DCAA Audits: Allegations That Certain Audits at Three Locations
Did Not Meet Professional Standards Were Substantiated
(22-JUL-08, GAO-08-857).
The Defense Contract Audit Agency (DCAA) under the Department of
Defense (DOD) Comptroller plays a critical role in contractor
oversight by providing auditing, accounting, and financial
advisory services in connection with DOD and other federal agency
contracts and subcontracts. DCAA has elected to follow generally
accepted government auditing standards (GAGAS). These standards
provide guidelines to help government auditors maintain
competence, integrity, objectivity, and independence in their
work. GAO investigated hotline complaints it received related to
alleged failures to comply with GAGAS on 14 DCAA audits.
Specifically, it was alleged that (1) working papers did not
support reported opinions, (2) supervisors dropped findings and
changed audit opinions without adequate evidence, and (3)
sufficient work was not performed to support audit conclusions
and opinions. GAO also investigated issues related to the quality
of certain forward pricing reports. GAO investigators interviewed
over 50 individuals, reviewed the working papers and related
documents for 14 audits issued from 2003 through 2007 by two DCAA
field offices, and reviewed documentation on audit issues at a
third DCAA office. GAO did not reperform the audits to validate
the completeness and accuracy of DCAA's findings. DCAA did not
agree with the "totality" of GAO's findings, but it did
acknowledge shortcomings with some audits and agreed to take
corrective action.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-857
ACCNO: A83032
TITLE: DCAA Audits: Allegations That Certain Audits at Three
Locations Did Not Meet Professional Standards Were Substantiated
DATE: 07/22/2008
SUBJECT: Audit oversight
Audit reports
Auditing procedures
Auditing standards
Contract administration
Contract oversight
Contractor payments
Corporate audits
Data collection
Defense audits
Department of Defense contractors
Documentation
Internal auditors
Internal audits
Internal controls
Investigations into federal agencies
Noncompliance
Reporting requirements
Requirements definition
Standards
Corrective action
GAO High Risk Series
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GAO-08-857
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Report to Congressional Addressees:
United States Government Accountability Office:
GAO:
July 2008:
DCAA Audits:
Allegations That Certain Audits at Three Locations Did Not Meet
Professional Standards Were Substantiated:
GAO-08-857:
GAO Highlights:
Highlights of GAO-08-857, a report to congressional addressees.
Why GAO Did This Study:
The Defense Contract Audit Agency (DCAA) under the Department of
Defense (DOD) Comptroller plays a critical role in contractor oversight
by providing auditing, accounting, and financial advisory services in
connection with DOD and other federal agency contracts and
subcontracts. DCAA has elected to follow generally accepted government
auditing standards (GAGAS). These standards provide guidelines to help
government auditors maintain competence, integrity, objectivity, and
independence in their work.
GAO investigated hotline complaints it received related to alleged
failures to comply with GAGAS on 14 DCAA audits. Specifically, it was
alleged that (1) working papers did not support reported opinions, (2)
supervisors dropped findings and changed audit opinions without
adequate evidence, and (3) sufficient work was not performed to support
audit conclusions and opinions. GAO also investigated issues related to
the quality of certain forward pricing reports.
GAO investigators interviewed over 50 individuals, reviewed the working
papers and related documents for 14 audits issued from 2003 through
2007 by two DCAA field offices, and reviewed documentation on audit
issues at a third DCAA office. GAO did not reperform the audits to
validate the completeness and accuracy of DCAA�s findings. DCAA did not
agree with the �totality� of GAO�s findings, but it did acknowledge
shortcomings with some audits and agreed to take corrective action.
What GAO Found:
GAO substantiated the allegations. Although DCAA policy states that its
audits are performed according to GAGAS, GAO found numerous examples
where DCAA failed to comply with GAGAS. For example, contractor
officials and the DOD contracting community improperly influenced the
audit scope, conclusions, and opinions of three audits�a serious
independence issue. At two DCAA locations, GAO found evidence that (1)
working papers did not support reported opinions, (2) DCAA supervisors
dropped findings and changed audit opinions without adequate evidence
for their changes, and (3) sufficient audit work was not performed to
support audit opinions and conclusions. GAO also substantiated
allegations of inadequate supervision of certain audits at a third DCAA
location. The table below contains selected details about three cases
GAO investigated.
Table: Selected Details of Audits GAO Investigated:
DOD contractor: Major aerospace company (DCAA location 1); Audit type:
Estimating system;
Significant case study issues:
* DCAA made an up-front agreement with the contractor to limit the
scope of work and basis for audit opinion.
* Contractor was unable to develop compliant estimates, leading to a
draft opinion of �inadequate in part.�
* Contractor objected to draft findings, and DCAA management assigned a
new supervisory auditor.
* Management threatened the senior auditor with personnel action if he
did not delete findings from the report and change the draft audit
opinion to �adequate.�
DOD contractor: Company produces and supports military and satellite
systems (DCAA location 2); Audit type: Billing system;
Significant case study issues:
* Draft audit report identified six significant deficiencies, one of
which led the contactor to overbill the government by $246,000 and
another which may have led to $3.5 million in overbillings.
* First supervisory auditor and auditor were replaced by other auditors
who dropped the findings and changed the draft audit opinion from
�inadequate,� to �adequate.�
* Sufficient testing was not performed to support an opinion that
controls were adequate.
* DOD Inspector General recommended that DCAA rescind the final audit
report. Over a year later, at the end of GAO�s investigation, DCAA
rescinded the final report.
DOD contractor: Major weapons system contractor (DCAA location 3);
Audit type: Forward pricing; Significant case study issues:
* Two supervisors responsible for 62 forward pricing audits of over
$6.4 billion in government contract negotiations did not review working
papers before report issuance.
* Inexperienced trainee auditors were assigned to 18 of the 62 audits
without proper supervision.
* An internal DCAA audit quality review found 28 systemic deficiencies
in 9 of 11 selected forward pricing audits.
* The DCAA field office lost control of final working papers because
trainee auditors did not always properly enter them in the electronic
workpaper system.
Source: GAO.
[End of table]
Throughout GAO�s investigation, auditors at each of the three DCAA
locations told us that the limited number of hours approved for their
audits directly affected the sufficiency of audit testing. Moreover,
during GAO�s investigation, DCAA managers took actions against staff at
two locations, attempting to intimidate auditors, prevent them from
speaking with investigators, and creating a generally abusive work
environment.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-857]. For more
information, contact Gregory D. Kutz at (202) 512-6722 or
[email protected].
[End of section]
Contents:
Letter:
Summary of Investigation:
Background:
Questioned DCAA Audits Did Not Comply with GAGAS:
DCAA Management Actions Intimidated Auditors, Impaired Some Audits, and
Created a Generally Abusive Environment:
Corrective Action Briefing and Agency Response:
Conclusions:
Appendix I: Comments from the Department of Defense:
Appendix II: Additional Investigative Case Study Results:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: GAGAS Compliance Problems Associated with Hotline Case
Investigations:
Table 2: Summary of DCAA Case Studies GAO Investigated:
Table 3: Additional Case Studies of DCAA Audits at Location 2:
Figures:
Figure 1: Relationship between Contract Phases, Contract Events, and
DCAA Audit Activities:
Figure 2: DCAA Internal Control and CAS Compliance Audit Opinions,
Criteria, and Resultant Actions:
Abbreviations:
ASBCA: Armed Services Board of Contract Appeals:
BOE: basis of estimates:
CAM: Contract Audit Manual:
CAP: corrective action plan:
CAS: Cost Accounting Standards:
DCAA: Defense Contract Audit Agency:
DCIS: Defense Criminal Investigative Service:
DCMA: Defense Contract Management Agency:
DFARS: Defense Federal Acquisition Regulation Supplement:
DOD: Department of Defense:
DOD IG: DOD Office of Inspector General:
ELC: expendable launch capacity:
ELS: expendable launch services:
FAO: field audit office:
FAR: Federal Acquisition Regulation:
FOB: free-on-board:
G&A: general and administrative:
GAGAS: generally accepted government auditing standards:
GPS: global positioning system:
IPT: integrated product team:
RAM: regional audit manager:
SMC: Space and Missile Systems Center:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 22, 2008:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Henry A. Waxman:
Chairman:
Committee on Oversight and Government Reform:
House of Representatives:
Department of Defense (DOD) contract management has been included on
our high-risk list since 1992, meaning that the government continues to
be vulnerable to fraud, waste, abuse, and mismanagement in this area.
In our most recent High-Risk Series: An Update,[Footnote 1] we reported
that DOD is not able to assure that it is using sound business
practices to acquire the goods and services required to meet the needs
of U.S. warfighters. Additionally, we reported that DOD has not always
made sound use of various techniques to acquire goods and services, nor
has it had a comprehensive plan to ensure that its workforce has the
right skills and capabilities. Downsizing of contract oversight staff
in the 1990s coupled with hundreds of billions of dollars in increased
contract spending since 2000 has exacerbated the risks associated with
DOD contract management.
The Defense Contract Audit Agency (DCAA), a defense agency supervised
by the Office of the Under Secretary of Defense (Comptroller), plays a
critical role in DOD contractor oversight by providing auditing,
accounting, and financial advisory services in connection with the
negotiation, administration, and settlement of contracts and
subcontracts. DCAA also performs audit services for other federal
agencies, as requested, on a fee-for-service basis. Although DCAA
provides a range of services to contracting officers and other DOD
officials, DCAA's primary function is contract audit services. The DCAA
Contract Audit Manual (CAM)[Footnote 2] prescribes the standards,
policies, and techniques to be followed by DCAA personnel in carrying
out contract audits. DCAA contract audits are intended to be a key
control to help assure that prices paid by the government for needed
goods and services are fair and reasonable and that contractors are
charging the government in accordance with applicable laws, regulations
(e.g., Federal Acquisition Regulation (FAR) and Defense Federal
Acquisition Regulation Supplement (DFARS), standards (e.g., Cost
Accounting Standards (CAS)), and contract terms. DCAA also audits
contractor-proposed estimates used to support contract negotiations and
costs charged to the government. To determine the amount of testing on
these proposal and cost-related audits, DCAA audits contractor controls
in accounting, billing, estimating, and other key systems, and issues
opinions on the adequacy of those control systems. For example, DCAA
auditors may audit a contractor billing system to determine whether the
contractor has adequate internal controls in place to assure that the
government is being charged appropriately for the goods and services
received. The results of billing system audits support decisions to
approve contractors for direct-billing privileges, whereby the
government pays contractors without prior review of invoices.
In performing its audits, DCAA states that it follows generally
accepted government auditing standards (GAGAS).[Footnote 3] These
standards provide guidelines to help government auditors maintain
competence, integrity, objectivity, and independence in their work and
require that they obtain sufficient evidence to support audit
conclusions and opinions. GAGAS apply to financial and performance
audits and attestation engagements. Although DCAA refers to the
assignments covered by our investigation as audits, most of them were
performed as examination-level attestation engagements.[Footnote 4]
GAGAS covering examination-level engagements require that auditors
perform sufficient testing to express an opinion on whether the subject
matter, such as internal control, conforms with applicable criteria in
all material respects.[Footnote 5] GAGAS also require that an
experienced auditor who is unfamiliar with the audit should be able to
review the evidence in the audit documentation and come to the same
conclusion as the original auditor.[Footnote 6] According to GAGAS,
supervisors should review and approve audit documentation before audit
reports are issued.[Footnote 7]
We investigated FraudNet hotline complaints and additional allegations
and auditor concerns we received during our investigation related to
alleged failures to comply with GAGAS on 14 DCAA audits at two DCAA
locations in California. Specifically, DCAA auditors alleged that (1)
the working papers did not support the reported opinions; (2) on
certain audits, their supervisors personally changed (or directed
others to change) draft audit conclusions without adequate audit
evidence to support the changes; and (3) work performed on other audits
was not sufficient to support the final audit opinions. Auditors noted
that as a result of these practices, DCAA supervisors were issuing
reports in which the audit documentation was not sufficient or it
contradicted the final opinions or conclusions of the reports. During
our investigation, we received additional allegations that raised
concerns regarding the quality of forward pricing audit reports issued
by a third DCAA field office in California. We investigated the
allegations and concerns we received as 13 separate cases[Footnote 8]
to determine whether they could be substantiated.
In our case investigations, we conducted over 100 interviews of over 50
individuals and reviewed applicable CAM and relevant FAR, DFARS, and
CAS requirements. We also obtained and reviewed the working papers
related to the audits. We interviewed current and former DCAA auditors,
supervisors, and managers who worked on the audits and interviewed DOD
and other federal agency contracting officers. In assessing DCAA
audits, we used GAGAS as our criteria. We learned that the DOD Office
of Inspector General (DOD IG) was investigating the 10 audits noted in
the original allegations we received. We therefore coordinated our work
closely with DOD IG auditors and Defense Criminal Investigative Service
(DCIS) investigators.[Footnote 9] DOD IG's Office of Audit Policy and
Oversight, which has oversight responsibility for DCAA, issued a
memorandum to DCIS on its findings on January 24, 2007. We reviewed
this memorandum and DCAA's response.
DCAA audit reports covered by our investigation were issued from 2003
through 2007. We did not reperform the audits to independently validate
the completeness or accuracy of the findings contained in DCAA working
papers. Where it was relevant to our investigation, we relied on the
electronic date and name stamps on audit files to indicate when files
were accessed and who accessed them. During our investigation, we noted
a pattern of frequent management actions that served to intimidate the
auditors and create an abusive environment at locations 1 and 2. As a
result, some auditors were hesitant to speak to us. We performed our
investigation from June 2006 through July 2008 in compliance with the
standards for investigations prescribed by the President's Council for
Integrity and Efficiency.
