    [Senate Hearing 111-945]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-945

         DEFENSE CONTRACT AUDIT AGENCY: WHO IS RESPONSIBLE FOR REFORM?

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                   HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                                     of the

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 23, 2009

                                   __________

             Available via the World Wide Web: http://www.fdsys.gov

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

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    20402-0001

            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   JOSEPH I. LIEBERMAN, Connecticut, Chairman
    CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
    DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
    THOMAS R. CARPER, Delaware           JOHN McCAIN, Arizona
    MARK L. PRYOR, Arkansas              GEORGE V. VOINOVICH, Ohio
    MARY L. LANDRIEU, Louisiana          JOHN ENSIGN, Nevada
    CLAIRE McCASKILL, Missouri           LINDSEY GRAHAM, South Carolina
    JON TESTER, Montana                  ROBERT F. BENNETT, Utah
    ROLAND W. BURRIS, Illinois
    MICHAEL F. BENNET, Colorado

                      Michael L. Alexander, Staff Director
                             Troy H. Cribb, Counsel
                         Paula Haurilesko, GAO Detailee
         Brandon L. Milhorn, Minority Staff Director and Chief Counsel
              Molly A. Wilkinson, Minority Deputy General 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 Coburn...............................................    20
        Senator McCaskill............................................    22
        Senator Burris...............................................    24
    Prepared statements:
        Senator Lieberman............................................    31
        Senator Collins..............................................    34

                                   WITNESSES
                         Wednesday, September 23, 2009

    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, U.S. Government Accountability Office     5
    Hon. Gordon S. Heddell, Inspector General, U.S. Department of
      Defense........................................................     7
    Hon. Robert F. Hale, Under Secretary of Defense (Comptroller) and
      Chief Financial Officer, U.S. Department of Defense............     9
    April G. Stephenson, Director, Defense Contract Audit Agency,
      U.S. Department of Defense.....................................    11

                         Alphabetical List of Witnesses

    Hale, Robert F.:
        Testimony....................................................     9
        Prepared statement...........................................    66
    Heddell, Gordon S., Hon.:
        Testimony....................................................     7
        Prepared statement...........................................    56
    Kutz, Gregory D.:
        Testimony....................................................     5
        Prepared statement of Mr. Kutz and Ms. Fisher................    37
    Stephenson, April G.:
        Testimony....................................................    11
        Prepared statement with an attachment........................    69

                                    APPENDIX

    Responses to post-hearing questions for the Record from:
        Mr. Kutz.....................................................    86
        Mr. Heddell..................................................    99
        Mr. Hale.....................................................   107
        Ms. Stephenson...............................................   114

    GAO report titled ``DCAA Audits: Widespread Problems with Audit
      Quality Require Significant Reform,'' GAO-09-468, September 23,
      2009...........................................................   134

         DEFENSE CONTRACT AUDIT AGENCY: WHO IS RESPONSIBLE FOR REFORM?

                                  ----------

                         WEDNESDAY, SEPTEMBER 23, 2009

                                         U.S. Senate,
                               Committee on Homeland Security
                                      and Governmental Affairs,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:04 a.m., in
    room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
    Lieberman, Chairman of the Committee, presiding.
        Present: Senators Lieberman, McCaskill, Burris, Collins,
    and Coburn.

                OPENING STATEMENT OF CHAIRMAN LIEBERMAN

        Chairman Lieberman. The hearing will come to order. Good
    morning to all who are here. Welcome to this hearing where we
    are going to examine the potential that billions of taxpayer
    dollars are at risk of being wasted because of the inadequate
    auditing procedures at the Defense Contract Audit Agency
    (DCAA).
        DCAA has 300 offices and 3,800 auditors throughout the
    United States and the world. Just to give you a sense of the
    scope of their responsibilities, in fiscal year 2008, which is
    the last one obviously for which I have complete data, DCAA did
    more than 30,000 audits covering $501 billion in proposed or
    claimed contracts. That is a lot of audits with a lot of money,
    and therefore, what it does or does not do well is of great
    consequence to the taxpayers.
        A year ago, our Committee heard from the Government
    Accountability Office (GAO) and two auditors, whistleblowers,
    if you will, from DCAA about alarming problems in the Western
    Region of DCAA. We heard and then found that there was
    widespread failure in meeting professional auditing standards
    in that region. Time after time, DCAA had issued clean audits
    of contractors that were simply not supported by the underlying
    audit work. In some cases, supervisors had even overturned the
    audit findings of subordinates without a justification for
    their decisions.
        Because Senator Collins and I were concerned that these
    problems in the Western Region might be symptoms of a larger
    systemic breakdown rather than just a regional one, we, joined
    by Senator McCaskill, asked the GAO to do a review across all
    the regions of DCAA, and today we are going to hear the results
    of that review.\1\
    ---------------------------------------------------------------------------
        \1\ The GAO report referenced by Chairman Lieberman appears in the
    Appendix on page 134.
    ---------------------------------------------------------------------------
        I am sorry to say that GAO has found similar problems just
    about everywhere DCAA operates. I will just highlight some of
    the findings because I know Mr. Kutz will speak to them in
    detail.
        Each and every audit that GAO reviewed for this report was
    out of compliance with auditing standards, most with very
    serious deficiencies. As an example, in one case, a supervisor
    directed audit staff to delete some audit documents, generate
    others, and copy the signature of a prior supervisor onto the
    new documents and then issued a clean audit opinion. This
    supervisor was later promoted to Western Region Quality
    Assurance Manager, responsible for the quality control of
    thousands of audits.
        One auditor asked supervisors for permission to spend more
    time on an audit of a contractor known to be under criminal
    investigation for fraud. The auditor ultimately drafted a
    negative opinion that was overturned by supervisors who then,
    rather than praise the auditor's efforts, lowered his
    performance appraisal for performing too much testing and
    exceeding budgeted hours.
        In an audit of one of the Department of Defense's (DOD)
    largest contractors, the auditor told GAO that he did not
    perform detailed tests ``because the contractor would not
    appreciate it.''
        When auditors reviewed contractor invoices, in many cases,
    they did not look to see if the contractor could offer
    supporting documentation for the goods or services they were
    charging the government for. The auditors simply looked at the
    numbers on the invoices to see if they added up.
        To date, GAO's two reviews have led DCAA itself to rescind
    80 of its audits, which is, I gather, a rare and, of course,
    embarrassing step for an auditing agency. The recision of 80
    audits is, to me, effectively a self-indictment by DCAA for
    failure to hold audit quality above all else.
        Now, this would be bad enough if it was a separate and
    unique critical audit by GAO, but the fact is that this is the
    fifth major report sounding the alarm about DCAA. In addition
    to the two GAO audit reports that I have cited, we have a 2007
    Department of Defense Inspector General (IG) peer review, a
    report last fall from the Defense Business Council, and a new
    DOD IG report, all showing that an important watchdog agency,
    DCAA, is badly in need of overhaul.
        The fact is, when the people we have charged with the
    responsibility of auditing themselves receive this many
    critical audits--Washington, we have got a problem--and it is a
    big problem because of the enormous amount of money being
    audited that is spent--over half-a-trillion dollars in 2008
    through the Defense Department.
        In my opinion, DCAA is in need of a complete overhaul. One
    problem may be, as GAO suggests, that DCAA emphasizes speed and
    production of audits over the quality of results. DCAA also
    appears to be very insular, with little or no infusion of
    skills from outside the agency.
        I think it is really time for us to make sure that we
    change this environment with specific steps, such as improving
    audit quality control, increasing training of the auditors, and
    developing a strategy to target resources rather than simply
    churning out audits that are faulty to hit numerical goals.
        So we want to have a very frank discussion today because
    this is very important. A lot of money is on the line, and the
    discussion really is about who is responsible in the end for
    the operational reform that is necessary at DCAA.
        This auditing agency has a unique role. Because of that
    role, it also needs to have independence. It needs to stand up
    to pressures from both agencies and contractors, and as I
    believe may be suggested here today, perhaps that independence
    should be strengthened. Perhaps it is time for us to consider
    separating DCAA from the Department of Defense and, either
    separately or as part of a larger operation, making it an
    independent auditing agency.
        But what is also needed right now is clearly strong
    leadership from the top ranks of DOD to help DCAA achieve the
    necessary transformation and reforms because this Committee,
    Senator Collins and I and the Members, do not want to be
    sitting here a year from now discussing another audit which
    finds similar problems once again in DCAA. Let us identify the
    root causes and implement the solutions that Congress must
    demand and that the taxpayers surely deserve.
        Senator Collins.

