[Senate Hearing 110-1035]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 110-1035
 
  EXPEDIENCY VERSUS INTEGRITY: DO ASSEMBLY-LINE AUDITS AT THE DEFENSE 
             CONTRACT AUDIT AGENCY WASTE TAXPAYER DOLLARS? 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 10, 2008

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs

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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
                         Troy H. Cribb, Counsel
                      Nora K. Adkins, GAO Detailee
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
               Richard A. Beutel, Minority Senior Counsel
                   Eric B. Cho, Minority GSA Detailee
                  Trina Driessnack Tyrer, Chief Clerk
         Patricia R. Hogan, Publications Clerk and GPO Detailee
                    Laura W. Kilbride, Hearing Clerk





















                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Lieberman............................................     1
    Senator Collins..............................................     3
    Senator McCaskill............................................    24

                               WITNESSES
                     Wednesday, September 10, 2008

Gregory D. Kutz, Managing Director, Forensic Audits and Special 
  Investigations, U.S. Government Accountability Office, 
  accompanied by Gayle L. Fischer, Assistant Director, Financial 
  Management and Assurance Team, U.S. Government Accountability 
  Office.........................................................     5
Diem Thi Le, Senior Auditor, Defense Contract Audit Agency, U.S. 
  Department of Defense..........................................     7
Paul Hackler, Supervisory Auditor, Defense Contract Audit Agency, 
  U.S. Department of Defense.....................................     9
Hon. Gordon S. Heddell, Acting Inspector General, U.S. Department 
  of Defense.....................................................    12
April G. Stephenson, Director, Defense Contract Audit Agency, 
  U.S. Department of Defense.....................................    14

                     Alphabetical List of Witnesses

Hackler, Paul:
    Testimony....................................................     9
    Prepared statement...........................................    71
Heddell, Hon. Gordon S.:
    Testimony....................................................    12
    Prepared statement...........................................    79
Kutz, Gregory D.:
    Testimony....................................................     5
    Prepared statement...........................................    49
Le, Diem Thi:
    Testimony....................................................     7
    Prepared statement...........................................    67
Stephenson, April G.:
    Testimony....................................................    14
    Prepared statement with an attachment........................    90

                                APPENDIX

DCAA Memorandum dated August 31, 2007, submitted for the Record 
  by Senator McCaskill...........................................   102
DCAA Memorandum dated September 12, 2008, submitted for the 
  Record by Senator Lieberman....................................   104
Charts submitted by Mr. Kutz.....................................   105
Responses to post-hearing questions for the Record from:
    Ms. Stephenson...............................................   107


                      EXPEDIENCY VERSUS INTEGRITY:
                     DO ASSEMBLY-LINE AUDITS AT THE
                  DEFENSE CONTRACT AUDIT AGENCY WASTE
                           TAXPAYER DOLLARS?

                              ----------                              


                     WEDNESDAY, SEPTEMBER 10, 2008

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Joseph I. 
Lieberman, Chairman of the Committee, presiding.
    Present: Senators Lieberman, McCaskill, and Collins.

            OPENING STATEMENT OF CHAIRMAN LIEBERMAN

    Chairman Lieberman. Well, good morning and welcome to our 
hearing. I thank all of the witnesses for being here.
    Today's hearing will look into the disturbing allegations 
that the Defense Contract Audit Agency (DCAA)--which is one of 
our government's most important and, I would say, respected 
watchdog offices--has over the years ignored standard auditing 
rules to issue clean audits of contractors, despite problems 
identified by DCAA's own auditors.
    Investigators have found that on repeated occasions DCAA 
has issued audits favorable to contractors that are not 
supported by facts, which has the effect, I fear, of 
encouraging waste, fraud, and abuse of taxpayer money.
    The reports that we are going to hear today tell us that 
one of the causes of these problems may be that DCAA is 
obsessed with the speed of their process rather than the 
accuracy of the results. The reports also raise questions of 
whether the Defense Contract Audit Agency is independent enough 
to be able to stand up to pressures from both Federal agencies 
and contractors.
    DCAA's mission is simply too important for these failures 
to be tolerated. The agency is responsible for all contract 
audits for the Department of Defense. In fiscal year 2007, that 
equaled $314 billion of the $440 billion the Federal Government 
spent on contracts for goods and services. That is a lot of 
taxpayer money. DCAA, incidentally, also performs audits for 
other agencies, such as the Department of Energy and NASA.
    The revelations that are part of the reports that will be 
discussed today and the testimony given by two whistleblowers, 
in fact, begin in the fall of 2005, when a DCAA auditor called 
the Department of Defense (DOD) Inspector General's hotline to 
complain that the DCAA supervisors were breaking auditing rules 
to favor certain contractors. That call set off a series of 
investigations that brought to light the problems we will focus 
on today.
    Investigators for the Government Accountability Office 
(GAO), in a report issued in July, said that when auditors at 
DCAA found problems with contractor proposals violating 
procurement laws and auditing standards, too often their 
supervisors ignored, and sometimes even altered, their 
underlying work to give the contractors favorable audits. That 
is unacceptable behavior.
    Separate investigations done by the Defense Criminal 
Investigative Service (DCIS) and the Inspector General (IG) at 
DOD confirm GAO's findings in general.
    One of our witnesses today--Ms. Thi Le--will describe an 
audit, requested by the Department of Energy, of the Fluor 
Corporation's accounting system. Fluor provides a variety of 
management and engineering services to Department of Energy 
valued at almost $1 billion.
    Accounting system audits, as our witnesses well know, are 
not tied to any one government contract but, rather, evaluate 
the adequacy of the contractor system's control environment and 
overall accounting controls and the contractor's compliance.
    In performing this audit, Ms. Le determined that the 
accounting system of the Fluor Corporation was vulnerable to 
significant overcharging of the Federal Government. Instead of 
letting her perform additional testing, as she requested, Ms. 
Le's supervisors simply changed her audit opinion from 
``inadequate'' to ``adequate.''
    Given that Fluor holds an additional $431 million in 
contracts with our government--with the Federal Emergency 
Management Agency (FEMA), the Army, the Air Force, and the 
Employment and Training Administration--these poor accounting 
methods could mean tens of millions of dollars of undetected 
waste in overpayments to Fluor.
    Another witness, Paul Hackler, will describe how Integrated 
Defense Systems, a subsidiary of Boeing, structured its costs 
under an Air Force contract for satellite launch capability in 
a way that helped Boeing make up for losses in its commercial 
markets--in direct contradiction of Federal procurement law.
    The auditor alerted his supervisor to the problem and was 
told to leave his findings out of the audit so the project 
could go forward. The result? The Federal Government seems to 
have wound up picking up the cost of Boeing's $270 million loss 
when the company did not sell satellite systems to the private 
cell phone industry, a development unrelated to the contract 
that the company had with the government.
    In granting contractors these unjustified clean bills of 
health in its audits, DCAA has enabled them to proceed with 
large-scale projects without the additional DCAA scrutiny that 
would have followed had the contractors received less favorable 
audits.
    GAO also found that some supervisors in the Western Region 
office of DCAA created an abusive work environment for those 
who tried to maintain the integrity of their audits. Sometimes, 
when auditors challenged what they believed to be waste and 
fraud, they received not praise for a job well done but 
downgraded performance reviews, transfers, and other forms of 
reprisal.
    Worst of all to the integrity of the system, GAO found that 
some DCAA managers intimidated auditors who cooperated with the 
GAO and IG investigators.
    Since the GAO report was released in July, at least 18 
other DCAA auditors have contacted GAO with similar stories of 
clean audits being issued without underlying support. So this 
is a real problem. And I must say that I was unhappy with the 
DCAA's initial response to these GAO allegations because it 
looked to me basically like a circling of the wagons.
    In a letter dated July 11, 2008, DCAA said that it does 
``not concur with the totality of GAO's overall conclusions.'' 
I do not understand that as sensible or responsive since those 
conclusions, as I have said, were backed by DCIS and IG 
investigations, and since, as far as I can tell, DCAA has not 
refuted the specific findings of the GAO report.
    To get to the bottom of this troubling story and to see how 
together we can fix what is wrong with a critically important 
auditing agency, we have five witnesses today--the two 
whistleblowers, a representative of GAO, the Acting Inspector 
General of DOD, and the Director, finally, of DCAA.
    I am going to call on Senator Collins in a minute, but as 
my staff may have told you, I think we have decided to change 
the order of the witnesses slightly. We will begin with Mr. 
Kutz to lay out the overall GAO findings, then go to Ms. Thi Le 
and Mr. Hackler, and then we will go on to the rest of the 
table.
    Thank you very much. Senator Collins.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you, Mr. Chairman. Let me begin by 
thanking you for holding this hearing this morning. I also am 
not surprised to see that we are joined by our auditing expert 
on this Committee, the Senator from Missouri, and I am sure she 
will add a great deal to the hearing this morning as well.
    More than 2 years ago, Senator Lieberman and I asked the 
GAO to undertake a comprehensive assessment of audit work 
performed by the Defense Contract Audit Agency, known as DCAA. 
The DCAA is the principal auditor for contracts at the 
Department of Defense.
    We asked for this investigation in response to allegations 
of serious mismanagement that had been reported to the GAO, the 
DOD Inspector General, and to this Committee. During the course 
of its review, the GAO uncovered outrageous conduct and flawed 
audits at three offices in DCAA's Western Region.
    The comprehensive GAO audit requested by the Committee will 
be issued later this fall, but I commend the GAO for releasing 
an interim report detailing the significant shortcomings 
already observed in DCAA audit practices.
    In the interim report, GAO investigators confirmed that 
DCAA issued audit opinions with inadequate support, that 
supervisors altered audit opinions with insufficient 
justification, that some major audits were conducted by 
inexperienced staff without adequate supervision, and--most 
troubling of all--that some DOD contractors ``improperly 
influenced'' the audits.
    These findings suggest that the wasteful or even fraudulent 
use of taxpayer dollars has gone undetected and that the 
government may have been overcharged by some contractors to the 
tune of millions of dollars.
    Thorough, accurate, and tough audits are essential, and 
DCAA's work must be untainted by pressure or conflicts of 
interest. Instead, the GAO found ``numerous failures'' to 
comply with government auditing standards. That is a serious 
failing for, as the GAO has noted, substandard audits do not 
provide assurances that billions of dollars in payments to 
contractors complied with Federal regulations, accounting 
standards, or even contract terms.
    These facts are bad enough. But GAO's work also reveals 
that at least one major defense contractor reached an advance 
understanding with DCAA about the nature and scope of an audit, 
that some DCAA employees changed findings at the direction of 
senior managers, and that ``a pattern of frequent management 
actions . . . served to intimidate the auditors and create an 
abusive environment'' at two DCAA locations.
    I am also deeply concerned about GAO's findings that 
whistleblowers who reported misconduct were subject to 
intimidation and threats from supervisors. Congress relies on 
courageous whistleblowers to expose wrongdoing so that we can 
improve and reform Federal programs and operations. It is 
critical that supervisors throughout the Federal Government 
respect the protections that our laws provide whistleblowers 
and act swiftly to remedy the problems that they identify.
    As we address the particular problems that the GAO has 
identified, we must also work to reestablish DCAA as a first-
rate, independent audit agency.
    Some current and former employees have identified 
performance metrics keyed to speed and volume as undermining 
good auditing practices in some cases. Now, obviously, 
productivity is important, but whether the subject is executive 
compensation, mortgage underwriting, or contract auditing, 
metrics that emphasize time and volume over quality or long-run 
results can invite shortcuts, sloppy work, and, ultimately, 
even program failure. It does little good to have internal 
controls and review processes if employees are gaming or 
bypassing them in order to meet metrics.
    Of course, inappropriate influences can also come from 
outside of an organization. All of us recall the infamous case 
of the Air Force procurement officer who negotiated a plush job 
with a defense contractor while at the same time engaged in 
negotiating a $24 billion contract with that company. 
Ultimately, she pled guilty to criminal conflict-of-interest 
violations.
    The GAO report raises a red flag. It suggests that a few 
DCAA employees may have been more interested in protecting 
contractors and securing future employment than in protecting 
taxpayers and our national security.
    These failures at DCAA illustrate the aptness of a question 
that was raised by a Roman satirist nearly 2,000 years ago, 
when he asked: ``Who shall guard the guardians themselves?'' We 
rely on the many honest and hard-working employees at DCAA to 
be the first line of defense. When the audit agency fails, 
problems cascade throughout the system and ultimately can even 
shortchange our troops in the field. Congress must carefully 
consider the reforms needed at the Defense Contract Audit 
Agency in light of these disclosures.
    I commend the GAO once again for its diligence and 
thoroughness in studying this problem, and I look forward to 
the completion later this fall of the comprehensive audit that 
the Chairman and I initiated 2 years ago.
    The GAO, as the Chairman has indicated, coordinated its 
work with the Defense Department Inspector General and the 
Defense Criminal Investigation Service. I expect these 
investigators to also vigorously pursue their work in the event 
that criminal conduct is exposed in their independent 
investigations.
    Finally, let me just conclude by thanking the Chairman for 
this latest example of his leadership and our shared interest 
in probing defects in our Federal acquisition process as a 
prelude to additional legislative reforms.
    Thank you, Mr. Chairman.
    Chairman Lieberman. Thank you very much, Senator Collins, 
for that excellent statement and also for the work that we have 
done together.
    Thanks, Senator McCaskill, for being here and for the 
support that you and your staff have given this particular 
investigation and the preparation of this hearing.
    Mr. Kutz, I would like to start with you. For the record, 
you are the Managing Director, Forensic Audits and Special 
Investigations of the GAO, and I note that you are accompanied 
by the Assistant Director, Gayle Fischer. Please proceed with 
your testimony.

 TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC 
      AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
    ACCOUNTABILITY OFFICE, ACCOMPANIED BY GAYLE L. FISCHER, 
 ASSISTANT DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE TEAM, 
             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Kutz. Mr. Chairman and Members of the Committee, thank 
you for the opportunity to discuss the Defense Contract Audit 
Agency.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kutz appears in the Appendix on 
page 49.
---------------------------------------------------------------------------
    Today's testimony highlights the results of our 
investigation of allegations we received in 2006. The bottom 
line of my testimony today is that these allegations were 
accurate. Specifically, DCAA's work for 14 audits that we 
investigated did not meet professional standards.
    My testimony has two parts: First, I will discuss the 
problems that we identified; and, second, I will discuss key 
causes of these problems.
    First, our investigation covered 14 audits at two locations 
and a series of forward pricing audits at a third location. For 
these audits, we identified four key themes. These themes were 
lack of independence, changing audit opinions, inadequate 
supervision of staff, and an abusive work environment.
    With respect to independence, we found that pressure from 
contractors and DOD buying commands appeared to improperly 
influence audits. For example, this pressure resulted in 
dropped findings and the issuance of reports before supervisors 
had reviewed the work. In one case, DCAA agreed with a 
contractor in advance to set up a process that ensured a 
favorable result.
    We also found what appeared to be a systematic whitewashing 
of findings from draft audit reports. For 11 audits, initial 
auditor opinions of ``inadequate'' or ``inadequate in part'' 
were changed to ``adequate'' or what we refer to as a ``clean 
opinion.'' In many of these cases, supervisors provided no 
basis for these changes.
    For example, as the posterboard on my right shows, one 
auditor found six significant deficiencies and drafted an 
inadequate opinion report in June 2005.\1\ As you can see, by 
September, this supervisor had changed the draft to an 
``adequate'' opinion. This opinion allowed the contractor to 
bill DOD and receive payments with no government review.
---------------------------------------------------------------------------
    \1\ The first chart referenced by Mr. Kutz appears in the Appendix 
on page 105.
---------------------------------------------------------------------------
    We also found a lack of adequate staff supervision. For 
example, again on the posterboard shown on my right, you see a 
memo where an auditor writes, ``We are not holding this 
contractor, with a history of questioned costs, poor internal 
controls, and shoddy practices, to a high standard by 
downgrading what are clearly significant deficiencies.'' \2\
---------------------------------------------------------------------------
    \2\ The second chart referenced by Mr. Kutz appears in the Appendix 
on page 106.
---------------------------------------------------------------------------
    We found a number of memos just like this one documenting 
disagreements between staff and management. These memos reflect 
the lack of timely supervision. In a normal, healthy audit, 
issues like this are worked out on a daily basis, and there is 
no need for a memo like this at the end of the audit.
    These disagreements help explain the fourth key theme: An 
abusive work environment at two locations. We found evidence of 
verbal warnings, involuntary reassignments, and threats of 
disciplinary action against auditors because they would not 
drop audit findings or draft favorable reports. Auditors were 
also scared to speak to GAO's staff for fear of retaliation.
    Let me move on to my second point: Two key causes for these 
problems.
    First, auditors told us that the limited number of hours 
budgeted for their audits resulted in a disincentive to 
identify and report contractor problems. According to DCAA, 
their 3,500 auditors annually perform about 35,000 audits. 
Given these numbers, the focus on production rather than impact 
is not surprising.
    Second, for DCAA to be most effective, as was mentioned 
earlier, they must be independent. However, in addition to the 
improper influence by contractors, we found pressure from 
within DOD for auditors to facilitate the process rather than 
protect the interests of taxpayers.
    In conclusion, I cannot tell you today whether these 14 
audits are isolated instances or the tip of the iceberg. 
Additional evidence indicates problems not only here in the 
United States but also in Iraq. What I can tell you today is 
that, with hundreds of billions of dollars at stake, taxpayers 
need a contract audit agency that is looking out for their 
interests.
    Mr. Chairman, this ends my statement. Ms. Fischer and I 
look forward to your questions.
    Chairman Lieberman. Thanks, Mr. Kutz. I must say that was 
devastating. And just as a point of fact, I am going to ask 
you: How did you choose those 14 contracts to audit?
    Mr. Kutz. They were the ones the allegations were 
specifically related to. That is why this is an investigation.
    Chairman Lieberman. Understood. And now you are doing a 
broader audit.
    Mr. Kutz. A broader look, correct.
    Chairman Lieberman. A somewhat more random, but----
    Mr. Kutz. Yes, much more DCAA-wide.
    Chairman Lieberman. OK. Thank you. We will have questions 
for you.
    The next two witnesses are the whistleblowers who have 
acted with professionalism and, I would say, courage. I 
appreciate very much what you have done and your willingness to 
be here today. First we are going to call on Diem Thi Le, 
Senior Auditor, Defense Contract Audit Agency. Ms. Le, good 
morning. Thanks for coming, and we welcome your testimony now.

 TESTIMONY OF DIEM THI LE,\1\ SENIOR AUDITOR, DEFENSE CONTRACT 
            AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE

    Ms. Le. Thank you. Good morning, Chairman Lieberman and 
Members of the Committee. I first would like to thank you for 
the opportunity to take part in this hearing. My name is Diem 
Thi Le, and I have been with the DCAA for 19 years. For 17 
years I have been a senior auditor. I am also a licensed CPA in 
the State of California.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Le appears in the Appendix on 
page 67.
---------------------------------------------------------------------------
    Nineteen years ago, I left the private sector to join DCAA 
because I wanted to be a part of an organization that was 
committed to excellence in support of the national interest and 
protecting taxpayers' money. However, in recent years, because 
of the emphasis on performance metrics, DCAA has changed from 
putting an emphasis on excellence to an emphasis on performance 
metrics, and that is one of the reasons why I am here today.
    My testimony includes four parts: First, what triggered my 
calling the hotline; second, how the hotline personnel 
mishandled my case; third, the harassment I have suffered; and, 
last, the systemic problems at DCAA.
    In September 2005, I was performing an accounting system 
audit at the corporate office of a contractor. This is the GAO 
Case No. 6. I found that the contractor's accounting system was 
inadequate in part and, as a result, the contractor was 
misallocating and mischarging costs to the government. 
Originally, my supervisor concurred with my audit findings, but 
later on she told me that my branch manager did not agree with 
my findings. After my requests to meet with the branch manager 
to explain my audit findings were denied, I elevated the 
unreconciled difference of opinion to the next level of 
management. But I was told that I, as the performing auditor, 
had no say in the final audit opinion. My supervisor then 
deleted the audit findings from my working papers and used 
those changed working papers as her working papers to support 
the change in the audit opinion from an inadequate system to an 
adequate system without performing any additional work.
    As a result, the contractor was not required to propose or 
implement any corrective actions to eliminate the system 
deficiencies that would result in mischarging and misallocating 
costs to the government.
    Subsequently, I found out that my branch manager had been 
changing other auditors' opinions of ``inadequate'' system to 
``adequate'' system.
    Because an ``adequate'' system would result in less audit 
risk and fewer audit hours by having a contractor's system 
deemed ``adequate,'' my branch manager was trying to increase 
the productivity rate, which measures the audit hours incurred 
versus the dollar examined, and the productivity rate is one of 
the factors on which my branch manager's annual performance is 
rated.
    Mr. Chairman and Members of the Committee, in recent years, 
because of the emphasis on performance metrics, we auditors 
have been pressured by management to perform our audits within 
a certain number of hours. But this was the first time that I 
discovered my management changed the auditors' opinions of an 
``inadequate'' system. I confided this troubling discovery with 
some of my colleagues. All of them told me that I had no choice 
but to call the DOD IG hotline, so I did in November 2005.
    I would have never imagined that I would submit an 
allegation against my management. Equally the same, I would 
have never imagined that the hotline people would refer my 
compliant back to my agency so that my agency could perform an 
investigation of my complaint.
    Subsequent to my first meeting with the IG investigator, it 
was confirmed by him that my referral was, in fact, sent back 
to DCAA headquarters, and that referral included specific 
personal identifying information, such as my name and my phone 
number. As a result, I believe that my identity as a 
whistleblower was not adequately protected, and I have suffered 
reprisal from DCAA management.
    Following are just some of the significant incidents of 
harassment and retaliations directed at me.
    At the November 2005 Staff Conference, the regional audit 
manager stated to us, the auditors, that if we did not like our 
management's audit opinion, we should find another job.
    In October 2006, I found out that I was the only auditor 
with an ``Outstanding'' rating who did not get a performance 
award.
    In April 2007, after the Office of Special Counsel (OSC) 
investigator contacted the DCAA regional management to inform 
them of my whistleblower complaint, I was told to see a 
psychiatrist.
    In August 2007, I was given a memorandum instructing me 
that I was not allowed to provide any documentation generated 
by a government computer to any investigative unit, including 
the OSC. Failure to do so would result into disciplinary 
action.
    In October 2007, I was then advised to read 18 U.S.C. 
Section 641, Theft of Government Property. I was told by my 
supervisor that the unauthorized distribution of agency 
documents would result in a theft charge, and it does not 
matter if it is to respond to a hotline or OSC complaint.
    And last, but not least, since the IG investigation 
started, I have been downgraded from an ``Outstanding'' auditor 
to a ``Fully Successful'' auditor, and my promotion points have 
been reduced from 78 to 53 out of 120 maximum.
    The last part of my testimony is the systemic problems at 
DCAA. It is my opinion and my observation that DCAA management 
has become so metric driven that our audit quality and 
independence have suffered. Audits are no longer dictated by 
the audit risks but, rather, by the established guidelines of 
audit hours and audit due dates. The pressure for us to 
complete our audits within a certain time frame is so intense 
that it would often prevent us, the auditors, from following 
our instincts in questioning contractor costs, reporting system 
deficiencies, and evaluating suspected irregular conducts. In 
the end, contractors are getting away with murder because they 
know we are so metric driven.
    Also, because of the emphasis on the performance metrics, 
DCAA has created layers of personnel who do nothing but monitor 
the metrics. As a result, the goal is not to protect the 
government's interest and to save taxpayers' money but to 
answer to management's questions related to performance 
metrics.
    Mr. Chairman and Members of the Committee, again I would 
like to thank you for the opportunity to be here. It is my hope 
that by participating in this hearing, it will help bring 
changes at DCAA. It is also my hope that those changes will 
allow us truly to perform our audits in accordance with the 
generally accepted government auditing standards in order to 
protect the government's interest and to save the taxpayers' 
money.
    This concludes my testimony, and I look forward to your 
questions. Thank you.
    Chairman Lieberman. Ms. Le, thank you very much. That was 
an act of public service, and I appreciate it greatly.
    Our next witness, another whistleblower, we call on you 
with thanks and respect, Paul Hackler, Supervisory Auditor, 
Defense Contract Audit Agency.
    Mr. Hackler, where do you live now?
    Mr. Hackler. I live in California.
    Chairman Lieberman. You both came from California?
    Ms. Le. Yes.
    Chairman Lieberman. Please proceed with your testimony.

  TESTIMONY OF PAUL HACKLER,\1\ SUPERVISORY AUDITOR, DEFENSE 
       CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE

    Mr. Hackler. Mr. Chairman, Ranking Member Collins, and 
Members of the Committee, thank you for the opportunity to 
speak to you today about DCAA's Expendable Launch Capability 
(ELC) Buy III proposal audits. I am a GS-13 supervisory auditor 
and a certified public accountant in California with 25 years 
of DCAA experience. I am going to be speaking about lot costing 
today and how it related to the ELC proposals.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hackler appears in the Appendix 
on page 71.
---------------------------------------------------------------------------
    Lot costing is an accounting concept where certain products 
are more efficiently made in batches rather than one by one. 
If, for instance, the government goes to a contractor and says, 
``I would like to buy 100 tanks,'' and the contractor says, 
``OK, but I make tanks in lots of 1,000, and it takes 15 years 
to build them. Although I know I can make a tank today for $1 
million, I think it is going to take $5 million to build that 
last tank in my lot 15 years from now. So what I am going to do 
is charge you the average over those 15 years, and I am going 
to charge you $3 million today instead of the $1 million I know 
I can make it for.'' That is how lot costing works.
    The 2005 and 2006 ELC proposal audits I supervised 
contained a 15-year lot costing scenario just like the one I 
described to you that allowed Boeing to recover $270 million in 
past losses it incurred for aggressively pursuing a commercial 
satellite market. The government realized this and restructured 
the program so that Boeing could be reimbursed for launch 
capability on a day-to-day basis, but the cost of building the 
launch vehicle, the rocket, would remain a fixed-price 
contract.
    Boeing projected that the cost per launch would decrease 
substantially in the future, and so when they restructured the 
contract, the government needed to compensate them for the 
higher up-front costs. Actually, enormous up-front costs 
resulted only from Boeing's decision to gear up for a 
commercial market that never existed, and DCAA was directed to 
play along with this outrageous government bailout.
    My testimony will focus on the inherent problems with lot 
costing, DCAA upper management's directed audit opinion, and 
reprisals for resisting that opinion.
    Boeing initially anticipated the emerging cell phone market 
would deploy satellites to route cell phone traffic. Shortly 
after Boeing geared up for this, cell phone providers switched 
to land-based towers. The cell phone satellite market went from 
75 percent of projected sales to zero almost overnight. And 
Boeing announced an $835 million loss because of it.
    Since Boeing was losing more than $100 million per launch, 
the government decided to restructure the contract by 
reimbursing Boeing directly for launch capability, basically on 
a month-to-month basis. Before this, Boeing was only paid for 
launch capability when the launch actually took place. However, 
we were directed by the Pentagon officials that prices for the 
remaining 11 fixed-price launches already in place were to 
remain in place, no losses were to be recovered, and all 
applicable government regulations were to be adhered to.
    In reviewing the 2005 proposal, my team determined that 
there were serious procurement regulation violations and issued 
an audit opinion that would not let the Air Force go forward. 
Two of the significant deficiencies were Boeing's use of a 15-
year lot costing scenario and the lack of subcontractor cost or 
pricing data to verify the subcontract prices included in that 
proposal.
    The Air Force went to Washington and said, ``We would like 
to get a waiver for the violations related to lot costing. But 
the waiver was unpopular in Washington because of Boeing's 
recent Procurement Integrity Act violations, alluded to by 
Senator Collins earlier. They were, however, provided a waiver 
for the subcontractor cost or pricing data.
    Boeing then resubmitted its proposal still using the 15-
year lot costing scenario, and the primary problem with that 
15-year lot costing scenario is it rolls the losses attributed 
to Boeing's pursuit of the commercial market forward for 
recovery from the government.
    The applicable regulations prohibit recovering prior losses 
and charging the government for costs that do not benefit our 
contracts. However, as directed, we issued an audit opinion 
that overlooked serious regulation violations, and the Air 
Force awarded Boeing the contract allowing recovery of $270 
million of past losses. It also increased the price of existing 
contracts.
    While my testimony today focuses on DCAA's indiscretions, 
the Air Force may have gone well beyond DCAA with this bailout 
by not holding Boeing to previously negotiated launch prices. I 
would be happy to answer questions on that also if it is 
necessary.
    Boeing initially anticipated and prepared for a commercial 
market that would have launched over 100 missions by now and 
300 missions by 2020. Only one commercial mission has ever been 
launched, and no more will be launched. There is nothing on the 
launch manifest schedule.
    Some of the losses that Boeing incurred pursuing the 
commercial market were overbuilding a plant that could produce 
40 rockets per year, while Boeing has only averaged one launch 
per year. They bought excess inventory. They had a specially 
constructed vessel that does nothing but transport the Delta IV 
rocket to the launch pad once a year.
    All of the auditors involved in Boeing's lot costing 
methodology and the audit that I supervised objected to the use 
of lot costing. Since then, Boeing partnered with Lockheed to 
make these products, and their outside auditors directed them 
to discontinue lot costing.
    Despite our documented objections, upper management 
instructed us to issue an audit opinion that failed to report 
numerous violations, and the Air Force awarded Boeing $270 
million of past losses.
    The opinion in that report was so unthinkable that the 
audit staff documented our disagreement in the audit file. That 
is the first time in my career that has ever happened.
    For 25 years, I have jealously protected the American 
taxpayers' interests, but during the course of the two ELC 
proposal audits I supervised, I was harassed and denied a 
promotional opportunity. Lately, I have seen this scenario over 
and over again because of the emphasis on performance metrics 
and customer satisfaction while audit findings have taken a 
back seat to expediency and personal ambition. DCAA is broken.
    Thank you for the time and thank you for this opportunity 
to bring these matters to your attention. I would be happy to 
answer any questions.
    Chairman Lieberman. Thanks very much, Mr. Hackler, for your 
personal testimony and for your direct conclusions. When you 
say ``customer satisfaction,'' who is the customer?
    Mr. Hackler. In this case, that would be the Air Force.
    Chairman Lieberman. Not the taxpayer----
    Mr. Hackler. No.
    Chairman Lieberman [continuing]. Who you have been trying 
to protect all these years. We will get back to you with more 
questions. Thank you.
    Next we will call on the Hon. Gordon Heddell, Acting 
Inspector General of the Department of Defense. Thanks for 
being here.

   TESTIMONY OF HON. GORDON S. HEDDELL,\1\ ACTING INSPECTOR 
              GENERAL, U.S. DEPARTMENT OF DEFENSE

    Mr. Heddell. Mr. Chairman and distinguished Members of this 
Committee, thank you for the opportunity to appear before you 
this morning. As you know, I am the Acting Inspector General of 
the Department of Defense. I have also had the honor of serving 
as the Inspector General of the Department of Labor for almost 
8 years. And prior to Senate confirmation, I had a 28-year 
career with the U.S. Secret Service.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Heddell appears in the Appendix 
on page 79.
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    As Acting Inspector General, I have examined our past 
actions and am reviewing our ongoing efforts to ensure that we 
are aggressive when investigating allegations of the nature 
that are being discussed at this hearing. I understand the 
importance of keeping the Secretary of Defense and other senior 
departmental officials apprised of significant issues that come 
to my attention.
    Contractor oversight, which includes the efforts of DCAA, 
is one of the Federal Government's best and first lines of 
defense against waste, fraud, and abuse of taxpayer funds. I am 
dedicated to working with DCAA to ensure that their internal 
controls are in place and functioning effectively. My 
responsibilities as Inspector General providing oversight of 
the largest Department in the Federal Government, particularly 
during this time of war, could not be more important.
    I know that there are concerns regarding the length of time 
that it took to refer allegations received by the hotline to 
the DCAA. The short answer is that, in the wake of Hurricane 
Katrina and subsequent Hurricane Rita, the DOD hotline was 
assigned the responsibility to be the hurricane relief fraud 
hotline for the entire Federal Government. And so from 
September 2005 until March 2006, the Department of Defense 
hotline received almost 10,000 hurricane-related allegations, 
and during that time period the hotline focused only on those 
allegations that involved life, death, or safety issues, and 
allegations against senior officials. Therefore, referral of 
the allegation to DCAA took longer than our normal standards.
    In February 2006, the DOD IG Defense Criminal Investigative 
Service (DCIS) received the same allegations. Shortly 
thereafter, DCAA suspended its own inquiry based on the 
initiation of an investigation by the DCIS.
    In June 2006, the U.S. Government Accountability Office 
informed DCIS that it was conducting its own investigation of 
DCAA. GAO indicated that, in addition to receiving the same 
hotline complaint, it received reports of DCAA misconduct in 
other offices and regions located throughout the United States. 
GAO and DCIS coordinated certain investigative activities 
regarding these allegations of misconduct.
    In support of the DCIS investigation, my office of Audit 
Policy and Oversight reviewed DCAA audits that were identified 
in the original hotline complaint. In January 2007, we issued a 
memorandum to DCAA detailing the results of our review of 10 
DCAA audits. This memorandum contained the following 
conclusions--and all ten, by the way, we found to be deficient.
    On nine of these audit assignments, the supervisors either 
changed, or directed to be changed, an auditor's draft audit 
conclusions without adequate documentation.
    The working papers of seven assignments did not adequately 
support the final audit report opinions. And on the three 
remaining audit assignments, the supervisory auditor should 
have directed the auditor to perform additional audit 
procedures prior to issuing the final report.
    In addition, DCAA should rescind three reports because the 
reports were not supported by the working papers.
    The director of DCAA's Western Region, in a memorandum 
dated July 2007, expressed strong disagreement with the overall 
results of our review and refused to rescind any reports, 
although he acknowledged, saying ``working papers could have 
been improved.''
    The DCIS investigation indicated that the emphasis by DCAA 
on a metrics-driven system of conducting systems audits within 
predetermined milestones and deadlines created an environment 
where the pressure to meet goals affected the outcome of the 
audit. In contrast, the field auditors stated that, in prior 
years, auditors were routinely praised and rewarded 
commensurate with the amount of money they questioned and how 
much money the government saved or recovered as a direct result 
of their audit activities.
    In June 2008, DCIS presented the results of its 
investigation to the U.S. Attorney's Office in Santa Ana, 
California. The U.S. Attorney declined criminal prosecution.
    Subsequently, in August 2008, DCIS prepared a Fraud 
Vulnerability Report that documented investigative findings. 
That report was provided to DOD Comptroller Tina Jonas and DCAA 
Director April Stephenson.
    GAO issued their report in July 2008, and it was titled, as 
you know, ``Allegations That Certain Audits at Three Locations 
Did Not Meet Professional Standards Were Substantiated.'' The 
findings in the GAO report are consistent with the findings 
contained in our January 2007 memorandum.
    With regard to ongoing and future work, after publication 
of the GAO report, additional hotline complaints have been 
received concerning misconduct allegations by senior managers 
in the same California DCAA offices. These allegations are 
being assessed.
    On August 4, 2008, we announced a follow-up review focusing 
on audit work deficiencies and the abusive work environment 
that was identified by the GAO. As part of this review, we are 
performing an assessment of the completed and planned actions 
taken by DCAA in response to the GAO report and the allegations 
concerning supervisor misconduct. We have also scheduled 
another External Peer Review of DCAA to begin in January 2009. 
In so doing, we will consider the results of the follow-up 
review, and we also consider the previous GAO review, the one 
they just completed, our prior DCAA Peer Reviews, and the DCAA 
Internal Quality Assurance Reviews. This review will cover 
audits performed by all five DCAA regions and the Field 
Detachment.
    Oversight of Department of Defense contractors is essential 
in the fight against waste, fraud, and abuse. We remain 
committed to supporting DCAA to ensure that their internal 
oversight mechanisms are in place and working effectively.
    I thank you for your time, and I am ready to answer any 
questions that you may have.
    Chairman Lieberman. Thank you, Mr. Heddell. Excellent 
report of your activities, and you are validating the problems 
we have seen.
    The final witness is April Stephenson, Director of the 
Defense Contract Audit Agency. Obviously, these are very 
serious charges, and I must say all the more troubling because 
the Defense Contract Audit Agency has over the years been held 
up as one of the best of the Federal Government's taxpayer 
watchdog agencies. So I hope you will respond with the 
seriousness of the moment.
    Ms. Stephenson, it is all yours.

TESTIMONY OF APRIL G. STEPHENSON,\1\ DIRECTOR, DEFENSE CONTRACT 
            AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE

