We love seeing comments from our members. We also love hearing from readers who are moved to write us—whether to argue with us or ask questions. But we don’t necessarily publish everything we receive. For example, you never heard about “Jimbo”—a warranted DCMA contracting officer who wrote seeking advice on how to resolve a dispute between DCAA and one of his contractors regarding some typically bizarre auditor assertions.

Similarly, though we’re going to dedicate this article to “San Francisco Fan,” you are not going to see the various emails that led to it. Except we’ll quote one of SFF’s last comments—“Ok, gotta run.  Thanks for listening to me rant.  This may make a good article for your website.“ Well, yes.

We happen to agree with San Francisco Fan’s comments and, indeed, we were already gathering some info that would lead to this article—though SFF’s comments really added some edginess to what we were thinking. So we dedicate this article to “San Francisco Fan” and all those government contracting and accounting professionals who continue to fight for their principles in the face of mounting evidence that the DOD’s acquisition environment is breaking down around them.

Now, on to today’s article, in which we ponder the question, “Is it time to disband DCAA?”

Background

Recently we posted an article on the a hearing conducted by the Senate Committee on Homeland Security and Governmental Affairs (HSGA) and its ad hoc Subcommittee on Contracting Oversight, Co-Chaired by Senators Claire McCaskill and Scott Brown. While ostensibly the hearing was to focus in a broad sense on how the Federal government conducted audits of its contractors, we noted that particular attention was paid to the Defense Contract Audit Agency (DCAA) and its role in auditing non-DOD agencies (such as NASA and the Department of Energy). The question on everybody’s mind was, “Since DCAA is already auditing so many non-DOD contracts, why not go ahead and simply pull DCAA out of the DOD and make it the Federal Contract Audit Agency?” Perhaps unsurprisingly, answers to that question varied.

Our article focused on the written testimony of three panelists: DCAA Director Patrick Fitzgerald, Inside-the-Beltway Government Contracts Attorney Sandy Hoe, and the Project-on-Government-Oversight (POGO’s) Nick Schwellenbach. We’ll summarize the key points, since they directly bear on today’s question.

• DCAA’s productivity has dropped in recent years. And by “dropped” we mean “plummeted like a big boulder plunging off a steep cliff in a high-gravity environment.” We first reported on DCAA’s audit report statistics here. (In fact, we included that damning chart in our letter to the DAR Council commenting on the latest proposed DFARS “business systems rule.”) It was noted by Mr. Schwellenbach that, in GFY 2010, for the first time in recorded history, DCAA actually cancelled more audits than it completed.

• Mr. Fitzgerald publicly confirmed what most of us already knew—that DCAA had put audits of contractor incurred cost submissions and final indirect cost rate proposals on the back-burner, choosing instead to focus on more “high risk” areas such as contractor cost proposals in excess of certain dollar thresholds.

• And, while audits were being cancelled and final rates were not being audited and funds were expiring, DCAA was devoting “between 9 and 13 percent” per year of its audit resources to auditing non-DOD agencies.

Media Reports

Let’s look at what the media (mainstream and otherwise) are saying about the situation.

First, the Center for American Progress published this on the same day of the hearing—

The senators will consider whether DCAA should be replaced by a more powerful independent agency—perhaps a Federal Contract Audit Agency—that reports to Congress and the White House. Such a move would not be unprecedented: The U.S. Treasury and subsequently the General Accounting Office, which is now the Government Accountability Office, once audited all federal contracts. … The subcommittee’s research suggests most contracts are audited by DCAA. This makes a powerful case to create one single federal audit agency. … If nondefense agencies are deterred from using DCAA services because they have to pay DCAA for its services, it may also make sense to create an independent agency available to the entire federal government. … Allowing DCAA or an FCAA to report directly to Congress may allow auditors freedom to examine contractors more critically.

Progressive-leaning Common Dreams.org posted this article on the hearing, which essentially restates the testimony of Mr. Schwellenbach—

Rather than creating a new bureaucracy, Congress could simply expand the duties of the existing Defense Contract Audit Agency (DCAA), while making it independent of the Department of Defense (DoD)…. Unlike most agencies, a new Federal Contract Audit Agency (FCAA) could save more money each year by uncovering waste and fraud than it would cost to run it. The FCAA would provide a needed check on contractors, ensuring that the government is not overcharged for goods and services.

An independent, central auditor would be more efficient than the current system, under which contract audits are performed by the DoD’s DCAA, small auditing offices in other agencies, contracted auditors, and various Inspectors General. Non-DoD agencies, which currently can utilize the DCAA for a fee, would have a greater incentive to use a central auditor.