                  OPENING STATEMENT OF SENATOR COLLINS

        Senator Collins. Thank you, Mr. Chairman.
        With the release of today's GAO report, we once again focus
    on the extensive problems with the quality of audits at the
    Defense Contract Audit Agency and with the management of this
    watchdog agency.
        The DCAA is the Defense Department's principal contract
    auditor. It completes more than 30,000 reviews and audits per
    year that cover hundreds of billions of dollars in Federal
    contracts. A well-functioning DCAA is thus vital to our
    government's responsibility to be careful stewards of taxpayer
    funds. DCAA plays a necessary role in ensuring the
    accountability and transparency of Federal contracts.
        Unfortunately, the GAO report contains a haunting refrain
    of disturbing past reports. It cites, for example, and perhaps
    most troubling, a lack of independence from undue influence on
    audit outcomes by contractors, program managers, and even some
    senior managers at DCAA. It cites poor or inadequate audit
    quality and gross mismanagement of government resources. And it
    cites ineffective audit practices that allow contractors to
    overbill the government in some cases for millions of dollars.
        The Department of Defense and other Federal agencies rely
    on DCAA to help detect waste, fraud, and abuse. It is,
    therefore, completely unacceptable for this Federal policing
    agency to continue to have such significant performance
    problems.
        With more than a little frustration, I note that we are
    here almost 1 year to the day since the Committee's last
    hearing on this very same topic, DCAA's poor performance.
    During the 2008 hearing, I raised significant concerns, as did
    the Chairman, about the mismanagement of DCAA, and yet here we
    are again.
        Three particularly troubling areas still need to be
    addressed. First, the GAO report highlights the ongoing lack of
    rigor and independence of DCAA audits due to coercion by a few
    errant contractors, program managers, and on occasion, even by
    DCAA management. Auditors cannot be constrained from doing
    their jobs. They must be able to work in an environment where
    they are encouraged to conduct their oversight in a fair,
    unbiased, and principled manner--indeed, not just encouraged,
    required to conduct their audits in that manner.
        Now, I want to make clear that there are many principled,
    dedicated, and competent auditors at DCAA who endeavor to
    conduct themselves with the highest possible ethical and
    professional standards. The management and the culture at DCAA
    must support their efforts, not undermine them.
        Second, I am baffled by the complete lack of a sense of
    urgency in terms of addressing and resolving these problems. As
    the Chairman has indicated, there have been repeated reports
    indicating these flaws. Recent reviews of DCAA's reform efforts
    do not assure me that significant progress has been made over
    the past year. While DCAA has taken some steps toward
    improvement, it has been too little.
        To date, DCAA, as the Chairman has indicated, has rescinded
    some poor quality audits and issued guidance to improve the
    quality. The agency also plans to hire 700 additional auditors
    to augment its workforce. But if all we do is add more people,
    that is not going to solve the fundamental failings of this
    agency. Indeed, the consequences of not requiring high-quality
    audits and of mismanagement may only multiply with these
    additional resources. Just throwing more people at the problem
    is not going to solve it.
        Less than a month ago, the DOD Inspector General completed
    an investigation that found evidence of this kind of
    mismanagement. It cited time pressure, uncompensated overtime,
    unauthorized changes to audit results, and other unprofessional
    behavior that had created a work environment not conducive to
    performing quality audits. What will it take to finally see
    progress? DCAA's inability to remedy its mismanagement, despite
    numerous hearings, investigations, and report after report, is
    truly an epic failure by the agency and the Department.
        Third, the GAO report raises significant questions
    regarding the need for structural reforms, such as the Chairman
    has mentioned and I brought up last year. How can it be that
    DCAA auditors spent more than 530 hours auditing a billing
    system that did not exist? How can it be that they repeatedly
    change audit findings to make the results acceptable to some
    contractors?
        To make matters worse, I am told that some supervisors
    responsible for deficient audits were given performance ratings
    ranging from ``exceeds fully successful'' to ``outstanding.''
    Again, how can this be? Where is the accountability?
        Now, let me end by saying why this is so important. When an
    audit agency fails, the fallout can cascade throughout the
    system and ultimately shortchange our troops in the field. For
    this reason alone, Congress must carefully consider whether
    fundamental restructuring as well as internal reforms are
    needed at DCAA in light of these disclosures.
        Reestablishing DCAA as a first-rate audit agency is
    critical, and I will say that to date, I have been very
    disappointed at the lack of leadership at DCAA itself and at
    the Office of the Comptroller, which is responsible for
    overseeing and supporting DCAA. Action must be taken swiftly to
    help this agency regain its credibility and restore its
    oversight mission. Once its performance and image have been
    repaired, it can once again assume its vital role of ensuring
    the best value for the American taxpayer on all defense
    contracts.
        Thank you, Mr. Chairman.
        Chairman Lieberman. Thank you very much, Senator Collins.
        Before I call on Mr. Kutz, I want to say that I mentioned,
    Senator McCaskill, that you had joined us in the request for
    this report by GAO, and I appreciate that, and it leads me to
    moving slightly behind you and acknowledging the work of your
    Counsel, Peg Gustafson, who as you know has been nominated by
    the President to be the Inspector General of the Small Business
    Administration. I want to thank her for the hard work she has
    done on the matter before us today and so many other issues,
    and we look forward to working with you as you move on into the
    IG community. Your nomination is pending before our Committee
    now. We will give it a rigorous and dispassionate review, of
    course, and hope to discharge your nomination by unanimous
    consent as soon as possible. Good luck.
        Senator McCaskill. Mr. Chairman, can we slow that down any?
    [Laughter.]
        I am having buyer's remorse----
        Chairman Lieberman. I understand.
        Senator McCaskill [continuing]. About losing Ms. Gustafson.
    [Laughter.]
        Chairman Lieberman. We have a conflict of interest here,
    but we will help you resolve it.
        Mr. Kutz, you are here for the second day in a row. God
    only knows what may bring us together tomorrow---- [Laughter.]
        But I thank you for your continuing high level of work,
    which greatly benefits Congress and ultimately the people of
    our country. I would note that you are here with Gayle Fischer,
    who is an Assistant Director at GAO who will be available to
    answer questions.
        For the record, Mr. Kutz is before us as Managing Director
    of the Forensic Audits and Special Investigations Team of GAO.
    Thanks for your work, and we welcome your testimony now.

     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, 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. Last year, I testified that 14 audits at three
    California locations did not meet professional standards.
    Today's testimony highlights our broader review of the DCAA
    quality control system.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Kutz and Ms. Fischer appears in
    the Appendix on page 37.
    ---------------------------------------------------------------------------
        My testimony has two parts. First, I will discuss our
    findings, and second, I will discuss our recommendations.
        First, 65 of the 69 engagements that we reviewed did not
    meet professional standards. Key issues relate to lack of
    independence, insufficient testing, and inadequate planning and
    supervision. Examples of these problems include, first, an
    accounting system report drafted with eight significant
    deficiencies. One year after contractor objections to this
    draft report, an adequate or clean opinion was issued with no
    deficiencies. We found little evidence to support these
    changes.
        Second, an adequate opinion issued on a billing system with
    insufficient testing. As you mentioned, in this case, Mr.
    Chairman, an auditor told us that testing was limited because
    the contractor would not appreciate it.
        Third, an adequate opinion issued for a billing system
    based on a test of only four vouchers, all from the same day.
        And finally, as Senator Collins mentioned, 530 hours spent
    auditing a billing system that did not exist.
        Further evidence of problems at DCAA is the recision of 80
    audit reports. I expect that the recision of 80 audit reports
    is unprecedented in both the Federal Government and the private
    sector. The evidence supporting our conclusion of widespread
    audit quality problems is irrefutable.
        So why did these problems happen? Let me give you a few of
    the examples. First, we found a production-focused culture
    resulting in part from flawed metrics. These metrics focused on
    getting audits done on time and within budget. Taking time to
    find and address issues was discouraged. This resulted in some
    audits of accounting and billing systems being issued within 2
    to 3 weeks of the entrance conference. No wonder we saw
    opinions of contractor systems being issued based upon a
    conversation with the contractor and a quick look at a few
    transactions.
        Further evidence of the need to cut corners is the 22,000
    reports issued in 2008 by DCAA's 3,600 auditors. That is 60
    reports issued every day of the year, including weekends and
    holidays. There is also evidence of pressure caused by the fear
    of DCAA being outsourced. In other words, DCAA's metrics were
    intended to show that they could do their work faster and
    cheaper than public accounting firms.
        Let me move on to human capital. Last year, the original
    whistleblower, Thi Le, testified before this Committee on her
    experience at DCAA. Ms. Le's testimony is one of the most
    memorable of my experience. If this GS-12 auditor and the
    dozens of others that we have spoken to are representative of
    DCAA's employees, then the quality of audit staff is not the
    issue. Instead, what you have are thousands of good auditors
    trapped in a broken system.
        Let me move on to steps that can be taken to improve DCAA's
    operations. First, let me commend this Committee for your
    oversight on this matter. The hearing you held last year and
    your consistent oversight have made a difference. DOD is taking
    these matters very seriously. Positive steps have been taken
    and are underway to address most of these issues. My only
    recommendation to you is to continue your oversight.
        We made 15 recommendations to the Secretary of Defense. The
    intent of these recommendations was to strengthen DCAA's
    independence and effectiveness. DOD agreed with 13 of these
    recommendations. We also provided three matters for the
    Congress to consider, as you had requested.
        The first of these relates to providing DCAA with the
    protections and authorities granted to Inspectors General.
    Legislation would be needed to implement this matter. This
    change could strengthen leadership, independence, and
    transparency through external reporting of DCAA results to the
    Congress.
        The other two matters relate to organizational placement.
    Most of the effectiveness issues can be addressed within the
    current organization placement. However, elevating DCAA to a
    separate DOD component or outside of DOD as an independent
    audit agency are matters for longer-term consideration. We
    believe that organizational placement changes should not be
    considered until current reform efforts are complete.
        In conclusion, the 14 audits that we reported on last year
    were not isolated cases but, in fact, proved to be the tip of
    the iceberg. We commend DOD for their recent actions. However,
    it is important to remember that if not for a tip from a
    courageous GS-12 auditor, Congress would still believe that
    everything at DCAA was fine. We look forward to working with
    this Committee and DOD to help DCAA achieve its full potential.
        Mr. Chairman, this ends my statement, and I look forward to
    your questions.
        Chairman Lieberman. Well done. Thank you very much.
        Next, we are going to hear from the Hon. Gordon Heddell,
    who is the Inspector General for the Department of Defense.

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

        Mr. Heddell. Chairman Lieberman, Ranking Member Collins,
    and distinguished Members of this Committee, thank you for the
    opportunity to be here today to discuss continuing oversight by
    my office of audits conducted by the Defense Contract Audit
    Agency.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Heddell appears in the Appendix
    on page 56.
    ---------------------------------------------------------------------------
        The Department of Defense Office of the Inspector General
    has the responsibility to verify that audits by all DOD audit
    agencies, including DCAA, comply with stringent standards. At
    the hearing last year before this Committee, we discussed
    serious problems with DCAA, to include weaknesses in its
    quality assurance programs, audits that failed to comply with
    generally accepted government auditing standards, and
    allegations of an abusive work environment. We have been
    monitoring DCAA's efforts to correct the deficiencies
    identified in our May 2007 peer review and in a report issued
    in July 2008 by the Government Accountability Office.
        On August 31 of this year, we issued a report following up
    on the deficiencies identified by GAO. We found that a flawed
    audit could have allowed a contractor to recover millions of
    dollars in unallowable costs on a major aerospace program. We
    found audits performed by trainee auditors at one location that
    did not comply with standards. We found audit opinions that
    were not sufficiently supported. And we found audit findings
    that were dropped without sufficient justification.
    Additionally, employee concerns with time pressures,
    uncompensated overtime, changes to audits, and unprofessional
    behavior created a work environment not conducive to producing
    quality audits.
        We made several recommendations to DCAA, including that it
    rescind an additional five audit reports and notify contracting
    officials not to place reliance on the reports' conclusions.
    Our report also recommended that DCAA take appropriate
    corrective action regarding the performance of the two
    supervisors associated with the majority of cases reviewed by
    my office and GAO. DCAA reported that those individuals will
    retake supervisory courses and receive additional training. We
    expect DCAA to monitor their performance very carefully.
        We issued a report on September 11 of this year regarding
    improper conduct by a DCAA manager. This senior official
    investigation supported a GAO finding that a former regional
    audit manager was not free from external impairments to
    independence. Her direction resulted in a flawed audit that
    could have allowed a contractor to recover $271 million in
    unallowable costs. Additionally, we concluded that the
    individual failed to adhere to established leadership standards
    and fell short of the type of leadership skills expected from
    senior leaders. The report was provided to the Director of DCAA
    for appropriate action.
        Based on the most recent GAO review of DCAA, together with
    the deficiencies identified in our May 2007 peer review, I
    notified DCAA that our adequate opinion on its system of
    quality controls would expire as of August 26 of this year.
    Further, that DCAA should qualify its audits with a statement
    noting an exception to compliance with the quality control and
    assurance standard.
        On August 5 of this year, we announced the peer review for
    the period ending September 30, 2009. This review will assess
    whether DCAA's quality control system provides reasonable
    assurances of compliance with standards. We will also follow up
    on DCAA corrective actions in response to prior GAO and DOD IG
    recommendations, including the findings in our May 2007 and
    December 2003 peer review reports.
        On September 1 of this year, DCAA requested that GAO
    approve delaying the announced peer review by at least 2 years
    so that it could continue internal improvements. The DOD
    Inspector General has a statutory responsibility to provide
    continuous audit oversight, and should the peer review be
    postponed, we will undertake a number of targeted reviews of
    DCAA high-risk areas.
        Our oversight is essential to helping DCAA identify audit
    deficiencies and to take corrective actions. However,
    implementing change and creating a quality workforce requires a
    commitment by management. It is essential that DCAA's senior
    management address fundamental issues, to include recruiting,
    training, and cultivating skilled personnel, and most
    importantly, developing highly skilled and motivated leaders.
    Equally important is the engagement, involvement, and support
    of senior DOD management. Absent any of these factors, DCAA
    will fail to achieve the cultural transition necessary for
    success.
        This concludes my statement. I welcome your questions.
        Chairman Lieberman. Thank you very much.
        Next, we will hear from the Hon. Robert Hale, Under
    Secretary of Defense, Comptroller, and Chief Financial Officer
    of the Department of Defense, to whom, if I have this straight,
    the DCAA reports, correct, Mr. Hale?
        Mr. Hale. Yes.
        Chairman Lieberman. Thanks for being here.

    TESTIMONY OF HON. ROBERT F. HALE,\1\ UNDER SECRETARY OF DEFENSE
     (COMPTROLLER) AND CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF
                                DEFENSE

        Mr. Hale. Mr. Chairman, Members of the Committee, thank you
    for the opportunity to share some observations about the
    Defense Contract Audit Agency. I will focus on the concerns
    raised by the recent audits of DCAA, particularly by the GAO
    audit.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Hale appears in the Appendix on
    page 66.
    ---------------------------------------------------------------------------
        As Members of the Committee are aware, the Department has
    submitted a lengthy response to GAO's recommendations. We
    acknowledge the seriousness of GAO's findings as well as those
    of the IG and others and concur with their recommendations with
    very few exceptions. I will mention a couple below.
        Based on my own review of DCAA and the GAO recommendations,
    as well as the IG, I believe that DCAA, with assistance from me
    and others in the Department of Defense, needs to focus on
    three major issues. First, maybe foremost, improving the
    quality of audits, especially the audits of contractor business
    systems. Second, assessing the number and types of audits
    performed by DCAA and whether all audits currently required by
    acquisition laws and regulations are appropriate. I am worried
    about 24,000 audits a year, as the GAO pointed out. We have to
    be sure we do all that are needed, but we also need to look at
    that number. And finally, assessing improvements in the process
    for resolving DCAA audit results to ensure that audit findings
    are fully considered during contracting officer deliberations.
        DCAA has already begun to focus on these major issues and
    on others. As GAO said, a number of steps have been taken, and
    in her testimony, the DCAA Director, April Stephenson, will
    describe some of the actions that have already been completed
    and those that are underway.
        It is important to note that the audit assignments covered
    by GAO and the IG were completed 3 to 5 years ago, and all of
    the audits that we are talking about cover items completed 3 to
    5 years ago, and that a series of corrective actions was
    undertaken beginning in late 2008, not long after the hearing
    that you held last year. The Committee has to understand that
    it may take several years--it took us several years to get into
    this problem--for the full benefit of these actions to be
    realized.
        In addition, I would like Members of the Committee to know
    that the Office of the Under Secretary of Defense, Comptroller,
    my office, has taken some steps to improve oversight of DCAA
    operations. First, I have assigned a senior member of my staff
    to assist on oversight efforts. This provides me some personal
    eyes and ears to keep track of what is going on.
        Second, last March, I established a DCAA Oversight
    Committee to provide my office with advice and recommendations
    concerning the oversight of DCAA. The committee is made up of
    the Auditors General of the Army, Navy, and Air Force--all
    three of them personally agreed to participate--and these
    individuals provide me with some heavyweight audit experience
    that is simply not present on my staff, which is focused on
    financial management and the budgetary responsibilities.
        Also on this oversight committee is--and I think we need to
    pay careful attention to--the Director of Defense Procurement
    and Acquisition Policy (DPAP). He is the key customer for DCAA,
    and we want to keep them in mind as we work to improve the
    agency's performance. The DOD Deputy General Counsel for
    Acquisition and Technology is also a member.
        This senior group will assess DCAA's activities--they have
    already begun to do so--and the actions taken to correct
    problems, and they have provided me advice. I have met with
    them several times personally and will continue to do so.
        We have also taken steps in the Department of Defense to
    increase the resources available to DCAA. During fiscal years
    2009 and 2010, we will add 500 new auditors, and we will
    consider additional auditor positions beyond fiscal year 2010.
    I will be monitoring the DCAA budget carefully, and that is
    something I can do during our fall program and budget review.
        We believe that by taking aggressive action, improving
    oversight, and increasing resources, we can resolve the
    significant issues posed by the GAO report, as well as the
    report by the IG, and we will monitor that progress, and I will
    personally, to determine if further actions need to be taken.
        While we generally agree with GAO, there are two areas
    where we take exception or disagree with their findings. First,
    GAO suggested that Congress consider providing DCAA with
    independence similar to that of the Department's Inspector
    General. There are some aspects of that suggestion that may
    make sense. For example, we are looking at increased subpoena
    authority for DCAA. But we disagree with the number of the
    implications of that recommendation.
        For example, we do not believe the DCAA Director should be
    a presidential appointment with Senate confirmation. It will
    inject, in my view, an inappropriate element of politics into
    what should be a technical audit agency and inevitably will
    create long periods of delay--it is just inevitable in our
    system--when there would be no Director in charge.
        Likewise, we oppose fixed terms for the DCAA Director and
    mandatory public reporting, as the IG is required to do. It is
    an additional burden on an agency that is already struggling to
    meet its many mission demands.
        While we do not support IG-like independence for most
    aspects of it, we are taking steps to strengthen DCAA's
    independence internally in a number of ways, but I will mention
    one in particular, by assessing improvements to the process
    used by contracting officials to resolve DCAA audit findings.
    When there is disagreement, we need a process that allows DCAA
    to elevate that disagreement if it cannot be resolved at the
    staff level, and we have put that in place with the Director of
    Procurement and Acquisition Policy and appeals to both the
    Under Secretary of Acquistion, Technology, and Logistics (AT&L)
    and the Comptroller if DCAA does not feel that the first set of
    appeals has resolved the issues.
        Second, GAO suggested that Congress require DCAA to report
    to the Deputy Secretary of Defense. DOD strongly disagrees with
    this recommendation. The Deputy Secretary is the Chief
    Management Officer of one of the world's largest organizations.
    He backs up the Secretary in the wartime chain of command.
    Direct oversight of an individual Defense Department agency
    would, I believe, add unreasonably to his current
    responsibilities.
        I think DCAA should remain within the Department, and at
    least until these issues are resolved, I believe it should
    continue to report to my office. I feel personally responsible
    for helping to fix the problems that have occurred.
        In sum, Mr. Chairman, we acknowledge that GAO has raised
    some serious issues. We believe that we have begun taking
    appropriate steps--and I think that is important--to resolve
    these issues, and I will personally monitor the situation to
    determine if additional steps are needed.
        Let me close with what I believe is an important and
    critical context, and I ask the Committee's help. DCAA provides
    valuable services to the Department of Defense and other
    government organizations. You have all said that. I agree. I
    have spoken personally to the Director of Defense Procurement
    and Acquisition Policy, one of DCAA's key customers. He
    informed me that DCAA products are necessary and critical to
    the acquisition process. The Commission on Wartime Contracting
    has made similar comments.
        As we strive to resolve the issues raised by GAO and
    others, I am worried about morale at the agency. We have to be
    careful not to undermine the unique value of DCAA to DOD and
    other organizations. Let us be careful not to throw out the
    baby with the bathwater here.
        Mr. Chairman, thank you again for providing this
    opportunity for me to comment on GAO's findings. I am convinced
    that working together with this Committee and the senior
    leadership of the Department and, of course, DCAA, we can
    ensure that the work of DCAA will continue to support the
    Department and the security of the United States.
        When the other witnesses have completed their statements, I
    would be glad to answer your questions.
        Chairman Lieberman. Thank you, Mr. Hale.
        And finally, April G. Stephenson, Director of the Defense
    Contract Audit Agency.

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

        Ms. Stephenson. Mr. Chairman, Members of the Committee,
    thank you for the opportunity to appear before you today. I am
    pleased to be here.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Stephenson appears in the
    Appendix on page 69.
    ---------------------------------------------------------------------------
        As requested, I will describe the actions taken as a result
    of the recent oversight reviews of DCAA. Please be assured, we
    take all findings that have taken place on DCAA from any source
    very seriously.
        We have worked diligently since late 2008 to accomplish a
    number of actions to improve the quality of the audit services
    and to improve the working environment for our employees. As
    shown in the appendix of my submitted testimony, we have
    completed over 50 specific improvement actions. We are not
    done, and we have various long-term actions in process.
        For the purposes of my testimony today, Mr. Chairman, we
    have categorized the issues into four general areas:
    Insufficient testing, ineffective quality assurance program,
    lack of independence, and management abuses.
        The GAO identified noncompliances with the audit standards
    of nearly all the assignments it has reviewed. This is
    primarily due to an insufficient number of transactions tested,
    particularly in assignments of business systems where the
    contractor's system was deemed to be adequate.
        Contractor internal control systems involve hundreds of
    control points. Auditors assess the risks of the control points
    on government contracts and establish the level of testing on
    that risk. At times, auditors assess the risk at low and
    sampled few transactions, and at other times the risk was high
    and sampled more transactions. In some instances, the number of
    transactions we reviewed, we have no defense for. It was
    unacceptable. In others, it was a judgment call, and we are in
    the process of revamping this process.
        As I said, we recognize these concerns with the business
    systems and initiated a project in 2009 to reassess the entire
    process for performing audits of business systems and the types
    of opinions to be provided. This will continue into early 2010.
    We are consulting with the GAO and the IG as we proceed with
    this project.
        The GAO concluded that DCAA's quality assurance program was
    deficient. We recognize that improvements are required, not
    only with the structure of the quality assurance organization,
    but also the manner in which the reviews were performed. In
    August 2008, we centralized the quality assurance function to
    headquarters. We then proceeded with more than double the
    reviews we performed in the past. We no longer provide a rating
    of pass-fail depending on the number of deficient assignments.
    Offices that are determined to have at least one assignment in
    noncompliance with the auditing standards are required to
    provide a meaningful corrective action plan, which is monitored
    at the headquarters level.
        The GAO concluded that DCAA's independence was impaired.
    This was primarily due to providing input on draft corrections
    to internal control policies and procedures and then auditing
    the final policies and procedures. It is not uncommon for
    contractors with system deficiencies to seek input from the
    auditors while they are developing corrections to the systems.
    In many instances, providing feedback throughout the process
    expedites the correction of the deficiencies.
        The GAO has concluded that this feedback impairs the
    auditors' objectivity as they audit information they have
    provided feedback for prior to implementation. We have
    corrected these issues. Auditors no longer provide feedback to
    contractors on draft corrections to systems, and we will no
    longer remove deficiencies from reports when the deficiencies
    are corrected during the audit.
        In July 2008, the GAO concluded that DCAA had an abusive
    work environment. The IG was engaged to investigate this
    matter, and as Mr. Heddell mentioned, they finished their
    review in August 2009. Although they did not go as far as to
    say we had an abusive work environment, it concluded that we
    had a work environment that was not conducive to producing
    quality audits. Auditors felt pressure to work uncompensated
    overtime, and in another office, several employees said that
    they heard people yelling in the office and raising their
    voices. We believe these issues have been adequately addressed,
    and the IG concurs.
        The DOD IG did not identify any attempts by DCAA to impede
    the GAO investigation other than the letter that was written in
    August 2007 to one of our senior auditors, which I know this
    Committee is familiar with. As we discussed at the hearing last
    September, the letter was prepared by one of the Defense Legal
    Services attorneys that reports to DCAA. The letter was
    rescinded the day after the hearing last year.
        To provide employees an opportunity to report instances of
    perceived management abuse without fear of retaliation, we
    launched an anonymous Web site in September 2008. The Web site
    is treated as a hotline, and allegations are either
    investigated by DCAA's internal ombudsman team, which we
    established in late 2008, or referred to the DOD IG for
    investigation.
        Mr. Chairman, as a result of these oversight reviews, we
    have taken a number of actions. I would like to highlight some
    of the actions I have not previously discussed in a very brief
    form.
        We completed a bottom-up staffing assessment to determine
    whether we had the appropriate staffing at all levels of the
    organization. We have received funding under the Defense
    Acquisition Workforce Development Fund, as Mr. Hale mentioned.
    We added 25 new field audit offices, increasing from 79 offices
    in August 2008 to 104 offices in August 2009, to provide
    greater training to employees as well as to ensure appropriate
    oversight of audit quality.
        The performance measure process was completely revamped. We
    eliminated 18 prior measures and added eight new measures to
    focus on audit quality. Focus groups were held in 2009 and
    feedback was favorable that most employees reported they did
    not feel pressure to meet the performance measures on
    individual assignments. Auditors did feel pressure to meet
    additional budget hours and did not feel they could request an
    extension. So as a result, we removed the requirement to meet
    budget hours from performance standards and inserted new
    language on the requirement to complete audits in accordance
    with the auditing standards.
        We hired the Center for Defense Management Reform at the
    Naval Postgraduate School to assist with cultural
    transformation across the agency. We instituted a revised
    process for determining the audit requirements for 2010. Audit
    priorities were established based on the audits required under
    laws and regulations, and the field offices developed the audit
    hours that were necessary, taking into consideration the risk
    of the contractors, the skill level of the audit staff, and the
    additional hours required to comply with the auditing
    standards. This process is consistent with the GAO's
    recommendation of performing a risk-based approach rather than
    production line auditing.
        We engaged the Army Force Management Support Agency to
    evaluate DCAA's process for planning 2010 audit needs as well
    as our staffing requirements. We provided training to all
    employees on quality audits and the work environment.
        In closing, Mr. Chairman, I want to underscore that DCAA is
    committed to ensuring the agency is above reproach, that our
    audits are performed in accordance with auditing standards, and
    that its culture promotes the kind of vigilance and quality
    that protects the interests of the American taxpayers.
        Mr. Chairman, thank you again for the opportunity to
    address the Committee. I would be pleased to take your
    questions.
        Chairman Lieberman. Thank you, Ms. Stephenson. We will now
    go to 7-minute rounds.
        Mr. Kutz, let me begin with you just to draw out a little
    more a couple of the points that were in your findings than you
    had the time to do in your opening statement. One of the
    findings was, and I paraphrase it, you found a lack of
    independence in DCAA. So I wanted to ask you, a lack of
    independence from whom, the contractors, the Department of
    Defense, perhaps supervisors? What is the problem?
        Mr. Kutz. It would be more along the lines of the
    contractors, I would say, with respect to the example I
    mentioned in the opening statement, that they did not do
    additional work because the contractor would not appreciate it.
    That is a disturbing finding, I think, that someone would
    actually believe that was important. That would be like us
    auditing an Executive Branch agency for you, and if they said,
    we would prefer that you do not look at the transactions, we
    would walk away. I mean, that is not the way things should
    work.
        Chairman Lieberman. So they were too cozy or whatever,
    intimidated in some sense by some of the contractors, is what
    you are saying. So they were not performing the independent
    audits that we presume auditors will perform.
        Mr. Kutz. That, and there were also certain other issues
    with respect to data requests maybe that were made, not filled,
    and then the audit was completed even though the data was not
    received at the end of the day. So things like that----
        Chairman Lieberman. Without the auditor insisting on it.
        Mr. Kutz. Or making it a scope restriction and saying, we
    just did not have enough evidence to conclude on the system or
    whatever was being audited. So those are the kinds of things.
    And again, I believe it was seven--Ms. Fischer, is that
    correct?
        Ms. Fischer. Right.
        Mr. Kutz. Seven of the audits. So how widespread it is, I
    do not know, but seven of the 69. So there is enough there that
    it is a bit of a concern.
        Chairman Lieberman. Senator Collins cited, and you did,
    too, this case of the auditor spending more than 500 hours
    auditing a billing system that did not exist. How does that
    happen?
        Mr. Kutz. Well, it was not the contractor in this case. It
    was a grantee, and grantees do not bill. They do drawdowns on
    lines of credit. So that was the issue there. And there was
    actually a single audit done that would have covered the actual
    drawdown system. So the audit was not necessary in the first
    place. So it really was not the contractor. It was a grantee.
        Chairman Lieberman. So an audit was done. In other words,
    it is not that somebody cheated on their worksheets to describe
    what they were doing. It is that 500 hours were spent----
        Mr. Kutz. That were not necessary.
        Chairman Lieberman [continuing]. That were not necessary.
        Mr. Kutz. Correct. That is what that is. Yes. And I think
    that they agree, and they are not going to do that one in the
    future.
        Chairman Lieberman. When there is such a collapse, if you
    will, or so many shortcomings in an audit, or any organization,
    obviously, there is a lot of blame to go around. But I was very
    interested in your comment. Again, you are drawing from
    selective cases--you could not review every one of the
    auditors. I paraphrased from what you said. Your conclusion
    from the auditors you did interview is that there are thousands
    of good auditors trapped in a broken system, and some of the
    recommendations you have made are clearly systemic. But then
    some of the responses that I have heard today go more to the
    individual auditors, training opportunities and the like.
        So I am going to ask you first to comment on that, and then
    ask the other witnesses. Is it both, or is it really the
    system? If it is the system, are you talking about the fact
    that they are trying to do too many audits?
        Mr. Kutz. Yes, I really am, and I think Mr. Hale touched on
    it in his opening statement. I agree with him 100 percent.
        Chairman Lieberman. Yes.
        Mr. Kutz. You are trying to do 22,000, or he mentioned
    24,000, or whether it is 30,000 audits----
        Chairman Lieberman. Right.
        Mr. Kutz [continuing]. With 3,600 people. That is not
    possible.
        Chairman Lieberman. You just cannot do those audits. That
    is 22,000 to 30,000 a year.
        Mr. Kutz. Right. You are going to do drive-by audits in
    some cases, where you go by and ask a few questions, look at a
    couple transactions----
        Chairman Lieberman. Yes.
        Mr. Kutz [continuing]. And issue an opinion, and you are
    setting up the people in that particular case to fail. You have
    not given them the proper resourcing. Now, I cannot believe
    there are 22,000 audits that are necessary. That gets into the
    risk-based approach that we talk about with respect to--and I
    think Mr. Hale hit it on the head--are those audits necessary?
    Are there things that can be done either by redefining audits
    or looking at what is actually generating the audits from the
    Federal Acquisition Regulation (FAR) or whatever the case may
    be? If you do not deal with that issue, I do not think you will
    ever fix this.
        Chairman Lieberman. That is a very powerful point. Let me
    go back to whether it is a problem with the auditors or it is a
    problem of the system. That is part of the indictment of the
    system that we just talked about, that perhaps they are trying
    to do too much and therefore they are doing a lot badly. But
    let me ask this direct question. Is the leadership inadequate?
    I know it is awkward, not just for Ms. Stephenson, but anybody,
    but the supervisors generally----
        Mr. Kutz. Well, I think it is an insular culture. I think
    we talked about that.
        Chairman Lieberman. Yes.
        Mr. Kutz. And that is why I think one of our
    recommendations to bring in some outside expertise to take a
    fresh look at this is useful, someone to come in and say, OK,
    how are we doing these audits? How are we deciding which ones
    to do? Are they all mandated? Do we have to go back to the
    source and figure out how we get down?
        Because, again, I think, if you learn to do an audit where
    a couple of transactions is enough to opine on a system, that
    does not mean you are not a good auditor. It means you were not
    taught how to do an audit correctly. I mean, if I had been
    brought in as an entry-level auditor at DCAA and I learned that
    is the way you do audits, then I would think it was OK. That
    does not necessarily mean I am a bad auditor. It means I really
    grew up in a system where I learned that was the way you do
    audits because we have 10 audits to do in the next 2 months and
    the only way to get them done is to do them quickly.
        Chairman Lieberman. Mr. Hale, let me ask you to comment on
    this a bit. I know you are relatively new on the job. I
    appreciate the steps you have taken. When you said you assigned
    somebody on your staff to oversee your liaison with DCAA, is
    that going to be their primary responsibility?
        Mr. Hale. It is probably about half-time. She is doing some
    other things for me----
        Chairman Lieberman. Yes.
        Mr. Hale [continuing]. But I will have her devote enough of
    her time to see this through. I told you, I am committed to
    fixing this.
        Chairman Lieberman. Right.
        Mr. Hale. Yes, it happened on a previous watch, but
    nonetheless, it is my responsibility now, and I need those eyes
    and ears as we go forward.
        Chairman Lieberman. Right.
        Mr. Hale. There are still a number of issues that need to
    be resolved. I think we all understand that.
        Chairman Lieberman. Have you, since you have been there,
    met regularly with Ms. Stephenson?
        Mr. Hale. Yes. I see her almost weekly at my staff
    meetings, and we have had a number of one-on-one discussions,
    and Ms. Stephenson and I are e-mail buddies.
        Chairman Lieberman. Yes.
        Mr. Hale. We have had a lot of exchanges.
        Chairman Lieberman. So do you agree, just to draw you out
    from your testimony, that one of the most significant problems
    here is that DCAA is trying to do too much and therefore it is
    doing a lot of it badly?
        Mr. Hale. You have a tough tradeoff to make. I am concerned
    about that. We need to look at it. On the other hand, I do not
    want to start not doing audits----
        Chairman Lieberman. Yes.
        Mr. Hale [continuing]. That could be productive for the
    government.
        Chairman Lieberman. Right.
        Mr. Hale. So there is a tradeoff. Incidentally, just to
    clarify the numbers, the 30,000 is the total number of
    engagements. I thought it was 24,000 under Generally Accepted
    Government Auditing Standards (GAGAS). Maybe it is 22,000--
    well, just to clarify the numbers.
        Ms. Stephenson. It is merely a difference of the number of
    assignments that we do and the number of reports issued. There
    are some assignments that incorporate into a single report, so
    it is not necessarily one-for-one. The number of reports are
    around 20,000.
        Mr. Hale. So I have talked to Ms. Stephenson about the
    numbers. I have talked to Shay Assad, who is the Director of
    Defense Procurement and Acquisition Policy. He is the customer.
        Chairman Lieberman. Right.
        Mr. Hale. We need to keep them in mind here.
        Chairman Lieberman. Sure.
        Mr. Hale. I am concerned the pendulum has swung too far. We
    were not paying enough attention to quality. I do not want to
    swing back and ignore the customer or we will not meet DOD's,
    the government's, and the taxpayers' needs. So there is a
    balance to be struck. So we have talked to both of them. We
    need to review the numbers.
        Chairman Lieberman. Do you know if you have the statutory
    latitude to selectively audit so you reduce the numbers----
        Mr. Hale. I am going to need to get the lawyers involved.
        Chairman Lieberman. Mr. Kutz, do you know?
        Mr. Hale. They may not. Some of it may be the FAR. Some of
    it may be laws.
        Chairman Lieberman. Yes.
        Mr. Kutz. I would defer to DOD. We did not do an in-depth
    look at that.
        Chairman Lieberman. My time is up. Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.
        Ms. Stephenson, I want to read to you your opening
    testimony before our Committee last year on September 10, 2008.
    You said, ``Mr. Chairman, I want to assure you and all the
    members of this Committee that DCAA is taking the GAO's
    findings very seriously.'' This year, at the beginning of your
    testimony, you said, ``Please be assured that we have taken the
    GAO's findings very seriously.'' In other words, almost the
    exact same words. But from what I can see, very little has
    changed during the past year.
        I am particularly concerned to learn from my staff that one
    of the executive-level managers from the Western Region who was
    responsible for the problematic audit has actually since been
    promoted to the Senior Executive Service.
        So what has really changed since you came before us a year
    ago and assured us that you were taking GAO's audits very
    seriously? It is not sufficient for you to come back a year
    later and just repeat those same words. I had such hope when I
    heard that from you last year because I knew you were a career
    employee with a lot of experience who had worked her way up in
    the agency and only several months before our hearing last year
    had become head of DCAA. But words are not enough. We need to
    see real progress.
        Ms. Stephenson. I agree, Senator, and it is a very fair
    question to ask, and I will say, over the last year, we have
    made significant progress. And let me answer your question in a
    couple of ways.
        First, the Senior Executive was promoted in October 2007.
    It was not after the hearing, it was a year before the hearing,
    just to clarify that.
        Second, the number of actions we have taken have ranged
    from--we completely changed the way in which we conduct the
    performance measures. Feedback from employees has been
    favorable on that. We removed the requirement for employees to
    meet budget hours, which was one of the primary barriers that
    people felt. That was removed actually from the performance
    standards. Language about quality assurance has been inserted
    in all standards at all levels within the organization.
        We completely changed the way in which we review contractor
    documents. No longer do we look at drafts. We only look at a
    final product. We have removed any fixed cycle times on
    assignments. It is now based on the amount of time that is
    necessary to perform a full and complete audit. We have
    reiterated to our workforce the necessary number of
    transactions that must be reviewed in order to express an
    opinion, and if there is an impairment, such as a time
    constraint from a contracting officer, to have an appropriate
    disclaimer in a report.
        I have numerous actions in which I could go through to
    describe what has changed, but I will explain what employees
    tell me as I visit the offices. They tell me that there has
    been more positive change made in DCAA in the last year than
    there had been in the prior 10 years. They explain that we have
    put a workforce environment in place with our anonymous Web
    site where they feel they can come forward and discuss and
    disclose allegations of poor management or an abusive work
    environment.
        I feel that although we have a number of changes yet to be
    done, we have made significant progress in this past year.
        Senator Collins. Ms. Stephenson, I want to clarify the
    issue you raised about the manager because you said that the
    promotion occurred in October 2007. But in fact, it was a
    probationary period, I am told, that extended for a year. So
    the information was available to you, and yet this woman's
    probationary period passed and, in fact, she was made permanent
    in October 2008.
        Ms. Stephenson. That is correct.
        Senator Collins. It is a bit misleading for you to say that
    she was promoted prior to your having knowledge of these
    issues.
        Ms. Stephenson. It is the difference between promotion----
        Senator Collins. That is a big difference. She could have
    failed the probationary period. It could have been rescinded.
    So you had that information.
        Ms. Stephenson. But I did consult with attorneys. We did
    not have enough information to reduce her appraisal below
    ``achieved.''
        Senator Collins. There is something wrong with the
    performance system then. I do not want to spend all our time on
    one employee.
        Ms. Stephenson. I understand.
        Senator Collins. I want to go to Mr. Kutz and ask a broader
    question. You found clear violations of DCAA policy and
    procedures representing serious departure from what is called
    the Yellow Book standards. To your knowledge, were any of the
    management personnel who were involved in these problematic
    audits disciplined or retrained or counseled? Was action taken?
        Mr. Kutz. Probably on the training front, yes. Counseling,
    I am not sure. Any serious consequences, none I am aware of.
        Senator Collins. Thank you.
        Ms. Fischer, you testified last year that some of the DCAA
    auditors were scared to talk to you and were nervous about
    being seen with GAO and telling you what was really going on.
    Have you seen an improvement in that area or is this still a
    problem?
        Ms. Fischer. I guess I would have to put it in the context
    of the continuing hotlines we are getting----
        Senator Collins. Yes.
        Ms. Fischer [continuing]. In our office. Some of the people
    that have come to us have also gone to DCAA's internal hotline
    through the Web site, and I would say there is a greater
    comfort level coming forward in the agency now than there was
    before. I think the management of the hotline is working pretty
    well, at least in the cases we have looked at, and they have
    shared that information with us.
        Senator Collins. Thank you.
        Mr. Hale, my time is almost gone, but let me just make a
    comment to you. You expressed your concern about the morale of
    the people working at DCAA, and in a sense, you were cautioning
    us about tipping the balance too far. You said, ``I am
    concerned about morale at the agency.'' Well, I guess I would
    say to you, what effect do you think that it has on morale when
    managers who are responsible for problematic audits get
    promoted? When there is pressure to weaken audit findings? When
    report after report indicates that there is undue pressure for
    production at the expense of quality?
        It seems to me that those problems have a far more
    devastating impact on the morale of the auditors than our
    investigations or other reports that are trying to get this
    agency back on track. Ultimately, you are the person to whom
    DCAA reports, and I think you need to take personal
    responsibility to get this agency back on track.
        Mr. Hale. Senator, I think I may not have been clear
    enough. What I was looking for is a statement from the
    Committee, which you have done, that DCAA performs valued
    services. I also want them to hear that from me. I have said
    it, and you have said it, too. That is what I was driving at,
    not that we should not solve the problems that have been
    identified here or continue to look at them. I am sorry if I
    was unclear.
        I do worry that the drumbeat of criticism needs to be
    balanced by the fact, as the GAO has pointed out, that there
    are a lot of good people at DCAA trying to do good things, and
    I want them to continue to hear that.
        And I do take this personally. Again, it did occur before I
    had this job, but it is my job to fix it. I am here today to
    tell you I will do my best, and I have devoted a fair amount of
    my personal time in the midst of a fairly chaotic budget
    environment and two wars to try to make this better.
        Senator Collins. Thank you.
        Chairman Lieberman. Thanks, Senator Collins.
        I had the same reaction Senator Collins expressed in her
    last question, so I appreciate your response. And I will say
    that, perhaps it is because employees of DCAA know the
    Committee is on the case, in fact, the calls from employees to
    our office have gone up over the last year, not down. So I am
    encouraged to hear that though the calls have continued, they
    seem to reflect some improvement, at least as GAO is getting
    those calls on its hotline. Thanks, Senator Collins.
        Senator Coburn is next.