    Ms. Stephenson. Thank you, Mr. Chairman and Members of the 
Committee. Thank you for the opportunity to be here before you 
today. I am pleased to be here.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Stephenson with an attachment 
appears in the Appendix on page 90.
---------------------------------------------------------------------------
    I will briefly describe the actions taken by DCAA as a 
result of the GAO report. A more detailed account is provided 
in the statement that I have submitted for the record.
    Mr. Chairman, I want to assure you and all the Members of 
this Committee that DCAA is taking the GAO's findings very 
seriously and that we are committed to taking the necessary 
steps to review and correct the issues cited in the report. We 
fully support any review of our procedures, and we are taking 
immediate action to correct the problems.
    Before I proceed with the rest of my testimony, let me tell 
you a little bit about myself. I have 21 years with DCAA, and I 
have held a number of positions. I started out as an auditor 
trainee. I was an auditor, a supervisor, a branch manager. I 
have been a deputy regional director, a regional director, and 
deputy director of the Agency. I became Director 7 months ago.
    Mr. Chairman, DCAA's mission is to perform audits of 
contractors and to provide results to contracting officials 
responsible for the negotiation, administration, and settlement 
of contracts, and I would like to think we do it well. But I 
recognize we have a lot of improvements to make.
    To accomplish it, the Agency employs some 4,000 people and 
has 79 field offices across the country and overseas. In 2007 
alone, DCAA performed 33,801 audits covering $391 billion of 
proposed or claimed contractor costs. These audits have taken 
issue with $14.2 billion in questioned costs--these are areas 
where we recommended reductions in what was proposed or 
billed--and another $4.6 billion in unsupported costs. These 
are costs in which the contractor did not provide sufficient 
information to render an opinion.
    Of those 79 field offices, three offices were covered by 
the GAO's investigation. These three performed a combined total 
of 4,786 audits over the 5-year period covered by the GAO.
    For my testimony today, we categorized the GAO's findings 
into three general areas: Deficient working papers and audit 
work; lack of independence; and management abuses of employees 
and impediments to the GAO investigation.
    With regard to deficient working papers and audit work, the 
GAO concluded that the working papers did not adequately 
support the final conclusion and opinion for any of the 13 
cases it investigated; that, in some of the cases, auditors did 
not perform sufficient work to support their conclusions; and 
that their supervisors did not instruct or allow them to 
perform additional work. We agree.
    We agree that the audit work should have been better 
documented in the working papers, and in some cases, 
supervisors should have assessed the need to perform additional 
audit work prior to issuing the audit report. Changing draft 
findings without adequate explanation, documentation, and 
review is not acceptable, and does not follow the auditing 
standards that DCAA strives to uphold.
    So why did this happen?
    In our discussions with the management team, we learned 
that they did want to include inadequately supported findings 
in audit reports, but did feel pressured to issue reports by 
due dates. Thus, they removed the findings rather than 
assessing the need to perform additional work. This is not 
acceptable.
    Regardless of the due date, audit work must be completed 
prior to the issuance of any audit report or, in the case of an 
external constraint, clearly state why the audit work could not 
be performed by the due date.
    Regarding lack of independence, the GAO concluded that, in 
three audits, the contractor or the DOD contracting community 
improperly influenced the audit scope, conclusions, and 
opinions. The root cause of this conclusion was DCAA's 
participation in Integrated Product Teams (IPTs). IPTs, as you 
may know, were established in the mid-1990s as a way to 
expedite the assessment of contractor bid proposals and to 
resolve outstanding issues.
    In the specific example cited by the GAO, the IPT was 
established to expedite the resolution of a labor estimating 
system problem at a major contractor. As the contractor 
developed the revised procedures, the IPT, including the 
auditor, provided feedback. The DCAA field office manager 
informed the IPT that DCAA would audit the final estimates and 
provide feedback on the drafts.
    After several rounds of reviews, the contractor provided 
the final procedure for audit. DCAA notified the contractor 
that it planned to test a sample of estimates over a 
prospective 4-month period although the auditor did not 
specifically state which estimates would be selected. The GAO 
concluded that the DCAA's participation in the Integrated 
Product Teams was a violation of the independence requirements 
under the auditing standards. The GAO also objected to the 
auditor providing the time period.
    As a result of the GAO's concerns, we have ceased DCAA 
participation in all Integrated Product teams. Although audit 
services will be provided during an IPT when requested by the 
contracting officer, DCAA is no longer a member of an IPT. We 
will no longer provide feedback during an IPT. DCAA will audit 
only final contractor-approved submissions and will have no 
involvement in draft submissions.
    Regarding management abuses and impediments to the GAO, the 
GAO concluded that a pattern of frequent management actions 
served to intimidate some auditors and created an abusive 
environment at two of the three locations it investigated. Rest 
assured, inappropriate management actions will not be 
tolerated, and disciplinary action will be taken as necessary.
    However, since the GAO did not provide specific information 
on which personnel action could be taken, we asked that the DOD 
Inspector General investigate this matter. A draft report is 
due in January 2009.
    Mr. Chairman, my submitted testimony contains a list of the 
actions DCAA has completed to date and actions we plan to take. 
For the interest of my testimony today, I will discuss some of 
those actions having to do with the Agency's structure, 
culture, and processes.
    We are performing a top-to-bottom staffing assessment, 
including an assessment of the staffing of our quality 
assurance function, to determine whether we have the 
appropriate staffing at all levels of the organizational 
structure.
    We are assessing whether additional staffing will be 
needed, including auditors, supervisors, and managers. And we 
will continue to work with the Department on how best to 
address future staffing needs.
    Prior to the issuance of the GAO report, we recognized that 
the span of control of supervisors to auditors needed to be 
lowered, especially in those areas that had a significant 
number of auditor trainees.
    In June 2008, I lowered the number of auditors controlled 
by each supervisor to provide for additional oversight.
    I also approved additional field offices to lower the span 
of control for the field office manager. Three additional 
offices were approved earlier in the year; three more offices 
were approved after the issuance of the GAO report.
    DCAA has also realigned the quality assurance function so 
that now reports directly to the Deputy Director. This change 
will bring additional daily oversight at a very high level in 
the organization and demonstrates our emphasis on quality 
audits.
    With regard to culture, we have undertaken an assessment, 
which we hope to complete by the end of this month, to 
determine whether the agency is using the appropriate metrics 
and benchmarks, and whether those metrics are driving the right 
behavior. This assessment includes focus groups, including 
auditors, at all levels to provide feedback.
    In the meantime, we have emphasized through various venues 
the need to perform quality audits, and that other factors, 
such as metrics, budgets, due dates, or external pressures, 
should in no way compromise audit quality. For example, August 
was declared ``Audit Quality Month.'' Each location held a 
stand-down day to discuss audit quality and to resolve 
impediments to audit quality.
    We plan to conduct an agency-wide survey to identify 
additional cultural issues.
    As mentioned earlier, we have ceased participation in 
Integrated Product Teams to avoid the appearance of a lack of 
independence.
    Finally, to address process improvements, we have increased 
the number of management levels to resolve disagreements from 
two to four. This raises the issue to the level of a senior 
executive, if needed, and provides greater objectivity to the 
resolution process.
    Based on our own quality assurance reviews, in February 
2008, we changed the signature authority for internal control 
audits from the supervisory auditor to the field office 
manager. We have now required managers to sign all reports, 
regardless of findings, which should improve audit quality.
    We expanded our next round of quality assurance reviews, 
which started this month, to include additional offices and 
additional assignments.
    We initiated an internal assessment of audit work at other 
locations to identify additional areas of improvement.
    In addition, we have asked the DOD Inspector General to 
review the actions we have taken on the specific 13 cases cited 
by the GAO, in addition to assessing the issues involving the 
management environment.
    For all 13 cases, we have either completed additional audit 
work or have assignments in process to mitigate the risk with 
the assignments the GAO determined did not comply with the 
auditing standards.
    In closing, Mr. Chairman, Members of the Committee, I want 
to again underscore the seriousness with which DCAA is taking 
these actions. DCAA is committed to ensuring that the agency is 
above reproach.
    I thank the Committee for the opportunity to come before 
you, and I look forward to your questions.
    Chairman Lieberman. Thanks, Ms. Stephenson, for the 
seriousness of your response.
    We will go now to questions. Let's have 8-minute rounds 
since there are only three of us here at this point.
    Mr. Kutz, let me go to you here and ask you to answer the 
question that, in a way, Ms. Stephenson raised, which is: Why 
did this happen? I have heard some reference to the performance 
metrics, which presumably put time pressure on auditors. But 
just to repeat, this is an audit agency with a pretty good 
reputation over the years, and yet you have documented, and Mr. 
Heddell's group and the others have documented, some really 
outrageous breaches of normal auditing standards.
    Was it just the performance metrics? Or was something else 
happening here?
    Mr. Kutz. Well, as she mentioned, there were independence 
issues with several of these. Whether it be in fact or 
appearance or both, we found independence was an issue with at 
least three of these audits.
    Chairman Lieberman. OK. So define that a little more. What 
do we mean by independence issues?
    Mr. Kutz. Well, the case that she mentioned was with a 
contractor where there was an up-front agreement that if a 
certain process was followed, they would get a favorable 
result. And DCAA was commenting on what it was auditing at the 
end throughout the process, and yet they gave an opinion on the 
final product. And what she is saying now is they are going to 
back away from that and really provide audit of the final 
product which will assess the system.
    In that particular case, the system could not produce 
reliable estimates, yet they gave an ``inadequate in part'' 
opinion, I think, on that one.
    Chairman Lieberman. So was that because they were subject 
to undue pressure from the contractor?
    Mr. Kutz. I am not sure if it was pressure. Just the way 
the process was set up in that particular case.
    Chairman Lieberman. And they went along with it.
    Mr. Kutz. And they went along with it, yes.
    Chairman Lieberman. Yes.
    Mr. Kutz. And they have been doing it for years, as she 
mentioned. So that would be an example of the independence 
problem.
    In other cases, there was pressure from contractors to have 
certain things happen, and reports were issued by supervisors 
that had not reviewed working papers. She mentioned that there 
is pressure for deadlines, and I think the reality is there is 
pressure from contractors and the commands to help facilitate 
the process rather than look out for the taxpayers, as these 
two witnesses to my right have described. So independence was 
one of the issues.
    You mentioned production. I think there is a difference 
between production and productivity. There was a big focus on 
production here, and I think productivity is----
    Chairman Lieberman. In other words, the number of audits 
that would be----
    Mr. Kutz. The number of audits and how many days were to be 
spent on them rather than making sure that if there were 
significant complex issues that there was plenty of time spent 
to resolve them and issue the right report. If it was September 
and there were issues, they would get a report out the door 
rather than resolve those issues. I think she addressed that 
also in her opening statement in the way that they thought 
about this. So that was another issue.
    I think the other one in some of the locations was there 
was----
    Chairman Lieberman. Let me stop you there and just ask if 
you have reached a judgment yet or you are going to wait until 
your final report to reach judgment on whether these 
performance metrics drive, time pressures, or whether the DCAA 
is understaffed? In other words, one reason they may be under 
time pressure is that they do not have enough personnel.
    Mr. Kutz. Well, it raises a serious question when you are 
issuing tens of thousands of audits with 3,500 auditors.
    Chairman Lieberman. Yes.
    Mr. Kutz. Either you are not doing the right audits and you 
are doing a lot of audits that do not have a lot of 
significance, or you do not have enough staff. We have not 
taken a complete look at that. I agree with you, Senator, that 
is something that needs to be looked at----
    Chairman Lieberman. OK. Look further, then.
    Mr. Kutz [continuing]. Because the dollars have gone up and 
the number of staff has stayed flat or gone down. That raises 
questions.
    Chairman Lieberman. Go on with what you were saying.
    Mr. Kutz. Well, the other one was inexperienced staff were 
not being supervised on a daily basis. I think that was an 
issue, and, again, I think they were stretched thin. It could 
get back to what you just described. But inexperienced staff 
that came up with findings and supervisors that did not have 
time necessarily to review them on a day-to-day basis. So you 
get to the end of the audit, and a bunch of issues have been 
raised. You do not have time to fully vet them, so you just 
issue the report. The supervisor says, ``Well, those are not 
really good findings. I am going to delete them, and I am just 
going to issue a clean opinion at the end of the day.''
    So those are some of the kinds of things that I believe----
    Chairman Lieberman. OK. That is helpful. You do not want to 
reach a prejudgment where there are such amounts of money 
involved here, of why changes were made to the benefit of the 
contractors. I am just looking at that point of view. Was there 
any indication of supervisors who were currying favor with the 
contractors in hopes of going through the revolving door to go 
to work with the contractors? Is there any evidence of self-
serving here in the ``inadequate'' audits that you found?
    Mr. Kutz. I think it is a high risk. We did not see it 
specifically.
    Chairman Lieberman. It is a high risk that it may be going 
on?
    Mr. Kutz. Yes, it is a high risk because all the opinions 
changed in the same direction, in favor of the contractor. We 
had 11 opinions of the 14 that improved for the contractor. If 
some of those had gotten worse, I would not be quite as 
suspicious. They all got better at the end of the day. We did 
not see any specific evidence of bribes, kickbacks, things like 
that.
    Chairman Lieberman. Right.
    Mr. Kutz. But that does not mean it is not happening. I 
just do not have any evidence that it is. But I think it does 
tie clearly to the production focus and the inability to take 
enough time to fully vet those findings. And it is easier to 
wash them away than to deal with them.
    Chairman Lieberman. How about the other kind of pressure, a 
different kind of pressure--which Mr. Hackler really referred 
to--which is the satisfaction of the customer, the customer in 
the case you mentioned being the Air Force, either because the 
Air Force itself was in a buddy system with the contractor or 
because the Air Force just wanted to get the job done and did 
not want it held up by some audit? Did you find evidence of any 
inappropriate pressure by the Air Force on the auditing 
supervisors?
    Mr. Kutz. Yes, I think we did see evidence of that. And, 
again, you have a situation where the Department of Defense 
partners, in effect, with these contractors. Sometimes it looks 
like DCAA gets swept into that partnership. But they are the 
auditors. The auditors cannot really be the partners in this 
whole situation.
    So I believe there was some of that, and it raises a bigger 
issue from an independence standpoint where DCAA is within the 
organization or whether there should be more independence of 
DCAA organizationally. She talked about other issues, but I 
think organizationally, they need to assess whether they are 
placed in the proper place in the government.
    Chairman Lieberman. Am I right that right now they are 
under the Comptroller of DOD?
    Mr. Kutz. They are under the Comptroller, yes.
    Chairman Lieberman. So I hope that one of the other things 
that you will take a look at and speak to us in your final 
report is whether a move out of that line reporting to more 
independence would help the Agency.
    Mr. Hackler, do you have anything you want to add to this 
question, this perplexing question about why the supervisors 
acted badly here?
    Mr. Hackler. In my situation, it was personal ambition. I 
should note that all of the individuals involved with every 
audit that was looked at by the GAO are either retired or have 
been promoted. In my situation, the directed audit opinion that 
I had to issue because of a directed stance, the person has 
been elevated to the Senior Executive Service (SES) level.
    Chairman Lieberman. Yes. So the ambition was within the 
agency.
    Mr. Hackler. Yes.
    Chairman Lieberman. And the thought was that if you did not 
cause waves with critical audits, you would be more likely to 
rise?
    Mr. Hackler. It is a common theme. It helps you with your 
metrics.
    Chairman Lieberman. Yes.
    Mr. Hackler. Everyone looks good.
    Chairman Lieberman. Yes. Ms. Le, do you want to add 
anything?
    Ms. Le. In my opinion, I think there are two fronts. The 
first one is that I think it is because of DCAA's desire to be 
a partner with the procurement offices, and in that partnership 
we want to have customer satisfaction.
    Chairman Lieberman. Right.
    Ms. Le. And that is the pressure. So that is up front.
    Chairman Lieberman. And, again, who is the customer there?
    Ms. Le. The procurement offices or the officers.
    Chairman Lieberman. OK.
    Ms. Le. And the second part of that is the personal 
ambition and promotion within the agency, because the agency is 
so metric-driven that anybody who would meet the metric will be 
promoted. And like Mr. Hackler has stated, the people involved 
in the investigation, they have been promoted.
    Chairman Lieberman. OK. I thank you. I will come back to 
this issue, and maybe my colleagues will ask Ms. Stephenson 
about why the supervisors who were criticized by GAO and the 
other investigations have either been promoted or retired and 
not disciplined. If my colleagues will allow me, let me ask you 
that question just to wind this up because you spoke with real 
seriousness about the Agency's response to these allegations, 
and I appreciate that. But here you have a situation where it 
seems to me that exactly the opposite message is being sent to 
the people who were criticized by GAO.
    Ms. Stephenson. I understand that, sir, and I understand 
