Starting back in 2021, DCAA issued updates to its audit programs supporting the audit of incurred cost. Here are a few interesting things we noted in the updates.
Focus on Compensation
Most of the audit programs have entire sections now devoted to the audit of compensation, all based on DCAA’s belief that reputable (i.e., not free) market surveys are a requirement to support the reasonableness of compensation. Even DCAA’s so called Incurred Cost Audit Program for Small Business has section “U-1” titled “Agency Compensation Team: Compensation Reasonableness and FAR Cap Allowability.” This tells us that even a small business will be expected to have extensive job descriptions, current (yes – updated annually) resumes for each employee, and a documented compensation system. In the current, and pretty much always, highly competitive labor market this is simply over-kill. DCAA’s love-hate (hate some more) relationship with small business is truly concerning.
Hiding from Public View Some of the Planned Audit Procedures
DCAA has developed working paper templates that we believe provide the auditors with a greater level of detail than the audit procedures they are expected to complete. These templates are delivered to the auditors through the DCAA automated working paper system and not made publicly available. While the audit program states these “[t]emplates are offered as a tool to facilitate the documentation of the applicable procedures performed” and the “templates are not intended to replace auditor judgement of critical thinking” we doubt that the checklist-driven DCAA auditors will do anything but simply complete the delivered templates – risk or no risk.
DCAA is back to Reporting Expressly Unallowable Costs
For a time DCAA got out of the business of reporting what it believed was expressly unallowable cost; however, based on the updated audit programs, all containing a new step covering expressly unallowable cost, it appears they are back at it. The audit step instructs the auditor to “[c]alculate the total questioned costs considered to [be] potentially expressly unallowable costs subject to penalty … [and] [a]t a minimum, the report should identify questioned costs potentially subject to penalty and include supporting rationale (FAR 42.709-2(b)).” Well, if you do not have the resources to do your own job – at least that is what DCAA says – you might as well do the contracting officer’s job as well. Historically, DCAA and DCMA have not seen eye to eye on just what is an expressly unallowable cost. However, if the Inspector General has a boot to the throat of the contracting officer for not supporting what is reported to be “an independent audit opinion” – it is a great time to be a little less than independent.
Travel
A search of the DCAA audit programs disclosed no mention of or direction to the auditor to review travel costs. Travel costs has been a favorite area for DCAA for years, even though the audit findings are in many cases immaterial to the contract values being audited. Well, maybe there is light at the end of the tunnel. Do you think DCAA gets it, that between their questionable sampling software – that is being pulled from their website – and the fact that extensive controls over travel costs that are in most cases low dollar, if not immaterial, DCAA’s past actions have ended up costing more than they ever returned? One can hope.
Our Takeaway
While the number of incurred cost audits by DCAA is significantly down compared to the past, a small business that is selected for audit will have to invest extensive resources to get DCAA in and out. Unfortunately, DCAA expectations of small business go far beyond that of a public practice auditor (in our opinion).
Redstone GCI assists government contractors with understanding the Government’s expectations before, during and after audit. Let us help you be prepared for your next incurred cost audit.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant