Kind of a smug headline, we suppose. It’s an exaggeration of course; hyperbole that probably doesn’t accurately reflect the true reality of the situation. And yet it may not be all that far off the mark either. The signs are all pointing that way.

Do you read them the way we read them?

For some time now we have been telling readers that choices made by DCAA’s leadership were going to have consequences. We told readers that DCAA’s new approach to “risk-based” audit selection was going to generate repercussions. We’ve been pointing out that Executive Branch agencies such as the United States Postal Service have deemphasized use of DCAA on a reimbursement basis because of concerns over timeliness and audit quality. We’ve noted that the Department of Defense has started to look for ways to finalize contractors’ billing rates and close-out contracts without waiting for an official DCAA audit report. We’ve reported that the DoD Inspector General has recommended that the Defense Contract Management Agency learn to manage DCAA in a more tailored fashion, with respect to audits of contractors’ Forward Pricing Rate Proposals. We’ve reported that the DoD IG has recommended that DCMA enhance processes and staff training with respect to negotiating new contract awards, because DCAA doesn’t audit as many of those as it used to audit. And we’ve also told readers that the DAR Council is seeking to reduce DCAA’s role in reviews of contractor business systems because reducing DCAA’s role will lead to increased “efficiency and effectiveness” of those reviews.

But that’s not all. We’ve also reported that DCMA has taken on reviews of contractors’ CASB Disclosure Statements for adequacy. We’ve also reported that DCMA Contracting Officers will issue Forward Pricing Recommended Rates on their own if DCAA cannot issue an audit report in time to support the analysis of contractors’ FPRPs. In short, we’ve fairly well documented the diminishment of the universe as measured by DCAA audit scope, and we’ve opined that the tide will continue to ebb in that respect. We’ve even gone so far as to suggest it’s time to let the 50 year-old audit agency go, and replace it with something better.

Thus: this opinion of ours, this reading of the signs and portents, this belief that DCAA is going the way of the dinosaurs and the Dodo Bird—it is really nothing new. It’s been our position on the matter for several years. Sometimes we rant and rave about DCAA ineptitude, and other times we shake our heads and mutter in despair as the state of the Pentagon’s contract audit agency. But we’ve been convinced for some time that the only thing that’s going to save DCAA is a complete regime change.

So when we tell our readers that the NASA Office of Inspector General has issued a report in which it found that “NASA is at increased risk of paying unallowable, unreasonable, and unallocable incurred costs and of losing the opportunity to recoup improper costs because Agency contracting officers rely too heavily on DCAA’s incurred cost audit process,” you may simply mark it up to more of the same ranting and raving in which we’ve been engaging for some time. Or you can read our summary and thoughts of the NASA OIG report and, perhaps, conclude that we may be on to something. Or you can read the report yourself and ignore our thoughts.

It’s all good.

The OIG reported that NASA spends more than $8 Billion each year reimbursing contractors via cost-type contracts. The report noted that contractors with such contracts are required to submit, annually, “an incurred cost proposal outlining their direct and indirect costs.” It noted that “Under the FAR, NASA generally has 6 years to recover unallowable costs from the date the contractor’s adequate incurred cost proposal is submitted.” Since 1969 DCAA has audited NASA contractors’ “incurred cost proposals” and DCMA has provided contract administration services for NASA on a reimbursable basis.

The support DoD provides to NASA does not come cheaply. The OIG reported that “From FYs 2009 through 2013, NASA paid DCMA approximately $204.8 million for contract administration and support services and DCAA approximately $77.5 million for audit services. For FY 2014, NASA anticipates paying DCAA $17.7 million for 150,000 hours of work. Based on DCAA’s 2013 work, we estimate approximately 71 percent of this figure, or $12.6 million, will pay for incurred cost audits.”

What does NASA get from DCAA? According to the OIG: “Between FYs 2009 and 2013, DCAA performed 337 incurred cost audits of proposals submitted by NASA contractors and identified $313.5 million in questioned costs. … Since 2009, the rate of sustainment for questioned costs in NASA contracts has fluctuated between 6 and 71 percent.’

Well, that seems like a good deal, doesn’t it? NASA is paying DCAA roughly $18 million a year and, in return, DCAA is questioning roughly $60 million in contractor costs, of which somewhere between 6 and 71 percent end up as bona fide cost reductions and taxpayer savings. (Even if the average sustainment rate was 40 percent, that would still be a good return on investment for NASA.) So what’s the problem, then?

The problem, according to the NASA OIG, is that “NASA contracting officers relied almost exclusively on DCAA’s incurred cost audit process to identify unallowable, unreasonable, and unallocable costs. Contracting officers we spoke with pointed to these audits as their only means of identifying questioned costs.” And the problem with that reliance, according to the OIG, is that DCAA’s new “risk-based” audit approach “substantially decreases” the number of contractor “incurred cost proposals” that are audited. Many contractor annual proposals to establish final billing rates are never audited because DCAA deems them to be “low risk.”

Because the NASA Contracting Officers rely on DCAA, and because DCAA is letting a substantial number of contractor proposals through unaudited, that means that nobody is looking for unallowable costs. The OIG is (rightfully) concerned that millions of dollars of contractor costs that would previously have been audited and questioned by DCAA are getting through with zero scrutiny, and that NASA will be in the position of reimbursing contractors for costs for which they are not entitled to reimbursement.

Here is the conclusion from the NASA OIG audit report:

NASA contracting officers place an unhealthy reliance on DCAA audits to identify unreasonable, allocable, and unallowable costs charged on NASA’s cost-type contracts, performing little to no additional oversight of costs on the 20 contracts in our sample. In addition, this reliance on DCAA – which has an approximately 6-year backlog in conducting incurred cost audits – has delayed NASA’s ability to timely close contracts and deobligate funds. Moreover, the delays and 6-year time limit to recover funds may affect NASA’s ability to recoup funds improperly charged by contractors. DCAA’s revised incurred cost audit methodology reduced the number of incurred cost audits performed on NASA contracts and under the new procedures only a sample of vouchers submitted for payment on NASA’s cost-type contracts receive a high-level review. Accordingly, NASA cannot afford to rely solely on DCAA to determine whether incurred costs are allowable, allocable, and reasonable and should revise its current processes or develop additional procedures and oversight mechanisms to better safeguard the billions of dollars it spends annually in contract funding.

The NASA OIG made five recommendations intended to help address the foregoing situation. Among those recommendations, we noted the following –

Revise the NASA FAR Supplement 1815.404-2(a)(1)(F)(1) to allow independent public accounting firms to provide supplemental audit coverage for NASA contracts where DCAA currently conducts any contract audit services but cannot be responsive to NASA’s need for an audit.

In other words, revise the regulations to permit auditors other than DCAA to do the job that DCAA has been performing for NASA since 1969.

Are we reading too much into this audit report? Perhaps. Or perhaps we are correctly seeing this audit report as being yet one more indication that DCAA’s management decisions are putting it out of business.