We recently told you about brand-new audit guidance (MRD 10-PSP-023(R)) that encouraged DCAA auditors to support DCMA contracting officer negotiations with contractors—but placed limits on that interaction. We asserted that some of those limits would leave “the contracting officer and buying commands stuck in limbo” for perhaps 90 days, “awaiting a supplemental report in order to have DCAA officially alter its original opinion based on receipt of new facts” provided by the contractors during negotiations. We liked the idea that DCAA HQ was encouraging its auditors to get back in the role of providing financial advisory services to DCMA, but we didn’t much care for the stringent limits and narrow-minded approach the audit agency placed on its auditors.

Thus, we were very interested in receiving an official DCAA PowerPoint presentation used to train auditors on the “’Rules of Engagement’ for Auditor Communications.” The presentation we received included the speaker’s notes in addition to the slides themselves. The presentation was undated; however, we believe it to be contemporaneous with the September 9, 2010 MRD discussed in the link above. If you are a site member, you can find the entire presentation here. For the rest of you, here’s a brief overview.

The presentation did more than encourage auditors to communicate with both requestors of audits and those being audited—it actually stated that such communications were required. The notes stated—

While GAGAS specifically addresses communication at the planning and reporting stages, communicating with the contractor and requestor throughout all phases of an audit is necessary to comply with other GAGAS requirements. For example, GAGAS 6.04b requires the auditor to obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report. To obtain sufficient evidence, it is essential for auditors to communicate with the contractor to ensure that conclusions are based on a full understanding of all relevant facts. In addition, discussions with the requestor may disclose information relevant to the audit. Such discussions are a normal part of an audit and can be conducted without impairing an auditor’s independence.

As we’ve previously noted, the U.S. Air Force recently implemented a new process designed to facilitate the negotiation and final price agreement for Undefinitized Contract Actions (UCAs). We also noted that the DCAA issued audit guidance regarding the auditors’ roles in that process, which included attending the mandatory “proposal walk-through” for Government personnel. Tellingly, the presentation treated the Air Force’s focused UCA definitization process as the norm for all contractor proposals, including proposals to establish final indirect cost rates. The presentation stated—

At the commencement of the audit the contractor should provide Government representatives (e.g., DCAA, ACO, and PCO) with a ‘walk-through’ of its assertion (e.g., forward pricing proposal, incurred cost submission). The walk-through should generally take place after the auditor performs an initial adequacy review of the contractor’s assertion and may occur either before or during the entrance conference. At these meetings, the contractor should fully explain its assertion and allow the audit team to ask questions to fully understand the contractor’s assertion. This process will facilitate the early identification of any inadequacies with the contractor’s assertion that needs to be addressed.

Yikes! How did an Air Force process designed to expedite proposal negotiations with the contracting officer, in order to meet specific statutory deadlines, morph into this? Apparently, the walk-through is now hosted by DCAA “either before or during the entrance conference,” and not the contracting officer. It is now to be expected for all proposals, not just those for large sole-source procurements and for definitization of UCAs. And it is now to be used by DCAA to identify inadequacies, instead of to facilitate negotiations. How did we get from there to here? (Note: that was a rhetorical question.)

Much criticism has been leveled at DCAA—by us and many others—regarding the lack of communication with those being audited. In fact, we recently wrote—

[Audit] reports that have been issued, generally have been riddled with factual errors and other quality shortcomings, because (a) auditors are afraid to openly communicate with those they are auditing (as well as those agency customers requesting the audits), and (b) once the auditors reach a preliminary finding, everybody (from the auditor to the supervisory auditor to the branch manager to the regional audit manager) is afraid to change it—even when confronted by facts that would lead a reasonable person to a different conclusion.

So we were pleased to see the presentation emphasize that it’s perfectly okay for auditors to actually communicate with contractors during an audit. Moreover, preliminary findings should be discussed with the contractor so as to see if there are any facts that would tend to lead a reasonable person to a different conclusion. The presentation stated—

Discuss matters as needed for a full understanding of contractor’s basis for each item in submission or aspect of area being audited. Discuss preliminary audit findings (potential system deficiencies, FAR/CAS noncompliances, etc.) so that conclusions are based on a complete understanding of all pertinent facts. Through-out the audit, the auditor should discuss matters with the contractor as needed to obtain a full understanding of the contractor’s basis for each item in the submission, or each aspect of the area subject to audit. The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential FAR/CAS noncompliances, etc.) with the contractor to ensure conclusions are based on a complete understanding of all pertinent facts. These types of discussions do not impair auditor independence and are generally necessary to obtain sufficient evidence to support audit conclusions.