Summary of Investigation:
We substantiated the allegations and auditor concerns made on each of
the 13 cases we investigated, involving 14 audits and forward pricing
audit issues related to seven contractors. In the 12 cases at locations
1 and 2, we substantiated the allegations and auditor concerns that (1)
workpapers did not support reported opinions, (2) DCAA supervisors
dropped findings and changed audit opinions without adequate audit
evidence for their changes, and (3) sufficient audit work was not
performed to support audit opinions and conclusions. In addition, we
also found that contractor officials and the DOD contracting community
improperly influenced the audit scope, conclusions, and opinions of
some audits--a serious independence issue. We also substantiated
allegations of problems with the audit environment and inadequate
supervision of certain forward pricing audits at location 3. Moreover,
during our investigation, DCAA managers took actions against their
staff at two locations, attempting to intimidate auditors, discouraging
them from speaking with our investigators, and creating a generally
abusive work environment. DCAA states that its audits are performed
according to GAGAS. However, in substantiating the allegations, we
found numerous failures to comply with GAGAS. The working papers did
not adequately support the final conclusion and opinion for any of the
14 audits we investigated. In many cases, supervisors changed audit
opinions to indicate contractor controls or compliance with CAS was
adequate when workpaper evidence indicated that significant
deficiencies existed. We also found that in some cases, DCAA auditors
did not perform sufficient work to support draft audit conclusions and
their supervisors did not instruct or allow them to perform additional
work before issuing final reports that concluded contractor controls or
compliance with CAS were adequate. Two supervisors were responsible for
the 12 audits we investigated at location 2, and 11 of these audits
involved insufficient work to support the reported opinions. The
following examples illustrate problems we found with audits at two DCAA
locations:
* In conducting a 2002 audit related to a contractor estimating system,
DCAA auditors reviewed draft basis of estimates (BOE) prepared by the
contractor and advised the contractor on how to correct significant
deficiencies. BOEs are the means for providing government contract
officials with information critical to making contract pricing
decisions. This process resulted from an up-front agreement between the
DCAA Resident Auditor and the contractor--one of the top five
government contractors based on contract dollar value--that limited the
scope of work and established the basis for the audit opinion.
According to the agreement, the contractor knew which BOEs would be
selected for audit and the audit opinion would be based on the final,
corrected BOEs after several DCAA reviews. Even with this BOE review
effort, the auditors found that the contractor still could not produce
compliant BOEs and labeled the estimating system "inadequate in part."
We found that enough evidence had been collected by the original
supervisory auditor and senior auditor to support this opinion.
However, after the contractor objected to draft findings and
conclusions presented at the audit exit conference, the DCAA Resident
Auditor replaced the original supervisory auditor assigned to this
audit and threatened the senior auditor with personnel action if he did
not change the summary workpaper and draft audit opinion. The second
supervisory auditor issued the final report with an "adequate" opinion
without documenting adequate support for the changes. This audit did
not meet GAGAS for auditor objectivity and independence because of the
up-front agreement, and it did not meet standards related to adequate
support for audit opinions.
* The draft report for a 2005 billing system audit identified six
significant deficiencies, one of which allowed the contractor to
overbill the government by $246,000 and another that may have led to
$3.5 million in overbillings. DCAA managers replaced the supervisory
auditor and auditor, and the new staff worked together to modify
working papers and change the draft audit opinion from "inadequate," to
"inadequate in part," and, finally, to "adequate." Sufficient testing
was not documented to support this opinion. DOD IG concluded that DCAA
should rescind the final report for this audit, but DCAA did not do so.
As noted previously, billing system audits are conducted to assess
contractor controls for assuring that charges to the government are
appropriate and compliant and to support decisions on whether to
approve contractors for direct billing. As a result of the 2005 audit,
DCAA authorized this contractor for direct billing of its invoices
without prior government review thereby providing quicker payments and
improved cash flow to the contractor. On June 20, 2008, when we briefed
DOD on the results of our investigation, DCAA advised us that a DCAA
Western Region review of this audit in 2008 concluded that the $3.5
million finding was based on a flawed audit procedure. As a result, it
rescinded the audit report on May 22, 2008. However, DCAA officials
said that they did not remove the contractor's direct-billing
privileges because other audits did not identify billing problems.
* The draft report for a 2005 CAS 403[Footnote 10] compliance audit
requested by a Department of Energy administrative contracting officer
(ACO) identified four deficiencies related to corporate cost
allocations to government business segments. However, a DCAA
supervisory auditor directed a member of her staff to write a "clean
opinion" report in 1 day using "boilerplate" language and without
reviewing the existing set of working papers developed by the original
auditor. The supervisory auditor appropriately dropped two significant
deficiencies from the draft report, but did not adequately document the
changes in the workpapers. In addition, the supervisory auditor
improperly referred two other significant deficiencies to another DCAA
office that does not have audit jurisdiction, and therefore did not
audit the contractor's corporate costs or CAS 403 compliance. The final
opinion was later contradicted by a September 21, 2007, DCAA report
that determined that this contractor was in fact not in compliance with
CAS 403 during the period of this audit.
We also substantiated allegations that there were problems with the
audit environment at a third DCAA location--a resident office
responsible for audits of another of the five largest government
contractors. For example, the two supervisors, who approved and signed
62 of the 113 audit reports performed at the Resident Office location,
[Footnote 11] said that trainees were assigned to complex forward
pricing audits as their first assignments even though they had no
institutional knowledge about the type of materials at risk of
overcharges, how to look at related sources of information for cost
comparisons, or how to complete the analysis of complex cost data
required by FAR. The supervisors, who did not always have the benefit
of experienced auditors to assist them in supervising the trainees,
admitted that they generally did not review workpapers in final form
until after reports were issued. Moreover, because the trainee auditors
did not have an adequate understanding of DCAA's electronic workpaper
filing system, they did not always enter completed workpapers in the
system, resulting in a loss of control over official workpapers. In
addition, one of the two supervisory auditors told us that contracting
officers would sometimes tell auditors to issue proposal audit reports
in as few as 20 days with whatever information the auditor had at that
time and not to cite a scope limitation in the audit reports so that
they could begin contract negotiations. If the available information
was insufficient, GAGAS[Footnote 12] would have required the auditors
to report a scope limitation. Where scope limitations existed, but were
not reported, the contracting officers could have negotiated contracts
with insufficient information. Moreover, a 2006 DCAA Region quality
review reported 28 systemic deficiencies on 9 of 11 forward pricing
audits reviewed, including a lack of supervisory review of the audits.
The problems at this location call into question the reliability of the
62 forward pricing audit reports issued by the two supervisors
responsible for forward pricing audits at the Resident Office location
from fiscal years 2004 through 2006, connected with over $6.4 billion
in government contract negotiations.
Throughout our investigation, auditors at each of the three DCAA
locations told us that the limited number of hours approved for their
audits and the number of audits required to be completed directly
affected the sufficiency of audit testing. Noncompliance with GAGAS in
the cases we investigated has had an unknown financial effect on the
government. However, substandard audits do not provide assurance that
billions of dollars in annual payments made to these contractors
complied with FAR, CAS, or contract terms.
During the DOD IG and GAO investigations, we identified a pattern of
frequent management actions that served to intimidate the auditors and
create an abusive environment at two of the three locations covered in
our investigation. In this environment, some auditors were hesitant to
speak to us even on a confidential basis. For example, supervisory
auditors and the branch manager at one DCAA location we visited
pressured auditors, including trainees who were in probationary status,
to disclose to them what they told our investigators. Some probationary
trainees told us this questioning made them feel pressured or
uncomfortable. Further, we learned of verbal admonishments,
reassignments, and threats of disciplinary action against auditors who
raised questions about management guidance to omit their audit findings
and change draft opinions or who spoke with or contacted our
investigators, DOD investigators, or DOD contracting officials. We
briefed cognizant DCAA Region and headquarters officials on the results
of our investigation in February 2008 and reviewed additional
documentation they provided. We briefed DOD officials on the results of
our investigation on June 20 and 25, 2008.
On July 3, 2008, DCAA provided a written response to our corrective
action briefing that stated that the 13 cases related to the three
field audit offices (FAO) whose audits we investigated represent a very
small portion of the audit work performed by these FAOs. DCAA stated
that the three FAOs are currently operating at a satisfactory level of
compliance with GAGAS. DCAA's response also stated that it did not
agree with the "totality" of our overall conclusions. However, DCAA
acknowledged that shortcomings existed in the working paper evidence
and documentation to support the final audit conclusions in several of
the assignments we investigated. DCAA's response noted that the
rationale for dropping many of the significant deficiencies from audit
reports was not adequately supported or documented and stated that DCAA
has no evidence that the supervisors "willfully" removed findings from
the audit reports. DCAA also acknowledged that in some cases,
additional work should have been performed to support the final audit
opinion. Finally, DCAA's response stated that DCAA found no evidence to
support our conclusions that DCAA managers took actions against their
staff at two locations, attempting to intimidate auditors, preventing
them from speaking with investigators, and creating a generally abusive
work environment because we had not provided them specific evidence.
DCAA stated that we did not advise them of this problem during our
investigation. We advised DCAA headquarters of our conclusions on
management issues in February 2008. However, because of the fear of
retaliation expressed by several individuals during our confidential
interviews, we did not provide DCAA the names of individuals or
specific incidents. DCAA indicated that it has begun actions to assess
the existence of management abuse. We maintain our position on the
results of our investigation of the 13 cases as well as the DCAA
management issues at locations 1 and 2. A more detailed discussion of
DCAA's response is presented in the Corrective Action Briefing section
of this report. We also reflected DCAA actions, as appropriate, in the
individual case summary discussions. DCAA's written response is
reprinted in appendix I.
We plan to issue a separate report at the request of the Senate
Committee on Homeland Security and Governmental Affairs concerning our
broader audit of DCAA's overall organizational environment and quality
control system and our review of selected audits performed by selected
offices within DCAA's five regions. Our report will include
recommendations for strengthening the overall contract audit
environment and ensuring compliance with GAGAS.
Background:
DCAA, reporting to the Office of the Under Secretary of Defense
(Comptroller), consists of a headquarters office at Fort Belvoir,
Virginia, and six major organizational components--a field detachment
office, which handles audits of classified contracting activity, and
five regional offices within the United States. The regional offices
manage FAOs, which are identified as branch offices, resident offices,
or suboffices. Resident offices are located at larger contractor
facilities in order to facilitate DCAA audit work. In addition,
regional office directors can establish suboffices as extensions of
FAOs to provide contract audit services more economically. A suboffice
depends on its parent FAO for release of audit reports and other
administrative support. In total, there are more than 300 FAOs and
suboffices throughout the United States and overseas.
DCAA plays a critical role in DOD contractor oversight by providing
auditing, accounting, and financial advisory services in connection
with the negotiation (i.e., procurement), administration, and
settlement of contracts and subcontracts. DCAA also performs audit
services for other federal agencies, as requested, on a fee-for-service
basis. Although DCAA provides a range of services to contracting
officers and other DOD officials, DCAA's primary function is contract
audit services. Figure 1 provides a summary of audit activities by
contract phase and event and notes the types of audit activities
covered in our investigation.
Figure 1: Relationship between Contract Phases, Contract Events, and
DCAA Audit Activities:
[See PDF for image]
This figure is an illustration of the relationship between contract
phases, contract events, and DCAA audit activities, as follows:
Contract phase: Negotiation phase;
Contract events: Proposal; Contract negotiations; Contract award;
Audit activities:
* Full proposal[A];
* Rate review[A];
* Financial capability;
* Pre-award accounting survey;
* Initial disclosure statement review;
* Other[A].
Contract phase: Administrative phase;
Contract events: Contract performance;
Audit activities:
* Provisional billing rates;
* Progress payments (fixed price and fixed price incentive fee
contracts only);
* Earned value management system (if required);
* Other requested special audits;
* Annual incurred cost reviews (flexibly priced contracts only);
* Audits of contractor internal control systems[A];
* Cost accounting standard (CAS) compliance[A];
* Paid voucher reviews;
* Overpayment review.
Contract phase: Close out/termination phase;
Contract events: Contract physically complete; Contract closed;
Audit activities:
* Final price submissions (fixed price incentive fee contracts);
* Contract audit closing statemente (cost type and time and materials
contracts);
* Termination.
[A] Audits covered by GAO's investigation.
Source: GAO analysis of DCAA information.
[End of figure]
According to DCAA data, in 1989, DCAA had almost 6,000 auditors on its
staff. During fiscal year 2007, as a result of gradual downsizing, DCAA
had about 3,500 auditors. According to the DCAA Director, DCAA's 3,500
auditors annually perform about 40,000 audits of approximately 10,000
contractors. In terms of organizational structure, teams of DCAA
auditors typically report to supervisory auditors. Among many other
duties, supervisory auditors are in charge of staffing audits and
helping auditors manage the scope of their audits in compliance with
DCAA policies and procedures. DCAA supervisory auditors review and
approve audit plans and risk assessments, allocate audit hours at the
beginning of an audit, and perform supervisory review and approval of
summary workpapers and underlying workpapers, as appropriate, at the
end of an audit. Supervisory auditors report to branch managers or
resident auditors, who oversee the operations of their offices and
manage the progress of all audits assigned to them. Branch managers and
resident auditors also work with regional management staff, such as
quality assurance managers, regional audit managers who oversee the
work of multiple DCAA offices, and region directors.
In accordance with GAGAS, the results of DCAA audits are issued in
report form. For example, DCAA audits internal controls in key
contractor accounting and management systems that have a significant
effect on government contract costs. DCAA reports on those audits
describe whether any significant deficiencies[Footnote 13] were found
in contractor internal controls and, if necessary, include
recommendations to correct the deficiencies. DCAA may issue one of
three opinions on a contractor's internal control system: "adequate,"
when no internal control deficiencies are found; "inadequate," when
internal control deficiencies are so significant that the entire system
is unreliable; or "inadequate in part," when deficiencies are found
that affect parts of the system. There are no materiality criteria for
determining whether significant deficiencies would result in a system
being labeled inadequate in part versus inadequate. However, DCAA's
CAM[Footnote 14] states that "A deficiency is significant when the
auditor believes that additional audit procedures are needed in related
audits to protect the Government's interest because the contractor's
internal controls are unlikely to accomplish specific control
objectives." Contractors are required to take action to correct
significant deficiencies. DCAA reports may also include suggestions for
improvement where identified weaknesses are not considered significant
deficiencies but still merit action by the contractor. Contractors are
encouraged, though not required, to address suggestions for
improvement, and suggestions for improvement do not affect the audit
opinion. According to the policy in effect at the time DCAA issued its
reports on all but one of the audits we investigated, if an audit
report expressed an "adequate" opinion, supervisory auditors could
issue the report under their own signature, if the branch manager or
resident auditor delegated this authority to them. However, if an audit
report expressed any opinion other than "adequate," a DCAA branch
manager or resident auditor was required to sign the report.[Footnote
15] In instances where the auditor determines that a contractor has an
"inadequate in part" or "inadequate" internal control system, DCAA is
required to perform a follow-up audit within 6 months to determine
whether the contractor has fully implemented corrective actions.
DCAA audit opinions provide support for granting contractors
authorization to directly bill a federal agency and receive payment
without prior review of invoices by the government. DCAA is the agent
of the contracting officer for purposes of granting contractors direct-
bill authorization.[Footnote 16] If DCAA determines, based on its audit
work, that a contractor should not be granted direct-bill authority,
DCAA must review the contractor's invoices prior to payment.[Footnote
17] DCAA's CAM states that to the extent appropriate, voucher (invoice)
reviews based on judgmental sampling will be performed by clerical
staff and requires the reviews to be completed within 5 business
days.[Footnote 18] DCAA forwards approved invoices to the federal
agency payment office, and it returns invoices with errors or
unallowable costs to the contractor for correction. Moreover, the
results of DCAA internal control audits affect auditor decisions on the
scope of work performed on future internal control audits and other
DCAA cost-related audits. This is because the nature, extent, and
timing of audit work are based on risk associated with significant
deficiencies. For example, if controls for a particular system are
deemed adequate, the level of testing on future audits will be
decreased based on the assurance provided by adequate controls.
Conversely, if a contractor's system is determined to be "inadequate"
or "inadequate in part," the assessment of risk and the testing
required would be increased because the controls do not provide
reasonable assurance that data generated by the contractor's system are
reliable.
Figure 2 summarizes the different DCAA audit opinions, the criteria for
judging them, and the resultant actions for audits of contractor
internal control systems and CAS compliance.
Figure 2: DCAA Internal Control and CAS Compliance Audit Opinions,
Criteria, and Resultant Actions:
[See PDF for image]
This figure is an illustration of DCAA internal control and CAS
compliance audit opinions, criteria, and resultant actions, as follows:
Risk: Low;
DCAA Opinion: Adequate;
Criteria: No significant deficiencies;
Resultant actions:
* Report could be signed by supervisory auditor[A];
* Contractor can potentially directly bill the government;
* Scope of future and concurrent audits of contractor may be narrowed.
Risk: Moderate;
DCAA Opinion: Inadequate in part;
Criteria: One or more significant deficiencies that affect parts of the
system;
Resultant actions:
* Field office manager or higher must sign report;
* Contractor required to make improvements;
* Follow-up testing within 6 months;
* Expanded audit scopes on future and concurrent audits;
* Contractor may not be authorized to directly bill (billing system
audits only).
Risk: High;
DCAA Opinion: Inadequate;
Criteria: One or more significant deficiencies that render the entire
system unreliable;
Resultant actions:
* Field office manager or higher must sign report;
* Contractor required to make improvements;
* Follow-up testing within 6 months;
* Expanded audit scopes on future and concurrent audits;
* Contractor may not be authorized to directly bill (billing system
audits only).
Source: GAO analysis of DCAA policy.
[A] On December 3, 2007, the DCAA Western Region changed its policy to
require branch manager or resident auditor signature on all internal
control audit reports. DCAA adopted this policy change agencywide on
February 13, 2008.
[End of figure]
Because DCAA audit opinions determine whether a contractor can directly
bill the government and drive the nature and extent of testing on
subsequent audits, it is essential that audit opinions be supported by
sufficient testing.
Questioned DCAA Audits Did Not Comply with GAGAS:
We substantiated the allegations regarding the 13 cases at the three
locations we investigated. Specifically, at two locations, we
substantiated the allegations that DCAA supervisors dropped findings
and changed audit opinions without adequate audit evidence for their
changes. In some cases, supervisors changed opinions in final audit
reports without changing the underlying workpapers, resulting in
opinions that contradicted the workpapers. We also found that even
though some auditors believed that they had not performed sufficient
work to support draft audit conclusions, their supervisors did not
instruct or allow them to perform additional work before issuing final
audit reports. At a third DCAA location, we substantiated allegations
that there were problems with the audit environment. These problems
included supervisors (1) assigning inexperienced trainees to forward
pricing audits (i.e., more complex audits related to proposals for
contract modifications) without proper supervision and (2) issuing
forward pricing audit reports before audit work was completed. In
addition, one DCAA supervisor noted problems with inadequate training
of new auditors on the electronic audit documentation system that
resulted in losing control over versions of the working papers as they
were imported and exported from the system for review and revision. The
problems at this location call into question the reliability of at
least 62 forward pricing audit reports issued by the two supervisors
responsible for forward pricing audits at this office from fiscal years
2004 through 2006, connected with over $6.4 billion in government
contract negotiations.
The DCAA audit reports we investigated all stated that they were
performed in accordance with GAGAS. These standards are intended for
use by government auditors to ensure that they maintain competence,
integrity, objectivity, and independence in planning, conducting, and
reporting their work and that auditors obtain sufficient evidence to
support findings and conclusions. GAGAS pertain to auditors'
professional qualifications and the quality of their work, the
performance of fieldwork, and the characteristics of meaningful
reporting. Adherence to GAGAS can help provide credibility of the
information in audit reports so that it can be relied upon by users and
decision makers. Among many key GAGAS requirements are the following:
* The audit organization and the individual auditor should be free both
in fact and appearance from personal, external, and organizational
impairments to independence.[Footnote 19]
* Auditors should plan audit work, perform sufficient testing, and
obtain sufficient evidence to express an opinion on the subject matter.
[Footnote 20]
* In making professional judgments, auditors should exercise reasonable
care and diligence and observe the principle of serving the public
interest and maintaining the highest degree of integrity, objectivity,
and independence.[Footnote 21]
* Documentation related to planning, conducting, and reporting on the
engagement should contain sufficient information to enable an
experienced auditor with no previous connection to the engagement to
determine that the evidence supports the auditor's significant
judgments and conclusions.[Footnote 22]
* Audit staff should collectively possess technical knowledge, skills,
and experience necessary to be competent for the type of work being
performed and should be properly supervised.[Footnote 23]
Despite DCAA's statements that its reports are performed according to
GAGAS, we found numerous failures to comply with GAGAS on the 13 cases
we investigated. These problems are briefly summarized in table 1.
Table 1: GAGAS Compliance Problems Associated with Hotline Case
Investigations:
Case: 1;
Impairment to auditor independence: [Check];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Empty];
Significant problems: The DCAA resident office and contractor made an
up-front agreement on audit scope, which had the effect of
predetermining an "adequate" audit opinion.
Case: 2;
Impairment to auditor independence: [Check];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Empty];
Significant problems: Based on pressure from contractor and buying
command to resolve CAS compliance issues and issue a favorable opinion,
a DCAA region official directed the auditors not to include CAS
compliance problems in the audit workpapers.
Case: 3;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Branch manager and supervisory auditor terminated
audit work and issued opinions without sufficient documentation based
on their view that defective pricing did not exist on the related
contracts.
Case: 4;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Supervisory auditor dropped preliminary findings
of deficiencies based on a flawed audit procedure instead of requiring
auditors to perform sufficient testing to conclude on the adequacy of
billing system controls.
Case: 5; Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Auditor was excluded from exit conference,
findings were dropped without adequate support, and supervisor made
contradictory statements on her review of the audit.
Case: 6;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Dropped findings on corporate accounting were
referred to another FAO, which does not review corporate costs.
Supervisor prepared and approved key working papers herself, without
required supervisory review.
Case: 7; Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Supervisor directed another auditor to write a
clean opinion report without reviewing the working papers. Supervisor
then changed the working papers without support and referred two
dropped findings to another FAO, which does not review corporate
overhead allocations.
Case: 8;
Impairment to auditor independence: [Check];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Empty];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Inexperienced trainees assigned to complex
forward pricing audits without proper supervision. Reports issued with
unqualified opinions before supervisory review was completed due to
pressure from contracting officers.
Case: 9;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Empty];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Significant deficiency and FAR noncompliance
related to the lack of contractor job descriptions for executives not
reported.
Case: 10;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Empty];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Significant deficiency related to subcontract
management not reported.
Case: 11;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Empty];
Significant problems: Second auditor and supervisor dropped 6 of 10
significant deficiencies without adequate documentation to show that
identified weaknesses were resolved.
Case: 12;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Check];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Supervisor identified problems with test
methodology but dropped findings instead of requiring tests to be
reperformed.
Case: 13;
Impairment to auditor independence: [Empty];
Working papers did not support reported opinions: [Check];
Draft audit opinions changed without sufficient documentation: [Empty];
Auditor did not perform sufficient work to support conclusions:
[Check];
Significant problems: Second auditor and supervisor deleted most audit
steps and performed limited follow-up work that did not support the
reported opinion of overall compliance with CAS.
Source: GAO analysis.
[End of table]
Our investigation found that contractor officials and the DOD
contracting community improperly influenced the audit scope,
conclusions, and opinions of some audits--a serious independence issue
(Cases 1, 2, and 8). In addition, we found problems with the adequacy
of workpaper support for opinions in all 13 cases we investigated.
Specifically, our investigation determined that working papers for 14
audits[Footnote 24] at two DCAA locations (Cases 1 through 7 and 9
through 13) did not adequately support the final audit report opinions.
The two supervisors responsible for 12 audits we investigated at
location 2 did not ensure that sufficient work was performed to support
audit conclusions and opinions for 11 of these audits. Further, all but
two of the 12 audit reports were issued in the last 2 weeks of the
fiscal year to meet performance metrics. The two remaining audits were
issued by the end of the first quarter of the following fiscal year--
also a performance metric. Finally, absent final supervisory review of
forward pricing working papers prior to report issuance, there is no
assurance that audit opinions in Case 8 were supported by sufficient
audit evidence, as required by GAGAS.[Footnote 25] In 9 of our 13
cases, a supervisory auditor or manager either changed or directed
changes to be made to an auditor's draft audit conclusions without
adequate audit evidence to support the changes. In Case 6, the
supervisory auditor prepared and reviewed her own working papers, which
is also a GAGAS noncompliance. Moreover, in 9 of our 13 cases, the
auditors did not perform sufficient work to support their draft
conclusions, and the supervisory auditors failed to note that the work
was insufficient or direct or authorize the auditors to perform
additional audit procedures before issuing the final reports. On 10
audits, the original supervisor or auditor was reassigned and the new
supervisor or auditor dropped findings and changed conclusions and
opinions without adequate supporting documentation.
Throughout our investigation, auditors at each of the three DCAA
locations told us that the limited number of hours approved for their
audits directly affected the sufficiency of audit testing. At the third
DCAA location we investigated, two former supervisory auditors told us
that the volume of requests for the audits, short time frames demanded
by customers for issuing reports to support contract negotiations
(e.g., 20 to 30 days), and limited audit resources affected their
ability to comply with GAGAS. Our review of DCAA performance data
showed that DCAA measures audit efficiency and productivity as a factor
of contract dollars audited divided by audit hours. In addition,
because customer-requested assignments--such as forward pricing audits
requested by contracting officers--which are referred to as demand work
by DCAA, take priority, other work, such as internal control and CAS
compliance audits, are often performed late in the year. Auditors told
us that there is significant management pressure to complete these
nondemand audits by the end of the fiscal year to meet FAO performance
plans. To test this, we analyzed internal control audit reports issued
in fiscal years 2005 and 2006 at the location associated with nine of
the nondemand audits in our initial hotline complaint. We found that 92
percent (2005) and 83 percent (2006) of these reports were issued in
the last 2 weeks of the fiscal year. These percentages are
significantly higher than those for most other DCAA offices. DCAA
Western Region officials also recognized that this office issued an
unusually high number of reports at fiscal year-end.
Noncompliance with GAGAS in the cases we investigated has had an
unknown financial effect on the government. Because DCAA auditors'
limited work identified potential significant deficiencies in
contractor systems and accounting practices that were not analyzed in
sufficient detail to support reportable findings and recommendations
for corrective action, reliance on data and information generated by
the audited systems could put users and decision makers at risk.
Because the DOD IG was concerned with the effect of certain
noncompliance issues, in its January 24, 2007, memorandum of
investigation, it concluded that the final reports associated with
Cases 4, 5, and 9 should be rescinded. In making its determinations,
the DOD IG stated that "the reports were not supported by the working
papers, are still being used, and could have a negative effect on
current actions involving the contractor." We agree with the DOD IG's
position and advised DCAA of our same concern with the final report
related to Case 13. The DCAA Western Region Director disagreed with the
DOD IG's and our determinations. As a result, the systems and processes
audited may have been relied on since the 2005 audits. After our
briefings on the results of our investigation, DCAA's Western Region
rescinded the reports associated with Cases 4 and 5. In addition, new
audits were performed on Cases 7, 9, and 12 that identified numerous
significant deficiencies and included "inadequate in part" opinions.
The following table summarizes key details related to 8 of the 13 cases
we investigated, which are explained in detail in the body of our
report. We included 5 of the 10 cases we investigated at location 1 in
the body of our report. The additional 5 cases are summarized in
appendix II.
Table 2: Summary of DCAA Case Studies GAO Investigated:
Case: 1;
Type of audit: Estimating system survey follow-on (2002);
Contractor: Contractor A; DCAA Location: Location 1[A];
Case details:
* Purpose of audit was to review the corrective action plan (CAP)
developed by Contractor A in response to prior findings of inadequate
BOEs related to labor hours;
* In the face of pressure from DOD's contracting community to approve
Contractor A's estimating system, we found evidence that there was an
up-front agreement between DCAA and Contractor A to limit the scope of
work and basis for the audit opinion (a significant impairment of
auditor independence);
* Auditors found significant deficiencies with the CAP implementation
plan, that is, the contractor could not develop compliant BOEs without
DCAA's assistance at the initial, intermediate, and final stage of
estimates;
* Original supervisory auditor was reassigned; the resident auditor and
new supervisory auditor directed the draft opinion be changed from
"inadequate in part" to "adequate" after the contractor objected to
DCAA draft findings and opinion;
* The working papers did not contain audit evidence to support the
change in opinion;
* Field office management threatened the senior auditor with personnel
action if he did not change the draft audit opinion to "adequate".
Case: 2;
Type of audit: Proposal audit (2006);
Contractor: Contractor A;
DCAA Location: Location 1;
Case details:
* Audit related to a revised proposal submitted after DCAA reported an
adverse (inadequate) opinion on Contractor A's 2005 proposal;
* At beginning of the audit, buying command and Contractor A officials
met with a DCAA regional audit manager to determine how to resolve CAS
compliance issues and obtain a favorable audit opinion;
* Contractor A did not provide all cost information requested for
audit;
* Contrary to DCAA CAM guidance, the regional audit manager instructed
auditors that they could not base an "adverse" (inadequate) audit
opinion on the lack of information to audit certain costs;
* On the basis of an "inadequate in part" opinion reported in May 2006,
the buying command negotiated a $967 million contract, which has grown
to $1.2 billion.
Case: 3;
Type of audit: Three defective pricing audits (2004);
Contractor: Contractor B;
DCAA Location: Location 2[B];
Case details:
* Branch manager and supervisory auditor predetermined that there was
no defective pricing; however, the auditor concluded that Contractor
B's practice potentially constituted defective pricing and obtained
technical guidance that specific contracts would need to be analyzed to
make a determination. The branch manager disagreed;
* Supervisory auditor and branch manager subsequently issued three
reports stating that Contractor B's practice at three divisions did not
constitute defective pricing;
* Insufficient work was performed on these audits to come to any
conclusion about defective pricing, and as a result, the final opinions
on all three audit reports are not supported;
* Absent DCAA audit support for defective pricing, the contracting
officer pursued a CAS 405 noncompliance at three contractor divisions
and recovered $71,000;
* At the end of our work, a settlement on a separate DCIS defective
pricing case was being negotiated.
Case: 4;
Type of audit: Billing system; (2005);
Contractor: Contractor C;
DCAA Location: Location 2;
Case details:
* Draft audit report identified six significant deficiencies, one of
which led Contractor C to overbill the government by $246,000 and
another which potentially led to $3.5 million in overbillings, but
audit work was incomplete. The contractor had refunded the $246,000;
* The original auditor concluded that the $3.5 million was for
subcontractor costs improperly billed to the government. The supervisor
deleted the finding based on a flawed audit procedure, but did not
require additional testing;
* First supervisory auditor and auditor were replaced after draft audit
report was completed;
* New auditor and supervisory auditor worked together to modify working
papers and change the draft audit opinion from "inadequate," to
"inadequate in part," and, finally, to "adequate";
* Sufficient testing was not performed to determine if the contractor
had systemic weaknesses or to support an opinion that contractor
billing system controls were adequate;
* On the basis of the "adequate" opinion, the FAO approved the
contractor for direct billing;
* DOD IG recommended that DCAA rescind the final report for this audit,
but DCAA did not do so;
* Following the briefing on our investigation, the DCAA Western Region
rescinded the audit report on May 22, 2008.
Case: 5;
Type of audit: Estimating system (2005);
Contractor: Contractor C;
DCAA Location: Location 2;
Case details:
* Auditor identified five deficiencies and concluded the contractor's
system was "inadequate in part";
* Auditor did not perform sufficient work to support some findings, but
supervisory auditor did not direct the auditor to gather additional
evidence;
* After consulting with the branch manager, the supervisory auditor
modified documents and eliminated significant deficiencies, changing
the draft audit opinion from "inadequate in part" to "adequate";
* Working papers did not properly document the reason for the change in
opinion and therefore do not support the final opinion;
* DOD IG recommended that DCAA rescind the final report for this audit,
but DCAA did not do so;
* On June 27, 2008, the DCAA Western Region informed us that it was
rescinding this audit report.
Case: 6;
Type of audit: Accounting system (2005);
Contractor: Contractor D;
DCAA Location: Location 2;
Case details:
* Auditor believed audit evidence related to a 24 percent error rate in
a small sample of cost pools supported an "inadequate in part" opinion
and suggested testing be expanded, but supervisory auditor disagreed;
* Auditor and supervisory auditor documented their disagreement in the
working papers;
* Supervisory auditor subsequently modified documents to change the
draft audit opinion from "inadequate in part" to "adequate" before
issuing the final report;
* Certain final working papers were prepared and approved by the
supervisory auditor;
* Branch manager and supervisory auditor determined that findings of
corporate accounting problems should be referred to another FAO for
future audit. However, the other FAO does not audit corporate costs;
* Working papers do not support the final opinion.
Case: 7;
Type of audit: Compliance, CAS 403 (2005);
Contractor: Contractor D;
DCAA Location: Location 2;
Case details:
* Auditor identified four potential instances of noncompliance with CAS
403;
* Auditor was transferred to a different team before supervisory review
of her working papers. Three months later, the supervisory auditor
requested that another auditor write a "clean (adequate) opinion"
report;
* Second auditor used "boilerplate" (i.e., standardized) language to
write the final report and never reviewed the working papers;
* The supervisor correctly deleted two findings and referred two
findings of corporate-level noncompliance to another FAO for future
audit. The other FAO does not audit corporate-level costs;
* Working papers do not support the final "clean opinion," which was
later contradicted by a September 21, 2007, DCAA report that determined
that Contractor D was in fact not in compliance with CAS 403 during the
period of this audit.
Case: 8;
Type of audit: Forward pricing (2004 through 2006);
Contractor: Contractor E;
DCAA Location: Location 3[C];
Case details:
* Two Location 3 supervisors signed 62 of 113 forward pricing audits
performed by the resident office related to Contractor E from 2004
through 2006;
* Supervisors responsible for the 62 forward pricing audits admitted to
us that they did not always have time to review working papers before
report issuance;
* According to the DCAA Region, inexperienced trainee auditors were
assigned to 18 of the 62 audits. However, the region did not provide
assignment documentation for the 62 audits;
* An internal DCAA Region audit quality review found audits where the
audit working papers did not support the final audit report, working
paper files were lost, and working paper files were not archived in the
DCAA-required time period;
* The 62 forward pricing audits were connected with over $6.4 billion
in government contract negotiations.
Source: GAO analysis.
[A] Location 1 is a DCAA resident office located at facilities run by
one of the five largest DOD contractors (Contractor A). The audit in
Case 1 was performed at a suboffice location and the audit in Case 2
was performed at the resident office.
[B] Location 2 is a DCAA branch office.
[C] Location 3 is a DCAA resident office located at facilities run by
another of the five largest DOD contractors (Contractor E).
[End of table]
The following discussion summarizes our investigations of the above
eight cases, including the allegations we received, and the details of
the audits for seven cases at two DCAA locations; for Case 2, similar
significant audit issues we identified in current GAO work; and for
Case 8, the issues associated with the forward pricing audit
environment at a third location; and the results of our investigation
of each case.
Case 1: 2002 Follow-on Survey of Contractor A's Estimating System:
We investigated allegations that DCAA managers at a suboffice under
location 1 engaged in an up-front agreement with Contractor A to
provide an "adequate" audit opinion on a corrective action plan (CAP)
developed by the contractor to correct weaknesses in its estimating
system that DCAA had identified in two previous audits. According to
the allegations, consonant with this up-front agreement, the working
papers for this audit do not support the opinion because the DCAA
resident auditor at location 1 directed the auditor to remove findings
from the draft report. Contractor A is a major aerospace company that
is among the five largest defense contractors in the United States. In
calendar year 2006, Contractor A reported over $61 billion in revenue.
The resident office we investigated is located on the site of a wholly
owned subsidiary of Contractor A; this subsidiary produces cost
estimates for several major Air Force weapon systems.
Details of the Audit (Case 1):
In audit reports issued in September 2000 and September 2001, DCAA
documented inadequacies in the estimating system Contractor A used to
produce BOEs on labor hours related to support and maintenance of the
major weapon systems manufactured at this California location. BOEs are
critical because they define the purpose of contract estimates, the
estimate scope, the basis for pricing, and other important factors that
government contract managers must consider in making decisions on
pricing contract work. As a result of these reports, the Defense
Contract Management Agency (DCMA) downgraded Contractor A's estimating
system rating from green (satisfactory) to yellow (marginal). As
required by DCAA policy,[Footnote 26] whenever at least one inadequacy
is disclosed in an audit, the contractor must develop a CAP to address
the deficiencies. Because of continuing problems with labor-hour
estimates noted in the 2000 and 2001 DCAA reports, DOD established an
integrated product team (IPT) to address the inadequacies. The IPT,
which included DCMA contracting officials, Air Force acquisition
officials, Contractor A management representatives, and DCAA auditors,
was a key component of the contractor's CAP.
According to working papers we reviewed, at the time the audit of
Contractor A's CAP was initiated in March 2002, there was an up-front
agreement between the DCAA resident auditor and Contractor A officials
that limited the audit scope and noted that the yet-to-be-performed CAP
audit opinion would be based on final approved BOEs for labor hours in
selected forward pricing proposals. This agreement had the effect of
predetermining an "adequate" audit opinion. For example, under the
agreement, Contractor A would provide BOEs to be audited for all
proposals issued during March through June 2002. Thus, Contractor A
knew in advance which proposals would be audited. Further, under the
agreement, DCAA auditors would review Contractor A's BOE proposals at
three phases and advise the contractor of needed corrections. According
to the agreement, which was documented in a "letter of understanding"
between DCAA and Contractor A, DCAA would only report on its audit
results after reworking the BOE proposals and reaching agreement on
them. This represented a significant deviation from DCAA audit
procedures. According to the auditors, DCAA normally allows a
contractor to produce several final proposals through its estimating
system before randomly selecting and reviewing proposals. Our
interviews of DOD contracting officials and an Air Force buying command
official revealed that there was pressure from the contracting
community to approve Contractor A's estimating system.
In October 2002, DCAA auditors prepared a draft audit opinion of
"inadequate in part." They found that Contractor A failed to adequately
implement the CAP and that the contractor could not produce compliant
BOEs even after they had been reviewed twice by DCAA auditors. In
addition, they identified a risk of $11 million in unsupported labor
charges on the specific BOEs Contractor A had selected for them to
review. Auditors explained that the effect of the unsupported labor
charges could extend beyond the specific BOEs they reviewed and could
affect all BOEs prepared over the next 3 to 4 years, until the next
estimating system internal control audit is performed, if the problems
were not corrected. A DCAA working paper showed that during an exit
conference with Contractor A on September 13, 2002, the director of the
contractor's estimating system stated that if the report was issued
with an "inadequate in part" opinion he would "escalate" the issue "to
the highest level possible" in the government and within his own
company. He contended that the DCAA audit attempted to hold Contractor
A to standards that were guidelines rather than requirements in the
contractor's estimating system manual. However, our analysis of DCAA
working papers showed that the contractor's estimating system manual
was not FAR compliant,[Footnote 27] which led to the disagreement.
In mid-January 2003, the resident auditor at this location reviewed the
working papers for the CAP audit and, as documented in the working
papers, demanded in several e-mail messages that the senior auditor
make modifications that would support an "adequate" opinion. The senior
auditor acquiesced and added a statement in certain key working papers,
including the working paper summarizing the exit conference with
Contractor A, stating that DCAA's understanding of the contractor's
estimating system manual was "clarified." The statement concluded that
the draft report findings were based on guidelines rather than
requirements. The statement closed by noting, "In addition, the
contractor has corrected the originally cited deficiency discussed in
DCAA's prior audits due to the government's participation in the BOE
IPT." On February 10, 2003, the new supervisory auditor issued a report
stating that contractor's estimating system was adequate.
Results of Investigation (Case 1):
Our investigation substantiated the allegations. We determined that
this audit did not comply with GAGAS because (1) the working papers did
not support an "adequate" opinion, (2) the resident auditor directed
the auditor to remove findings from the draft report without adequate
supporting documentation, and (3) draft conclusions in the working
papers were changed without adequate support. Moreover, the up-front
agreement, which limited the scope of the audit and provided the basis
for an "adequate" opinion, impaired the objectivity of the audit and
posed a serious independence issue.[Footnote 28] Our review of the
audit workpapers showed that the DCAA auditors determined that the
contractor's estimating system guidance was not FAR compliant; thus,
the resident auditor's directions to add language to certain key
working papers stating that Contractor A "clarified" its estimating
system procedures misrepresented the condition of the contractor's
estimating system and related controls. We found that the majority of
the working papers were not revised to reflect an "adequate" opinion,
and that enough evidence had been collected by the original supervisory
auditor and senior auditor to support an "inadequate in part" opinion.
For instance, the auditors identified a risk of $11 million dollars in
unsupported labor charges on the final BOEs. Further, the auditors told
us that the risk to the government would be much greater than the $11
million because once Contractor A's estimating system controls were
deemed adequate, future proposals would receive less audit scrutiny.
According to the senior auditor whom we interviewed, he initially
refused to make changes, but later did so after being pressured by the
resident auditor who did not want this report to be inconsistent with
recent proposal audit opinions. An Air Force procurement official who
had worked closely with the auditors on reviewing the BOEs told us that
he was aware that the resident auditor had threatened the senior
auditor with personnel action if he did not change the workpapers. The
Air Force official told us that he advised the DCAA senior auditor not
to "lose his job" over the disagreement and to go ahead and make the
changes to the working papers.
Further, the Air Force procurement official involved in this case told
us that while DCAA's CAP audit was ongoing, there was talk within DCMA
of lowering the contractor's rating to red (unsatisfactory and
unusable). He said that throughout the CAP process, Contractor A
continued to deliver unsatisfactory BOEs that lacked information on
scope, methodology, pricing estimates, and other critical elements.
This official added that Contractor A was putting considerable pressure
on the government to raise its estimating system rating to green
despite these problems.
In November 2002, while the CAP audit was still in draft, the original
supervisory auditor was promoted and reassigned to another DCAA audit,
even though he requested that he be allowed to complete this audit
beforehand. The resident auditor was subsequently transferred to the
branch manager position at location 2. In her new position, this
individual was in charge of managing the audits associated with Cases 3
through 7 and 9 through 13 (Case 8 occurred at a third DCAA office).
Furthermore, Contractor A officials met with the Commander of DCMA and
requested staffing changes in DCMA related to the audit.
In a January 2007 memorandum, the DOD IG also concluded that the
working papers supported the original draft "inadequate in part"
opinion on the contractor's estimating system, not the "adequate"
opinion that was actually reported. On May 17, 2007, the second
supervisory auditor, who had signed the audit report, prepared a
Memorandum for the Record documenting her conclusions on the 2002
audit. Specifically, she stated that the draft "inadequate in part"
opinion was based on draft BOEs, when the opinion should have only been
based on the contractor's final certified BOEs, which she concluded
were adequate. To support her opinion, the second supervisory auditor
created a new workpaper on her analysis of the final, corrected BOEs
that omitted the original analysis of BOEs at the initial and interim
stages. The revised workpaper was consistent with the up-front
agreement.
