Triaging Audits

In November 2009, Patrick Fitzgerald took the reins of a troubled Defense Contract Audit Agency. His predecessor director, April Stephenson, had stepped down after a series of critical reports from the Government Accountability Office and the Pentagon inspector general landed the agency in hot water. Contentious congressional hearings pointed to reports of poor documentation in 80 audits and a stretched workforce demoralized by bosses seen screaming, cursing and intimidating employees. 

“The GAO was sharply critical, sayingwe didn’t have the necessary evidence in files to support our conclusions and opinions, which goes to the essence of auditing,” Fitzgerald recalls. “People rely on those reports, so we have to do the testing and analysis to support our conclusions and recommendations because contract officers use them to negotiate and allow costs to 

be approved.” 

Fitzgerald, a member of the Senior Executive Service who had risen to the top of the much-smaller Army Audit Agency, took to heart a Pentagon commitment to add DCAA staff. Fitzgerald studied mediocre results in organizational health surveys from the Office of Personnel Management. He traveled from his Fort Belvoir, Va., headquarters to many of DCAA’s 120 field offices and held 90 town hall meetings. He facilitated a 50 percent turnover in managers supervising a workforce that has grown by 6 percent in four years to nearly 4,900, with more hiring ahead.

Among the most critical changes, the reformed DCAA revamped its audit procedures and training to stress quality over quantity. “By using a risk-based process to identify the highest-payback areas of focus for DoD, the warfighter and the taxpayer,” Fitzgerald says, “we are able to put our resources in the right place for the best return on investment.”

This type of triage meant raising by tenfold the threshold dollar amounts that trigger audits of fixed-priced and cost-type contracts. Fitzgerald’s analysis of recent audits showed that reviewing low-dollar contracts required 53 percent of DCAA’s work hours, but covered only 12 percent of contractor-submitted costs, with only 7 percent called into question. By contrast, audits of high-dollar contracts ate up 47 percent of work hours, but examined 88 percent of costs, resulting in the questioning of 93 percent.

DCAA’s first mandated report to Congress in March showed the agency conducted more than 7,000 audits in 2011 and challenged almost $12 billion in proposed or claimed costs, saving $3.5 billion.

Not everyone who follows DCAA has been thrilled with the new triage approach. Danielle Brian, executive director of the nonprofit Project on Government Oversight, has long criticized the agency’s personnel operations and handling of whistleblowers. “Unfortunately, DCAA’s changes have rendered it less, not more, effective for both pre- and post-award audits,” she says. 

“While DCAA focuses on quality and larger-dollar audits, more and more contract dollars as a percentage of awards go unaudited than ever before,” Brian says. “Coupled with the nearly $1 trillion backlog, it is easy to see this as a situation where the medicine was far more damaging than the disease.”

Richard C. Loeb, a veteran of the Office of Federal Procurement Policy and the Cost Accounting Standards Board, wrote a stern critique of DCAA’s approach in a May contracting journal essay titled “DCAA—Is Anyone Home?”

Loeb, who now teaches contract law at the University of Baltimore, called DCAA’s new focus “form over substance” and faulted the agency for shrinking the number of audits by 400 percent, according to his calculations. “Did DCAA need such a drastic overhaul that it no longer has time to complete thousands of required audits?” he wrote. “Or did the agency respond to the GAO reviews by going overboard and spending an inordinate amount of time on working paper documentation to ensure that GAO and the Department of Defense inspector general would not find fault with any working papers, all the while letting billions of contract costs go unaudited?”

Loeb says it pains him to see DCAA “shoot itself in the foot because there is truly a deep philosophical difference on how audits should be conducted.” Fitzgerald and GAO, he says, “approach each audit as an individual project, almost from scratch, with no prior assumptions by auditors.” The result is DCAA seems more concerned with “producing a work paper that can be seen as perfect than getting audits completed to support the contracting process,” Loeb says.

Contractors and federal acquisition managers sympathize with the need for risk-based triage, despite DCAA’s increased demands for paperwork.

“DCAA is never going to have enough staff to audit 100 percent of contracts or 100 percent of contractors, so it needs some methodology to meet the needs of the acquisition community, the procurement staff and contractors,” says Alan Chvotkin, executive vice president and counsel of the Professional Services Council. The agency is “under significant pressure to meet an ongoing critical timeline” for evaluating future contract solicitations, he adds. “It is more important to highlight DCAA’s visibility to contractors” than to highlight dollar thresholds.

Still, contractors might complain about the premium put on proper paperwork because “auditors have less time for on-site meetings” and because “paper doesn’t talk to you,” Chvotkin says. He favors ongoing, collaborative communication between industry, auditors and contracting officers, while respecting rules that protect the Pentagon buyer’s independence.

Fitzgerald says he moved DCAA away from its customary frowning on communications with contractors. He and his deputies take active speaking roles at contractor forums and receive feedback. He’s confident the sampling approach to auditing only a portion of low-dollar contracts continues to be a deterrent against fraud. DCAA’s field offices, which are closest to the decision-making, continue to deal with companies daily, he adds. 

“No contractor gets a free ride, as there’s always a chance of being audited. Sampling is a better use of taxpayer funds,” Fitzgerald says.

The DCAA chief challenges the assertion that his agency’s backlog of un-audited incurred costs is as high as $1 trillion, arguing it is actually $570 billion, $170 billion of which is “normal current inventory,” he says. As of July, DCAA had completed twice as many audits as in the previous two years combined, he adds. With an accelerated pace, “we are on track to complete the current backlog by 2014,” Fitzgerald says. 

“As we take measures to improve the quality of our reviews, we recognize that audits may take longer to complete,” he says of new demands for documented contractor invoices. 

Some DCAA responsibilities have been flagged as overlapping with those of the Defense Contract Management Agency, which focuses on pricing and product quality. The two agencies’ work in financial and purchasing audits, for example, are being rethought to reduce duplication.

“The workforce has done a great job making a lot of changes in training and policy,” Fitzgerald says, pointing to a boost in morale reflected in OPM’s 2011 employee satisfaction survey. “We’re making significant progress.”