We were also pleased to see that an exit conference should be held promptly “after completion of field work.” But despite that very helpful language, the presentation also contradicted that statement, saying that exit conferences were to be held “upon completion of field work and after supervisory review and FAO manager approval (or all management reviews if RAM/DAM review is required).” So which is it? We’ll post the exact language below and let you decide—

Upon completion of the field work, the auditor should hold the exit conference to discuss the audit results and obtain the contractor’s views concerning the findings, conclusions, and recommendations for inclusion in the audit report as required by GAGAS. Except for audits requiring RAM/DAM review, the exit conference may be held after the supervisor completes his/her review of the working paper and draft report but before the FAO manager completes the final review if the FAO manager believes it is appropriate based on his/her involvement with the audit, and/or the complexity of the audit and the experience of the audit team. In such cases, the auditor should inform the contractor that the results are subject to management review. For audits requiring RAM/DAM review, all applicable management reviews must be completed prior to holding the exit conference. The auditor should invite the requestor/contracting officer to the exit conference, especially if there are major or complex audit issues.

We want to be excited about this, we really do. But we think it’s more likely that the requirement for supervisory review of the draft report, and potential FAO manager review of the working papers and draft report, will mean that the contractor won’t hear about the auditor’s findings/conclusions until it is too late to affect them with explanations and facts. Yes, it’s true that “preliminary audit findings” are to be discussed with the contractor, but that really doesn’t happen very often. It’s great when it does happen, but the exit conference is also an opportunity to hear and rebut preliminary findings—or at least it used to be. Not so much anymore, apparently.

Moreover, the presentation included guidance that—

The information provided to the contractor at or in anticipation of the exit conference (i.e., draft report/results or, in the case of forecasted costs subject to negotiations, factual information) should be provided concurrently to the requestor/contracting officer.

So by the time the contractor learns about the auditor’s official findings/conclusions—but has not yet submitted a written response to those findings/conclusions—so has the customer. The customer gets an unrebutted audit report, one that lacks the contractor’s official response. That’s nice. (Note: that was sarcasm.)

To sum up, we expect to use this presentation in our interactions with DCAA, to try to force more open communication, especially to try to learn about preliminary audit issues before they get into draft audit reports. But we know from experience that the strategy will not always work. And now we know that if we don’t learn about those issues before the exit conference, then it will be too late—because the DCMA contracting officer will be receiving a one-sided report at about the same time we’re hearing the auditor’s findings for the first time.

DCAA has published some significant audit guidance recently, much of which we have discussed on this website. We usually get access to new audit guidance (issued in the form of Memoranda for Regional Directors) a couple of weeks in advance of publication on the DCAA’s website. Recently, however, DCAA has experienced delays in putting its new audit guidance on the Internet; publication of some guidance has been delayed as much as six weeks. Typically, we wait to discuss new guidance until it’s available to the public, but now we’ve lost patience—and so we have some things to discuss with you.

First, you may remember that we’ve taken issue with the latest DCAA audit guidance that provides direction to auditors on how to evaluate contractors’ estimates of future indirect cost rates. For example, we had very few nice things to say about MRD 10-PSP-021(R) and many negative ones. Prior to that, we had even fewer things--and many more negative things—to say about MRD 10-PSP-018(R). Our overarching thought, based on the recent guidance, is that, in essence, DCAA as an organization has gone insane.

You can’t have worked in the arena of government contract cost accounting for the past two years and not noticed the intense barrage of criticism leveled at the audit agency—much of it politically driven, unwarranted, and based on flawed review methodology. One of the more frequent criticisms has been that DCAA has not met the independence standards imposed by generally accepted government auditing standards (GAGAS). That accusation hasn’t been true—or at least, it’s been rarely true—but it has driven the audit agency into a virtual obsession with maintaining independence. That obsession has impacted auditor interactions with contractors, DCMA contracting officers, and buying commands. As a result, issuance of audit reports has slowed to a crawl. And those reports that have been issued, generally have been riddled with factual errors and other quality shortcomings, because (a) auditors are afraid to openly communicate with those they are auditing (as well as those agency customers requesting the audits), and (b) once the auditors reach a preliminary finding, everybody (from the auditor to the supervisory auditor to the branch manager to the regional audit manager) is afraid to change it—even when confronted by facts that would lead a reasonable person to a different conclusion.

As we’ve noted many times on this website, it now takes roughly three times longer for DCAA to issue its audit reports, and those it does manage to issue don’t provide much value to anybody. We know DCMA is working hard to dissolve its dependence on the audit agency, and we recently noted some criticism from the DOD IG regarding DCMA’s efforts in that regard. Perhaps sensing that something must be done to turn the tide, DCAA issued MRD 10-PSP-023(R) on September 9, 2010.