                  OPENING STATEMENT OF SENATOR COBURN

        Senator Coburn. Thank you, Mr. Chairman, and thank you for
    having this hearing. I think it is really important.
        I read a summary of the GAO report last night and, quite
    frankly, got sick. There is a culture that is absolutely
    unacceptable in your agency, Ms. Stephenson, and it still
    exists. It is not about doing auditing. It is about getting the
    work done and looking like you are doing the auditing.
        You have been Director since 2008, correct?
        Ms. Stephenson. Correct, sir.
        Senator Coburn. Do you have any auditing experience outside
    of this agency?
        Ms. Stephenson. No. I have been with DCAA since college.
        Senator Coburn. There was a firm called Arthur Anderson. It
    no longer exists because it failed greatly in its ability to do
    independent audits. If we cannot trust auditors, we cannot
    trust anybody.
        Personally, I can put forward about $50 billion of waste a
    year in the Pentagon--$50 billion. And now I really understand
    why--we have a system that we call an audit that is not an
    audit. I mean, that is essentially what the GAO report is
    saying. We probably would not see much difference without your
    organization there. And although there may have been some
    changes brought forward, the fact that there was a recision of
    80 audit reports and 65 to 69 were not professionally conducted
    audits, did not meet the Federal Accounting Standards Advisory
    Board (FASAB) accounting standards for auditing, to me says we
    have to start over.
        Mr. Kutz, what would be the effect of ending or phasing out
    the direct bill program at the Pentagon?
        Mr. Kutz. I do not know.
        Senator Coburn. Do you have any comments on that? Ms.
    Fischer.
        Ms. Fischer. Well, either DCAA or the Defense Finance and
    Accounting Service would need to review vouchers prior to
    payment, or maybe the contracting officers. DCAA has assumed
    this responsibility for the contracting officers, and the
    certifying officers in the Defense Finance and Accounting
    Service rely on that work in making payments.
        Senator Coburn. But if we have an agency that is not
    actually performing its function, what control, what safeguards
    do we have?
        Ms. Fischer. You do not.
        Senator Coburn. We do not, and that is exactly it. The
    question that comes down to me is, the people responsible, I
    cannot understand why they are still there. I do not understand
    that. I do not understand why the management of this agency has
    not been totally changed and why people with real experience,
    with real audit experience in the real world, have not been
    brought in to create a culture of true auditing, which means
    you verify to make sure when you claim an audit that it is
    accurate, and you do the amount of testing that is necessary to
    make that verification. Otherwise, you give a qualified
    opinion, and we do not see that.
        Mr. Chairman, I will not spend all my time on questions. I
    am a little bit too upset to go where I really want to go. But
    I think our Committee, with Senator McCaskill and her
    experience, should look at this thing from the ground up. And I
    do not doubt that some efforts have been made to improve
    things, but, in fact, Ms. Stephenson's experience coming up,
    starting as an auditor trainee and now leading this agency,
    tells me that there is a culture that is outside of what we
    would expect of auditing, and it is different than the culture
    anywhere else in this country in terms of when you get a
    certified audit.
        I have been audited as a businessman. It is tough. As a
    publicly traded company, you had better be able to justify what
    you are saying. The auditors, you pay them, but you want that
    unqualified opinion when they finish, and you had better be
    able to prove what you are doing is accurate, and I do not
    think we are anywhere close to having the confidence that is
    the case. And this is our biggest agency. It is a half-a-
    trillion dollars a year. And we know the waste that is out
    there. I mean, in our Subcommittee on Federal Financial
    Management, Senator Carper and I have documented the waste, and
    now I understand why it is there. There is not a check on what
    is going out.
        So I am highly disappointed. I thank the GAO for their
    insight, but I think we ought to stay on this. And I will tell
    you, morale will improve. It will not go down. It will improve
    when people are doing what they are supposed to be doing,
    getting rewarded for doing what they are supposed to be doing
    rather than checking the boxes in a culture that says we will
    look out for the contractors more than we will look out for the
    American people, and I think that is the culture that exists
    there today. Thank you.
        Chairman Lieberman. Thanks, Senator Coburn.
        I agree with you. Incidentally, the calls that we get from
    auditors in DCAA are exactly along that line. Just help us to
    make this place better. We know we have an important job to do.
    We feel like we are not able to do it now.
        I do not want to jump ahead, but the Committee, just to
    respond to Senator Coburn, is going to stay on this because it
    is very important. I would say that the number of Members of
    Congress who know that DCAA exists is small, but its
    responsibilities are enormous. Its impact on taxpayer spending
    is enormous. Its impact, as Senator Collins said in her earlier
    statement, on the well-being and security of our troops is
    enormous.
        So we are going to stay on it. In the short-run, I think we
    are going to really focus on you, Mr. Hale, because this group
    reports to you. You are new there. You do not have
    responsibility, if you will, for how it got to where it is, but
    you do have a responsibility now to fix it, and we are going to
    figure out a way to stay in touch on a regular basis and ask
    you to report to us, and maybe we will come back periodically
    for hearings on how we are progressing.
        Thanks, Senator Coburn. Senator McCaskill, again, thank
    you.