Although the workpaper documentation clearly lays out the nature of the
up-front agreement, DCAA disagrees that there was an up-front
agreement. DCAA also stated that sufficient evidence was not collected
by the original auditors to support the draft "inadequate in part"
opinion. However, we found the workpaper evidence to be sufficient in
this regard.
Further, because of the well-known history of improper practices by a
senior Air Force acquisition official, we believe that the DCAA
Resident Office should have increased its audit scrutiny during the
2002 estimating system follow-on audit. For example, in 1993, a senior
Air Force acquisition official involved in procurements related to a
company later acquired by Contractor A was investigated for involvement
in a plan to speed up Air Force payments to that company. In 2000,
during the earlier estimating system audit, the senior Air Force
acquisition official sent the r�sum�s of her daughter, a recent college
graduate, and her daughter's fianc�, a published PhD aeronautical
engineer, to Contractor A and both were hired. From 2000 through 2002,
Contractor A was attempting to secure a $24.5 billion contract with DOD
related to major weapon systems covered by the Contractor A's same
estimating system. During this period, while the same senior Air Force
acquisition official was negotiating this contract on behalf of DOD,
the official was simultaneously negotiating for a high-paying job for
herself with Contractor A. After resolving the contract negotiations in
Contractor A's favor, this official then retired from the Air Force and
accepted a $250,000 per year job with Contractor A, plus a $50,000
signing bonus. She later pled guilty to 18 counts of conflict of
interest violations. She received 9 months in jail, 7 months of halfway
house/home confinement, and 150 hours of community service. Following
this sequence of events, DCAA did not revisit the 2002 estimating
system audit.
Case 2: Continuing Audit Issues with Contractor A Related to a 2006
DCAA Proposal Audit:
A current GAO audit of a program to provide satellite launch capability
identified audit issues that are similar to those involved in our
investigation of the 2002 DCAA estimating system audit discussed in
Case 1. Accordingly, we investigated issues related to (1) buying
command and contractor pressure for a favorable audit opinion and (2)
an unsupported change in the draft audit opinion directed by a DCAA
Western Region official. DOD initiated the program in 1995 to develop a
new generation of launch vehicles and provide assured, affordable
access to space. The program was developed in three phases. The initial
phase, low cost concept validation involved four separate $30 million
contracts and was completed in November 1996. The second phase involved
two $60 million contracts for preengineering and manufacturing. Phase
three began in October 1998 with the award of two development
agreements and two initial launch services contracts known as Buy 1
totaling more than $3 billion. Additional launch service awards were
made in Buy 2 and proposed in Buy 3. Buy 3 launch services awards are
continuing. By mid-2004, program costs had increased by more than $13
billion over the approved 2002 baseline estimate of $18.8 billion,
resulting from the failure of the commercial market to materialize and
other factors. The cost increase led the Secretary of Defense to
certify that the program was critical to national security and that the
revised program cost estimates were reasonable. DOD's Selected
Acquisition Report as of September 30, 2007, estimated total program
acquisition costs at $35.7 billion.
Contractor A was one of two government contractors selected to provide
two families of launch vehicles for this program, each using common
components and common infrastructure. To meet reductions in projected
life cycle costs, the program was expected to capture at least 15
percent of the commercial market. However, Contractor A proceeded to
develop launch capability based on 75 percent commercial participation-
-about 300 commercial launches compared to 100 government launches.
Further, the contractor lacked negotiated contracts with interested
private sector entities, primarily cell phone companies. During 1998
and 1999 the cell phone companies decided to use communication towers
instead of space satellite technology, and nearly all of Contractor A's
anticipated commercial business fell through, leaving Contractor A with
excess capacity associated with the operation of only one of two
production lines, excess equipment and materials, and a corresponding
shortfall in revenue to cover the related costs. Contractor A and DCAA
refer to the commercial losses included in Contractor A's cost
estimates as "unabsorbed costs" and "over average" costs rather than
identifying them specifically as losses.
In 2005, the government split the program into two efforts--expendable
launch services (ELS) involving hardware (rockets) and expendable
launch capability (ELC) involving support and maintenance. Up to this
point, the government had actual cost data and pricing estimates on the
cost to complete these efforts. Over $2.5 billion had been recorded as
acquisition cost of commercial-type items. Under the two efforts, the
contract changed from coverage under FAR Part 12--Acquisition of
Commercial Items--to FAR Part 15--Contracting by Negotiation. FAR Part
12 does not require contractors to submit cost or pricing data. FAR
Part 15 places a higher burden on contractors for documenting costs and
submitting cost or pricing data. ELS, which involved costs associated
with construction of the production facility and associated tooling and
equipment, involved firm, fixed-price contracts. ELC cost-type
contracts covered launch operations, mission assurance, mission
integration, supplier readiness, transportation, data reporting,
unabsorbed program management and hardware support, and special studies
to support launch requirements.
In September 2006, we reported[Footnote 29] that Office of the
Secretary of Defense guidance states that commercial acquisition was
not intended to allow military-unique items to be purchased
commercially. Misclassification of items as commercial can leave the
Air Force vulnerable to accepting prices that are not the best value
for the department. When an item is designated as commercial, the Air
Force should be able to determine if the price is reasonable on the
basis of prices in the commercial market. If the Air Force designates
an item as being commercial when it is not really available in the
commercial market, this limits its ability to assess the reasonableness
of the contractor's price because it might, especially in sole-source
situations, have less information on prices to make its decision.
Details of the Audit (Case 2):
The ELC proposal addressed in the May 8, 2006, DCAA audit report was a
revision to the Buy 3 launch capability proposal[Footnote 30] for which
the DCAA resident office at location 1 had rendered an adverse opinion
[Footnote 31] in its July 29, 2005, audit report. On the revised $1.1
billion proposal, the May 2006 DCAA audit report questioned about $88.6
million[Footnote 32] and found that another $123.4 million in proposed
costs was unsupported.[Footnote 33] The audit report also included a
qualification related to the Air Force's refusal to provide DCAA
auditors a copy of a technical evaluation on labor hours performed by
DCMA to support the Buy 3 launch capability contract negotiation. As
previously discussed, our investigation of Case 1 determined that
Contractor A had uncorrected estimating system deficiencies related to
labor-hour estimates, which could affect contract negotiations on
future proposals. In addition, the workpapers documented the auditors'
concerns that they were unable to evaluate the extent to which the
contractor included costs related to lost commercial business in the
ELC Buy 3 proposal because Contractor A did not provide all requested
cost information. On April 28, 2006, the auditors submitted their draft
report with an inadequate (meaning adverse) opinion for review. The
final report issued on May 8, 2006, included an "inadequate in part"
opinion.
Results of Investigation (Case 2):
Our interviews of DCAA auditors, review of DCAA workpapers, and
analysis of related documentation on meetings and briefings obtained
during our investigation substantiated concerns about (1) buying
command and contractor pressure for a favorable audit opinion and (2)
an unsupported change in the draft audit opinion that was directed by
DCAA Western Region officials. Contractor A's noncompliance with CAS
was viewed by the Space and Missile Systems Center (SMC)--the Air Force
buying command--and DCMA as an obstacle to awarding the revised Buy 3
launch capability contract. Documentation of meetings between SMC,
DCMA, and the DCAA regional audit manager (RAM) noted discussions on
how to resolve CAS issues so that the buying command would be in the
best position to negotiate the ELC contract without CAS impediments.
Air Force legal counsel had previously instructed the buying command
that it could not negotiate this ELC contract if DCAA issued an adverse
audit opinion. According to documentation by SMC and DCMA officials on
meetings held in December 2005 at the beginning of the ELC Buy 3
proposal audit, a senior buying command official stated that "CAS
waivers [were] being considered to overcome DCAA's documented, adverse
opinions on the Expendable Launch Capabilities (ELC) and the Expendable
Launch Services (ELS) proposals." However, the official also noted that
the "SMC proposed CAS waiver appears to be politically unacceptable in
Washington, DC at this time." The official asked "[Contractor A], DCAA,
DCMA, and SMC to reevaluate their respective positions to determine if
there is some material way of overcoming the CAS Waiver challenges
facing the Government and [Contractor A]." The meeting documentation
revealed that a Contractor A official had stated that he considered the
15-year duration of Lot 1 to be discretionary and a reasonable way to
conduct business. The official stated that that he did not believe that
his company had violated the CAS. The DCAA RAM agreed to revisit DCAA's
position on CAS issues and provide a "recommendation to withdraw CAS
406/411 [noncompliance issues]" by January 15, 2006 or shortly
thereafter." When we asked the former RAM what was recommended, the
former RAM explained that after observing Contractor A's "accounting
demo" (demonstration), she had concluded that there were no CAS 406 or
other CAS compliance issues. We do not consider an accounting
demonstration to represent sufficient audit evidence without
independent testing and confirmation. Further, our review of the audit
workpapers revealed that Contractor A provided bulk cost data and bulk
allocations to the auditors without necessary detail to trace costs to
program components or contracts.
DCAA's audit workpapers did not contain evidence of CAS compliance
issues. The auditors told us that they were instructed by the RAM not
to document CAS compliance issues in the workpapers. Further, other
related documentation, including DCAA briefing documents and
documentation of various meetings, showed that CAS compliance continued
to be a significant issue. For example, although CAS 406 requires
contractors to account for costs by annual periods,[Footnote 34]
Contractor A used a lot costing methodology that covered multiple
years.[Footnote 35] According to the auditors and our review of
Contractor A's lot cost accounting definition, Contractor A's cost
accounting for Lot 1 initially covered 2 years in 1997, but was
extended to cover 15 years by 2005. In addition, Contractor A's Lot 1
costs consisted of all production and launch capability costs to place
a satellite in orbit, including a combination of costs and estimates
for past and future years as well as costs for more than one contract
(i.e., launch capability and launch services), which is a noncompliance
with cost allocation guidance in CAS 418.[Footnote 36] Documentation of
meetings with the Air Force, Contractor A, and the DCAA RAM also
indicated concerns about compliance with CAS 411, which provides
guidance on accounting for material inventory costs.[Footnote 37]
During meetings with DCAA auditors, a senior Contractor A official and
an Air Force buying command official verbally confirmed that Lot 1
costs included the period of time during which Contractor A was
incurring costs to gear up for a "robust commercial market.":
According to the auditors, based on fixed costs of $600 million
annually for ELC launch support and the limited number of launches,
average launch costs had significantly increased. DCAA briefing
documents showed that to address this problem, Contractor A used lot
costing as a means of spreading costs over the 15-year period in Lot 1
and increased the estimated number of government launches to 32
launches using 42 common booster cores (rockets). One DCAA briefing
document described this gradual reduction in costs over the 15-year
period in Lot 1 as the wedge. The wedge includes unabsorbed costs, also
referred to as over average costs, related to contractor commercial
business losses. A wedge diagram showed declining costs per launch as
additional government launches were projected and the time frame for
accomplishing the launches stretched over several additional years
based on Contractor A's lot-costing methodology. For example, the wedge
diagram showed 4 launches from 1998 through 2005, with an additional 28
launches projected through 2011. Because only 4 launches were
accomplished in the first 7 years, the auditors considered the 28
estimated launches to be unrealistic. As of June 2008, only 1
additional government launch had been conducted.
The auditors completed the workpapers and prepared a draft audit report
on April 28, 2006. The audit workpapers showed that on that date, the
RAM advised the resident auditor (FAO manager) at location 1 that DCAA
"did not have an authoritative basis (such as allocability) to question
the entire wedge." However, the workpapers also showed numerous auditor
requests for cost information and meetings with contractor officials to
request and discuss cost information. At the end of the audit, the
workpapers indicated that Contractor A had not responded to several
requests for information that would have helped the auditors identify
costs related to lost commercial business. For example, Contractor A
did not provide information on the cost of excess and obsolete
materials, excess production facility capacity, and excess equipment.
The audit findings on five significant issues/qualifications and access
to records problems in the ELC Buy 3 proposal audit meet DCAA's
criteria for an adverse (inadequate) opinion,[Footnote 38] particularly
the criteria related to the lack of access to key records and related
cost documentation.
DCAA disagreed that the audit opinion was influenced by pressure from
the contractor and the buying command. DCAA also stated that there is
no evidence in the workpapers that the RAM directed the draft opinion
to be changed from "inadequate" to "inadequate in part." However,
according to the auditors, on April 28, 2006, the RAM directed the DCAA
resident auditor to change the draft audit opinion on cost and pricing
data from "inadequate" (adverse) to "inadequate in part" and add
language to the report stating, "However, we consider it a procurement
decision as to whether or not payment of these costs will further the
objective to maintain Assured Access to Space as a vital national
security interest." DCAA also stated that Contractor A did not have CAS
and FAR compliance issues related to the 2006 proposal. However, the
opinion paragraph makes reference to CAS and FAR noncompliance,
although the referenced pages of the report do not discuss any CAS
noncompliance. Further, although DCAA stated that the contractor did
not substantively use lot costing in the 2006 proposal, this is not
supported by the audit documentation or subsequent documentation on
meetings related to approval of advance agreements related to the
proposal, which were approved in November 2006. The final "inadequate
in part" audit opinion allowed the Air Force to negotiate the contract.
Following the report, on June 1, 2006, DOD approved a $967.8 million
contract for Buy 3 launch capability for the period October 1, 2005,
through September 30, 2007. The contract has since grown to over $1.2
billion.
During this audit, Contractor A was the subject of a well-publicized
investigation of industrial espionage related to contract competition
that was ongoing during the 2005 ELC Buy 3 proposal audit. Therefore,
we would have expected DCAA to have been skeptical of contractor
accounting practices and related assertions. During the investigation,
the government charged Contractor A with hiring an engineer from a
competing firm in 1996 and agreeing to provide pay raises in exchange
for proprietary documents that later favorably aided Contractor A in
contract negotiations during the development phase of the program. The
theft of proprietary documents was identified in June 1999. An
investigation ensued and the two former Contractor A managers--the
engineer and his recruiting manager--were charged with conspiring to
steal trade secrets concerning a multibillion-dollar rocket program.
According to the civil settlement agreement entered on June 30, 2006,
Contractor A did not admit liability, and agreed to settle the matter.
Under the settlement agreement, Contractor A agreed to pay the
government $565 million, withdraw any unallowable costs previously
submitted to the government, and provide cognizant contracting officers
or their designated representatives with a fiscal year schedule of all
incurred costs excluded, withdrawn, or adjusted as a result of the
settlement agreement. Costs that do not comply with CAS and FAR are
generally unallowable. The government also divided future launches
between Contractor A and the other contractor.