Entitled, “Audit Alert on Auditor Attendance at Negotiations,” the audit guidance “encourages” DCAA auditors to support DCMA contracting officer negotiations—but also puts limits on that interaction. Following are a selected few quotes from the audit guidance—

• It is DCAA’s policy to support contracting officers at negotiations where DCAA has issued an audit report on the contractor’s submission (e.g., price proposals, incurred cost submissions, termination claims), especially for complex submissions with significant audit issues. Attendance at pre-negotiation meetings with the contracting officer when requested to discuss audit report results is also encouraged.

• Providing support and technical advice based on the auditor’s technical knowledge and expertise to help the contracting officer understand audit report results does not impair auditor independence. Answering questions about audit rationale/computations or giving advice regarding contractor rebuttals to reported results helps the contracting officer understand audit conclusions.

• At times, contractors provide information and/or data directly to the contracting officer as a means to support their proposed positions in anticipation of or during negotiations. … The contracting officer may request DCAA assistance in understanding how that data impacts the reported audit conclusions. Auditors should support the contracting officer, to the extent possible, by providing advice on this data. This may include, for example, providing advice on the contractor’s rationale for a revised estimate, verifying data to the contractor’s books and records or other supporting data, or running various Government position scenarios using the data through audit report schedules and underlying spreadsheets, where appropriate.

The MRD includes a Frequently Asked Questions (FAQ) section. Here is a quote from that section of the MRD—

[The auditor] should answer the cost analyst’s questions to help him understand the audit conclusions and rationale. Providing such explanations is a normal part of any audit and does not impair your independence or otherwise violate GAGAS. … On occasion, it may also be appropriate to provide selected working papers which support complex audit computations to facilitate the contracting officer’s understanding.

The foregoing sounds good and would appear to be aimed at facilitating negotiations. However (as we noted above), the guidance also limits auditor interaction with the negotiating parties. In particular, the MRD discusses circumstances in which the auditor should seek to issue a “supplemental report” instead of supporting negotiations. The audit guidance says—

… if the data is complex and/or represents a significant update to the audited proposal, and requires extensive review or analysis, the auditor would generally need to issue a supplemental report. … When a supplemental report is not issued, any documentation provided to the contracting officer of the work performed should be clearly marked to distinguish it from audit report results. For example, it should include a statement noting that the documentation contains advice provided in support of negotiations and does not represent audited data, nor a revised audit opinion. Nothing short of a supplemental report will result in a revised audit opinion.

We note that, once again, DCAA refuses to let new facts get in the way of its prior audit findings—leaving the contracting officer and buying commands stuck in limbo awaiting a supplemental report in order to have DCAA officially alter its original opinion based on receipt of new facts. The FAQ emphasizes this audit guidance, stating that, where the new facts require “extensive review or analysis,” then the auditor should—

… recommend in writing that the contracting officer delay the negotiations for that part of the proposal to allow time for [a supplemental report to be issued]. … in the meantime, the contracting officer [should] proceed with the negotiations for the other parts of the proposal. [Emphasis added.]

The MRD also directs that auditors cannot review data provided by contractors during negotiations unless they have first performed sufficient audit work to support an opinion on that data. In such circumstances, the audit guidance directs auditors to “recommend to the contracting officer that the FAO audit the costs and issue a supplemental report.” That supplemental report, as you readers know, will take roughly 90 days to issue. Meanwhile, negotiations are stalled, the contract schedule becomes unattainable, and the resulting delay leads to increased costs. Not to mention, somebody somewhere doesn’t get what they need to accomplish their mission.

Undersecretary of Defense (A,T&L) Dr. Ashton Carter recently emphasized the importance of schedule in program execution. As this interview of Dr. Carter at DefenseNews.com reports—

Q. What's most important: requirements, cost, schedule?

A. The variable we pay the least attention to is time. And time is money. The default way of dealing with a program that is costing too much is to buy it more slowly. The default way of dealing with a program that is not meeting its requirements is to keep working on it until it does. So a five-year program stretches 10 years, and a 10-year program stretches to 15. That costs money. Those stretches don't cost more money per year, and no one feels a cost increase over 15 years. We need more programs with a philosophy of meeting a strict schedule.

Dr. Carter, if you want to see programs embrace a philosophy of meeting a strict schedule, you might want to start with evaluating why negotiations drag on so long and program delivery dates have already slipped before the first labor hour has been incurred. And should you do so, you might want to review the impact of DCAA’s recent audit guidance on that process.

We’re just saying.