the way that this appears. Most of the promotions, except for 
one, happened prior to the GAO report. There were no 
indications in those promotions that they did not follow the 
merit promotion principles. There was one who was promoted 
after the GAO report was issued, a couple of days later. That 
particular promotion was reviewed through the General Counsel's 
office to determine whether it followed merit promotion 
principles. In that particular case, it did.
    Chairman Lieberman. You mean it was reviewed after the GAO 
report?
    Ms. Stephenson. Yes. However, on that particular promotion, 
I would like to explain the person has not been put in their 
position, and we recognize that there may be some additional 
findings that will come out of the IG report that is due in 
January. And if there are indeed additional actions that come 
out of that GAO report, we will take the actions at that time.
    Chairman Lieberman. So that person has been promoted but 
not placed in the position?
    Ms. Stephenson. That is correct.
    Chairman Lieberman. And not given additional pay?
    Ms. Stephenson. No, they have not.
    Chairman Lieberman. OK.
    Ms. Stephenson. Now, I would say that we have been advised 
by counsel that because the IG is performing a review of the 
management abuses and is looking into the actions of these 
employees that were taken, we needed to cease on any 
disciplinary actions that we took on those employees in case 
there are additional actions that need to be taken, and we 
would take them all at once because you cannot discipline twice 
for the same action. So we have been put in a holding pattern, 
and we are grateful to the IG for taking on this action for us 
to bring objectivity to the process versus us looking at 
ourselves, having the IG look at ourselves. And I am committed 
that if there are actions that the IG finds need to be taken, 
we will take those actions.
    Chairman Lieberman. OK. I appreciate that very much, and to 
say the obvious, this Committee would like to be kept informed 
on a very timely basis of what you are doing with regard to 
those supervisors.
    Ms. Stephenson. Absolutely, sir.
    Chairman Lieberman. Thank you. Senator Collins.
    Senator Collins. Thank you.
    Mr. Kutz, the DCAA has some 300 field offices, and we have 
talked about the very disturbing findings that GAO has 
documented in three of those offices. But you are, at the 
Chairman's and my request, in the midst of doing a broader 
assessment of DCAA. Thus far--and I realize your assessment is 
still underway--are you seeing the same kinds of troubling 
problems that we have talked about this morning in other 
regions of the country in other field offices?
    Mr. Kutz. I would say in some cases, yes; other cases, not 
necessarily. The abusive work environment one, for example, we 
have not seen--although we were doing it more like a peer 
review, we had specific allegations with respect to the 14 
audits that we looked at to this point. So it does not mean it 
is not going on, but that does not appear to be as big of an 
issue.
    The overall theme, some of the independence issues I talked 
about, the lack of sufficiency of work, and a little bit of the 
changing of opinions, appears to be out there also. Ms. Fischer 
may want to add a little more. She is leading that broader 
look.
    Senator Collins. Ms. Fischer.
    Ms. Fischer. That is correct. We found the same types of 
problems with regard to support for the audit opinions and the 
dropping of some findings in the work we have looked at across 
the various DCAA regions.
    Senator Collins. And the independence issue, which to me is 
the most troubling, are you seeing that?
    Ms. Fischer. We have seen some aspects of that with regard 
to the effect of the metrics process where they would maybe do 
less work than they should. That is one of the impairments to 
independence if you do not allow enough time for the audit. We 
have seen a hesitancy to disclose, maybe in a report, that 
there is an ongoing fraud investigation. We have some questions 
about the low number of fraud referrals coming out of some of 
the work across the offices, that kind of thing.
    Senator Collins. We will be looking forward to the results 
of that more comprehensive review because I think a fundamental 
issue that has been raised this morning is whether DCAA has 
sufficient insulation and independence within the Department of 
Defense. This whole debate reminds me very much of when some of 
the major accounting firms became too close with their 
corporate clients and lost their independence and objectivity a 
few years back when the corporate accounting scandals broke. 
And it seems to me that what we are hearing over and over again 
is that DCAA sees as its customer not the American taxpayer but 
the program manager or the procurement officer or in some cases 
perhaps even the defense contractor.
    So I think it is premature for us to reach a conclusion on 
that, but that is an issue that I think we should take a look 
at of whether or not it is a mistake to have DCAA within the 
Department of Defense. Maybe it needs to be pulled out to be 
more independent of the program manager, the procurement 
officers, and even the contractors themselves. And that is 
something that I would like GAO to take a look at as you come 
back to us with your recommendations.
    Ms. Fischer. Yes, we are taking a broader look at that 
whole environmental picture.
    Senator Collins. Mr. Heddell, I found your testimony 
troubling and surprising this morning on a couple of counts. 
First of all, the IG's office completed a review of DCAA in May 
2007, and it basically said that the quality and the compliance 
with established policies, procedures, and applicable auditing 
standards were adequate. And yet at the same time, other DOD IG 
personnel were involved in assisting the GAO with an 
investigation of these 14 audits that we have discussed today.
    How could DOD IG conclude in its report dated May 1, 2007, 
that DCAA passed the review and that its procedures were 
satisfactory, when at the same time your office knew of these 
questionable audits on the West Coast offices?
    Mr. Heddell. Well, I think that is a very important 
question, Senator Collins, and I will try to give you what I 
hope will be a satisfactory answer.
    We are talking about two different things that were 
occurring here. The hotline investigation, which was initiated 
as a result of a November 13, 2005, complaint, which identified 
10 audits in two specific offices in southern California--
Huntington Beach and Santa Ana--and that initiation was a 
criminal investigation entirely.
    The external peer review that you are referring to, which 
was reported on May 1, 2007, was a broad review, had a totally 
different scope and totally different approach--one being more 
of an audit, the other being a criminal investigation. And the 
time periods that were covered are different. The hotline 
investigation looked at 10 audits that were conducted between 
2002 and 2005. The external peer review that we reported on in 
May 2007 looked at fiscal year 2006. So you also had two 
different time periods.
    In addition, in the criminal investigation we were focused 
on supervisors, managers, and auditors in a very limited 
geographic area, as I indicated. In the external peer review, 
we were looking at five DCAA regions coast to coast, as well as 
their field detachment that looks at classified information. So 
one was very broad. The other was very narrow and very focused.
    Now, the reality is that criminal investigators were using 
the assistance of auditors, and it was through their assistance 
that we were able to identify and say that all 10 of those 
audits out in Santa Ana and Huntington Beach were deficient. 
And the auditors were conducting their peer review with the 
general knowledge of what had been discovered and was known out 
in southern California. So there was a general knowledge, but 
the results are different because it is two different focuses. 
Again, the focus out in southern California was on whether or 
not the opinions were correct and whether the working papers 
were supported. The focus in the peer review was whether there 
were significant deficiencies that were enough to indicate that 
material deficiencies adversely affected the overall system of 
quality in DCAA.
    The professional and collective opinions of the audit staff 
that conducted that peer review that they reported on in May 
2007 had the opinion, when everything was said and done, that, 
in fact, the structure in place at DCAA during fiscal year 2006 
was such as to be acceptable according to government auditing 
standards.
    Now, if I could just add one other quick thing, the fact of 
the matter is even though I think that it is reasonable to say 
you could have two different results, I believe that in our 
look at this thing, we were a little off on this because I 
think that the Office of Inspector General unfortunately failed 
to get its arms around the broader issue here. So it is a 
matter of an organization being focused audit-wise, being 
focused criminal-investigation-wise, but the broader 
organization did not pull it together. I am not saying there 
would have been a difference, but I think it was a weakness 
within the Office of Inspector General.
    Senator Collins. Thank you. In my next round, I want to get 
back to the handling of the complaint and the 3-month delay in 
referring it and your comments about Hurricane Katrina. 
Obviously, the DOD IG was involved in the fraud investigations 
given that the Army Corps of Engineers had a number of the 
contracts for the blue tarps, for water, and for ice. But I am 
alarmed at what you said today, but I will get into that in a 
second round.
    Thank you.
    Chairman Lieberman. Thank you, Senator Collins.
    Thanks, Senator McCaskill, for being here and for the 
support that you and your staff have given this particular 
investigation and the preparation of this hearing.
    Senator McCaskill. Thank you, Mr. Chairman. And for 
purposes of managing my time, will we have more than one other 
additional round? Because I obviously could be here for hours, 
and I wanted to take a couple of minutes to put something in 
the record before I began. But I will not waste that time if--
--
    Chairman Lieberman. My expectation was that we would have 
at least one more round. If you want more time than that, I may 
just leave you here. [Laughter.]
    Senator McCaskill. That would be great. Check back in 
tomorrow.
    Chairman Lieberman. And require the continued presence of 
the witnesses.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. OK. Thank you, Mr. Chairman, very much.
    Back in 1986, when I was a young attorney, I remember 
hearing about $400 hammers and $600 toilet seats. And like most 
Americans at the time, I thought, how in the world does that 
happen at the Pentagon?
    Now, after spending a great deal of my professional life as 
an auditor, I understand why it could happen at the Pentagon. I 
have had some sleepless nights after I read this GAO report, 
not because what was in the report was so incredibly 
unbelievable--that is true--but more the response of the 
foundational organizations within the Department of Defense and 
government oversight that have failed.
    There are so many failures that are wrapped up in this 
hearing, it is hard to know where to begin. And I have to 
disagree with you, Inspector General, about peer review. I 
fundamentally understand what peer review is. There is a 
dramatic failure of peer review in this instance. Peer review 
is all about seeing if the systems are adequate in terms of 
working papers supporting findings. What an auditor must do is 
find the facts supported by working papers. It is just that 
simple.
    And if we have instances--I do not care if they are in 
southern California or in a small town somewhere in the 
Midwest. If we have instances within an auditing agency where 
someone is ignoring working papers and changing findings, a 
peer review ought to find it, and a peer review ought to call 
it out. That is what they are there for. That is the only 
reason a peer review is there, to examine the fundamental 
strengths of the auditing processes. They are not there to cast 
judgment on individual findings or individual scopes or 
individual priorities that an agency may set.
    And so I certainly respect your record as an Inspector 
General at Labor, and I know you have walked into a hornet's 
nest. And I am hoping that in the time I spend here, eventually 
we will get to a point in a hearing where I feel really good 
about the DOD IG. I am a long way from there right now.
    I want to commend the auditors. You are heroes. You did not 
go into this line of work for the money, and you certainly did 
not go into it for the glamour. This is hard stuff. It is 
complicated. It is so complicated that it is very hard for 
Congress to have longer than a 5-minute attention span, which 
is one of the reasons why we have continually had the 
astronomical numbers of waste, fraud, and abuse at DOD and the 
Pentagon because it is hard. And as you can see by the 
attendance at this hearing today, it is not glamorous on this 
side either.
    So I want to really commend you, as a 17-year auditor, as 
two people who realize that the absolute foundation of what 
made you feel good about coming to work was shaken because you 
were not coming for the money and you were not coming for the 
glamour. You were coming because you fundamentally believed 
that when you found problems, they were going to be exposed.
    Now, the response to the audit was wrong. The fact that 
people who are responsible for this have been promoted or have 
retired is ridiculous on its face. It is ridiculous on its face 
that anyone who was involved in this has been promoted. And 
nobody in America gets it, how you can promote somebody who was 
involved in this. And we are going to try to get to the bottom 
of it before this is all over.
    I appreciate you, Ms. Stephenson, for coming to my office 
and spending the time with me that you have. And I have a 
specific question about that before I finish.
    I think at the root of this problem is a phony baloney 
performance metric. We need to get to the bottom of the Office 
of Management and Budget (OMB) and these performance metrics, 
and this is something I would like to talk to you about, Mr. 
Chairman. When you have performance metrics, there are pages 
here--and I have read every word--about how great DCAA is 
doing. And do you know there is one paragraph about how much 
money they saved?
    This was all about making sure that somebody looked good up 
the line in terms of how many hours they were spending on an 
audit and, second, about pleasing the contracting people at the 
active military. That is all this was about. And, by the way, 
this says they are doing great at pleasing their client, which 
is, in fact, the people who enter into contracts in the Air 
Force, the Army, and all those places; that they are showing 
that they are cheaper than outside auditors so nobody needs to 
worry about getting privatized; and that they are doing a lot 
of audits in a few amount of hours.
    Now, by the way, multi-billion-dollar contracts are where 
it should take a lot of time. This is hard. Most of us do not 
even understand all the intricacies of these contracts. 
Congratulations that you do. You have given the best 
explanation of lot pricing I have ever heard, and I am on the 
Armed Services Committee.
    So, this is really fundamentally broken. The culture is 
broken, the performance metrics are broken, and the oversight 
is broken. And we have got to get it fixed. We have enough 
money, if we scrape the surface, to bail out all the Fannie 
Mae's and Freddie Mac's in the world if we would just get 
serious about this.
    Let me start, if I can, with the most difficult question I 
have to ask today. Ms. Stephenson, I hate to put you on the 
spot, but this is your job. You and I met in my office, and I 
have been impressed at your willingness to acknowledge that 
your response to the audit was inadequate, that there is a 
serious and substantial problem here, and you pledged to me 
that you wanted to work with me and my staff to do the best job 
you could getting it fixed.
    I have heard troubling rumors since our meeting that you 
have been instructed by Tina Jonas not to talk to me or meet 
with me again. Is that true?
    Ms. Stephenson. No, ma'am. It is not true. My understanding 
is that we met with the staffers on August 20, and that we have 
been providing weekly updates on the actions that we have 
taken. I, at no time, was instructed by Tina Jonas not to meet 
with you. I was told in various instances that we would meet 
with the staffers. I apologize, ma'am, if you wanted me to come 
back to you.
    Senator McCaskill. No. I was told by people--I mean, you 
can imagine how my phone is ringing off the hook. And we 
received information that Tina Jonas instructed people around 
DCAA, including you, that they should not have contact with my 
office. And I wanted to find out if that rumor was true or 
false.
    Ms. Stephenson. That rumor is not true, ma'am.
    Senator McCaskill. OK, great. That is the best news I have 
heard all day.
    Let me ask you, because my time is almost up on this round, 
Inspector General Heddell, have you done any investigation as 
to the people under your supervision who exposed the 
whistleblowers? Do you know who those people were that exposed 
Ms. Le?
    Mr. Heddell. Well, it is not--the answer to that is it is 
not as simple at that. If I could take a minute, I would be 
more than happy to try to address that.
    Senator McCaskill. OK.
    Mr. Heddell. With regard to your earlier remarks, Senator 
McCaskill, I do not think you and I really disagree. I 
appreciate your remarks, in fact.
    First of all, I would like to say thank you to Ms. Thi Le 
because, frankly, being a law enforcement professional for most 
of my life, we depend on people who will come forward----
    Senator McCaskill. That is exactly right.
    Mr. Heddell [continuing]. And who will talk to us. And she 
did. And there is a lot more that I could say that is very 
positive about what she has done for us.
    Let me explain what happened in this situation, however, 
and it probably is a situation that needs to be fixed. But here 
is the case.
    There was a 3-month delay in handling that hotline 
complaint. It came in on November 13, 2005. It was not handled 
until February 8, 2006. As I indicated in my statement, the 
Department of Defense OIG hotline became the fraud hotline for 
the entire Federal Government between September 2005 and March 
2006. During that time we took in almost 10,000 Katrina and 
Rita hurricane-related allegations. In addition to that, we 
took in our regular allegations, which were about 8,000, so 
tremendously overtaxed. And there was a priority system in 
place that said that we would only--that we would for the most 
part address life-threatening issues and senior official 
issues. And that is why the delay.
    Now, routine hotline referrals that we get--and I emphasize 
the term ``routine''--the way that they are handled is they 
come in, and as long as they are routine, they are referred to 
a DOD agency, in this case DCAA. The Department of Defense has 
a hotline program, and they have very formal instructions under 
DOD Instruction 7050.01, and those instructions say that when 
hotline referrals come in, they are required to have a process 
in place whereby they independently review and report on the 
nature of the hotline. And it goes on to say that maximum 
emphasis must be given to protect the identity and the 
confidentiality of the person who calls in or provides the 
information.
    Now, in this particular case, the hotline referral came in 
and was treated routinely, and, of course, with regard to all 
the major issues that were occurring at that time--and I could 
go down the list--that particular hotline complaint was treated 
as a routine matter and, like all routine matters, it went to 
the agency involved, with the exception--we have three 
exceptions: If it involves a senior official, if it involves 
reprisal, or if it involves criminal activity. And that 
particular hotline complaint was judged not to have any of 
those three attached to it at that point in time. But it also 
was judged to be routine, and, therefore, it was referred to 
DCAA.
    Now, I will tell you, I think we misstepped on that one 
