Should DCAA Hand Certain Audits to Commercial Firms?

Deep inside the House Armed Services Committee’s acquisition reform bill (H.R. 2511) unveiled in May is a provision broadening language to give Pentagon managers greater authority to bypass the Defense Contract Audit Agency to tap private-sector expertise.

Adjusting a provision in last year’s National Defense Authorization Act giving outside auditing firms more input in auditing indirect costs, the proposed new language would allow the Defense Contract Management Agency or a military service contract officer to pick a “a qualified private auditor to perform an incurred cost audit.”

Defense Department officials are not happy.

“These reforms will streamline the bureaucracy, drive greater efficiency through competition, and give the Pentagon the tools it needs to make better business decisions,” said committee chairman Rep. Mac Thornberry, R-Texas, on introducing the Defense Acquisition Streamlining and Transparency Act. “They also promote greater transparency and accountability. While these reforms will save money over the long term, they will also help improve support for the warfighters right away.”

Driving the change in auditing authority over the past several years is the DCAA’s long-standing backlog of uncompleted audits, each of which prevents a contracting officer from determining the general and administrative rate of payment and closing out payments to contractors for a given year.

“It creates a domino effect, with thousands of contracts not closed and contract officers in the dark saying, ‘Where are my audits?’ ” said Christine Williamson, a partner in the Government Contracting Industry Practice in the Washington office of the tax and accounting firm CohnReznick. So Congress in the NDAA said the DCAA couldn’t do audits for civilian agencies, some of which are already going out to independent auditing firms for their audits.”

It’s not that the DCAA are “bad guys—they’re a good governing body,” Williamson added. “They’re trying to keep up. But they’re coming out swinging at people who have different ideas.”

Basically, she said, DCAA “doesn’t want the competition,” asserting that her firm can do audits faster, less expensively and with more auditors who are certified public accountants than DCAA has. “Aren’t we going to be a country of competition?” Williamson asked. “It keeps prices down, the people in check, and keeps the schedule and quality up.” Thornberry, she added, is saying that DCAA should have to pass a peer review of its audits.

But DCAA has shown progress and is protective of what it defends as the two-thirds of its work that is “inherently governmental.” As of Sept. 30, 2016, it reported it cut its incurred cost audit backlog by three fourths over five years, to a current average of less than 18 months. Were it not for hiring freezes, the agency might be further along toward its plan to eliminate the backlog by next year, the report said.

“DCAA is better positioned to perform these audits because of their expertise in auditing to the unique requirements of government contracts,” DCAA Director Anita Bales told an April 6 hearing of the House Armed Services oversight subcommittee. “And I believe that allowing [independent public accountants] to conduct these could have a significant negative impact on DoD contract administration and audit processes.”

The Defense Department, in its annual legislative proposals last month, warned of a “significant number of unintended consequences” in both the 2017 NDAA language and the new Thornberry bill. Rather than level the playing field for competition in auditing indirect costs and helping small business contractors, Pentagon analysts said, the result appears to be that “some of the largest Defense contractors will also meet the criteria stated in this provision, and will therefore not be subject to government audits of their indirect costs.”

That would include, it added, some of the top defense contractors (e.g., Raytheon Missile Systems, Lockheed Martin Aeronautics, Boeing Military Aircraft). “DCAA would be precluded from auditing the indirect costs of some of the largest government contractors performing contracts across a broad spectrum of government agencies.”

House Armed Services Ranking Member Adam Smith, D-Wash., said in a statement to Government Executive, “We should be careful about turning over DCAA’s incurred-cost audit work to the private sector without oversight, as private contractors auditing private contractors with whom they may already have business entanglements poses the danger of a conflict of interest. I’m also concerned that privatizing these functions could end up costing more for the taxpayer, because we haven’t established what the costs will be with a business case analysis.”

Smith said a better approach would be to give the DCAA director authority and tools to address the backlog, yet hold her accountable for progress. “That flexibility could be the ability to hire private contractors with appropriate oversight or the ability to hire civil servants expeditiously,” he said.

Objections were also sent to Thornberry’s office by the American Federation of Government Employees, which in a June 2 letter said the bill “expresses an unfounded and inappropriate bias favoring private-sector auditors.” The union’s national president, J. David Cox Sr., expressed doubts that outside public auditors are independent, citing the example of the now-defunct Arthur Anderson’s mishandling of audits of the Enron energy firm that fell apart in 2001.

Cox added that the provision requiring peer review by commercial independent auditors “strikes at the heart of the ability of the government to have independent audits by allowing private-sector firms seeking additional audit work to be the judge of whether or not DCAA should continue to perform unqualified audit findings.”

Analysts at the nonprofit Project on Government Oversight agreed with the Pentagon’s position, pointing to dangers in having “contractors pick their own auditors. …This is not a backyard experiment with few consequences for failure,” wrote Nick Schwellenbach and Daniel Van Schooten and in a June 20 blogpost. “Billions of taxpayer dollars are on the line every year. While DCAA has room for improvement, privatizing the agency’s work would most likely make it harder to crack down on contractor overbilling.”