It is essential that a new FCAA be given enough resources and authority to succeed. The DCAA is woefully understaffed, and there are also concerns that it is ‘risk-averse,’ not having issued a subpoena to a contractor in more than 20 years.

The website ExecutiveGov reported—

The terms of the debate couldn’t be clearer: should Congress consider a more robust, single agency to handle audits on contracts, which account for $530 billion in federal spending. Or, should it keep on with DCAA. And, if DCAA stays, will it be given a shorter or a longer leash?

Robert Brodsky at GovExec.com, writing the day after the hearing, reported—

The Defense Department conducted nearly 90 percent of all federal contract audits in fiscal 2009, and there appears to be little support for creating an audit unit to support civilian agencies, witnesses told a congressional panel on Wednesday. … The subcommittee found Defense conducted more than 15,000 contract audits that year, averaging one audit for every $24.7 million in procurement spending. The Pentagon, which accounted for 70 percent of total governmentwide contract spending in 2009, used DCAA for its audits.

Civilian agencies, meanwhile, conducted fewer than 1,900 audits in fiscal 2009, for an average of one audit per $511.4 million spent on contracts. Among the federal agencies conducting the fewest audits as a percentage of their total contract spending were the General Services Administration, and the Justice and State departments. DCAA performed 76 percent of civilian contract audits. The remaining 24 percent of civilian federal contract audits were performed either by the agency's inspector general, or by contractors.

Some civilian agencies, such as the Health and Human Services Department, used DCAA for 90 percent of their contract audits, the subcommittee found. But, reliance on DCAA could start to decline because the agency has seen its backlog of contract audits grow in recent years -- a byproduct of reform efforts following a series of Government Accountability Office investigations.

DCAA's pileup has led several agencies to look to the private sector for support. In fiscal 2009 and fiscal 2010, the Energy Department used DCAA for a combined 649 audits at a cost of $19.2 million. Ingrid Kolb, director of Energy's Office of Management, said the department now pays $150 per hour for a private sector accounting firm to conduct some contract audits, compared to $114 per hour for DCAA. ‘But, DCAA is stretched thin, so we had to go to an independent auditor,’ Kolb said. … Several witness testified that DCAA has been understaffed, overworked and underresourced for more than a decade.

FederalTimes.com had a quick blurb about the hearings, noting that civilian agencies aren’t deterred from using DCAA because they have to pay for audit services (as the Center for American Progress story—quoted above—suggested). The problem for non-DOD agencies is that DCAA simply isn’t responsive enough to meet their needs. The FederalTimes.com story stated—

Increasing backlogs and limited resources at the Defense Contract Audit Agency have caused non-defense agencies to seek contract audits elsewhere, agency officials told a Senate subcommittee last week.

‘One of the big issues for us is timeliness,’ Ingrid Kolb, the Energy Department's Office of Management director, told the Ad Hoc Subcommittee on Contracting Oversight. ‘And DCAA is stretched fairly thin. Sometimes it's very difficult for them to free up auditors to perform high-priority work.’

 

While DCAA charges agencies outside DoD for its services, the fee is still cheaper than hiring a private auditor, Kolb said.

POGO Weighs In

In our prior story, we were not especially kind to the Project-on-Government-Oversight’s Director of Investigations, Mr. Nick Schwellenbach. We didn’t have an issue with his facts, but we emphatically disagreed with his assertions that government contractors were taking advantage of the turmoil at DCAA, that they wanted DCAA to be risk averse, and that they wanted DCAA not to issue audit reports. We thought his otherwise interesting testimony was tainted by his unwarranted attacks on government contractors. So what did POGO have to say about the hearings?

In this article, POGO focused on DCAA’s questionable decision to stop performing audits of contractors’ “incurred costs” (also known as final indirect cost rate proposals), as well as the agency’s growing backlog of unfinished contract audits. The POGO article quoted Senator Scott Brown (Ranking Minority Member) as follows—

‘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.

POGO published a chart that graphically illustrated how few incurred cost dollars DCAA has recently audited.

As POGO noted—

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 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…

The POGO article also quoted Department of Energy official Kolb, as follows—

‘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.’

The POGO article also quoted a very illuminating exchange between DCAA Director Fitzgerald and Senator Brown, which we think our readers ought to check out. So go to the POGO article (link above) and see what you think. Note that Senator McCaskill (long-time DCAA critic) was actually defending Director Fitzgerald from Senator Brown’s pointed questions!