Case 3: Three 2004 Defective Pricing Audits of Contractor B:
We investigated allegations that the working papers for audits of three
Contractor B divisions do not support the opinions because the DCAA
branch manager and a supervisory auditor improperly made an advance
determination that defective pricing did not exist based on their
interpretation of one of the five defective pricing criteria. The
audits, which were reported in a series of three reports (one on each
of the contractor's Southern California divisions), were intended to
determine whether Contractor B's method of charging transportation
costs at three of its divisions from July 1998 through July 2003
constituted defective pricing. Contractor B is a service, engineering,
and technology development company with 57,000 employees in locations
around the world. Contractor B's three Southern California divisions
provide fuel systems, aerospace control systems, and military support
services. DCAA reported that these three divisions had about $429
million in government sales in fiscal year 2004.
Details of the Audits (Case 3):
A defective pricing audit of Contractor B was initiated in September
2003 at the request of DCMA to resolve an issue that began in 1998. On
July 13, 1998, Contractor B sent DCMA a letter stating that it would no
longer use government shipping and would pay its own transportation
costs instead. At that time, the contractor included its free-on-board
(FOB)-origin[Footnote 39] freight costs in its material overhead pool,
a practice that would inflate overhead and violate FAR if the
contractor continued it while paying its own freight costs. FAR
[Footnote 40] requires that such costs be billed as direct expenses.
Given this fact, at an August 6, 1998, meeting, DCMA requested that the
contractor provide a revised accounting disclosure statement.
Contractor B agreed to revise its disclosure statement, but through
July 2003, Contractor B's disclosure statement continued to show that
it was including FOB-origin shipping costs in the material overhead
pool, in violation of FAR. It was not until nearly 5 years after these
events that a DCMA ACO realized that the company continued to include
FOB-origin shipping costs in its material overhead pool. The ACO sent a
letter to Contractor B notifying it that it was violating FAR and CAS.
[Footnote 41] In response to the letter, Contractor B revised its
practice and agreed to bill shipping costs directly as required by FAR.
According to the workpapers, the specific objective of the audit was to
determine whether Contractor B's practice of including transportation
costs in the material-handling overhead pool for about 5 years--from
July 1998 through July 2003--constituted systemic defective pricing.
The audit focused on three Southern California divisions of Contractor
B and consequently resulted in three separate audit assignments--one
for each division. The auditor and supervisory auditor both concluded
that defective pricing existed and documented this conclusion in the
working papers. However, while the audit was still ongoing, the
resident auditor discussed in Case 1 was assigned to be branch manager
at this location. According to the auditor, the new branch manager then
assigned a new supervisory auditor.[Footnote 42] The branch manager
conferred with the new supervisory auditor and determined that
defective pricing did not exist. The supervisory auditor subsequently
issued three reports on September 28, 2004, stating that defective
pricing did not exist at each of three Southern California divisions of
Contractor B. Because DCAA determined that Contractor B's FAR and CAS
noncompliance did not constitute defective pricing, no cost impact was
assessed by DCAA, and DCAA did not audit the other 10 contractor
divisions with regard to defective pricing.
DCAA's CAM[Footnote 43] cites five criteria that must be met in order
to make a determination of defective pricing.[Footnote 44] For example,
the auditor must be able to show that the government was not aware of
the defective pricing and its significance. The auditor must also show
that the defective pricing caused an increase in government
expenditures on an actual contract. The only documentation provided in
the working papers to support the conclusion that defective pricing did
not exist was a memorandum written by the supervisory auditor on the
same day the reports were issued. The memorandum states that the five
criteria for defective pricing were not met in this case because the
government was aware of Contractor B's practice of including shipping
costs in the material overhead pool and its significance. However, the
supervisory auditor included no evidence to support this assertion, and
as explained below, our review of DCAA documentation did not find
sufficient evidence of knowledge by the government during contract
negotiations.
Results of Investigation (Case 3):
Our investigation substantiated the allegations that a DCAA branch
manager and a supervisory auditor improperly made an advance
determination that defective pricing did not exist based on their
interpretation of one of the five defective pricing criteria. We
determined that the three defective pricing reports did not comply with
GAGAS[Footnote 45] because sufficient evidence was not obtained to
support the conclusion that defective pricing did not occur. Although
the contractor's noncompliant practice was disclosed, under case law
[Footnote 46] the disclosure must be obvious to the government during
actual contract negotiations. According to our interviews with the ACO
and our review of the workpapers, the ACO was not aware of the FAR
noncompliance for 5 years, and DCAA's audits conducted up to that point
did not report the noncompliance. Therefore, in order to make a
determination of defective pricing, the auditor would have had to
review all contracts containing the FOB-origin clause and show that the
defective pricing caused an increase in the contract prices. However,
there was no evidence of such a review in the working papers.
Consequently, the working papers do not support the opinion and the
draft conclusions in the working papers were changed without adequate
documentation. However, because the branch manager and supervisory
auditor predetermined that defective pricing did not exist, they chose
not to pursue a review of contracts with an FOB-origin clause. In
addition, to document this unsupported determination, the auditor,
under the branch manager's and second supervisor's direction, changed
the draft conclusions in the working papers.
Without DCAA audit support for defective pricing, the contracting
officer instead pursued a CAS 405 noncompliance for improper recording
of FOB-origin costs in the material overhead pool. DCAA policy[Footnote
47] supports pursuing defective pricing issues under CAS when
applicable because CAS provide for greater recovery by the government.
For example, CAS allow for consistent recovery across all contracts
while defective pricing is pursued under specific individual contracts.
After considerable communication between DCMA, DCAA, and the
contractor, in July 2007, DCMA sent Contractor B a letter offering to
settle with the three Southern California divisions for $71,000, and
the contractor subsequently refunded the government that amount. DCAA
officials advised us that they will notify cognizant DCAA offices of
other contractor segments for follow-up on this issue.
In addition to our investigation of the allegations surrounding this
defective pricing audit, DCIS pursued a criminal investigation of
potential defective pricing by the same contractor. This defective
pricing issue related to the contractor negotiating a firm, fixed-price
contract with the intent to manufacture F-18 parts. Instead, another
DCAA auditor found that the contractor had purchased the parts from a
vendor at a lesser cost and did not remit the savings to the
government. When faced with legal action on this defective pricing
allegation, the contractor agreed to settle with the government. At the
time we issued this report, a settlement agreement was under
negotiation.
Case 4: 2005 Billing System Audit of Contractor C:
We investigated allegations that the working papers for this audit do
not support the opinion because a DCAA supervisory auditor (1) removed
some draft findings from the report without adequate support and (2)
evidence of deficiencies documented in the working papers was not
reported. The objective of a billing system audit is to evaluate the
contractor's adequacy of and compliance with billing system internal
controls. Those controls should provide reasonable assurance that
billings applicable to government contracts are prepared in accordance
with applicable laws, regulations, and contract terms, and that
material misstatements are prevented, or detected and corrected, in a
timely manner.[Footnote 48] Contractor C produces and supports military
display systems, global positioning systems (GPS), and satellite
communications systems. DCAA reported that for calendar year 2004,
Contractor C generated sales of over $99 million, including $92 million
from DOD contracts.
Details of the Audit (Case 4):
The first auditor on this engagement completed her working papers,
summary of audit findings and results, and draft audit report on June
23, 2005. The draft report included six significant system deficiencies
and an "inadequate" opinion on the contractor's billing system
controls. For example, the auditor identified about $3.5 million in
potential overbillings for unallowable costs. The auditor wrote an
explanatory note that these billings were for subcontract claims that
the contractor had not paid within 90 days, and that the contractor
admitted to including these charges in its billings to the government
even though the contractor had never actually paid the subcontractors
who performed the work. FAR precludes including such costs in billings
to the government.[Footnote 49] However, the auditor did not include
sufficient working paper support to show that the $3.5 million that the
contractor owed its subcontractor was over 90 days delinquent or that
it had been included in billings to the government. In addition, the
auditor identified about $246,000 in billings in excess of contract
ceilings or funding limits. Although the contractor eventually
reimbursed the government for this amount, the auditor noted that a
lack of policies and procedures in this area could constitute a
significant deficiency. Contractors are required to have policies and
procedures to detect and correct overbillings.[Footnote 50] After
submitting her workpapers for review, in July 2005, the first auditor
was transferred to a DCAA office in Europe. According to the original
acting supervisor, because he was too busy to review the working
papers, the audit was transferred to a different supervisory auditor on
July 26, 2005. Workpaper documentation showed that several days later,
the new supervisory auditor[Footnote 51] reviewed and approved the
working papers that supported four of the six significant deficiencies
identified by the auditor, including the $3.5 million and $246,000
overbillings.[Footnote 52] The new supervisory auditor then requested
that a second auditor review the first auditor's findings.
In August and September 2005, the second auditor, with review and
approval by the supervisory auditor, changed several working papers and
removed the original six significant system deficiencies from the draft
report. In the interim, on August 22, 2005, the supervisory auditor
signed off on a draft report with an "inadequate in part" opinion and
three significant deficiencies: (1) failure to monitor and adjust
indirect billing rates, (2) billing of $246,000 in excess of contract
cost ceilings, and (3) inadequate policies and procedures to ensure
that billings comply with applicable regulations and contract
provisions. Under DCAA policy, a branch manager was required to sign an
audit report with significant deficiencies. Although we could not find
any documentation of the branch manager's review of this draft report
or of a branch manager decision regarding the final audit opinion, the
draft opinion was changed. On September 15, 2005, the supervisory
auditor signed and issued the final report with all deficiencies
removed and an "adequate" opinion. We found no documented reason for
the supervisory auditor's reversal of her decision on the "inadequate
in part" opinion that she had approved earlier.
Results of Investigation (Case 4):
Our investigation substantiated the allegations. We determined that
this audit did not comply with GAGAS[Footnote 53] because the working
papers did not support an "adequate" opinion and the draft conclusions
in the working papers were changed without adequate support. Moreover,
four of the six significant deficiencies were adequately supported in
the working papers but were not reported. For example, according to the
supervisory auditor on this audit, the finding of $246,000 in
overbillings due to exceeding contract limits was dropped because it
was "insignificant" and because the contractor had identified and
repaid the amount. However, the working papers show that at least two
of the overbillings were identified by the government, not the
contractor. In addition, the original working papers and the results of
a prior audit explained that the billing personnel did not have correct
information on contract terms, including cost ceilings, indicating a
systemic internal control weakness. This was not addressed in the
revised working papers or the final audit report. For the other two of
the six findings, neither the original auditor's nor the final working
papers supported a determination of whether a finding existed. For
example, regarding the $3.5 million overbilling reported by the first
auditor, neither the first auditor nor the second auditor performed
sufficient work to determine whether the contractor adhered to FAR
requirements to only bill subcontract costs that the contractor had
paid in a timely manner. The first auditor documented this potential
finding in March 2005. Despite the magnitude of this finding, however,
no one reviewed the first auditor's support until late the following
July, although this supervisor was aware of the auditor's findings. By
the time the supervisor's review took place, the first auditor was
working in Europe. Neither the second supervisor nor the second auditor
asked the first auditor for support of her finding. Instead, the
finding was dropped without working paper support.
In its January 2007 memorandum, the DOD IG concluded that the working
papers for this audit supported, at best, an "inadequate in part"
opinion and that reliance on data and information generated by these
systems puts users and decision makers at risk. Therefore, the DOD IG
recommended that DCAA rescind this audit report, gather and evaluate
additional evidence, determine the appropriate conclusion, and reissue
the report. DCAA stood by its findings and did not rescind the report.
According to the DOD IG memorandum, the unsupported "adequate" opinion
on this report may have resulted in narrowed audit scopes for other
concurrent audits. Moreover, on the basis of the "adequate" audit
opinion on its billing system controls, DCAA authorized Contractor C to
bill the government directly--without review of its invoices prior to
payment--for the first time. Officials at the DCAA Western Region told
us that as a nonmajor contractor, Contractor C was not required to
undergo a billing system audit. We acknowledge this point. However,
because the branch office performed an audit and issued a report with
an "adequate" opinion on the contractor's billing system, it must have
adequate support for that opinion per GAGAS. In this case, the
workpapers did not support an adequate opinion. On September 16, 2005,
the day after the audit report was issued with an adequate opinion,
Contractor C was approved for direct billing. However, based on work
paper evidence of significant deficiencies, the contractor should not
have been eligible for direct-billing privileges.
In response to our investigation, the DCAA Western Region Deputy
Director stated that both auditors had used the wrong contractor report
for their test work. On May 22, 2008, DCAA rescinded the audit report
and notified the ACO that the report could no longer be relied upon for
any matters relating to the contractor. However, DCAA did not revoke
Contractor C's direct-billing privileges, stating that subsequent paid-
voucher audits did not identify billing problems. In addition, the
Deputy Director advised us that as a result of our findings on
inadequate supervisory review, the region established a policy to
require supervisory auditors to review audit sampling plans at the time
they approve the audit risk assessment.
Case 5: 2005 Estimating System Audit of Contractor C:
We investigated allegations that the working papers for this audit do
not support the opinion because a DCAA supervisory auditor removed
audit findings from the draft report. As an estimating system audit,
this audit was intended to determine whether the contractor's method of
estimating costs for contract proposals was adequate. As discussed
above, Contractor C produces and supports military display systems,
global positioning systems (GPS), and satellite communications systems.
DCAA reported that for calendar year 2004, Contractor C generated sales
of over $99 million, including $92 million from DOD contracts.
Details of the Audit (Case 5):
On August 9, 2005, the auditor tested six contract proposals from
Contractor C. He found errors on two of the six proposals related to
FAR noncompliance.[Footnote 54] For these two proposals, the auditor
documented that cost analyses were not performed before contract
negotiation, BOEs were not signed by a reviewer, and there was no
consolidated bill of materials. These were noted as three separate
significant deficiencies. The auditor also performed additional testing
on the BOEs and found that Contractor C did not provide its estimating
methodology when submitting its BOEs. Moreover, for four of the six
proposals the auditor reviewed, he documented that he was unable to
determine what methodology Contractor C used to estimate labor hours.
