and signed by Bill Reed, so we’re not going to delve into it. Try to contain your disappointment.

What we do want to talk about is a new MRD, dated September 29, 2020, entitled, “Guidance on the Contractor Information Survey (CIS).” What is the CIS? According to the MRD, the CIS is “a tool for obtaining information about contractors to assist the audit team in identifying potential areas where future audit effort may be warranted.” In addition, the CIS “will assist the audit team in understanding the contractor’s organizational structure and business, the overall design of the contractor’s accounting system, and basic information related to internal control.”

Sounds a lot like a Perm File, doesn’t it?

However, unlike a Perm File, the CIS is not to be used “as an integral part of the risk assessment process.” In the MRD, the word “not” is bolded.

Which makes us wonder. If the CIS is not a part of the risk assessment process (unlike a review of the Perm Files per DCAAM 3-204.3, as quoted above), then what exactly is it to be used for? What value does it add? Because if it doesn’t add any value, then completing it is just wasted time.

The good news is that it’s DCAA’s time to waste. It seems clear from the MRD that the auditors complete the CIS, and not contractor personnel. But still … we’ve all been there, right? We’ve all helped our auditors complete their required documentation because doing so helps ensure it is accurate, and because doing so get’s the audit completed that much faster. We have to wonder how much of the CIS will really be completed by the auditors, and how much will end-up getting handed-off to a contractor.

Another piece of good news is that the CIS is aimed primarily “at smaller contractor locations where they have had little or no audit effort in three to five years.” Remember, under the new DCAA risk-based incurred cost audit selection process (which really isn’t new at this point), some contractors may go years with an audit of final rates or incurred costs. (We think this is a bug, not a feature; but nobody else seems to care much about it.) Thus, the apparently role of the CIS is to document information about those contractors in between the very infrequent DCAA audits.

The CIS (Version 1.0) includes three parts, as follows:

  • Part A assists in understanding the contractor’s organizational structure, size, complexity, and business base.

  • Part B assists in understanding the design of the contractor’s accounting system and basic information related to internal control.

  • Part C provides for the auditor’s identification of potential recommended activities for future planning.

If you look at the questions the auditors are supposed to answer, you get the feeling that they will be reaching out to contractors. For example, how are the auditors supposed to answer the following question? “Have there been any changes in the last two years, or are there plans to implement future changes, in the methods used to account for or allocate costs?” Or what about “Use the embedded Excel file to document the contract/subcontract information for contracts awarded in the previous FY.”

We are thinking that the smaller contractors who have escaped in-depth DCAA audits, because they are “low-risk contractors,” are going to be getting some phone calls and/or emails in the near future….

 

DOD Implements New Approach to Resolving Defective Pricing Issues

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In the past few years, DCAA implemented a new approach to performing defective pricing audits. Defective pricing audits are known by various names, including “post-award audits,” “TINA audits,” “Truth-in-Negotiations audits,” and “Truthful-Cost-or Pricing Data Act audits.” For this article, we’re going to call them “defective pricing audits.” Your mileage may vary. Whatever you call them, DCAA revised its approach to Activity Code 4200 audits a while ago.

You probably wouldn’t know that unless you’ve experienced a recent defective pricing audit. But if you have, you know that the current approach (as memorialized in the audit program dated July 2020) is to first perform a “preliminary risk assessment” in order to determine “the overall risk that the contract price was materially increased due to defective certified cost or pricing data.” If the auditor believes that the risk is minimal, the file is documented and the contractor is told that a “no go” decision was reached. That ends the audit right there. But if the auditor believes that the risk of defective pricing is high, then a “go” decision is made and the auditor initiates a detailed examination (i.e., audit) and the entrance conference is scheduled.

While DCAA was modifying its audit approach, DCMA was still approaching adjudication and resolution of defective pricing audit findings in much the same way it had been doing for decades. The audit report went to the cognizant contracting officer, it was entered into the Contract Audit Follow-Up (CAFU) database, and the clock started ticking. When the contracting officer could find the time, the findings were reviewed and the resolution process was initiated, perhaps via a Contracting Officer Final Determination and demand for payment. Or perhaps there would be additional discussions with the contractor—especially if there was a strong rebuttal accompanying the audit report. The path toward resolution varied; however, it was rarely quick and rarely easy.

The length of the resolution process generally meant that the audit findings lingered in the CAFU database for longer than most anybody would like. In some instances, they lingered so long that the CDA statute of limitations kicked-in; and then the accuracy of the findings didn’t matter because the government had lost its opportunity to assert a valid claim. Unresolved CAFU audit findings were also embarrassing to various DOD stakeholders such as DCMA.

