Draft GAO Report Criticizing DCAA Will Likely Cause DCAA To Become Even More Aggressive
An industry source is reporting that last week the Government Accountability Office (“GAO”) internally released a draft report on Defense Contract Audit Agency (“DCAA”) audits of government contractors. The upcoming report is said to be highly critical of DCAA’s auditing methods and independence based upon an examination of 37 DCAA audits between 2004 and 2006 in which DCAA found contractor systems to be adequate. The GAO reportedly found deficiencies in all 37 audits, including the failure of auditors fully and adequately to review contractor data prior to finding contractor systems sufficient.
The draft report will likely accelerate a recent trend of increased DCAA assertiveness and aggression. This trend began after the July 2008 release of a GAO report that sharply criticized the DCAA. The 2008 GAO report, which reviewed 14 DCAA audits, identified deficiencies in the agency’s auditing processes and criticized the close relationship between DCAA auditors and contractors. As many contractors are all too aware, following the 2008 GAO report, the DCAA became significantly more aggressive, demanding an unprecedented level of access to information of questionable relevance to issues for which it has responsibility and closing traditional channels of communication between contractors and the agency. Following the 2008 GAO report, the DCAA also issued audit guidance that expanded the circumstances in which contractor systems should be determined to be “inadequate” and directed DCAA auditors to aggressively seek to compel production by contractors of information that the auditor deems relevant. As a result, among other things:
- DCAA has been issuing Forms 1 denying direct billing and finding systems inadequate for: denial of access to documents to which it is not entitled (including internal audit reports, lists of violations of contractors’ ethics codes, “turnover” data relating to employees of competitors and Sarbanes Oxley information); failing to provide information within an unreasonable period of time; failing to create information to provide to DCAA; or failing to provide unfettered access to employees;
- Finding accounting systems to be inadequate or withdrawing direct billing for immaterial system issues or because DCAA simply does not have the time or resources to evaluate a system;
- Challenging or disregarding PCO determinations of cost reasonableness; and
- Overturning prior purchase and billing system approvals despite the absence of any change in findings.
In January 2009, MLA issued a client alert offering suggestions for how contractors should respond to the new audit environment. This advice remains important. While the exact nature of GAO’s criticisms remain to be determined, we suggest, consistent with our January 2009 recommendations, that, among other things, contractors:
- Ensure that compliant systems are in place and well documented, respond appropriately to access requests and where appropriate, take and document corrective action swiftly. These actions will either avoid a systems inadequacy determination or provide the basis for a bid protest or a court action that the inadequacy determination is incorrect should that become necessary.
- Be ready to identify, resist, and document inappropriate DCAA demands for information. Remember that DCAA’s right of access is limited to reasonable requests pertaining to “records and other evidence” on the cost audit trail at “reasonable times.” See, e.g., 48 C.F.R. § 52.215‑2, Audit and Records; 48 C.F.R. § 52.232‑16, Progress Payments.
- The Federal Acquisition Regulation does not provide DCAA with the right to examine contractor employees. If necessary, be prepared to force the administrative contracting officer (“ACO”) to address audit issues in a timely manner and document the ACO’s failure to do so.
Since the 2008 GAO report, DCAA has become significantly more aggressive. If and when the latest GAO report is made public, contractors should expect an even more assertive and antagonistic DCAA. Contractors must be prepared to protect their interests.
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