because, in my opinion, anytime something comes in that 
involves DCAA, as important an organization as it is--and when 
you think about what it does--I think we should have taken 
that. I think we should have kept it--we, the Office of the 
Inspectator General (OIG)--and we should have worked it 
ourselves.
    Fortunately, within 30 days of referring it to DCAA, we 
realized and we were able to get back on track with that thing, 
and we took it back.
    Senator McCaskill. But it was only because Ms. Thi Le 
complained to Criminal Investigations.
    Mr. Heddell. Yes, ma'am.
    Senator McCaskill. If she had not done anything more, 
nothing may have happened.
    Mr. Heddell. I do not deny that is probably what would have 
happened--nothing--at least for a while.
    But here is the thing. What I outlined for you is the 
system for handling routine complaints because there are 
thousands of them that do come in. Unfortunately, in this 
particular case, it was referred to DCAA.
    Now, the complaint itself did not specifically identify any 
one person, but having said that, I can tell you as a trained 
investigation, I think I could have looked at that, and I think 
I could have figured it out. We made a mistake on that. And I 
feel badly because, as I said, we rely on people like Ms. Thi 
Le to help us out. I think the system could be improved there.
    Senator McCaskill. Thank you for acknowledging the mistake. 
Thank you, Mr. Chairman.
    Chairman Lieberman. Thank you, Senator McCaskill. We will 
now do a second round of 8 minutes.
    Ms. Stephenson, in terms of the response, we talked about 
what has happened to the supervisors who were criticized, but 
let me go now to the actual audits. According to the GAO 
report, since being briefed on the results of that report, you 
have rescinded three of the audits and performed three other 
new audits that resulted ``inadequate in part'' opinions. But 
that still leaves more than half of the questionable audits 
untouched.
    Is DCAA itself re-examining those audits?
    Ms. Stephenson. Oh, absolutely, sir. For all 13 cases, we 
have analyzed what the issues were with those cases, whether 
they be an estimating system, whether they be a billing system, 
where additional testing needed to be done. But all 13 have had 
additional audits either in process or completed. Most are in 
process as of this time.
    Chairman Lieberman. So you have rescinded three, issued 
``inadequate in part'' opinions on three. So on the remaining 
seven you are in review of those now?
    Ms. Stephenson. It is actually more than that, sir. There 
were 13 cases, and for some of them there are two to three 
additional audits that we are doing because the issues that may 
have been called into place may have been in various areas and 
not just one audit, although the audit that the GAO looked at 
was one audit. So we expanded it where we needed to, to ensure 
that we had the appropriate coverage.
    Chairman Lieberman. So, bottom line, none of the audits 
that are in question and found wanting are being left sitting 
as they were?
    Ms. Stephenson. No. In fact, contracting officers have been 
notified of the GAO's findings on those reports, and they have 
been told not to rely on the results in those reports. And they 
have been given the timeline for the additional audits that 
will be performed. We did not want a contracting officer that 
was holding those reports to be acting on the findings.
    Chairman Lieberman. Let me go to Mr. Heddell for a 
question, but it raises an issue I want to come back to you on. 
Mr. Hackler's testimony alleges a very costly flaw in a 
contract with Integrated Defense Systems, a Boeing subsidiary, 
for satellite launch capabilities. And as you know, his 
allegations have now been substantiated by GAO.
    I wanted to ask you what your office is doing to follow up 
on the audit and if there is any recourse--and this is where I 
will ask Ms. Stephenson to join you in answering--for the 
taxpayers for what sounds to me like an unjustified payment of 
$270 million of taxpayer money.
    Mr. Heddell. The answer to, I think, the core of your 
question there is, with regard to the Inspector General, we 
have two initiatives ongoing at this point, Mr. Chairman. One 
is an investigative initiative relative to senior officials.
    Chairman Lieberman. Right.
    Mr. Heddell. Another one is an audit initiative to take a 
look at what happened, to try and identify the problem. At 
least in my opinion, the more important question that you are 
asking, I think, is what is happening here, and why is this 
happening.
    I think for one thing--and this is an opinion--I think 
there is--appropriately, there is a lot of emphasis on what are 
called generally accepted government auditing standards. I 
think those are extremely important. I am not an auditor. My 
professional background is more in the leadership and 
management area. But I think the issue is more about leadership 
than it is about auditing standards. And I think that is 
where----
    Chairman Lieberman. Leadership right to the top.
    Mr. Heddell. Leadership to the top.
    Chairman Lieberman. To Ms. Stephenson in this case.
    Mr. Heddell. Well, it is not just Director Stephenson. I am 
talking about a much broader subject. The Department of 
Defense, its budget has doubled in recent years, as you know 
better than I do. And the number of procurements has 
skyrocketed. The number of life-threatening issues that the 
Department deals with--and you are not talking millions 
anymore. We are talking billions.
    Chairman Lieberman. Sure.
    Mr. Heddell. And the fact of the matter is that leadership 
is, in my opinion, the real issue. And who is important? Only 
the taxpayer can be viewed as the customer.
    Chairman Lieberman. Yes, that is the customer.
    Mr. Heddell. So I think our focus has to be on how do we 
lead better. For instance, I know that DCAA has an internal 
audit peer review that they do themselves, but I think the 
focus is more on audit than it is on management.
    Chairman Lieberman. Let me interrupt you, with apologies, 
because my time is running. Is there anything that the 
government could do to recover money improperly spent as a 
result of these inadequate audits?
    Mr. Heddell. Well, yes, sir. The government through audits 
that we conduct recovers millions of dollars every year. In 
fact, a lot of the semiannual reports of the Inspectors 
General, which, by the way, come out at the end of this month, 
will show the amount of monetary recoveries they have made over 
the past 6 months.
    Chairman Lieberman. So are you pursuing any monetary 
recoveries in any of these cases, including----
    Mr. Heddell. Yes, sir.
    Chairman Lieberman [continuing]. The one Mr. Hackler 
referred to.
    Mr. Heddell. Well, I cannot speak to that one because we 
are not finished yet, sir.
    Chairman Lieberman. OK.
    Mr. Heddell. But I can say that in some of the others, yes.
    Ms. Stephenson. Sir, can I speak to that?
    Chairman Lieberman. Please do.
    Ms. Stephenson. As far as the recovery?
    Chairman Lieberman. Yes.
    Ms. Stephenson. That is one of the 13 cases, and that is an 
instance where we do have a recovery mechanism under the Cost 
Accounting Standards. Under the Cost Accounting Standards, if a 
contractor is found to be noncompliant, you can retroactively 
go back to when that contractor started that practice and 
request recoupment from the contractor. That is a public law. 
We are in the process of performing audits under the Cost 
Accounting Standards on those particular issues and those 
accounting practices to determine whether that contractor is 
indeed compliant or not. So I believe that is a remedy which we 
could have.
    Chairman Lieberman. Good.
    Ms. Stephenson. Second, if I could clarify that situation 
as well, and I certainly appreciate Mr. Hackler and Ms. Le 
being here today, especially Mr. Hackler in talking about the 
issues with the Evolved Expendable Launch Vehicle (EELV) 
program. I know that has taken a lot of courage for them to 
come forward, and I do want to thank them.
    Chairman Lieberman. I want to ask you something about that 
while you are at it.
    Ms. Stephenson. Sure.
    Chairman Lieberman. Will you promise that you will do 
everything you can to make sure that Mr. Hackler and Ms. Le are 
not in any way harassed or punished as a result of their 
whistleblowing?
    Ms. Stephenson. You have my personal commitment on that, 
sir, because I know it did take a lot of courage for them to 
come forward, to continue coming forward, and to not let loose 
of their convictions as to the issues and the concerns they 
have about their agency.
    Chairman Lieberman. Yes, I agree. They are heroes, as 
Senator McCaskill said, and both of them feel that they have 
suffered as a result of blowing the whistle. So we are going to 
count on you to make sure, as the Director of the DCAA, that 
any harassment stops.
    Ms. Stephenson. Absolutely, sir.
    Chairman Lieberman. Go ahead with your answer.
    Ms. Stephenson. I just wanted to clarify. On the EELV 
program, which was a very complex program for all involved, 
including us, as technical as we are with auditors, there was a 
certain amount of the cost that was put forward as being 
questionable. There was another part of the cost on which we 
were not able to render an opinion because of the way in which 
the contractor's accounting records were maintained. And I know 
that was a point of disagreement as to whether that additional 
amount that stemmed from the way in which the costs were 
accumulated under portions of the contract prior to it having 
to comply with the Federal Acquisition Regulations and the 
accounting standards. And I realize that was a point of 
contention, and it did get raised up several levels to 
management within the region where they made a decision they 
did not feel that there was enough information in the 
accounting records of the contractor, given the way in which 
they had put the records together, in order to express a clear 
opinion that this was questionable. Rather, they set the costs 
aside in the report and stated that this was an area that 
appeared to be allocable to the government. We did it as what 
is called a ``qualification'' under the auditing standards, 
which is when you do not have enough information to express an 
opinion. We also asked the Air Force in that report not to 
conclude negotiations until it had assessed this situation.
    As I said, I completely understand Mr. Hackler's concern 
with this and the need to have completely questioned all of it 
as opposed to saying, well, for part of it we just may not have 
had the type of information necessary in order to express that 
opinion. And I think that is something we are going to look at 
closely as we go forward as to how aggressive we are in 
situations where there is a lack of information. Perhaps that 
could have been handled better.
    What I can give you is the commitment here today is we will 
complete those audits under the Cost Accounting Standards, and 
we will continue to work with the organizations--it would be 
the Defense Contract Management Agency and the Air Force--that 
if we feel recoupment is necessary, we will work with those 
organizations and work toward that recoupment.
    Chairman Lieberman. Good. Thank you for that. My time is 
up.
    Senator Collins.
    Senator Collins. Thank you.
    Mr. Heddell, you answered a lot of my remaining questions 
when the Senator from Missouri was talking to you earlier, but 
I want to clarify one point which is still unclear to me.
    When the complaint came in from Ms. Thi Le, did the IG 
mistakenly forward back to DCAA her personal information or 
identifying information? Or was it just a case that anyone 
could figure it out because of the contract and the nature of 
the complaint?
    Mr. Heddell. The complaint that came in on November 13, 
2005, came in with the name of a person who is not sitting at 
this table, or at least not with the name that was put on the 
complaint. So the complaint came in with a name that is not 
sitting here today. But the complaint did list potential 
witnesses, and Ms. Thi Le was listed as a potential witness, 
among others. And the complaint was deliberately--and I do not 
mean maliciously, but ``routinely''--forwarded on February, 8, 
2008, to the DCAA.
    Now, to the best of my knowledge, the DCAA management 
handled that complaint properly. I do not know that they 
divulged her name, but I do know this: That if you read the 
complaint, it would have been pretty easy to figure out who 
probably made the complaint.
    So it was the system. It was followed. But, unfortunately, 
that complaint was treated routinely, and that is why I said in 
my opinion it should not have been routine.
    Senator Collins. I was just going to say, that is a problem 
in and of itself, as you have conceded.
    Ms. Stephenson, I want to talk to you about DCAA's 
cooperation with investigators, whether it is from GAO, the 
Defense Criminal Investigative Service, or the IG's office. In 
the case of Thi Le, DCAA issued an extremely broad and 
restrictive memo--you could look at it as a gag memo--that 
directed her not to provide documents to the GAO or anyone 
else. And the memo also cautioned that if she did provide 
documents, she could be punished and even lose her job. In 
fact, Ms. Thi Le testified today that she was threatened that 
she could be prosecuted, that it could be criminal theft.
    What are the rules that DCAA has now on cooperating with 
outside investigators as far as access to documents?
    Ms. Stephenson. Let me answer this in a couple of ways, if 
I may, if I can first explain the letter that was issued in 
August 2007. I could say the tonal quality of that letter 
should have been improved. However, the intent of that letter 
was to protect the documents that were contractor proprietary 
documents. And it is within DOD policy and DCAA policy that we 
have to protect those documents. I do not think we had a clear 
understanding within our General Counsel's office at that time 
what those documents were going to be used for, and we used a 
blanket statement that is given when people are preparing cases 
and perhaps providing documents to third-party attorneys.
    I am not saying that was right, but that is what the intent 
of that letter was to do, to protect the contractor proprietary 
documents.
    However, at no time was there any restriction in Ms. Le 
giving the list of documents that the Office of Special Counsel 
or any other investigative agency would want. In fact, she did, 
and we did turn those documents over to the Office of Special 
Counsel. And we would continue to do that. It is my 
understanding that the Office of Special Counsel has the 
documents which they need. So at no time are we saying that 
they cannot give the documents that can be requested by the 
Office of Special Counsel. We did indeed turn those over.
    However, in looking at this in hindsight, in looking at 
what was going on at that time, we may not have fully realized 
the intent of what Ms. Le was wanting with those documents and 
that it was solely for an investigative organization and not 
for personal use. And so I look back on that and say we could 
have handled this better. And we have changed our policy for 
the cooperation with investigative organizations which----
    Senator Collins. Let me stop you for a moment to clarify a 
couple of points. The General Counsel's office knew that there 
was an ongoing investigation. Correct?
    Ms. Stephenson. It is my understanding, yes.
    Senator Collins. So this is not a case of protecting 
proprietary information from a corporate competitor or from an 
employee who is going to misuse it for personal purposes. This 
was a restriction that was imposed that prevented Ms. Le from 
cooperating with government investigators. How can that be 
proper under any circumstances? And how could the General 
Counsel's office have possibly thought it was related to 
protecting proprietary information?
    Ms. Stephenson. Ma'am, in hindsight we could have handled 
that better. We should have----
    Senator Collins. Well, I am finding this troubling, 
especially since when you were giving your explanation, Ms. Le 
was shaking her head. So I want to go to her now.
    How did you interpret the memo that you received, which was 
signed by your supervisor but was, in fact, drafted by a DCAA 
attorney telling you not to distribute or share any of these 
documents? What was your interpretation? \1\
---------------------------------------------------------------------------
    \1\ The memorandum for Diem Thi Le appears in the Appendix on page 
102.
---------------------------------------------------------------------------
    Ms. Le. My interpretation was that if I did that, I would 
be prosecuted and lose my job. But let me take this opportunity 
to clear up some issues here.
    I think Ms. Stephenson was misinformed. What triggered that 
memorandum was that I was asking my supervisor to allow me some 
time to respond to the OSC investigator in the investigation of 
my whistleblower complaint. I asked for some time to prepare. 
Then the next day, my supervisor gave me a memorandum saying 
that I cannot provide any documentation generated by a 
government computer, and I asked her specifically, and she told 
me including internal e-mails between me and my supervisor and 
my job performance evaluations, in which I do not think there 
is any contractor proprietary data right there, to any 
investigative unit, including the OSC.
    So, clearly, at least my management at my office understood 
that I was not about to give away any contractor proprietary 
data to outsiders, but to respond to the OSC investigation.
    Senator Collins. Office of Special Counsel.
    Ms. Le. Yes.
    Senator Collins. Mr. Kutz, what is your view on this? Did 
you have a difficult time getting access to documents were part 
of this investigation?
    Mr. Kutz. I will let Ms. Fischer answer that, but I think 
overall we got some cooperation. There were some people, 
though, as I mentioned in my opening statement, that were 
scared to meet with us and actually met with us off site 
because they did not want people at DCAA to know that they were 
talking to GAO. But I will let Ms. Fischer answer that in more 
detail.
    Senator Collins. Ms. Fischer.
    Ms. Fischer. Yes, Mr. Kutz is correct. We did end up 
meeting with about three auditors off site. Some auditors were 
afraid to talk to us, the younger junior auditors. One trainee 
was just about in tears when she got in the conference room to 
meet with us, and we just let her go.
    We actually phoned some auditors that we were told were 
willing to talk to us before we went out in person for 
interviews, and they suggested very strongly that we needed to 
do our interviews in confidence, that the auditors would be 
afraid to talk to us if their supervisors or managers were 
sitting there in the room. And that is why we handled the 
interviews in a confidential manner. But they were told not to 
give us any working papers or bring anything into the room, 
that everything had to go through their management. And as a 
result, their management would know what they wanted to give us 
to explain the audit issues, and they were afraid to do that. 
But we feel we saw enough documentation through the working 
papers we reviewed to support what we were concluding in our 
investigative report.
    In Ms. Le's case, of course, we never got that gag order 
memo because she could not share it with us.
    Senator Collins. Thank you. Let me just wrap this up 
because my time has expired. I would like to have Mr. Heddell, 
just as an experienced IG, comment on this issue, and then, Ms. 
Stephenson, I am going to ask you for a commitment to issue a 
clarifying memo or some sort of direction making very clear 
that when the investigation is from another Federal entity----
    Ms. Stephenson. Yes, ma'am.
    Senator Collins [continuing]. This is entirely different.
    Ms. Stephenson. Absolutely, ma'am, and that was 
unacceptable. And as I say, in hindsight that was unacceptable. 
I did not realize until Ms. Le just said right now that it was 
appraisals and other information that would not have contained 
contractor proprietary data. She should have been allowed to 
turn that over, no questions asked. I sincerely apologize to 
her that she was put in that situation.
    Senator Collins. Thank you. Very briefly, Mr. Heddell.
    Mr. Heddell. Yes, ma'am. Very briefly, there are three 
