What to Do and Not to Do When DCAA Cites Findings Against Your Company

So, the Defense Contract Agency Audit (DCAA) auditor comes into your office, performs an audit, and…they have findings. What do you do? Wait…is there something that I should not do?

What Does DCAA and Its Auditors Do?

They provide audit and financial advice to contracting officers in acquiring contracted materiel and services for sailors, soldiers, airmen, marines, and guardians in protecting and winning America’s wars. DCAA is independent of the military services, so it is not influenced by the military services in providing audit and financial advice. Specifically, DCAA’s audits address the “rules” that contractors need to comply with such as the Federal Acquisition Regulation (FAR), the Defense Federal Acquisition Regulation Supplement (DFARS), Cost Accounting Standards (CAS), other applicable government laws and regulations as well as any contract limitations.

DCAA quantifies its audit exceptions to contractor proposals such as initial pricing, claims, and incurred costs through “questioned costs.” This provides the contracting officer assistance with the negotiation of a dollar amount. DCAA also evaluates contractors’ compliance with regulations such as the FAR, DFARS, CAS, and issues audit reports and any exceptions in a narrative format. These types of reports assist the Administrative Contracting Officer (ACO) in the administration of contractors’ compliance with required regulatory criteria included as part of their contracts. DCAA’s Contract Audit Manual, 4.304.2(b) states, “[d]iscuss any factual differences found during the audit with the contractor and obtain a reaction for further analysis or inclusion in the audit report. However, pursuant to FAR 15.404-2(c)(1)(i), do not disclose to the contractor the audit conclusions and recommendations on projected costs or rates that are subject to contracting officer negotiation….” I recommend asking DCAA specifics during the exit conference. We have had one client that thought DCAA was questioning about $200K when it was questioning closer to $2 million.

DCAA shares its audit findings and audit reports with the contractors except for contractor initial pricing proposals, claims for equitable adjustment, and terminations. These reports are not shared since they provide information for the government’s contracting officers for the negotiation and settlement of these proposals. The DCAA findings are used by the government contracting officer in establishing the government negotiation baseline.

All other DCAA reports are supposed to be shared with the contractors, but they may not always be. For example, even when DCAA shares these reports, DCAA may only provide individual Statement of Conditions and Recommendations (SOCARs), which are specific findings to criteria, such as one of the 18 criteria for DFARS 252.242-7006(c) for an acceptable accounting system, and what is missing is the overall DCAA audit opinion. I recommend asking DCAA at its exit conference, “What is their overall audit opinion?” This is important since you may believe that DCAA audit findings are insignificant. In contrast, the recipient of the DCAA report, the ACO, is looking to withhold payments due to an adverse audit opinion.

What Do You Do with the DCAA Audit Reports?

The audit reports that get shared are compliance audits with contractor business systems, CAS, and incurred cost audits. What should you do with these? Well, I recommend that you do the following:

• Provide a single point of contact between your company and DCAA. This provides a single voice with your company and DCAA, so multiple people are not providing conflicting comments to the DCAA auditors.
• Track what DCAA is requesting and when it was provided.
• Communicate within your company record-keeping responsibilities and be proactive with DCAA audit requests.
• Review and have adequate policies for the treatment and retaining company records that are subject to audit. Having inadequate documentation and support for contract costs could lead to costs that are not reimbursed in accordance with FAR 31.201-2(d) Determining allowability.
• Know the regulations (FAR Part 31, Contract Cost Principles and Procedures) and especially the Audit and Records-Negotiation clause (FAR 52.215-2) in what DCAA can request.
• Train your personnel to recognize the FAR Part 31 requirements and screen for unallowable contract costs in submissions to the government.
• Agree with DCAA findings where they have it right. This will help you gain credibility in dealing not only with the DCAA auditors but also with the contracting officer.
• Recognize when DCAA is wrong. Know the facts and interpretations of regulations (for example, FAR) and public law (CAS). Start formulating a persuasive argument for allowing costs. State your exceptions at the audit exit conference and any subsequent negotiations.

What Should You Not Do After the DCAA Audit?

In a similar vein, what should you not do? I recommend NOT to do the following:

• Agree with DCAA findings if you really do not (unless it is insignificant).
• Discuss something with the auditor that could be interpreted as fraud.
• Argue with the DCAA auditor just to vent your frustration with the audit process.
• Discuss matters unrelated to the specific audit DCAA is conducting but could be findings in another audit DCAA could perform.
• Be overly candid with the DCAA auditors. Keep to the “facts and nothing but the facts.”

Being familiar with what to do and not to do could go a long way to having a successful professional relationship with the auditors as well as being successful in contracting with the government.

Redstone Government Consulting, Inc, with its experienced accountants and lawyers, can assist contractors through the facts and evidence collection, preparing a rebuttal to an audit finding, as well as Government contracting discussions. Make us part of your team!