On April 30, 2015, a US District Court Judge in Delaware granted a United States motion to dismiss an FTCA claim (Federal Torts Claim Act) filed by KBRS (Kellogg Brown and Root Services). The government’s motion to dismiss was premised upon jurisdictional issues; in particular discretionary functions on the part of a government official are exemptions to the FTCA. The litigation involved a two count complaint by KBRS; i) damages arising from a negligent DCAA audit and ii) damages caused by the negligent DCAA audit resulting in a Department of Justice investigation under the False Claims Act. Although the litigation involved a number of other issues (in addition to the allegedly negligent DCAA audit report), none of those issues were debated once the District Court determined that it did not have jurisdiction over actions exempt from the FTCA.
The 12 page decision included a number of citations (previous decisions) including Gen. Dynamics Corp. v. United States 46 F.3d279, 286 (3d Cir. 1995) wherein a DCAA audit was determined to be grossly negligent which lead to a False Claims Act investigation and approximately $24.6 million in legal costs (Gen. Dynamics Corp.). Although that decision did render an opinion on the DCAA audit, the contractor ultimately collected nothing because the government ultimately was successful in arguing that the investigation was a discretionary function exempt from the FCTA.
It remains to be seen if KBRS can take further action to pursue its case; however, as it now stands the April 30, 2015 Memorandum Opinion includes a very expansive view of the discretionary function (FTCA exemption). In particular, that the DCAA audit and the DCMA contracting officer functions are discretionary functions; hence, exempt from FTCA. The government attorneys were apparently successful in convincing the Judge that a DCAA audit involves professional judgment, by its very nature “discretionary”; thus the exemption. If that interpretation is not challenged, it basically means that DCAA is bullet proof because its audits and auditors will always involve some form of professional judgment at least in application to the scope of the audit (e.g. transactions tested during the audit).
Unfortunately, it does not appear that the FTCA exemption for professional judgment was fully vetted given the fact that “professional judgment” should not blindly apply to every facet of the audit. For example, auditing standards required auditors to consider all relevant evidentiary matter and based upon the evidentiary matter to express an opinion consistent with that evidentiary matter. It is inconceivable that any tribunal would agree that professional judgment allows an auditor to form an opinion which is blatantly inconsistent with the facts. Case in point, the Gen. Dynamics Corp. FTCA wherein DCAA’s negligence was attributable to its failure to properly apply the facts (cost overrun) to a “fixed price best efforts contract” (which operates much like a cost type contract once the costs incurred hit the fixed price; in particular, there was no requirement to continue to perform on the contract. Regardless of what could have been determined had the plaintiff fully argued its case, the summary dismissal based upon lack of jurisdiction leaves us with little or nothing in terms of DCAA’s audit. In particular, is there any tangible benefit to the contractor if it could have been demonstrated that DCAA’s audit failed to comply with Government Auditing Standards? There are DOD-IG reports which have concluded that certain DCAA audits failed to comply with Government Auditing Standards; hence, DCAA has inappropriately questioned the allowability of costs. Therein, the contractor might have prevailed in terms of recovering the disallowed costs, but far short of recovering the administrative and/or legal cost to deal with an audit which failed to comply with auditing standards. Brings up the rhetorical question, why would anyone want to be a government contractor?
Mike Steen is a Emeritus Advisor with Redstone Government Consulting, Inc. and a specialist in complex compliance issues to include major contractor cost accounting & business system regulations, financial compliance, resolution of DCAA audit issues, Cost Accounting Standards application, litigation support, and claims preparation. Prior to joining Redstone Government Consulting, Mike served in a number of capacities with DCAA for over thirty years, and upon his retirement, he was one of the top seven senior executives with DCAA. Mike Served as a Regional Director for two DCAA regions, and during that time was responsible for audits of approximately $25B and 800 employees. In October 2001, he was selected for the Senior Executive Service and in 2006 he received the Presidential Rank Award. During Mike’s tenure with DCAA, he was involved in conducting or managing a variety of compliance audits, to include cost proposals, billing systems, Cost Accounting Standards, claims, defective pricing, and then-evolving programs such as restructuring, financial capability and agreed-upon procedures. He directly supported the government litigation team on significant contract disputes and has prepared and presented various lectures and seminars to DCAA staff and business community leaders. Since joining Redstone Government Consulting in June 2007, Mike has developed and presented training and seminars on Government Contracts Compliance to NCMA, Federal Publications Seminars and various clients. Mike also is a prolific contributor of written articles to government contracting publications, as well as to our own Government Insights Newsletter. Mike also serves as the director of our training service offerings, with responsibilities for preparing and developing course content as well as instructing our seminars to clients and general audiences throughout the U.S. Mike also serves as a faculty instructor for the Federal Publications Seminars organization. Education Mike has a BS Degree in Business Administration from Wichita State University. He is also a graduate of the DCAA Director’s Fellowship Program in Management, and has a Masters Degree in Administration from Central Michigan University. Mr. Steen also completed a number of OPM’s management and executive development courses.