For example, in the latest DOD Inspector General Semi-Annual Report to Congress (as of March 30, 2020), Appendix F (“Status of Action on Post-Award Contract Audits) indicated that, at that point in time, there were 2,036 open (unresolved) audit reports worth potentially $12.75 billion. (We note that not all of those open reports were unresolved because of contracting officer inaction; nearly 300 were either under criminal investigation or else in litigation. Still, there were roughly 1,400 audit reports that had not been dispositioned and were “overage” at that time.)

Thus, it behooved DCMA to take a fresh look at its CAFU resolution process, particularly with respect to those DCAA audit reports that contained allegations of defective pricing. On October 5, 2020, that’s what they did, via Memorandum from the Acting Principal Director, Defense Pricing and Contracting. The Memo gives contracting officers the authority to request assistance, and to delegate the responsibility for, dispositioning and resolving, defective pricing audits to a new DCMA Defective Pricing Pilot Team. The Memo also provides authority for DCMA COs on that team to perform the delegated functions they receive from the cognizant contracting officers.

In the words of the Memo—”a new DCMA Defective Pricing Pilot Team will provide support to Government Procuring Contracting Officers (PCOs) in resolving and dispositioning Defense Contract Audit Agency (DCAA) Truth in Negotiations audits.”

The Memo continued—

Under each accepted delegation, DCMA will take all actions to resolve and disposition the DCAA findings of defective pricing in the Contract Audit Follow Up (CAFU) system; will issue contracting officer final decisions as needed, if no agreement is reached; and will execute any contract modifications necessary to implement final price adjustments, in coordination with the PCO. DCMA will litigate any appeal or case that results from delegated DCMA defective pricing actions.

What does this mean for contractors? It’s difficult to tell. Being optimistic, it might mean that a new center of independent and objective subject matter experts has been created to quickly evaluate and resolve allegations of defective pricing. That would be nice, wouldn’t it? But it might also mean that a bunch of strangers with no first-hand knowledge of the proposal or negotiations will be making decisions based on their interpretations of various documents—documents that will almost certainly vary in quality. There is already some industry chatter that says such a new organization would need to justify its existence through large dollar findings, which means that independence and objectivity may be compromised.

We don’t know how this new DCMA team will operate. We have had zero experience with them to date. (In fact, we’d be interested to know if the team has actually been formed at this point in time.) We will have to see what the future holds.

But in the meantime, contractors undergoing DCAA defective pricing audits should be aware of the new DOD audit resolution process, just in case the final audit report contains adverse findings.

Last Updated on Tuesday, 13 October 2020 15:53
 

DFARS Regulatory Revisions

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Recently I took an opportunity to criticize the do-very-little CAS Board for doing so very little to implement Congressional direction (issued via public law) to do something. The CAS Board, of course, is not the only regulatory rule-making body to suffer from inertia, though it is a very prominent one.

In the September, 2020, issue of The Nash & Cibinic Report, George Washington School of Law Professor Emeritus, and the man credited for founding the academic discipline of government contracts law (along with the late John Cibinic), felt compelled to write about the current rule-making environment in comparison to the one under the pre-FAR/DFARS Armed Services Procurement Regulation (ASPR) system. Professor Nash wrote—

The members of the ASPR Committee were senior officials in their services—reflecting the idea that procurement regulations deserved the attention of highly competent and experienced people. Devoting significant amounts of such people’s time to the process yielded a far better regulation than the Federal Acquisition Regulation.

It is sad to compare the current system to that one. Today regulations wend their way through the process at a snail’s pace with many of them having to undergo significant alterations after the comments on a proposed regulation are received. Some linger in the system for years before they are abandoned (like the rewrite to the organizational conflict of interest regulation in FAR Subpart 9.5). In this part of the Government procurement process we have regressed rather than improved.

So look, it’s not just Apogee Consulting, Inc. It’s pretty much everybody, from consultants to contracting officers to the most esteemed legal minds. We are all saying that the system is broken, and one of the main areas in which it’s broken is in the regulatory rule-making process.

Nonetheless, from time to time some rule-making does escape from the clutches of the bureaucrats and gets issued. Sometimes we get CASB Staff Discussion Papers; other times we get FAR or DFARS proposed rules. Infrequently, we get final rules. (Often months if not years after the underlying statutes were revised.)

Recently, the Defense Federal Regulation Supplement (DFARS) were revised by issuance of seven final rules and one proposed rule. Among the seven final rules, two of them eliminated something. The remaining five rules implemented something.

We’re not going to discuss all five. But here are a couple of important ones for your information.