                 OPENING STATEMENT OF SENATOR MCCASKILL

        Senator McCaskill. Thank you. I used to be a prosecutor
    before I was an auditor, and in the criminal law, we have
    ordinances, then we have misdemeanors, then we have felonies,
    and then we have capital crimes, and criminal conduct ranges
    from one end to the other. In the world of auditing, what has
    been committed here is a capital crime. There can be no greater
    indictment of an auditing agency than this GAO report.
        Now, how do we begin to get value out of this audit agency
    after it has had this kind of indictment? I want to make sure I
    put in the record just one of the case studies because,
    unfortunately, I know from experience, most people do not read
    these.\1\ This is an audit that was done with one of the five
    largest DOD contractors working in Iraq, initiated in November
    2003.
    ---------------------------------------------------------------------------
        \1\ The case study referenced by Senator McCaskill appears in the
    Appendix on page 158.
    ---------------------------------------------------------------------------
        In September 2005, after nearly 2 years of audit work, the
    DCAA provided draft findings and recommendations to the
    contractor that included eight significant deficiencies. The
    contractor objected, saying the auditors did not really
    understand. The auditors did not get the new policies and
    procedures that were being developed for the fast track in
    Iraq.
        Following those objections, various supervisory auditors
    directed the auditors to revise and delete some work papers,
    generate new work papers, and in one case copy the signature of
    a prior supervisor onto new work papers, making it appear that
    the prior supervisor had approved those work papers.
        On August 31, 2006, after dropping five significant
    deficiencies and downgrading three significant deficiencies for
    improvement, DCAA reported adequate opinion on the contractor's
    accounting system. The interim audit supervisor, who instructed
    the lead auditor to copy and paste the prior supervisor's name
    onto the risk assessment and work papers, was subsequently
    promoted to the Western Region's Quality Assurance Manager,
    where he served as quality control check over thousands of
    audits, including some that the GAO reported on last year.
        In April 2007, the Special Inspector General for Iraq
    Reconstruction (SIGIR) reported that despite being paid $3
    million to complete the renovation of a building in Iraq, the
    contractor's work led to plumbing failures and electrical fires
    in a building occupied by the Iraqi Civil Defense Directorate.
        Now, I have one simple question. Has that interim audit
    supervisor been fired?
        Ms. Stephenson. No, ma'am.
        Senator McCaskill. And, in fact, has that interim audit
    supervisor who told that auditor to commit fraud by copying and
    pasting a supervisor's signature to work papers even been
    demoted?
        Ms. Stephenson. On the work paper copying, that was an
    issue where they had copied work papers from one assignment to
    another. It was not deliberate to copy the signature. It
    happened when they copied papers.
        Senator McCaskill. Mr. Kutz, was there, in fact, a copying
    and pasting of an auditor's signature on a report that auditor
    supervisor had never even seen?
        Ms. Fischer. Senator McCaskill, yes, that did occur because
    the prior supervisor had moved on, and it occurred on a number
    of work papers, even work papers that were created after the
    signature date.
        Senator McCaskill. Mr. Hale, I have to tell you, when we
    had the scandal at Walter Reed, I admired Secretary Gates so
    much because he went to the very top and found accountability.
    When we had the problems at the Air Force, I admired Secretary
    Gates, and I really was beginning to believe that we had in the
    military now someone who understood that when you have a
    scandal, you must have accountability.
        Let me say for the record that no one has been demoted over
    this capital offense. No one has lost his job. And I will tell
    you, to add insult to injury, I do not think the GS-12 auditor
    even got a letter of commendation. In fact, I do not think she
    has even been promoted.
        Ms. Stephenson. She has been.
        Senator McCaskill. Well, it is a lateral move. She is
    training. This is not somebody who has been heralded by the
    agency as a hero. I mean, there has been no recognition. She
    has not been called to the Pentagon to be thanked for what she
    did. And if it was not for her, we would not be here. And the
    people who did this are still there. The culture is still
    there.
        Listen, I know, Ms. Stephenson, you are new, and I know you
    are trying, but we have to come to grips with the fact that
    people who work there work there forever, and their sense of
    outrage is not significant for the American taxpayer and the
    American military right now.
        And honestly, with all due respect, Mr. Heddell, you were
    not there, but how in the world does a peer review happen with
    a clean opinion in 2006 at this audit agency? Who are the
    people who did that peer review? Who said this agency was OK in
    2006? Clearly, it was not.
        And it is not the quantity of the audits, it is the quality
    that matters. If they do not have quality, they are nothing. It
    is hard enough to get people to read one that is good. The ones
    that are horrible, I mean, who is going to read a DCAA audit
    right now without joking, without laughing about it?
        I honestly have to tell you, Mr. Hale, that you have to go
    back to the Pentagon and you have to tell them this is not good
    enough. If somebody is not fired over this, I do not think
    anybody should ever take this agency seriously again.
        Thank you, Mr. Chairman.
        Chairman Lieberman. Thank you, Senator McCaskill. Senator
    Burris.