This was noted as a fourth significant deficiency. Finally, the auditor
documented a "lack of use of historical experience" in the estimating
process, noting that he could not find any instance in which the
contractor used historical incurred-cost records to develop estimates.
He also noted that engineers did not have access to historical cost
data when determining their estimates of engineering hours. This was
originally listed as a fifth significant deficiency. The auditor
concluded that Contractor C's estimating system had five significant
deficiencies and was "inadequate in part." The deficiencies were
reported in the following order: (1) failure to perform cost analyses
on subcontracts greater than $550,000 prior to award of the prime
contract, (2) lack of an estimating methodology; (3) lack of additional
review of estimated engineering hours, (4) lack of the use of
historical experience, and (5) failure to provide a consolidated bill
of material.
The draft report and working papers were forwarded to the supervisory
auditor (the same person as the replacement supervisor in Case 3) for
review throughout August and September 2005. Upon her initial review,
the supervisory auditor approved the "inadequate in part" opinion and
four of the five deficiencies, deleting the finding of a lack of an
estimating system methodology. Then on September 23, 2005, she
submitted the working papers to the branch manager for review. The
branch manager told us that "after taking one look at the working
papers" she felt the supervisory auditor needed to review the auditor's
support for the audit findings.
Following the branch manager's review, the supervisory auditor reviewed
the working papers again. During her final review, the supervisory
auditor revised several working papers and signed one revised working
paper herself as the preparer and reviewer, a noncompliance with GAGAS.
[Footnote 55] Regarding significant deficiencies one, three, and five,
the supervisor noted that they were suggestions for improvement rather
than significant deficiencies, and edited the auditor's summary of test
results to conclude that the findings "do not appear to be systemic
problems as they were limited occurrences in our sample." Although
audit work was based on a small judgmental sample, the supervisory
auditor did not explain why she considered deficiencies in three of six
sample items to be insignificant or why she summarily concluded that
there was no systemic problem without additional test work to determine
the extent of the deficiencies. In our judgment, to determine whether
the errors were systemic, the supervisory auditor should have
instructed the auditor to expand his testing and perform additional
work. The supervisory auditor deleted the second and fourth
deficiencies entirely. Regarding the second deficiency, the supervisory
auditor wrote a comment that the contractor told her that although the
estimating methodology details were not in the BOEs, they were
documented with the contractor's supporting documentation. However, the
supervisory auditor did not review or request that the auditor review
this additional documentation to test the contractor's assertion. This
should have been done in order to verify the contractor's statements.
The supervisor did not initially document why she deleted the fourth
deficiency. However, in a Memorandum for the Record dated May 21, 2007,
the supervisor stated that the auditor was "probably not qualified to
judge" the basis for using historical engineering hours, and that the
auditor's working papers were not sufficient to support this finding.
If the supervisor was correct about the auditor's qualifications to do
this work, she should have increased her supervisory guidance or
requested assistance from a technical expert.[Footnote 56] However, our
investigation determined that the auditor was an experienced senior
contract auditor who was subsequently detailed to DCAA location 3 to
help provide needed experience to assist that resident office with its
forward pricing proposal audits. Further, there was no evidence in the
working papers that a technical expert who would be qualified to judge
the basis for using historical engineering hours was consulted on this
audit. The supervisor's rationale for dropping the fourth finding is
not supported by factual evidence.
On September 23, 2006, the supervisory auditor held an exit conference
with Contractor C's pricing manager without the auditor's presence. A
record of the meeting shows that the supervisory auditor told the
pricing manager that the final report would include several suggestions
for improvement. On September 25, 2005, the supervisory auditor
transmitted suggestions for improvement via e-mail to the pricing
manager. After receiving the suggestions for improvement, on September
29, 2005, the pricing manager told DCAA he had to take care of a family
emergency and requested that DCAA wait for his response. However, DCAA
issued the report with the suggestions for improvement before the
pricing manager returned.
According to the auditor, his supervisor told him that the branch
manager did not agree with the first and fifth deficiencies (lack of
timely cost analysis and lack of bill of material), but that the branch
manager did agree with the fourth deficiency (failure to use historical
experience) and that the opinion would remain "inadequate in part." On
September 29, 2005, the auditor documented his disagreement with the
decision on the first and fifth deficiencies in the working papers.
On September 30, 2005, DCAA issued its estimating system audit report
with an "adequate" opinion and suggestions for improvement related to
three of the five significant deficiencies the auditor identified
originally (late cost analysis on subcontracts, lack of review of
engineering hours, and failure to consistently provide consolidated
bills of material). The auditor told us that he was surprised by the
final opinion. He told us that the fourth deficiency (failure to use
historical experience) represented, in his view, the greatest risk to
the government of all his findings. In particular, DFARS[Footnote 57]
specifies that the failure to ensure that historical data is available
to, and utilized by, cost estimators where appropriate is an indicator
of a potentially significant estimating system deficiency.
Results of Investigation (Case 5):
Our investigation substantiated the allegations. We determined that
this audit did not comply with GAGAS because the working papers did not
support the "adequate" opinion that was issued on the last day of
fiscal year 2005, and the draft conclusions in the working papers were
changed without adequate documentation. Further, some of the original
auditor's findings were not adequately supported in the working papers,
but the supervisory auditor dropped the findings or concluded that they
were insignificant without appropriate support for her position in the
working papers. In its January 2007 memorandum, the DOD IG recommended
that DCAA rescind this audit report, gather and evaluate additional
evidence, determine the appropriate conclusion, and reissue the report.
DCAA stood by its findings and did not rescind the report. In addition,
on May 21, 2007, the supervisory auditor prepared a Memorandum for the
Record documenting her conclusions on the first, fourth, and fifth
deficiencies, but not the second and third deficiencies. In this
memorandum, the supervisor included supporting documentation that was
not considered at the time the audit was performed and reviewed, and
the supervisor made several statements that contradicted her judgments
as documented during the performance and review of the audit.
DCAA Western Region officials told us that the findings related to
Contractor C not performing cost analysis on subcontracts greater than
$550,000 were justifiably dropped because subsequent analysis showed
that this requirement was met. Western Region officials also stated
that Contractor C used parametric estimating techniques to determine
the number and type of spare parts and, therefore, would not be
required to have a bill of materials. However, FAR does not preclude
use of a bill of materials when parametric estimating is used. Further,
historical experience on repairs could serve as a basis for a bill of
materials. Although the officials stated that they believe the reported
opinion is correct, they did not validate Contractor C's estimating
methodology or address Contractor C's failure to use historical
experience, which is a significant estimating deficiency. As a result,
the change to an "adequate" opinion was not supported. On June 27,
2008, a DCAA Western Region official informed us that after further
review, DCAA had rescinded this report and notified the ACO that the
report could no longer be relied upon for any matters relating to the
contractor.
Case 6: 2005 Accounting System Audit of Contractor D:
This audit was requested by a Department of Energy ACO. We investigated
allegations that the working papers for this audit do not support the
opinion because (1) sufficient work was not performed to support the
audit opinion and (2) a DCAA supervisory auditor[Footnote 58] removed
audit findings from the draft report without adequate support.
According to the allegation, the working papers support an "inadequate
in part" opinion on Contractor D's accounting system and related
controls. Contractor D is a publicly traded engineering, construction,
maintenance, and project management company. Contractor D has provided
temporary housing to victims of Hurricane Katrina and performed work in
Iraq and Afghanistan. For calendar year 2006, Contractor D reported
over $14 billion in revenue, including $2.9 billion in revenue from
government business.
Details of the Audit (Case 6):
While performing this work, the auditor (the same auditor as in Case 3)
identified costs that were misallocated among the contractor's directly
allocated corporate expense pools. The auditor reviewed $203,263 in
transactions from the contractor's population of about $11 million in
directly allocated expense pools. The auditor found that $47,955 (i.e.,
about 24 percent) of the reviewed costs were corporate-level direct
charges that were miscoded and should have been passed directly to
federal government business units, but were instead charged to the
contractor's federal services segment, which serves as an
administrative office for the federal government business units. In
this situation, the federal services segment costs would be inflated.
The auditor also noted that the federal services segment was adding on
a general and administrative (G&A) overhead expense as the direct costs
were passed through it. The inflated federal services segment costs,
combined with the added G&A expenses, would serve to inflate costs to
the government overall. The auditor identified a 100 percent error rate
for miscoding in two of the pools and high error rates in two other
pools. Even though the auditor identified no errors in certain material
cost pools, the testing performed was very limited. For example, the
information technology pool contained $2,772,630 in allocated costs,
but the auditor only reviewed $81 in costs allocated to this pool and
did not find any errors. The auditor said that she asked the
supervisory auditor to allow her to perform further transaction
testing, but her request was denied. No further testing is documented
in the working papers.
On September 4, 2005, the auditor submitted her working papers and
draft report to the supervisory auditor. The draft report concluded
that the contractor's accounting system was "inadequate in part."
Working papers indicate that the supervisory auditor initially
concurred with the auditor's opinion. However, when the supervisory
auditor discussed the findings with the branch manager at this
location, the branch manager stated that she did not understand how the
findings constituted an "inadequate in part" opinion and suggested that
the issue be referred to a different DCAA office. The supervisory
auditor subsequently agreed with the branch manager. At a September 26,
2005, meeting, the branch manager and supervisory auditor questioned
the auditor about whether the miscoded costs were material and
recommended that the issue be referred to a different DCAA office with
audit responsibility for Contractor D's federal services business
segments. The auditor disagreed with the supervisory auditor and branch
manager. In accordance with DCAA policy, the auditor documented her
disagreement in the working papers. The supervisory auditor also
documented her disagreement with the auditor.
On September 28, 2005, the supervisory auditor revised the auditor's
summary working papers to state that the contractor's accounting system
was "adequate" and to cite one suggestion for improvement. The
supervisory auditor signed these working papers as both the preparer
and reviewer. To justify the position that the miscoded costs were not
material, the supervisory auditor told us that the $47,955 in miscoded
costs was immaterial in relation to the contractor's approximately
$1.05 billion in total G&A overhead costs. The supervisory auditor also
told us that testing of transactions in the two pools containing the
majority of directly allocated costs--the real estate pool and the
information technology pool--had not found any errors. The report was
issued on September 29, 2005, with an "adequate" opinion and one
suggestion for improvement. The report included as a suggestion for
improvement that relevant Contractor D employees receive additional
training on the allocation of corporate direct costs to the benefiting
segments. The branch manager also told us that her office had referred
the miscoding errors to the DCAA office responsible for auditing
Contractor D's federal services segment.
Results of Investigation (Case 6):
Our investigation substantiated the allegations. We determined that the
audit did not comply with GAGAS[Footnote 59] because the working papers
did not contain sufficient audit evidence to support an "adequate"
opinion and the draft conclusions in the working papers were changed
without adequate supporting documentation. Our investigation found that
the supervisory auditor made an incorrect determination that the nearly
$48,000 in miscoded costs did not provide evidence of a material
weakness. In fact, it represented a significant percentage (24 percent)
of the costs that were tested. However, because additional testing was
not performed, the full extent of misallocated costs is unknown. Test
work in the real estate and information technology cost pools was also
too limited to conclude that miscoding errors did not exist in those
pools. Further, the supervisor's comparison of the misallocated direct
expenses to the G&A cost base, representing indirect costs, is not
relevant. Moreover, the working papers that summarized the final audit
findings and conclusion were prepared and reviewed by the supervisory
auditor. In order to comply with GAGAS,[Footnote 60] evidence of
supervisory review--for example, by the branch manager--should have
been documented in the working paper files.
Further, the referral of the corporate-level misallocations to the
branch office responsible for Contractor D's federal services segments
was not appropriate and did not address the underlying concerns with
the corporate accounting system. DCAA Western Region officials told us
that the other DCAA branch office had audited corporate costs during
its most recent incurred cost audits of Contractor D's federal services
segment, and provided us with the related audit reports, in which that
branch office questioned 100 percent of one of the corporate cost pools
(legal expenses). However, the branch manager at the other DCAA office
told us that his office only audited the federal services segments'
portion of the corporate costs, not the entire pools, and that his
office does not review corporate cost allocations. DCAA agreed that the
working papers do not adequately document the issues associated with
the "miscoded" costs. DCAA advised us that a separate assignment has
been established to test the contractor's internal controls related to
the proper coding of corporate costs.
Our review of the audit workpapers and interviews with the supervisory
auditor identified two qui tam[Footnote 61] cases involving allegations
that Contractor D had improperly charged government business segments
for corporate G&A overhead and various unallowed costs. Based on this
history of overcharging corporate overhead to the government, we would
have expected the auditors to assess risk as high and increase testing.
The first qui tam case, filed in December 1997, alleged that
unallocable indirect costs incurred by a Contractor D division for 1995
through 1997 were charged to government contracts in violation of
applicable FAR and CAS requirements and the False Claims Act.
Contractor D denied the allegations, but agreed to settle the case for
$8.2 million. The second qui tam case filed in March 2000 involved
similar allegations, specifically, that Contractor D knowingly
misrepresented costs of an accounting system conversion and improperly
allocated a disproportionate share of general and administrative costs,
capital facilities interest rate, executive and management bonuses,
computer network costs, and certain unallowable cost, including
lobbying, international sales, and luxury items, to government
contracts. This case was settled in October 2005 for $12.4 million.
Case 7: 2005 CAS 403 Compliance Audit of Contractor D:
We investigated allegations that the working papers for this audit do
not support the opinion because a DCAA supervisory auditor removed
audit findings from the draft report and asked another auditor to write
a "clean (adequate) opinion" report. The purpose of the audit was to
determine whether Contractor D's corporate office was in compliance
with CAS 403 requirements regarding allocation of home-office expenses
from January 1, 2004, through September 15, 2005. Contractor D is a
publicly traded engineering, construction, maintenance, and project
management company. Contractor D has provided temporary housing to
victims of Hurricane Katrina and performed work in Iraq and
Afghanistan. For calendar year 2006, Contractor D reported over $14
billion in revenue, including $2.9 billion in revenue from government
business.