  1. DFARS Case 2019-D041 (Assessing Contractor Implementation of Cybersecurity Requirements) was issued as an interim rule. This means that the rule goes into effect without the benefit of public comments; however, the public may submit comments and the interim rule may be altered as a result. (See Professor Nash’s thoughts on that aspect of the rule-making process in his quote above.) The interim rule implements the new Cyber-Security Maturity Model Certification (CMMC) and assessment approach. As most defense contractors know by now, DOD is going to be looking for CMMC assessments and certifications. This is not new news; however, the interesting aspect is that the clauses are being implemented in solicitations and contracts before the CMMC Accreditation Board knows how it is going to assess contractors.

  2. DFARS Case 2019-D036 (Inflation Adjustment of Acquisition-Related Thresholds) was implemented as a final rule. As the title indicates, certain thresholds were increased to account for inflation. Follow the link if you want to know which ones were increased.

  3. DFARS Case 2019-D029 (Treatment of Certain Items as Commercial Items) was issued as a final rule. The final rule implements several public law revisions from the 2017 National Defense Authorization Act (NDAA). The 2017 NDAA was signed into law in December, 2016. Yes, that was four years ago. (Talk about a “snail’s pace”….) Anyway, this one is important because it (a) permits certain items valued at less than $10,000 to be treated as commercial items if purchased to inventory destined for multiple contracts, and (b) permits both goods and services acquired from non-traditional defense contractors (as that term is defined in DFARS) to be treated as commercial items. There is also something in the background that says “provide that a contract for an item using FAR part 12 procedures shall serve as a prior commercial item determination, unless the appropriate official determines in writing that the use of such procedures was improper or that it is no longer appropriate to acquire the item using commercial item acquisition procedures” but we could not see where the DFARS was revised to implement that Congressional direction, so we’re not claiming that’s what the DFARS now says.

As does Professor Nash, we lament the current Federal acquisition rule-making system; however, when some change does slip out, we try to bring it to our readers’ attention. So here you go.

 

More Procurement Fraud

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After you’ve been in this business for a while, you learn that September is full of government spending, as each agency rushes to spend its precious budgetary dollars before the clock strikes midnight on September 30th and the budget vanishes, leaving perhaps only a single glass slipper behind. Each day in September, the DOD list of new contract awards grows longer, until early October, when it returns to the “normal” of new contract actions (except for those actions that didn’t make the cut-off for various bureaucratic reasons). It’s a normal, annual, phenomenon. You can count on it to happen every September.

This year we’ve noticed another interesting September phenomenon. It seems as if the number of procurement-related fraud press releases from the Department of Justice (and other enforcement agencies) has also spiked.

We could list each one that comes out, but that would be boring. Boring for you and boring for us. We only talk about the ones that have some aspect that catches our attention. But believe us, we could fill up many articles with hum-drum stories. For example, here are some September press release titles from DOJ and/or Department Labor:

  • Pharmacist Pleads Guilty to Wire Fraud and Money Laundering

  • Florida Contractor Pays $124,075 in Back Wages, Benefits After U.S. Department of Labor Finds Violations on Federal Construction Contract

  • Louisiana Company Pleads Guilty to Conspiracy to Defraud the Government and Violate the Procurement Integrity Act

  • Asphalt Contractor To Pay $4.25 Million To Settle Claims That It Misled The Government As To The Materials Used To Pave Road

  • Quantadyn Corporation And Owner Settle False Claims Act Allegations of Bribery To Obtain Government Contracts For Simulators

  • Former Business Executive Sentenced to Prison for $4 Million Bribery Scheme Involving DoD Contracts for Wounded Military Veterans

  • Two Individuals Charged with Bribery Related to Iraq Contracts

  • U.S. Department of Labor and Microsoft Corp. Enter Agreement to Resolve Alleged Hiring Discrimination Affecting 1,229 Applicants in Four States

  • U.S. Department of Labor Reaches Agreement with Texas Electronics Company to Resolve Alleged Hiring Discrimination

  • Operations Manager Indicted in Scheme to Sell Counterfeit Clothing to the U.S. Military

(That final headline was dated October 2, so maybe not all in September. But you see our point, right?)

We could probably write an article on just about any of the headlines in the above list. But instead, we are going to focus on another story that we didn’t list. It has the headline: “Wisconsin-Based Nonprofit To Pay $1.9 Million To Settle Allegations Of False Claims And Kickbacks On Federal Contracts For Blind Workers,” and you can find it here.

Now, it’s been a while, but we used to provide support to AbilityOne contractors. In fact, the very first client of Apogee Consulting, Inc. was an AbilityOne contractor. For a couple of years, we even traveled to Washington, D.C. in order to teach a class on audit support to AbilityOne contractors. It would be fair to say that, without the AbilityOne program, neither the consulting firm Apogee Consulting, Inc., nor this blog would exist. Thus, when we saw the headline, it piqued our interest and we wanted to know more.

