Redstone Government Consulting Blog | Contracts & Subcontracts Administration (24)

“My DCAA auditor is telling me I’m now subject to CAS. What does that mean? What do I do?” We get questions like this almost every day. Usually we then obtain as much information as we can to determine why DCAA has made this claim and advise our clients accordingly.

The Department of Defense (DOD) June 28, 2013 “Performance of the Defense Acquisition System” annual report states that little difference exists between fixed price and cost-plus contracts when it comes to predicting or controlling costs. 

President Obama will purportedly send to Congress proposed legislation this week which will cap reimbursement of all government contractor employee annual salaries at $400,000, the President’s annual (base) salary.  The proposed legislation is an expansion of the FY 2013 National Defense Authorization Act (NDAA) approved in early CY 2013, applicable only to Department of Defense Contracts, which would ostensibly apply to all government contracts awarded by civilian government agencies, and elevate the cap from the previously debated ceiling of $230,700 (Vice-President’s salary) to the $400,000 amount. 

DCAA issued its long awaited audit programs for accounting system internal controls.  In March of this year it issued audit programs for its billing system, and the two facets of its accounting system; the control environment and the accounting system or accounting controls.  A significant portion of the control environment audit program is devoted to assessing a company’s “Management’s philosophy and operating style, commitment to competence, and human resource policies and procedures.”  DCAA informs its auditors that this is a very subjective area and in conjunction with their risk assessment procedures and attendance at audit entrance conferences and system demonstrations they should be aware of positive and negative signs.  Leaving the disclosure and development of these positive and negative signs up to the judgment and discretion of the auditor DCAA, HQs decides not to give any illustrations or examples of either, save one.  It very subjectively asserts that excessive turnover may be a possible negative indicator regarding management’s philosophy and operating style.  However, it doesn’t provide any type of a benchmark or barometer as to what is excessive.  It then instructs the auditors to request a listing of management or supervisory personnel in key functions such as operations and program management, accounting, or internal audit that have either retired, quit, or been terminated.  The auditor is then told that if the turnover appears to be excessive, obtain explanations of the reason for management or supervisory personnel leaving the organization. 

In a recent DCAA audit policy, DCAA makes note of the 2013 NDAA (National Defense Authorization Act) which requires DCAA to track requests and contractor responses for internal audits and to ensure that DCAA does not use contractor internal audit reports for any purpose other than evaluating and testing the efficacy of contractor internal controls and the reliability of associated contractor business systems.  The reason the NDAA mentions this “limited use” is to diffuse contractor concerns and allegations that DCAA will misuse access to internal audits for so called fishing expeditions.

Loss of Memory or In-Denial?

As most contractors (subject to DCAA incurred cost audits) are aware, DCAA and DCMA were soundly “defeated” in terms of ASBCA rejections of DCAA FAR 31.205-6(b) compensation reasonableness challenges (Reference to J.F. Taylor, ASBCA Cases 56105, 56322 and Metron, ASBCA Cases 56624, 56751, 56752).

Recently the House of Representative unanimously passed a bill prohibiting new federal contracts with companies with seriously delinquent federal tax debts. However, the House failed to pass a similar measure, Federal Employee Tax Accountability Act (FETAA), which could have resulted in terminating government employees with seriously delinquent tax debts. It seems to us that retaining government employees with serious tax debt is equivalent to retaining employees who steal from their employer, but apparently in the view of Democratic Congress-persons (critics of the FETAA), it would be unfair to single out federal workers whose tax compliance is better than the general public. The last we checked, the general public does not work for the federal government and in any case, the specific federal employees who are seriously tax delinquent are not tax compliant so who cares if federal employees collectively are more tax compliant than the general public. 

The continuing trend toward the diminution of pay and benefits for Government employees will have a negative impact on DCAA for many years to come.  Over recent years, and especially the past few, DCAA has lost and will continue to lose its experience and knowledge base.  Once those who can retire and those who can find employment elsewhere do so, the “preeminent” government audit agency with the primary goal of contract audits will be a mere shell of its former self, and many would argue that has already come to pass.  Pay freezes, furloughs, changes in retirement benefits, and overall lack of leadership have had devastating effects on the DCAA auditor rolls and contractors are now seeing the impact of this “Brain Drain.”  These actions, coupled with the Agency’s overreaction to recent GAO and DoD-IG criticism, have resulted in at best inappropriate interpretations and at worst inaccurate uses of government regulations and internal DCAA guidance by auditors with very little experience or direction that in past years was provided by more senior people.

Contractor Agrees to Reimburse Employees for Back Wages after Cited SCA Violation

An investigation conducted by the U.S. Department of Labor’s (DOL) Wage and Hour Division for compliance with the McNamara-O’Hara Service Contract Act (SCA) and the Contract Work Hours and Safety Standards Act (CWHSSA) revealed that CH, Inc. violated the provisions of these two statutes by underpaying 35 employees $268,899 in fringe benefits and overtime which, under the statutes, those employees were entitled to receive.

The Department of Defense Inspector General(DOD IG) issued a March 7, 2013 report charging that the Defense Contract Audit Agency (DCAA) failed to “exercise sufficient professional judgment” while performing certain audits between 2006 and 2010 signaling another bump in the long road ahead for the Agency's return to compliance with GAGAS.