controlling points of authority here, I think, from an IG's 
point of view, the first being the Trade Secrets Act, which 
does not prohibit whistleblowers or people who want to provide 
information from providing it to the Office of Special Counsel, 
as long as it is properly marked. And the second thing is the 
Whistleblower Act. It prohibits reprisal against anyone who 
provides information to the Office of Special Counsel. The 
third being the Department of Defense policy itself, it does 
not prohibit the release of contractor proprietary information 
to the Office of Special Counsel.
    And the only other thing that I would add, having read that 
memo, I think the threatening tone of that memo goes beyond the 
simple caution that might have been required here. And I think 
clearly it could have been interpreted as an attempt to 
intimidate.
    Senator Collins. Thank you. Thank you, Mr. Chairman.
    Chairman Lieberman. Thanks, Senator Collins. Am I correct 
in assuming you do not have any more questions?
    Senator Collins. Correct.
    Chairman Lieberman. So I am going to stay a while, but, 
Senator McCaskill, you are free to go on, honestly, as long as 
you want. You bring a lot to this.
    So I would just like to say, before I turn it over to 
Senator McCaskill, thank you to the witnesses. This is exactly 
the kind of oversight that this Committee was created a long 
time ago to do, to protect taxpayer money. But I would say that 
we could not do this kind of hearing without, first, the guts 
of Ms. Le and Mr. Hackler, and then the very good professional 
work of Mr. Kutz, Ms. Fischer, Mr. Heddell, and now the 
response of Ms. Stephenson, because ultimately we are not here 
to play ``gotcha.'' We are here to fix what is wrong. So we are 
going to stay with this and ask for regular reports from you. 
We have a final report coming from GAO sometime later this fall 
or early winter. And we are open to as much as you can do to 
correct the problem we have found in DCAA administratively and 
to consider also legislative fixes that may be necessary, 
including the possibility of separating DCAA from the 
Comptroller at DOD.
    I would also say, just by way of the normal announcement, 
that we are going to keep the hearing record open for 15 days 
for Members of the Committee to submit additional questions to 
you, if they have them, or for you to add to the record 
yourselves. But I thank you very much.
    Senator McCaskill, it is all yours. Thank you.
    Senator McCaskill [presiding]. Thank you, Mr. Chairman. I 
appreciate the opportunity.
    I have three major areas I want to cover before we conclude 
today. One is the most important area, I think, and that is, 
whistleblower protection. The second is performance metrics and 
how debilitating they have been to oversight within DCAA. And 
third is the most important issue, I believe, going forward, 
and that is, accountability for what has happened and what 
happens in the future to people who have been involved in this 
sordid, unbelievable story of failure in terms of an auditing 
agency.
    Let me start with whistleblower protection. First of all, 
Ms. Stephenson, there are many things that you have done since 
I read the GAO report that I admire, and I will be honest with 
you. It is not going to surprise me if you are a fall guy here. 
It is not going to shock me if you are the one that is removed 
and no one else is. That would be wildly inappropriate, but I 
am beyond being surprised at this point. And part of me thinks 
you did have some management failures. You should not have 
responded to the GAO audit, as we have discussed, the way you 
did. For any auditor looking at that GAO report, I mean, we are 
talking about serious sirens, bells, and whistles all going off 
at the same time. If I had gotten a report like that of my 
audit agency and I was in charge, I guarantee you my response 
would have been much different than yours was. And you and I 
talked about that, and you have acknowledged that.
    And I thought we were turning the corner in part of your 
testimony today until you actually had the nerve to say that 
the gag order had something to do with proprietary information. 
Let me read you the first paragraph of the memo that Ms. Thi Le 
received.
    ``On August 28, 2007, you sent an electronic message to me 
concerning certain agency documents in connection with an 
auditing assignment you previously performed work on. You 
stated your purpose for searching these materials was to assist 
you in preparing a complaint to the Office of Special 
Counsel.''
    So in the lead of the memo, Ms. Stephenson, there is 
acknowledgment by this supervisor that the reason Ms. Thi Le 
wanted this information had nothing to do with protecting 
Boeing, Lockheed, or any of these guys. It had everything to do 
with protecting the integrity of the agency she worked for.
    Now, here is the most amazing part of this gag memo: ``You 
may not access such agency documents for any private purpose, 
including the pursuit of any complaints or other proceedings in 
any form.''
    Now, this is textbook whistleblower abuse within the most 
important audit agency in government when it comes to the 
massive amount of spending in the Department of Defense and our 
active military.
    Now, my question to you is: First, who drafted this 
ridiculous memo of August 31, 2007? Who drafted the language? 
Do you know?
    Ms. Stephenson. My understanding is it was an attorney in 
our General Counsel's office. I am not sure specifically which 
attorney. But it was an attorney in our General Counsel's 
office.
    Senator McCaskill. OK. I want to find out if they have 
retired or been promoted.
    Ms. Stephenson. I will get back to you on that, ma'am.
    Senator McCaskill. Most importantly, I would like to know 
if disciplinary action has been taken against him. As a lawyer 
in the Department of Defense, if he actually had the nerve to 
threaten someone for responding to a complaint, he really has 
abused his law license.
    Ms. Stephenson. It was wholly inappropriate, in the context 
of the investigation of the Office of Special Counsel, to in 
any way inhibit an employee from providing documents, 
interviews, or in other ways interacting with those 
investigators. Wholly inappropriate, ma'am.
    Senator McCaskill. I would like to know who drafted the 
memo, who reviewed the memo before it went to Sharon Kawamoto, 
who signed it; how far up in the counsel's office did it go; 
because if this was approved by the lawyers in the DOD 
counsel's office, knowing what she wanted the documents for, 
then we have a really ``rotten in Denmark'' situation.
    Ms. Stephenson. Ma'am, I do not believe it went outside the 
agency. I will indeed confirm on that, but I do not want to 
implicate----
    Senator McCaskill. No, I just want to know everyone who 
knew about the content of this memo----
    Ms. Stephenson. I will definitely get that information for 
you.
    Senator McCaskill. And where is Sharon Kawamoto right now?
    Ms. Stephenson. She is, I believe, a supervisor in the 
Santa Ana branch office.
    Senator McCaskill. Has she been promoted since she signed 
this memo?
    Ms. Stephenson. She is the individual who is awaiting the 
promotion.
    Senator McCaskill. OK. And I have to understand this notion 
that she could get promoted. Explain to me what is it in the 
byzantine personnel policy that allows you to threaten someone 
who is trying to expose abuse in an audit agency and she cannot 
get promoted, but somehow the rules say you have to promote 
this woman, after we know she is a supervisor who participated 
in the problem?
    Ms. Stephenson. Ma'am, I do not think that Ms. Kawamoto was 
the one who wanted to issue that memo. It went out under her 
signature based on the input from the General Counsel's office 
to the employee because she was indeed the employee's 
supervisor. I do not think she played any part in preparing 
that memo.
    Senator McCaskill. OK.
    Ms. Stephenson. I will definitely confirm. My understanding 
is that was prepared by the General Counsel's office. It merely 
went out under her signature. I will get that confirmed, 
though.
    Senator McCaskill. Would it be a ridiculous notion for 
accountability that we would, in fact, require the person who 
owns the language to sign the language within DCAA, which is 
all about accountability?
    Ms. Stephenson. I will certainly look into that. You raise 
an absolutely good question as to whether that should have been 
signed by the General Counsel versus the supervisor.
    Senator McCaskill. Yes. I mean, if this poor woman, if she 
is blameless here and she was told to sign her name to this, 
the only purpose you do that is to hide the person who is 
responsible for it. And DCAA is supposed to be about 
transparency and accountability. So it seems to me if somebody 
is going to sign a memo to a whistleblower that basically says, 
``You are in big trouble if you say anything to anybody,'' 
which is what this memo said----it basically said ``Sit down 
and shut up, or you are in trouble.''
    Whoever is responsible for that language--there needs to be 
a change at DCAA, and I will take this up with Tina Jonas and 
Secretary Gates if I have to--they need to own the language. 
They should not hide behind the skirts of a line supervisor. 
And we will figure out who it is, and I will make sure that 
they are not allowed to hide behind the skirts.
    Let me say for the record, for any auditor in government 
that wants to be protected as a whistleblower, please call my 
office. We will make sure that you are protected. It is a 
felony in Missouri for one of my auditors to expose a 
whistleblower. My auditors could have gone to prison if they 
exposed a government whistleblower in the agency I ran. And to 
say that Ms. Thi Le got exposed as a whistleblower because it 
was a routine complaint, as you have said--and I appreciate 
your testimony in that regard that this was anything but 
routine, that somebody is changing audit findings without any 
factual basis, to do so at the premier audit agency in the 
Department of Defense should set off sirens. And the fact that 
it was considered routine by people who were answering that 
hotline showed that it is a very cold, frigid hotline. We need 
to change it to the ``cold-line,'' not the hotline. I 
understand Hurricane Katrina was in process, and I understand 
the responsibilities there. But I have to impress upon you, 
Inspector General, that if we are getting these kinds of 
complaints and they are being characterized as ``routine,'' 
that is part of the culture that is a problem; the massive 
abuse of an audit agency in terms of government dollars is 
really a problem.
    We will enter this memo into the record of the hearing so 
it is part of the public record, the memo that Ms. Thi Le 
received that basically told her to be quiet or consider 
herself in peril.\1\
---------------------------------------------------------------------------
    \1\ The memorandum for Diem Thi Le appears in the Appendix on page 
102.
---------------------------------------------------------------------------
    Have you taken any specific actions, Inspector General to 
protect the identity of whistleblowers in light of this 
incident?
    Mr. Heddell. Well, I have certainly addressed the issue of 
how we handle hotline complaints, Senator McCaskill. Again, 
being an Inspector General for 8 years, I can tell you there 
are not many things that are more important to an Inspector 
General than protecting the rights of whistleblowers, and that 
is first and foremost, and it has been for the extent of my 
career as an Inspector General. It always will be the most 
important thing that I deal with when it comes to taking care 
of the people who provide important information to us.
    Senator McCaskill. Well, I hope that you make a 
demonstrable effort that is documented and that you explain to 
the people who are working in connection with the hotline that 
the identity of a whistleblower is a sacred thing because once 
this happened, I hope today will be a cleanser for the other 
auditors at DCAA--I will tell you by the phone calls I am 
getting, there is a great deal of fear in your agency right 
now. I do think this is the tip of the iceberg. I do think the 
GAO comprehensive audit work is going to find that there were 
kinds of pressures that were being put on auditors across the 
country in terms of these performance metrics.
    Let me move into the performance metrics. I am curious 
about who decides what these performance metrics are. Can you 
speak to that, Ms. Stephenson? Who decided that an important 
performance metric was cost per direct audit hour goal?
    Ms. Stephenson. That was a decision by the Executive 
Steering Committee of DCAA, which is comprised of the Director, 
the Deputy Director, the Regional Directors, and our Assistant 
Directors at headquarters. It is about 12 to 13 people. Some of 
those metrics have been in place for many years. Many were put 
in place in the mid-1990s with the National Performance Review, 
with a significant reduction in DCAA staff.
    To put it bluntly, cheaper, faster, better.
    Some of those metrics, if not all of them, we are 
revisiting. We are in 2008. I do not know if those metrics are 
good metrics today. They may have been metrics that were good 
in the mid-1990s to demonstrate that DCAA was performing 
efficient audits, meeting productivity goals cheaper than other 
organizations.
    Times have changed. We need to ensure that our goals are 
focusing in on the quality audits and on the questioned cost. 
We have attempted to turn the corner on this. We do have a team 
in process right now, and I will be honest, we are relying 
heavily on feedback from our field auditors. They are the 
individuals that are having these metrics put on them. I was a 
field auditor. I was a field supervisor and manager. I know 
what the scorecard is all about, and I will tell you, I had 
lots of red on my scorecard because I would not compromise 
audit quality.
    Senator McCaskill. Well, how did you get promoted?
    Ms. Stephenson. Because I had good explanations, I had good 
findings. I explained why I may have missed a metric. And in 
many instances, it was because we had a multi-billion-dollar 
item we were questioning and it needed more time, or it may 
have been we had an inadequate accounting system that needed 
more time. I was able to explain why we missed it.
    Senator McCaskill. These people were not even given an 
opportunity to explain.
    Ms. Stephenson. I cannot answer that, ma'am. That was not 
right. They should have been given an opportunity. And the 
value in the metric is in measuring--when we miss it or when we 
have a deviation, the improvement comes from the evaluation. So 
it is looking at what happened. It is not the red, yellow, 
green that matters. In fact, I would even say if someone had an 
entirely green scorecard--and I said this as a regional 
director--that would be the first office I would visit because 
there is something wrong.
    Senator McCaskill. Well, then let me ask you--this sounds 
great, but obviously the system failed.
    Ms. Stephenson. Yes, ma'am.
    Senator McCaskill. And I think the system is failing. I 
think the performance metrics are not the right ones, and I 
think the culture of this agency has been about this red, 
yellow, or green scorecard, as opposed to how well the audits 
accomplish the goal of saving money. And maybe the most 
important metric would be measuring how much money you save by 
the audits?
    Ms. Stephenson. That was one of our metrics that we had, 
our net savings.
    Senator McCaskill. Yes, well, I have counted. It is 
mentioned twice in here. There is page after page about how you 
are cheaper than private auditors. Clearly, this started in the 
1990s because you were worried that one of the big accounting 
firms was going to take the business. You were worried about 
Peat Marwick or somebody taking over, I assume. And then there 
is page after page after page about how quickly you do the 
audits and how many hours each audit takes, but literally, I 
mean, there are two sentences about money saved. And, by the 
way, let me talk about those savings. What is the metric in GAO 
of how many dollars you save per dollar of your budget?
    Mr. Kutz. It is about $94, is the last estimate.
    Senator McCaskill. DCAA is at $5. And you ought to be 
shooting fish in a barrel. I mean, literally, the audits you 
do, I start salivating thinking about how much money is 
involved and the savings that are potentially there. And I 
would like you all to speak to that, Ms. Thi Le and Mr. 
Hackler. I think DCAA did $300 billion in audit work in fiscal 
year 2006, and I think the return on that was 2 percent. You 
are saving $5 in return for every $1 you spend as opposed to 
$94 for every dollar spent in GAO. And I have to tell you, from 
where I sit and looking at the kind of audits GAO does and how 
many of them do not have the richness that you have in terms--I 
mean, the one audit you did, Mr. Hackler, was $276 million. 
That is more than half of DCAA's annual budget. That is a huge 
return. And basically that finding was just chopped off without 
cause.
    Would you all speak to how, if you have been there 17 
years--and how long did you say you had been there, Mr. 
Hackler?
    Mr. Hackler. Twenty-five.
    Senator McCaskill. OK. Talk to me about savings and what 
kind of promotions happen if you save a bunch of money for the 
government?
    Mr. Hackler. Savings are not nearly emphasized the way they 
were when I joined the agency. I believe back at that time we 
were saving in the $35 per $1 range. People do not get promoted 
because they have good savings anymore. They get promoted 
because they make metrics, because they make the customer 
happy.
    We did a climate survey in DCAA several years ago: What do 
you think of your boss? What do you think of your input? Is the 
agency doing the right thing? The agency could not stand to see 
the results of that.
    Senator McCaskill. And when was this done?
    Mr. Hackler. Five years ago. It asked about a couple dozen 
questions, and a 1 was a poor response, a 5 would be a very 
good response. And with the cumulative results that came back 
from that, the agency decided, well, this is pretty bad, we had 
better just address the items that came back as a 1. And we 
have not seen another climate survey since.
    Senator McCaskill. Ms. Thi Le, what about savings? In your 
experience, when did this shift occur? It used to be important 
how much money you were saving the government, and then it 
became how quickly you were doing the audits and how timely the 
audits were produced.
    Ms. Le. Back in the good old days, as I used to say, when I 
first joined the agency in 1989, the emphasis was on savings, 
how much money we save for the government. But starting in the 
early 1990s, the emphasis changed into do we issue the audit 
report within a certain time frame or do we meet the 
performance metric that we reduce the hours? So, lately, to be 
honest with you, I do not think of savings anymore. I think of 
how I am going to meet the due date, how I am going to meet the 
budgeted hours. And unless I am willing--and I have been--to 
work on my own time on weekends, I cannot finish within the 
certain hours. And at the year end, when my performance gets 
rated, my supervisor will run through a summary of the audits 
that I completed during the year and how much a percentage I 
ran over the budget, and if I ran over more than 10 percent, I 
got dinged.
    Senator McCaskill. And there was never any discussion about 
how much money you saved on any of the audits?
    Ms. Le. No, ma'am.
    Senator McCaskill. Talk to me a little bit about customer 
satisfaction. When did this notion--and, by the way, I noticed 
in the ``Expect More'' that I read that one of the action plans 
was to make sure they deployed more resources in keeping the 
client happy. They bragged about personnel being deployed into 
the procurement offices to make sure that the procurement 
officers were really happy. When did all that happen? When did 
all of a sudden keeping the people that were buying stuff in 
the branches of the military happy, when did that happen?
    Mr. Hackler. Some years ago--I will say 5 to 10--we used to 
have what we called procurement liaison auditors, and we had 
about a dozen of them over the years. And we would have a DCAA 
employee at the major buying commands, and he would interpret 
audit reports and coordinate with the offices and stuff. 
