Redstone_-_Congress_Section_893_2016_NDAA_and_DCAA

2016 NDAA (National Defense Authorization Act)

As reported in our December 3, 2015 blog,2016 Defense Authorization Act Section 893, the 2016 National Defense Authorization Act (NDAA) includes a requirement, ostensibly for improved DCAA auditing, but more narrowly focused on the so-called incurred cost audit backlog (contractor indirect cost rate proposals (ICPs), submitted annually as required by FAR 52.216-7(d)).   Section 893 prohibits DCAA from providing “audit support” for non-defense agencies (e.g. NASA) unless DOD certifies that DCAA is current on the ICP backlog.  “Current” is defined as 18 months of incurred cost inventory, further defined as “the level of contractor incurred cost proposals in inventory from prior years that are currently being audited by DCAA”. 

DCAA’s Response to Freedom of Information Act (FOIA) Request

Since we published the December blog, DCAA has sort of responded to our FOIA (Freedom of Information Act) request for: i) the number of contractor ICPs in inventory on the date of the 2016 NDAA, ii) DCAA’s description of the ICP inventory (how is it counting this inventory, and iii) the results (did DCAA meet the requirement to be current as defined in the 2016 NDAA?).  In its final FOIA response, DCAA indicated that its research identified 5,712 ICPs in inventory; however, DCAA did not respond to any questions (ii and iii) noting that FOIA does not require an agency to provide answers to questions (FOIA only requires an agency to provide existing, releasable documents as if DCAA does not have an existing document which answers the questions).  The less than subtle message, FOIA is anything but transparent in spite of President Obama’s message (January 21, 2009), “The presumption of disclosure should be applied to all decisions involving FOIA”.

DCAA Audit Guidance Interpreting Congressional Intent

Fast-forward to January 7, 2016 and DCAA Audit Guidance Memorandum No. 16-PPD-001(R) on: “The Impact of the National Defense Authorization Act on DCAA’s Audit Support to Non-Defense Agencies”.   In terms of what we (DCAA) know, this document confirms that DCAA did not meet the requirement; hence, DCAA can no longer provide “audit support” for non-DOD agencies (e.g. NASA, DOE, and DHS).  However, DCAA’s audit guidance memorandum includes a legal opinion (interoffice memorandum signed by DCAA’s Acting General Counsel) which interprets Section 893; in particular a discussion of the fine line between “audit support” and other than audit support.   In particular a statement:  “The fact that Congress limited the restrictions to the performance of audit support rather than include other types of services performed by DCAA indicates that Congress intended to only restrict DCAA from performing audits for non-defense agencies.”   We have no idea if DCAA made any attempt to confirm what “Congress intended”; however, there is nothing in the Congressional record which would suggest that Congress “split-hairs” in terms of intending for DCAA to assume a narrow definition of audit support (excluding non-audit support).  Unless Congress is well versed in the nuances of GAGAS (Government Auditing Standards), it is more likely that the Congressional intent was a broad definition which would preclude DCAA from providing any support to non-defense agencies (a logical assumption that by its very nature an audit agency provides (broadly defined) audit support).

Although DCAA’s in-house legal opinion used the inexact wording of the 2016 NDAA to open the door for DCAA to perform non-audit services for non-defense agencies that same legal opinion stated that DCAA could actually provide audit services for civilian agencies if the incremental requirements (audit resources) were de minimis.  For example in auditing a contractor ICP which included a mix of defense and non-defense contracts, DCAA could test direct costs for non-defense contracts if the additional audit resources were de minimis.    Nothing in the 2016 NDAA provides any qualifier with respect to what appears to be an absolute prohibition on DCAA providing audit services to non-defense agencies; however, DCAA appears to be focused on interpreting and/or embellishing the written words to achieve preferred and most likely a pre-determined outcome.   Although it might be meritorious on DCAA’s part to seek opportunities to provide some audit support/services to non-defense agencies, it’s impossible to use the wording of the 2016 NDAA to support the belief that Congress intended for DCAA to perform any audit services for non-defense agencies.

It remains to be seen if Congress will intervene (i.e. actually state or clarify its intentions) and in any case this debate could be limited to FY2016.   The most obvious reason, Section 893 only applies to the 2016 NDAA, by implication only to DCAA’s FY2016 funding.  The other less obvious reason, if DCAA sufficiently reduces its ICP backlog during FY2016, Congress will have achieved its objective and there would be no logical reason for including a similar restriction in the FY2017 NDAA.

DCAA’s Challenge

It also remains to be seen if DCAA field auditors will be up to the challenge (or willing) to de-scope certain audit steps to determine that non-defense contracts (direct costs) can be audited with de minimis incremental audit resources.  In and of itself, a risky strategy given the history of DCAA’s failures to comply with GAGAS largely attributed to inadequate testing.  As stated in the December 3, 2015 blog, 2016 will continue to be an interesting and evolving year for those contractors with defense and non-defense contracts.         

White paper: DCAA Rejection of Incurred Cost Proposal Download Now        

Written by Michael Steen

Michael Steen 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.

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: DCAA Audit Support