                  OPENING STATEMENT OF SENATOR BURRIS

        Senator Burris. Thank you, Mr. Chairman. I want to echo my
    colleague, Senator McCaskill. My experience as a Federal bank
    examiner, as a State comptroller, and on the board of directors
    leaves me to wonder whether or not the Defense Department
    should not have to do what we did in private industry. Senator
    Coburn made mention of what is happening.
        Do you all remember the law that passed here called
    Sarbanes-Oxley, detailing what you do with cost controls? I
    understand that the controls at DCAA were just not very
    effective at all, but the controls in auditing are what really
    run it. And if the auditor is not doing his or her job, there
    is no reliability. You are the first and the last line of
    defense to determine what is happening to taxpayers' money. I
    know you do not want to hear a lecture, but from what I have
    read and the testimony I have heard, it really leaves a lot to
    be desired.
        Mr. Hale, I know Sarbanes-Oxley does not apply to the
    Federal Government, but have you all tried to use those
    standards, which cause businesses to have to spend millions of
    dollars in order to make sure that their financial reporting is
    correct? Why would it not be the same thing for the taxpayers'
    money with the Defense Department?
        Mr. Hale. Well, as you say, that particular law does not
    apply to the Federal Government----
        Senator Burris. Sure.
        Mr. Hale [continuing]. But there are extensive standards--
    you can verify that with GAO--that govern both auditing and
    internal controls and management. I am not going to sit here
    and tell you that we do the greatest job in abiding by all of
    them, but we are mindful of them and working on them.
        Senator Burris. Ms. Stephenson, I read in my notes that the
    DCAA also does auditing outside of the Pentagon. So if you do
    not have enough staff--you just hired 700 new people--how are
    you doing outside audits of other agencies?
        Ms. Stephenson. We perform audits for 34 other civilian
    agencies on a reimbursable basis. However, we do put the
    priorities on efforts such as the war and other Department
    initiatives. We have deferred a significant number of audits
    that we were required to do under law and regulation since the
    beginning of the war. So we have quite a large backlog,
    especially of the annual audits of the cost-reimbursable
    contracts. So because we do not have what we need, we defer. It
    is not as though we try to get them all done in one year. We
    recognize that we cannot do that.
        Senator Burris. Now, Mr. Hale, do you, as the Comptroller
    of the Defense Department, authorize the payment of bills? Is
    that your responsibility?
        Mr. Hale. We set the policy for it. The actual
    authorization is done at lower levels in the organization. I do
    not personally do it.
        Senator Burris. Well, it comes under your jurisdiction?
        Mr. Hale. Yes.
        Senator Burris. Do you also prepare the financial statement
    for the Defense Department as the Comptroller?
        Mr. Hale. Yes.
        Senator Burris. Is there any type of certification of that
    financial statement, which would come about as a result of what
    they are spending with outside contractors, that the auditors
    are reporting to you for the accuracy of that statement?
        Mr. Hale. Well, there is an overall audit, and we do not
    have auditable financial statements in the Department of
    Defense. There are also a number of reviews at various levels
    in the Department and outside the Department, by the IG, GAO,
    and others, of particular aspects of those statements. I do not
    know if that answers your question, but overall, the
    Department's financial statements are not auditable.
        Senator Burris. Mr. Chairman, there is a deep concern here
    because I remember when I was President of the National
    Association of State Auditors, Comptrollers, and Treasurers, we
    came to Washington to try to get the Federal Government to
    really begin to set up a structure that would allow more
    accountability to the taxpayers, and what the compromise was--
    we tried to create an Auditor General who would take over the
    auditing of the Federal Government's financial statements, and
    the current Comptroller General of the United States would
    become the Auditor General, and then this person would have the
    same status as the Comptroller General has now, but he would
    oversee the financial statements of the Executive Branch.
        The compromise was this. They set a Comptroller up in the
    Office of Management and Budget (OMB), which is the fourth-
    level person in OMB, and then they put comptrollers in each one
    of the agencies. That is the reason why I was questioning Mr.
    Hale. His position was created as a result of that action that
    State governments took to bring them in line pretty much with
    what States were doing. And so they did not quite complete it
    because they said that they are too big to operate. I think
    there is no such thing, but we had to compromise in that
    regard.
        I would certainly like to follow up with that action
    because the whole accounting system of the Federal Government
    really needs to be changed. What you see happening in the
    Defense Department is just a microcosm of what is happening in
    other agencies, probably because what they allege to us is that
    it is their size.
        Of course, I have also a concern about personnel in terms
    of skills. Ms. Stephenson, in terms of the new hires, are you
    able to hire skilled auditors or certified public accountants?
    Just who are they, and where are you finding these people that
    you are hiring?
        Ms. Stephenson. The people that we are hiring are generally
    entry-level. Under the Defense Acquisition Workforce
    Development Fund, which is the funding that we have for this,
    it is entry-level interns that are funded for the hiring. So
    these are entry-level individuals. There are no other auditors
    that perform the functions that we perform.
        Senator Burris. What are their skills and qualifications--
    --
        Ms. Stephenson. We are contract----
        Senator Burris [continuing]. A bachelor's degree in
    accounting?
        Ms. Stephenson. Right. It is a degree in accounting, but we
    are contract auditors, and there are no other contract
    auditors, and so we have a very unique technical niche in the
    auditing arena. But specifically, under the Acquisition
    Workforce Development Fund, that is limited to interns and that
    is what we have hired.
        Senator Burris. We might have a problem with their skills.
    Who is training these individuals for skills and
    responsibilities and how long is their training period? GAO,
    did you all get into any of that, in terms of the skills of
    those new hires?
        Mr. Kutz. Not the new hires, but as we mentioned, we
    believe overall that the audit staff are good auditors, and as
    I mentioned in my opening statement, I think they were in a bad
    system at this point. And one of the things that the Department
    is trying to do is take actions to make a better system for
    them, better training, better scoping of audits, and possibly
    reducing the number of audits they are required to do so they
    can do more in-depth kind of work that you would expect a
    normal system-type audit to do.
        Senator Burris. So there is some concern about the work
    flow and the volume of work and the necessity of particular
    items being audited with these contractors?
        Mr. Kutz. Right. We believe that it is difficult to imagine
    22,000 or 30,000 audits being done a year by 3,600 people. I
    know they are trying to hire 700 more auditors, but I still
    think that denominator is a problem.
        Senator Burris. Thank you, Mr. Chairman. My time has
    expired, and I might not be here for the second round, but I
    would certainly like to follow up with this because I would
    like to talk more about the circumstances of the overall system
    that we tried to get established in the Federal Government.
        Chairman Lieberman. Thanks, Senator Burris.
        You bring a very helpful background and history about this
    State effect on the Auditing Comptroller system of the Federal
    Government. It is very interesting.
        Mr. Kutz and Ms. Fischer have made some suggestions for
    longer-term consideration that I think the Committee really
    needs to take seriously, which is whether the placement of DCAA
    within the Department is the correct place. Should it be
    separated from the Comptroller? Is there a better place for it
    to be? Should the Deputy Secretary handle DCAA? I know Mr. Hale
    has said that he thinks not.
        But the larger question, which really comes off of the
    history that Senator Burris refers to, is whether, as you
    suggest, we ought to take a look at creating a totally
    independent auditing agency for the Federal Government overall,
    maybe to go back to that idea of an Auditor General. That is
    something I think I would like to come back to.
        We are not going to do a second round. I think we have made
    the point here that this Committee has lost its patience,
    really, and there is too much on the line to not see the kind
    of aggressive action, decisive action, that Members of the
    Committee have asked for.
        Mr. Hale, I am going to ask you to give us a monthly
    report. It can be a letter, and our staff will work with you on
    the details of it. And then we will probably want to come back
    and do some more specific public hearings on this and other
    related questions.
        As soon as you are able, it would be of interest to me,
    anyway, to get your reaction to Mr. Kutz's and Ms. Fischer's
    recommendation that part of the problem here is the auditors
    are trying to do too much and they are doing a lot of it
    badly--in other words, DCAA should go to risk-based auditing. I
    would be interested in hearing whether you need statutory
    changes to do that. We understand, as you said, and you were
    right, that when you do that, you are running the risk that you
    are not going to audit a contract and you really will look back
    and say, oh, we should have audited that. But anyway, I want to
    have a more detailed evaluation of that.
        Senator Coburn. Mr. Chairman, would you yield?
        Chairman Lieberman. Senator Coburn, and then we will go to
    Senator McCaskill.
        Senator Coburn. If you create the expectation that you are
    going to get a real audit and you do not know when you are
    going to get the real audit, you will change multitudes of
    behavior. What needs to happen is the suppliers and contractors
    of the Defense Department need to be very worried about when
    they come into an audit, that, in fact, it is going to be
    thorough, aggressive, and accurate. And if you create that
    expectation, then you will not have to audit everybody every
    year. But they will not know when they are going to get
    audited, and that is how auditing works best, with the
    expectation that they are going to uncover our problems.
        So quality, as Senator McCaskill said. It is not quantity.
    It is quality and then creating an expectation in the rest of
    the contractor community that you better have it right.
    Otherwise, we are going to expose it.
        Senator Burris. Mr. Chairman, just one quick point----
        Chairman Lieberman. Yes, go ahead, and then we will go to
    Senator McCaskill.
        Senator Burris. Sorry. Thank you. As Senator Coburn
    mentioned, when I was a bank examiner, surprise, that is what
    we did. The banks did not know when we were coming.
        Chairman Lieberman. Yes.
        Senator Burris. So what Senator Coburn said is exactly what
    we did when I was with the Federal Government. The banks always
    had to be ready because they did not know when the examiners
    were coming in.
        Chairman Lieberman. Yes. To some extent, the Internal
    Revenue Service depends on this kind of psychology with the
    auditing. They cannot audit every tax return in the country,
    but because everybody worries that they may be audited,
    presumably, it encourages more honesty.
        Senator McCaskill.
        Senator McCaskill. I am almost disappointed we do not have
    a second round so I could be calm during the second round.
        Chairman Lieberman. I prefer to remember you as angry.
    [Laughter.]
        Senator McCaskill. Well, just a couple of things I think we
    need to make sure we have on the record. One is that I know
    that you may find this shocking, but there are hundreds and
    hundreds of auditors around the country that are not doing
    every audit that has been statutorily mandated because you know
    what legislators always do? Legislators always say, audit it in
    the legislation, and they never give the resources to audit it.
    So auditors are constantly struggling with mandated statutory
    audits that they do not do. That is why the risk assessment
    system was born. That is why we have the single audit, the
    different levels of programs that are audited because of risk
    and the amount of money that is flowing. And clearly in a
    contingency, in a situation like the case study I talked about,
    that is where you have the most risk. And I just really do not
    get this reluctance.
        And I think that leads to the second point, Mr. Chairman. I
    think we need to really stay focused on how insular this agency
    truly is. I have to tell you the truth, Ms. Stephenson, the
    notion that you just testified that there are no other contract
    auditors out there, there are. There are hundreds of auditors
    that have the same government auditing standard background,
    that have done the same kind of scope and work on their audits,
    that have the same kind of supervisory check. I mean, auditing,
    yes, there are different kinds and different expertise, but
    what you have always done in that agency is lateral and
    promotion. You have never brought in anybody from the outside,
    whether it is on a peer review or whether it is on deciding
    whether or not people get promoted. It has always been a birth-
    to-death organization, and it is dying because of it.
        I was going to calmly go through those points in questions
    if we had had a second round. I have a number of questions for
    the record, and I will just let both the Chairman and the
    Ranking Member know that if there is any of this follow-up work
    that the Subcommittee can do--as you can see, I am fairly
    agitated and involved in this particular subject matter--in
    terms of follow-up hearings, we are happy to do that on the
    Subcommittee if that is your pleasure and prerogative.
    Obviously, we leave it to your decision as to what work you
    would like us to do on the Subcommittee.
        Chairman Lieberman. No, I think that is a great idea. You
    are agitated, but you are also experienced, and that is a good
    combination. Senator Collins.
        Senator Collins. Thank you, Mr. Chairman.
        I think it is important for our witnesses to know why we
    feel so strongly and why there is such a sense of outrage among
    all of us who are here today. The first reason is that we are
    talking about contracts that are worth hundreds of billions of
    dollars. So what we have on the line here is an enormous
    investment by the taxpayers.
        Second, ultimately, we are talking about services and goods
    in the case of DOD that are going to support our troops in
    harm's way. Senator McCaskill's example of the Iraq contractor
    is replicated over and over again. So if we do not have good
    audits that are catching overbilling, shoddy work, the failure
    to deliver on a contract, contractors who are ripping off the
    Federal Government, the people who are being shortchanged in
    many cases are the men and women who are risking their lives
    every day for us, and that is why this matters so much.
        And third and finally, the frustration you are hearing
    today is that it appears that virtually nothing has changed
    since we held our hearing last year, and that is completely
    unacceptable.
        So I join the Chairman in his commitment to keep on top of
    this. It is exactly the kind of shoddy work that devalues the
    very good work that is done by the majority of the hard working
    employees at DCAA whose work I do value and acknowledged in my
    opening statement.
        We have to get this right. We cannot be here next September
    with yet another GAO report that tells us little has changed.
        Thank you, Mr. Chairman.
        Chairman Lieberman. Thanks, Senator Collins.
        I think the time for incremental responses is over.
    Training programs are good, but this organization really needs
    bold change, and we are counting on you, Mr. Hale. Bringing
    that about is another one of the bonuses that comes with your
    accepting this position.
        The record of this hearing will stay open for 15 days for
    additional questions or statements to be filed for the record.
        I thank everybody. The hearing is adjourned.
        [Whereupon, at 11:38 a.m., the Committee was adjourned.]

                                A P P E N D I X

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