Perhaps 5 to 8 years ago, we increased that number to well over 
100. I spent many hours upon hours during those ELC proposal 
reviews arguing with my co-workers that were in these financial 
liaison audit positions who were trying to convince me to give 
up findings. It was not just upper management.
    Senator McCaskill. So what they have created--I want to 
make sure I understand this. Let's say we have a procurement 
officer at the Navy, or the Air Force. Since we have had a lot 
of Air Force procurement problems, let's use the Air Force. You 
start with a procurement officer at the Air Force. Then you 
have a field auditor--and what you are telling me is that as 
the field auditor found problems with a contractor for the Air 
Force, then the person that was the go-between between the Air 
Force procurement people and the audit agency was, in fact, an 
employee of your agency.
    Mr. Hackler. Yes.
    Senator McCaskill. And their job was to somehow reconcile 
the two? I mean, what is their job? Just to make these guys 
feel happy? Warm and fuzzy?
    Mr. Hackler. Well, I think it started out to interpret DCAA 
audit positions, but what it turned out to be and what it has 
become is they aligned themselves with the buying command, and 
customer satisfaction becomes more important than doing the 
right thing, than telling the right story, than bringing up the 
appropriate exceptions that we find in the audit reports, what 
it takes to get it under contract. Buying commands are measured 
by putting dollars under contract----
    Senator McCaskill. That is their performance metric.
    Mr. Hackler. That is theirs. Not whether they get a good 
deal or save taxpayer dollars.
    Senator McCaskill. So who is the person who can change 
performance metrics? Give me their name.
    Ms. Stephenson. Ma'am, I can.
    Senator McCaskill. You can? Can you do it like tomorrow?
    Ms. Stephenson. I have put a team together, and we are 
assessing what are the appropriate metrics to use. We are 
anticipating having our analysis done by the end of this month. 
I have one of my highest senior executives within my 
headquarters that is leading this team, and I have tapped into 
many field resources to give us feedback. We will be changing 
our metrics by the end of this month.
    Senator McCaskill. Now, who has the authority to decide 
that customer satisfaction should be changed and we should move 
all these people that are out there trying to make these buyers 
happy into being field auditors trying to save taxpayer money? 
Who has the authority to do that?
    Ms. Stephenson. Let me first clarify what these positions 
are about, and I give my apologies to Mr. Hackler if he has 
experienced the negative feedback that he described here. That 
is not the role of our financial liaison advisers to fight with 
the field audit offices (FAOs) and the supervisors and the 
auditors. It is to facilitate. These financial liaison advisers 
are put into the buying commands to help identify the types of 
audits that are needed, to help interpret the audit results, 
and to facilitate additional audits that need to be done, not 
to stop audits from being done. It is to say which additional 
ones do you need in this circumstance.
    Second, our customer service surveys that we do with our 
customers are not about whether they are happy with our 
findings. It is not to say that if a clean report is making 
them happy, that is not what we are measuring. We are measuring 
to ensure that they understood the report; that we provided the 
results in an easy-to-understand manner for the contracting 
officer; that we were timely in describing what those issues 
may have been; if we needed a due date extension, we were 
timely in that discussion.
    I would really ask that Mr. Hackler after this hearing give 
me the input on that person that he said fought with him 
because that is not right and that is not what our financial 
liaison advisers are there for. They are to help our field 
offices in facilitating their audits, and they are to assist 
the buying commands in understanding what additional audit 
services they may need.
    Senator McCaskill. Well, let me make a suggestion. A dollar 
bet you a dime that if customer satisfaction is one of the 
performance metrics, and performance metrics is how you get 
promoted, then customer satisfaction is this big deal. 
Satisfaction means they are happy, and how you make buyers 
happy is by audits that say they have done everything right. 
That is how you make buyers happy.
    Ms. Stephenson. I would----
    Senator McCaskill. And so what I am saying is I guarantee 
you Mr. Hackler is not saying this is an outlier. Interrupt me 
if I am misrepresenting your testimony, Mr. Hackler, or what 
you believe is the culture. I believe the culture has, in fact, 
been driven by a notion that you make the buyers happy. And if 
the buyers cannot understand the audits, then we have got a 
problem with our procurement force because an audit--and that 
is a performance metric I would agree with. If you cannot write 
an audit so that the people that are going to consume the audit 
can understand it, then you have got a performance issue with 
an auditor. Every auditor must be able to express their 
findings in a way that is understandable.
    And I have got to tell you, I have looked at a lot of DCAA 
audits, and other than having to get out a book to figure out 
what all the initials stand for, you can follow them. And I am 
not a buyer.
    So I guess I am a little skeptical, Ms. Stephenson, that 
the culture that has grown up around page after page of 
customer satisfaction is that they are just identifying the 
next audit. If they are just identifying the next audit, they 
do not need to be arguing with Mr. Hackler about a finding.
    Ms. Stephenson. Ma'am, I opened this up today for the 
record that if there is any DCAA employee that feels our 
financial liaison advisers are not there to facilitate their 
audits and to facilitate the sustaining of our audits, I would 
like that person to give me a personal phone call or a personal 
e-mail. I will not take their name anywhere, and I will 
immediately rectify that situation.
    Senator McCaskill. OK, great.
    Ms. Stephenson. Open this for the record, ma'am.
    Senator McCaskill. That is great. Now, let me move on to 
performance metrics as it relates to being promoted. You said 
you had a lot of red marks and you got promoted. I imagine 
there are a lot of auditors out there listening to this that 
feel like you won the lottery because I do not believe 
fundamentally that people get promoted who get a lot of red. I 
think people get promoted who have a lot of green, or maybe 
some yellow and green.
    I guess what I would like to know is in the current 
management staff at DCAA, all of those people who have been 
promoted within the last 5 years--I do not need to know their 
names, but I would like somebody to submit for the record how 
many of them had essentially green records under the 
performance metrics and how many of them would have a record 
that would indicate that they were actually trying to stir the 
pot. That is, I think, something that is very important. And if 
either of you are willing to speak to that in that regard, I 
would appreciate it for the record.
    Ms. Le. Senator McCaskill, in my experience the last couple 
years, I do not think I have seen any person who has been 
promoted because he had a red card but rather because he had a 
green card. That is just my personal observation and 
experience.
    I also would like to take this opportunity to go back to 
your previous question about how you think this culture 
developed. I think the culture beholden to performance metrics 
developed starting in the early 1990s. And in the early 1990s, 
the former Director, Bill Reed, went around all the DCAA 
offices, telling us that there was talk in Congress to 
privatize our agency and if we do not become a lean and mean 
machine, we would lose our jobs.
    Looking back, I think that was a scare tactic because then 
we became afraid of losing our jobs, and we began to accept the 
metrics. And as you know, once you push it, you can push 
further and further because the fear is if you do not do it, 
you do not meet the metrics, we are going to lose our jobs.
    And let me tell you, you hit it right. We are the audit 
agency. We are supposed to be an independent agency. And our 
role should be advisory, not to be a partner in the process, 
but to advise the procurement office and contracting officer so 
that we can get reasonable costs for government contracts. We 
should not be pressured by those officers because they have the 
need to negotiate a contract to get the parts. And because of 
that, we lose independence because, let me tell you, if I am 
performing an audit and I know that I have to turn this in in 
25 days or 30 days because somebody else is waiting for that 
audit report, if I found a problem, I would not want to bring 
it up. And right there is the independence issue. I would not 
want to explore it further, follow my instinct because by doing 
so, I would not get the audit out in 25 days or 30 days and my 
customer is not happy.
    Another thing is that also because of the performance 
metrics on the audit hours, I would not want to explore the 
potential problem because I would run against the budgeted 
hours.
    Senator McCaskill. Right.
    Ms. Le. I am just an auditor at a small branch office. Of 
course, I do not see the whole picture. But it is my opinion 
that I do not think we should really belong to DOD. And maybe 
that is a white card out there, but this is, again, my opinion, 
that how could you audit DOD contracts? And you are supposed to 
be independent, but you are reporting to the same person. Just 
like Ms. April Stephenson has stated earlier--and I fully agree 
with her, I think she took a very corrective action--we have a 
Quality Assurance Department in our Agency, and it used to be 
that it was at the regional level. There is an Office of 
Quality Assurance, and they used to report to the regional 
director. Now, if you are going to report to your regional 
director and tell him what is wrong with your region, you 
cannot be independent. But since then, a change DCAA has made, 
if I understood it correctly, is that the Quality Assurance 
Division now reports directly to the headquarters. I think that 
is a great thing.
    Senator McCaskill. Good.
    Ms. Le. The same thing with DCAA, and again, I do not see 
the whole picture, but it is my opinion we cannot audit the DOD 
at the same time we are reporting to DOD. I think that is a 
conflict of interest there.
    Senator McCaskill. Mr. Kutz, probably I should ask the 
Acting Comptroller this. Should DCAA be a division of GAO as 
opposed to working for DOD?
    Mr. Kutz. I cannot answer that, but I think that her point 
about whether it should be in a different place, either within 
DOD or outside of DOD, should be on the table here for 
discussion.
    Senator McCaskill. Ms. Stephenson, what do you think? 
Should we remove it from the chain of command at DOD and put it 
so that it can have more independence?
    Ms. Stephenson. I am along with Mr. Kutz. I would certainly 
support an evaluation.
    Senator McCaskill. OK, great. How about you, Inspector 
General, DOD?
    Mr. Heddell. I do not have the answer to that, but if you 
look at it from the standpoint of the Inspector General 
community, Inspectors General are assigned at individual 
departments, but the law, the Inspector General Act, gives us 
independence. And so it works there when the Inspectors 
General----
    Senator McCaskill. Most times it works.
    Mr. Heddell. When they are doing their jobs, it works 
mostly.
    Senator McCaskill. As long as you have an IG that pays 
attention to the counsel. And we have a few rogues right now, 
as you know, where the counsel has recommended disciplinary 
action, and these yahoos, a couple of them, have stayed in 
their jobs, even though everybody knows that they have not done 
the title proud as an Inspector General. But the vast majority 
of the time, I agree with you. I think the Inspector General 
community, by and large, is professional, independent, and does 
the appropriate thing in most instances.
    And, by the way, let me say for the record I think in most 
instances at DCAA you have got strong, capable auditors that 
are doing the right thing.
    Ms. Stephenson. I fully concur.
    Senator McCaskill. And I absolutely do not believe this 
cultural problem is one that comes from people being dishonest 
or playing footsie with contractors. I think it comes from a 
set of phony performance metrics that have put inordinate 
pressure at the wrong place. And that can be fixed by a 
changing of the culture, by telling these auditors that they 
are going to be celebrated and promoted for the money they save 
taxpayers as opposed to making the guys who want this stuff 
happy or as opposed to doing it really quickly.
    Ms. Stephenson. And, ma'am, can I address that? Having been 
a regional director, there were times when I had offices that 
had quality problems. I told those managers to put the 
scorecard away because the measures of whether we were 
performing the right audits and whether our people were getting 
the right training was our audit reports. And that is what we 
needed to focus on. And regardless of the hours, we need to 
focus on that. We needed to train our people properly. We 
needed to ensure they had the right supervision, including the 
fact that these teams were not too large for oversight. It 
needed to be smaller teams.
    I completely recognized that, and that is the way I ran my 
region. And that is the way I envision running the agency.
    Senator McCaskill. That is terrific, and if you are going 
to be bold----
    Ms. Stephenson. Absolutely, ma'am.
    Senator McCaskill. If you are going to be bold, you have 
got a shot. But if you are not bold, that is not going to 
happen.
    Ms. Stephenson. And in many of these metrics, it was 
misapplication. Metrics such as 30 days on forward pricing, 
that was never intended to be a ceiling. That was merely an 
intention of measuring whether we were providing information in 
a timely manner. We have had a number of audit reports this 
year that have been issued far in excess of 30 days, and those 
have been very large dollar ones. And that is absolutely the 
right thing to do.
    And, again, for this record--and this is a good opportunity 
for me to ensure the acquisition workforce and my own workforce 
knows, I stand behind doing the audits appropriately, 30 days 
or not.
    Senator McCaskill. And I know that you have stated very 
strongly today, repeatedly, how committed you are to fixing 
these problems. And, obviously, we are going to be watching 
very closely. And I have now all kinds of lines of 
communication into your agency that we will maintain to make 
sure that is happening, not just what we are told by the people 
at the top but what we are learning from deep within the 
agency, from the auditors that are doing this heroic work day 
in and day out.
    Let me briefly go on to accountability before we close this 
today, and I will have additional questions for the record, 
probably for all of you. But on accountability, there are two 
kinds of accountability that have to happen here: One is for 
the personnel involved in this mess, and second is for the 
money that is potentially collected.
    Now, I have got to tell you, it sounded a little bit like 
the Tooth Fairy to me, Ms. Stephenson, when you said that there 
is some potential of recovering the $276 million from Boeing. I 
mean, I do not think there is any way that is going to happen, 
is there, Mr. Hackler?
    Mr. Hackler. Not the way it is going today. There is a re-
review of the ELC proposal within the office, but they are 
looking at the wrong things. They are only looking at the 
exceptions we were allowed to report in the initial ELC 
proposal which related to Cost Accounting Standard 406. But I 
was commanded, if you will, at the outset of that audit that we 
are not going to mention estimating deficiencies, we are not 
getting into Cost Accounting Standard 418. There are some major 
regulation violations that are not being looked at the second 
time around.
    Senator McCaskill. And what do you attribute that to?
    Mr. Hackler. Too much control of the person that directed 
the audit opinion in the first place.
    Senator McCaskill. Well, that is really problematic.
    Ms. Stephenson. Absolutely, ma'am. In fact, I will invite 
Mr. Hackler right now to set up those assignments that he feels 
are necessary to fully investigate this issue so that we can 
get the recoupment under the Cost Accounting Standards because 
that is the avenue for the recoupment here.
    Senator McCaskill. Now we could fix this if we had a 
hearing every day.
    The boss just said that whoever told you that was wrong. 
Now, I will follow up and see what happens. But there is 
accountability there. Whoever told him that should be demoted 
or fired. Whoever was involved in removing findings without any 
working papers to back it up should be demoted or fired. And I 
am waiting. Nobody has been demoted. Nobody has been fired. In 
fact, just the opposite. People have been promoted.
    So that is a failure in accountability--complete, total, 
and abject failure in accountability. And that should be a 
performance metric, that when people make mistakes that 
absolutely crush the credibility of an organization whose 
lifeline is credibility, something has to happen to them, 
whether it is the pretend lawyer who wrote this gag order or 
whether it is the supervisor who took out findings without any 
cause. And I will not be satisfied in this regard until someone 
is held accountable. It is just not fair to this auditor that 
her performance reviews dropped 20, 30 points overnight after 
17 years of hard work. She was held accountable for trying to 
do her job, but the people who were failing in their jobs have 
not been held accountable. That is upside down.
    And so this is the first chapter of what, I hope, will be 
many chapters toward a happy ending at DCAA, including the kind 
of independence that they need, the resources they need, and 
the performance metrics that celebrate the taxpayer instead of 
defense contractors and procurement officers.
    One other question I will have for the record that I will 
mention now is how many people who have retired from DCAA have 
gone to work for defense contractors? I would love to know if 
there is any way we could figure that out, and we will direct 
that to all of you through the record and see if we can figure 
that out.
    I do not think that is the big problem, though. My sense is 
the problem is not pleasing the contractors. The problem is a 
culture that went haywire. It just goes to show you--and I read 
all those books in the 1990s about government performance 
metrics and I began performance audits. Performance metrics are 
only as good as the metric itself and the testing of the 
metrics because the irony of this is that one of the metrics is 
peer review. And, clearly, peer review failed here. It does not 
happen very often that peer review fails, because normally the 
auditing profession takes peer review really seriously. And we 
will continue to follow up as to why the peer review failed in 
this instance because, clearly, it failed. This was a textbook 
example of where peer review should have done its job and said 
something is rotten here, and it did not.
    So I really appreciate all of you being here. I think you 
are all good, solid Americans, and I know I have been very hard 
on you, Ms. Stephenson, and it is not because I do not have a 
lot of sympathy for the situation you find yourself in. You are 
new on the job--both of you, the Inspector General at DOD and 
you, Ms. Stephenson, are new on your jobs. And you have 
inherited a myriad of problems. And I will be here to try to 
provide the accountability, but also to provide moral support 
and help anywhere I can to make this better.
    I believe very much in auditing. I believe very much in 
accountability. I refuse to give up on DOD. Many people who 
have come through these doors have given up. And I refuse to 
give up. I know we can make it better. And I appreciate all of 
you very much, and this hearing is adjourned.
    Ms. Stephenson. Thank you, ma'am.
    [Whereupon, at 12:43 a.m., the Committee was adjourned.]













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