Schwellenbach’s Testimony Critiqued

Our correspondent, San Francisco Fan, had a few things to say about Mr. Schwellenbach’s sworn testimony before the Senators. Part of his testimony included an assertion that DCAA auditors were unhappy with their agency’s leadership. Well, he didn’t have to convince us. But POGO did include an entire article dedicated to supporting that assertion. You should check out the comments. Here’s one—

I don't think many people from outside the agency have any idea just how really bad things are. There is a total state of paralysis and stagnation. Every audit file is being sent back and forth and over again from the staff to the supervisors second guessing every word and sentence. Should we say this or that ? How might this word be interpreted ? Change this font, center your initials, it is absolutely crazy. I get sick when I think of our brave men and women in the military who place their lives on the line in Iraq and Afghanistan and yet the management in DCAA are too ‘afraid’ to issue an audit report because they may get gigged by the IG or CIGIE for not being compliant with some insignificant administrative details. I have never seen such a pathetic cowardly management staff anywhere. Our military is not being well served by this agency. They are not saving any money and they are not doing any audits, they are only trying to make administratively critically perfect audit files motivated by fear of being gigged.

But San Francisco Fan didn’t dispute that part of Mr. Schwellenbach’s testimony (nor do we). SFF’s issues were with the assertions that government contractors were denying auditors access to information necessary to complete their audits, which was a cause of the growing backlog.

San Francisco Fan noted that Mr. Schwellenbach’s assertion was supported by this November 2008 article by USA Today. (Note that this was the time period of the original attacks on DCAA.) That article used a few examples of alleged denial of access to records (including that of the Bechtel Corporation) and extrapolated to the entire defense industrial base. The article reported—

The Bechtel episode illustrates how tolerant the agency can be when defense contractors slow the government's access to paper records and databases. There is no way to know how often DCAA withholds payments because it does not keep track. And it has not used its subpoena power in 20 years.

‘We have been basically on the trust system for years,’ said the auditor who attended the May meeting. ‘It did not work on Wall Street and it is not working for federal contracts,’ said the two-decade veteran of the agency who spoke on condition of anonymity because DCAA employees are not allowed to publicly discuss their work.

Negotiation, not confrontation, is the usual method for prying hard-to-get data loose from companies that make weapons or support troops in Iraq and Afghanistan. But the numbers show that approach is too cozy when the need for tough oversight is greater than ever.

The article also noted problems at Boeing, saying, “Boeing, a defense giant, did not give auditors the necessary detail to trace costs on a $1 billion space-launch contract.”

San Francisco Fan noted that not everybody felt that denial of access to records was a critical problem. In that same USA Today article, one can find the following—

In an e-mailed response to questions, Pentagon spokesman Darryn James said contractor delays and refusals to provide records are not extensive problems. He acknowledged there are times when contractors have to be reminded to provide information. Records disputes are handled at the lowest possible level by the nearly 3,500 defense auditors in the U.S. and overseas, James said. Officials at the agency's headquarters at Fort Belvoir, Va., have had to step in just four times since 2003, he said. All four disagreements were settled without going to court.

 

‘It should be considered a success that DCAA has been able to get the information it needs without having to resort to subpoena authority,’ James said. James described the Bechtel situation as an unusual case that was resolved after the agency and the company worked out a way to answer auditor requests for records more promptly.

Moreover (as SFF pointed out), the Boeing situation was not exactly as described by USA Today. SFF wrote—

The Boeing paragraph makes it sound like they wouldn’t provide any data to support the proposal.  …  This is actually based on the July 2008 GAO report, and the report says ‘At the end of the audit, the workpapers indicated that Contractor A had not responded to several requests for information that would have helped the auditors identify costs related to lost commercial business. For example, Contractor A did not provide information on the cost of excess and obsolete materials, excess production facility capacity, and excess equipment.’ (A far cry from ‘not giving the auditors the necessary detail to trace costs on a $1B program’...)

So we have to ask, did Mr. Schwellenbach knowingly misrepresent the situation regarding auditor access to contractor records in his sworn testimony before the Senators? Did he knowingly misrepresent the lack of DCAA subpoenas as a problem when DOD asserted it was strength of the process?

Or did he simply rely on a weak and misleading news report from three years ago, and hope nobody would check the sources? Or (as San Francisco Fan suggested), did he have his fingers crossed behind his back when he took the oath? You be the judge.

DCAA—Time to Go?

So where does the DOD’s premier audit agency go from here? It has a growing backlog of unfinished audits, a demoralized workforce, and customers who are turning to outside audit firms (and paying more) in hopes of getting more timely audit reports. What should be done?

Look, we make our living dealing with DCAA auditors and helping contractors successfully pass DCAA audits. The status quo keeps us busy and puts money in our pockets. But in all intellectual honesty, we are forced to say, this agency needs to immediately turn a 90 degree course correction. If it can’t do that, then we think another agency needs to take its place.

Your comments on this topic are welcome.