What we learned is that “Industries for the Blind and Visually Impaired Inc. (IBI) has agreed to pay the United States $1,938,684.09 to resolve allegations that IBI violated the False Claims Act and the Anti-Kickback Act in connection with certain federal contracts set aside to employ blind workers.” Let’s be clear right up front: $1.9 million is a huge settlement payment for a not-for-profit entity to make.

IBI received contracts set-aside for AbilityOne contractors. Those contracts are not competed and prices are determined by a Washington, D.C.-based review board. This is not special treatment just for IBI; in fact, that is how the AbilityOne Program works. In return for receipt of specially designated set-aside contracts, AbilityOne contractors agree to give jobs to individuals with severe disabilities. (In this case, IBI dealt with people who were legally blind or had other visual impairments.) The purpose of the AbilityOne program is to give meaningful work to those individuals who would otherwise not be employable or would have significant challenges to finding work. It’s a great thing!

But in this case, apparently IBI made some mistakes.

According to the DOJ announcement, for nine years (between 2009 and 2018) IBI represented that its workforce would be 3:1 visually impaired to non-visually impaired personnel. It was awarded contracts on that basis. However, it was alleged that “IBI improperly subcontracted a set-aside contract for screen-printed clothing to an entity that did not generally use blind labor.” Not only that, but it was alleged that “furniture designers and sales representatives working for IBI took impermissible payments and gifts from manufacturers on certain contracts.”

If we understand the situation correctly, the original qui tam relator (whistleblower) alleged that IBI did not maintain the required 3:1 personnel ratio; but when the government investigated the allegations, the FBI found the “impermissible payments and gifts,” which were not part of the original allegations. (Let’s mix a metaphor, just for fun.) It was at that point that the situation went pear-shaped and snowballed into a very expensive legal settlement.

In fairness, it is tough to maintain a 3:1 ratio when multiple contracts are being performed. We get that! But we are betting IBI wishes it had deployed better internal controls designed to detect or prevent wrong-doing by its furniture designers and sales representatives.

 

New CASB Staff Discussion Paper Asks Questions for Future Actions

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In a shocking display of activity, the CAS Board recently published a new Staff Discussion Paper (SDP) addressing possible revisions to Standards 404 and 411. As has been the recent trend, CASB published the news on the Federal Register but forgot to actually, you know, publish the SDP. But a link to the SDP was included! The link took one to the OMB site on whitehouse.gov, where it turned out the SDP hadn’t actually been uploaded yet.

Yes, you read that correctly. The Federal Register notice contained a link that took you nowhere.

Nice.

But a couple of days later, the SDP appeared. Yay!

Now you might think a complaint about a couple of days of missing SDP is just nitpickery. But remember, there is only a 60-day comment period available. Even a loss of two or three days can be enough to impact the public’s ability to comment. Therefore, in our view it’s not nitpickery; it’s a legitimate complaint that the CASB’s decision to publish the SDP outside of the Federal Register is a decision to undermine the public’s right to provide comment. This is especially important when the entire purpose of the SDP is to solicit public input.

Indeed, after literally six months of no apparent CASB activity, the SDP promised by the previous (March 13, 2020) SDP finally showed up. Just in time for the CASB to claim credit for doing something in GFY 2020.

But the new SDP actually doesn’t do anything. It just asks questions about Cost Accounting Standards 404 and 411. The questions are seemingly intended to provide input to the CAS Board about whether GAAP is sufficient (standing alone) to protect the government’s contractor cost accounting interests, or whether the rigors of CAS are necessary. Remember, Congress already directed CASB to conform GAAP with CAS—it’s a public law requirement—but apparently the CASB wants to be really sure that Congress actually meant what it put into the law.

In fairness, the SDP is a required step in the CASB rule-making process. You know, the one required by yet another public law. Apparently, CASB is very focused on complying with that particular public law, even as it delays complying with the more current one.

This second SDP asks questions. If you are a CAS-covered contractor, or think you may become one someday, you should read the questions and respond. Your input is being solicited.

Be advised, however, that if recent history is any predictor of future history, it will be a long time before CASB actually does anything with your input. You need to know that going in. CASB rule-making is moving at the speed of molasses. Molasses being poured at the North Pole.

One reason the Board may be moving so slowly is that the industry representative has been missing in action since Ms. Schmidgall (Boeing) departed after expiration of her term. From what we’ve been able to gather, there has been absolutely no forward progress made in choosing her replacement. Again, this seems to be the new normal for the CAS Board. Indeed, many observers credit Ms. Schmidgall for most of the recent CASB activity; it’s of little surprise to see CASB stalled after her departure.

Anyway, CAS 404 and 411 Staff Discussion Paper. Asking questions. Which may lead to another SDP or perhaps to an Advance Notice of Rule-Making (ANPRM). Or not.

Depends on whether CASB feels like doing anything next year.

Last Updated on Monday, 05 October 2020 16:52
 

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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.