DCAA’s 2014 Annual Report to Congress  Redstone Government ConsultingIn its report dated March 25, 2015, DCAA issued its fourth Annual Report to Congress including a number of self-accolades for numerous accomplishments in spite of a huge disconnect between DCAA’s audits and its statutorily required audits.  DCAA provides an overview wherein it reports that its “cost-effective” approach examined $182.6 billion, issued 5,688 audit reports, identified $4.5 billion in savings with a 6.9 to 1 return on investment (ROI).   DCAA now represents that its ROI is based upon a “conservative approach” because the savings only include realized savings and not future potential savings if DCAA recommendations are implemented.   However, DCAA fails to mention that future potential savings will be reported when realized; hence, if in any given year DCAA did report future savings as well as realized savings, DCAA would be duplicating reported net savings (coincidentally an issue reported in a 2014 DOD-IG report because two different DCAA audit offices reporting the same net savings for the same audit exceptions).

As with each of the previous three year reports to Congress, DCAA’s reporting is not constrained by any authoritative reporting standards; hence, DCAA provides highly selective comparative data which could lead one to believe that DCAA has dramatically improved its performance since DCAA’s Director has come from outside DCAA (i.e. for FYs 2010-2014, DCAA’s Directors were from Army Audit Agency).  For certain of its selective comparisons, DCAA compares 2004-2009 to 2010-2014 and it should come as no surprise that the use of selective data will almost always demonstrate more favorable results for a current agency/director.   In particular, that DCAA’s “conservatively reported” net savings has averaged $3.9 billion (2010-2014) which is 70% more than during 2004-2009.  DCAA did make note of a lower percentage of questioned costs (questioned costs divided by dollars examined); 5.9% in 2014 compared to an average of 9% for 2011-2013; however, DCAA reported that the lower 2014 questioned cost percentage was caused by proportionately fewer forward pricing (bid proposal) audits in 2014.  Oddly enough, DCAA still includes comparative data (2004-2014) without explaining that relatively low cost questioned rates in the earlier years was a function of the mix of audits; i.e. more incurred cost audits (lower payback) and fewer forward pricing audits (higher payback).   DCAA adequately explains FY2014’s lower questioned cost rate, but purposely avoids expanding that discussion to explain that its comparative chart, Questioned Cost percentages for each of FY2004 through FY2014, is essentially “apples to oranges”.

As one might expect, due to continuing external pressures, most recently from the Senate 2016 NDAA (National Defense Authorization Act), DCAA has made significant in-roads in terms of reducing its self-created incurred cost backlog.  In reference to “self-created”, DCAA essentially stopped its incurred cost audits, issuing 349 in 2009, 654 in 2010 and 487 in 2011 at the same time at least 5,000 contractor indirect cost proposals were submitted annually by contractors.   In reference to the 2016 NDAA, DCAA must reduce its incurred cost backlog inventory to a 12 month inventory, otherwise DCAA’s DOD appropriations will be reduced dollar for dollar for any reimbursable audits (performed for civilian agencies).  DCAA’s Deputy Director has publicly stated that DCAA might be able to accomplish this Senate mandate based upon DCAA’s recent achievements (11,101 incurred cost years closed in 2014); however, he never explains how DCAA “might” reach the objective of a 12 month incurred cost inventory on October 1, 2015 (start of FY2016).   There are at least two simple (slightly disingenuous) strategies, first, DCAA can simply write-off more incurred cost years as “low risk”, a strategy which was essential in closing 11,101 in 2014.  A second strategy, increase the number of contractor submissions which are deemed inadequate; hence, not counted within the incurred cost inventory.  In either case, DCAA can easily accomplish the Senate mandate without increasing the number of actual incurred cost audits.   Perhaps even more absurd, if DCAA determines that it can’t accomplish the Senate mandate, DCAA simply declines all reimbursable audits; hence, there is no dollar-for-dollar reduction of DCAA’s DOD appropriations.

Lastly, DCAA’s 2014 Annual Report to Congress still includes its wish list of recommended actions to improve the audit process and all of those improvements would require greater intrusion into contractor operations including DCAA subpoena authority for other than certified cost or pricing data, unfettered access to contractor records and systems (i.e. intranet access), internal audits, and contractor employees.   Apparently Congress has not pursued the issue of access to contractor employees because Congress believes that DCAA already has that contractual right (apparently Congress has never read FAR 52.215-2, the “access to records” contractual clause).   As with DCAA, apparently Congress prefers to believe what it prefers to be true.


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Written by Michael Steen

Michael Steen Mike Steen is a Senior 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.

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Topics: Business Systems Review, Defense Contractors, DCAA Audit Support