Redstone Government Consulting Blog | DFARS Business Systems (11)

Requirement for Improved Auditing of Contracts

In late November, President Obama signed the 2016 NDAA (National Defense Authorization Act, S.1356)) which includes a number of sections related to Acquisition Policy or Acquisition Management.  Of particular note for those subject to DCAA contract audits, a requirement for improved auditing which is 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 performing any audits 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”.  As a point of clarification, the inventory should include ICPs currently being audited or those in the queue awaiting audit.  Based upon DCAA’s 2014 report to Congress, DCAA had approximately 18,185 ICPs valued at $822 billion (on hand as of 9/30/2014).  Based upon May 2015 public comments made by DCAA’s Deputy Director, the annual inventory is approximately 7,500 ICPs which would implicate an approximate annual value of $339 billion.

“Help! We received a letter from our ACO informing us that they will be conducting a Contractor Purchasing System Review (CPSR) three months from now – can you help us?” This is a scenario we hear all too frequently these days. As promised, DCMA has ramped-up their efforts to ensure contractors purchasing systems are being reviewed and assessed for adequacy.

The simple English Wikipedia encyclopedia defines a Tsunami as “a series of fast moving waves in the ocean caused by powerful earthquakes or volcanic eruptions”. Arguably one can equate negative DOD Inspector General Reports to powerful earthquakes or volcanic eruptions at least to those organizations in the path of these Government oversight tidal waves. What tidal waves you may ask? Well, let’s look at two recent reports from the DOD IG very critical of DCMA; Report No. DODIG-2015-139 and Report No. DODIG-2016-001.  

The Foreign Corrupt Practices Act prohibits payments made directly or through intermediaries to foreign government officials to assist in obtaining business, retaining business, or directing business to any person.

The Foreign Corrupt Practices Act (FCPA) continues to be a high priority of enforcement for the Securities Exchange Commission (SEC) and the Department of Justice (DOJ). The U.S. Government’s aggressive approach to transactional bribery of foreign government officials will be anything but relaxed as companies and business people can expect a continued prioritization of FCPA cases. The DOJ has added more prosecutors and more resources than ever before. Additionally, U.S. regulators have stated that penalty amounts are not going down.

Just a follow-up to our July 13, 2015 blog and a reminder that effective October 1, 2015 a number of FAR dollar-thresholds will be updated in accordance with 41 U.S.C. Section 1908, which requires the inflation adjustment of dollar thresholds every five years. The upcoming changes were posted in July within Federal Register Vol. 80 No. 127; however, the impact of these changes is minimal with most commonly used dollar thresholds being increased around 6-7%. A detailed list of the most frequently used thresholds and their changes are noted below.

DCAA has had MMAS (Material Management and Accounting System) audit cognizance or review responsibility for DOD contractors since the advent of the DFARS Business Systems Rule in 2012. DCAA’s scope of audit is to determine if a contractor’s MMAS complies with the ten criteria or standards set forth in DFARS 252.242.7004.

Estimating System Deficiencies

In its recent report (DODIG 2015-139), the DOD-IG (Inspector General) found that DCMA Contracting Officers failed to comply with DFARS timing requirements related to contractor business systems (DFARS 215,407-5-70 and DFARS 252.242-7005. In this case, the IG evaluated actions (or more accurately inactions) on 18 DCAA audit reports related to contractor estimating systems which are subject to the criteria in DFARS 252.215-7002. The DFARS Business Systems rule includes no time frames concerning government audits of contractor systems; however, once a government audit report is (finally) issued, DFARS has the following time-requirements (“requirements” used loosely because due dates applicable to the government are routinely ignored as evidenced in the IG report):

On June 18, 2015, as a retired “civil servant” whose personnel records now reside with OPM, I was notified by OPM that OPM had “recently become aware of a cybersecurity incident that may have exposed my personal information”.

In 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).

A Prospective View of Model Employer (Government Contractor)

On April 15, 2015, members of the self-proclaimed Congressional Progressive Caucus called for an Executive Order (EO) which would define a model employer and provide model employers with preferences in terms of government contract awards.  The Progressive Caucus envisions an EO which would define a model employer to include a minimum wage of $15/hour, other benefits including paid time off, full-time hours and predictable schedules.  As noted by this Caucus, the 2014 EO which raised the minimum wage to $10.10/hour for employees of government contractors was simply not enough to eliminate stagnant wages which tether jobs to poverty and government assistance.