Details of the Audit (Case 7):
This audit also was requested by the Department of Energy ACO. From
June 28, 2005, through approximately September 15, 2005, the same
auditor as in Case 6 performed this audit under the supervision of the
same supervisory auditor from Case 6. According to the audit working
papers, the auditor originally identified six potential instances of
noncompliance with CAS 403. On the basis of our review of the working
papers and our discussions with the auditor, we determined that two
findings were substantially the same as others and did not warrant
presentation as separate findings. The four key findings related to (1)
allocation of Group Executive--Government Services costs, (2)
misallocated corporate expenses, (3) add-on of G&A pass-through
expenses after directly allocating costs,[Footnote 62] and (4)
allocation basis for liability insurance. The auditor was assigned to
another team before she could complete the audit and transferred the
working papers to the supervisory auditor on October 3, 2005, for her
review. The supervisory auditor subsequently reviewed the working
papers and partially documented her disagreement with the auditor's
work, but no additional audit work was performed.
* The auditor documented that the contractor incorrectly used the three-
factor formula to allocate Group Executive--Government Services costs
home-office expenses. The auditor concluded that this was a
noncompliance with CAS 403,[Footnote 63] because such costs are
homogeneous costs, which are required to be allocated using a causal or
beneficial relationship instead of using a three-factor formula. The
supervisory auditor disagreed and eliminated this finding.
* The auditor believed that Contractor D was not in compliance with CAS
403[Footnote 64] because it improperly allocated corporate charges that
benefited other nongovernment business units to its federal services
segment. According to the working papers, the DCAA branch office
provided an audit lead on this issue via e-mail to a different DCAA
office with responsibility for auditing this contractor's federal
services segment costs on September 6, 2005, for follow-up. The
supervisory auditor used this referral as justification for eliminating
the finding from the final report, stating in the working papers that
it was not within the scope of the audit to pursue the potentially
misallocated expenses. This was similar to the referral of two findings
in Case 6.
* The auditor believed that corporate project costs related to certain
government business units had been inflated, in noncompliance with CAS
403.[Footnote 65] The auditor explained in her working papers that
Contractor D passed these costs through its federal services home
office, which improperly added G&A expenses. The supervisory auditor
disagreed and eliminated this finding. The supervisory auditor also
referred this finding to the other DCAA office noted in Case 6 to
determine the cost impact, if any.
* The auditor believed that the contractor's use of a total labor
dollar base to allocate General Liability and Excess/Umbrella Liability
Insurance did not comply with CAS 403,[Footnote 66] because the
allocation base should have been based on both payroll and revenue
dollars. The supervisory auditor disagreed and eliminated this finding
without documenting the reason for doing so.
In addition to providing inadequate documentation to justify the
elimination of the draft audit findings, the supervisory auditor did
not provide documentation in the workpapers to show that she discussed
her disagreement on these findings with the auditor as required by the
CAM.[Footnote 67] Instead, nearly 3 months after the auditor submitted
the working papers for review, on December 30, 2005, the supervisory
auditor asked another auditor to write a "clean opinion" report for
this audit using "boilerplate" (i.e., standardized) language. The
second auditor was the same individual as the acting supervisor in Case
4. According to the second auditor, the supervisory auditor asked him
to use boilerplate language because she sought to issue the report the
same day. The second auditor told us that he did not review the audit
working papers because he had "too much work" on the day the
supervisory auditor wanted to issue the report. The final report was
issued on December 30, 2005, and stated that the contractor complied
with CAS 403 in all material respects. The original auditor told us
that she did not learn the report had been issued until she was
contacted by a Department of Energy procurement official in February
2006. The procurement official was aware of the original preliminary
findings of noncompliance and wondered why they had been removed from
the final report.
Results of Investigation (Case 7):
Our investigation substantiated the allegations. We confirmed that
another auditor wrote the "clean" opinion report without looking at the
supporting working papers. We also determined that this report did not
comply with GAGAS[Footnote 68] because the working papers did not
support the reported adequate opinion that Contractor D was in
compliance with CAS 403, and the draft conclusions in the working
papers were changed by the supervisory auditor without adequate audit
evidence. We concluded that the supervisory auditor was correct in
eliminating the first finding related to the contractor's use of the
three-factor formula for allocating corporate expenses to the federal
services group and the fourth finding related to the allocation base
for liability insurance cost. However, despite the claims of the
supervisory auditor, we determined that referring the potential
deficiencies related to misallocated costs (findings two and three) to
a different DCAA office was not appropriate. These findings indicated
corporate-level CAS 403 noncompliances related to misallocations of
home-office expenses. The branch manager of the FAO to which these
issues were referred told us that his office does not audit corporate
costs of this contractor. Therefore, the corporate-level CAS 403
noncompliance issues were not fully audited by either office. Moreover,
by asking an auditor who was unfamiliar with the work to write a "clean
opinion" in 1 day using boilerplate language and without reviewing the
working papers or obtaining additional audit support, the supervisory
auditor deviated significantly from GAGAS requirements for performing
sufficient testing and obtaining sufficient audit evidence to express
an opinion and support conclusions.[Footnote 69] The supervisory
auditor later explained her reasons for disagreement with the original
auditor's findings more fully in a May 21, 2007, Memorandum for the
Record. The explanation in the memorandum was similar to the
explanation given by the DCAA Western Region on July 27, 2007, in its
response to the DOD IG findings. The supervisory auditor's memorandum
presented the rationale noted above for transferring corporate cost
allocation issues to another FAO that we determined does not review
corporate cost allocations, and it contained several errors and
miscalculations related to the basis for allocating liability insurance
costs.
While conducting our investigation, we learned that DCAA contradicted
its 2005 "clean opinion" of Contractor D's compliance with CAS 403 in a
report issued on September 21, 2007. This report expressed the opinion
that Contractor D was, in fact, not in compliance with CAS 403 from
January 1, 2004, through December 31, 2004, part of the time period
covered by the "clean" opinion reported in 2005. The basis for
noncompliance identified in the 2007 report was not mentioned in the
2005 audit working papers. The noncompliance related to an "uplift" in
costs for doing work in the Iraq war zone, which affected Contractor
D's labor allocation base. DCAA Western Region officials stated that at
the time the 2005 audit was being performed, Iraq work was "ballooning"
at DCAA, but DCAA often did not have much information available on
increased costs associated with this work. In addition, during 2005,
Contractor D was in the process of settling a qui tam suit related to
misallocations of costs, including CAS 403 noncompliance. The
contractor had also settled a similar qui tam suit in 2001. Until the
second qui tam suit was settled, Contractor D was under a "suspension
of administrative process" under which its incurred cost claims could
not be audited. However, the FAO did not include a cautionary note in
the audit report that other information could become available when
ongoing issues are resolved that could affect the audit opinion, and
the report did not include a discussion of a scope limitation related
to insufficient documentation on war-related costs.
In response to our corrective action briefing, DCAA agreed that the
working papers do not fully explain the supervisor's rationale for
eliminating some of the auditor's draft findings. However, DCAA
disagreed with our position that two findings should not have been
referred to the other DCAA office. DCAA also disagreed that the audit
report should have included a scope limitation for the lack of incurred
cost proposals and the ongoing qui tam investigation. However, DCAA
stated that during discussions with us and the DOD IG during the past
several months a number of questions were raised regarding the
accounting methodology at both the corporate office and the federal
services group regarding corporate cost allocations. As a result, DCAA
said it has expanded the scope of the 2008 CAS 403 compliance audit to
thoroughly address these questions.
Case 8: 2004-2006 Forward Pricing Audits of Contractor E:
We investigated allegations of problems with the audit environment at
this resident office--location 3. Specifically, we received allegations
that this resident office was issuing audit reports before work was
completed. In addition, the two forward pricing audit supervisors at
location 3 told us that inexperienced trainees were being assigned to
complex forward pricing (proposal) audits without proper supervision,
and one supervisor noted problems that resulted in losing control over
the audit workpapers. Although these audits were not part of our
original investigation, a DCAA employee came forward while we were
conducting our work and alerted us to this issue. We investigated the
complaints by interviewing the two supervisory auditors, both of whom
retired from DCAA in early 2007, who had supervised 62 forward pricing
audits at this location from fiscal year 2004 through 2006. We also
reviewed documentation relevant to the case. The forward pricing audits
in question were related to Contractor E, a publicly traded company
that designs government business and defense weapons systems. For
calendar year 2006, the contractor reported that the division under
which this California office is grouped generated about $5.28 billion
in revenue from government sales. Contractor E is one of the five
largest DOD defense contractors in terms of contract dollars.
Details of the Audit (Case 8):
During fiscal years 2004 through 2006, the DCAA resident office and its
suboffices issued 113 reports on forward pricing audits[Footnote 70]
related to Contractor E. Of the 113 forward pricing audits, 62 audits
were led by the two supervisory auditors assigned to the resident
office location. Forward pricing audits are important because they
affect how much the government pays for goods and services. They are
complex engagements, requiring the auditor to have years of contract
auditing experience and a proficient understanding of CAS, FAR
requirements for cost and price analysis, unallowable costs, and
details of the contractor's industry. For example, the auditor must
know the types of materials at risk of overcharges and how to look at
related sources of information for cost comparisons.
Newly hired trainee auditors are required to take extensive in-house
DCAA training. Within the first 2 months of being hired, trainees spend
2 weeks at DCAA's Defense Contract Audit Institute in Memphis,
Tennessee,[Footnote 71] where they receive mandatory new-hire technical
indoctrination training. This training covers topics such as ethics,
contract auditing procedures, and unallowable costs under FAR Part 31.
Six months after the indoctrination training, new hires may begin
taking other courses, such as intermediate contract auditing. In
addition, trainees take online computer managed training library
courses. DCAA's practice is to use senior auditors as advisors or
mentors to trainees and to assign trainees to work with journey-level
auditors (generally grade GS-12) who are to assist supervisors with on-
the-job training and development of new hires. On-the-job training
plays a large role in trainee development.
As a part of their initial training, new hires are also instructed on
the purpose and use of DCAA's Audit Planning and Performance System
(APPS). APPS operates as a stand-alone system at each FAO and is used
to store workpapers for ongoing audits. Workpapers are exported as
auditors need to work on them and then imported so that supervisors can
export them for review. When audits are completed, DCAA policy requires
the workpapers to be archived in the Integrated Recorded Information
Management System within 10 days.
Results of Investigation (Case 8):
Our investigation substantiated the allegations. DCAA partially agreed
with our findings, as noted in the following discussion.
* Workpaper review. The two supervisors, who approved and signed 62 of
the 113 forward pricing reports issued by this resident office during
fiscal years 2004 through 2006, admitted that they generally did not
review workpapers in final form until after reports were issued.
According to GAGAS, working papers should contain evidence of
supervisory review prior to report issuance.[Footnote 72] The DCAA
Western Region Quality Assurance Manager told us that errors had been
identified on some of these reports after they were issued. DCAA agreed
that the two supervisors did not always properly review the working
papers prior to report issuance. When the new FAO manager became aware
of this practice, she counseled one supervisor to discontinue this
practice immediately (although he retired 3 days later). The FAO
manager followed up with an e-mail to the entire staff that this
practice was not acceptable. The second supervisor has since retired.
* Assignment of trainees to complex audits without adequate expertise.
Trainee auditors were assigned to complex forward pricing audits as one
of their first assignments because management believed that information
on labor and overhead rates was available and that these audits were
straightforward. However, one former supervisory auditor pointed out
that the trainees had no institutional knowledge about the types of
materials at risk of overcharges, how to look at related sources of
information for cost comparisons, or how to complete the analysis of
complex cost data required by FAR.[Footnote 73] The two former
supervisors told us that trainee auditors assigned to them had only
worked for DCAA for a few months and that they lacked the experience
needed to perform these audits. For example, the trainees were not
capable of discerning whether (1) materials identified in proposals
were appropriate for the product being developed, (2) contractor
personnel assigned to projects had the right skills to perform the
required work, and (3) estimates submitted met relevant FAR
requirements.
DCAA did not agree that auditor trainees were assigned to complex
forward pricing audits without requisite skills. DCAA stated that
during their first year, trainees have up to 300 training hours to
apply directly to audits to ensure that they spend an adequate amount
of time on audits. Based on our investigation, the 300 hours is on-the-
job training hours that are allowed in addition to planned audit hours
on particular assignments. This does not mean that trainees always
receive on-the-job training. For example, trainees and supervisors that
we interviewed during our investigation at locations 2 and 3 told us
that DCAA classroom training is high level and does not provide
insights or expertise needed to perform all the technical aspects of
various contractor audits. To provide on-the-job guidance, location 2
had provided increased supervision for trainees by assigning them to
one supervisor with responsibility for trainees and also assigning a
senior-level auditor to work with them on their audit assignments. One
of the former supervisory auditors at location 3 told us that there is
disconnect between DCAA training and what trainee auditors are required
to do on the job. The former supervisor told us that at one point when
she was acting supervisor at the resident office, she was "tasked with
training seven new hires working on seven separate projects and this
was not possible." The other former supervisor told us "the lack of
experience of these auditors and the pressure to complete the proposal
audits in limited time was ridiculous."
DCAA also stated that trainee auditors worked on 18 of the 62
assignments, and that several of these assignments were not complex
based on audit scope and dollar amount. However, the summary-level
documentation that DCAA provided was incomplete, and we have not seen
or reviewed the underlying supporting documentation. Further, while we
recognize that some types of audits, such as forward pricing rate
agreements, pose less risk than other audits, we do not agree with DCAA
that as a general matter cost-type audits are not inherently less risky
because, unlike a fixed-price contract where the government has agreed
to pay an established amount, the government agrees to pay all
reasonable and allocable costs the contractor incurs during contract
performance.
* Lack of proper supervision and review of work. Our investigation
determined that supervisors did not always have the benefit of
experienced journey-level auditors to assist them in supervising the
trainees. As a result, supervisors were overwhelmed by their dual
responsibility for supervising numerous trainees and completing forward
pricing audits within 20 to 30 days to meet time frames for contract
negotiations. Further, supervisors did not always review audit work
performed by senior auditors that they trusted. GAGAS state that
assistants shall be properly supervised.[Footnote 74]
* Lack of understanding of the electronic workpaper system. One former
supervisor told us that newly hired auditors and administrative staff
did not have an adequate understanding of DCAA's electronic workpaper
filing systems. The former supervisor explained that APPS training on
the automated workpaper system for trainee auditors sometimes would be
delayed for 3 to 4 months in order to focus on getting the audits done.
He said this lack of understanding contributed to the resident office
losing control of audit documentation. For example, trainees would
export audit workpaper sets to document their work and forget to import
them or they would duplicate the files and then forget which version
was updated. In this environment, workpapers did not always get
imported and some were lost and had to be recreated later.
With regard to late filing of audit documentation for completed audits,
one former supervisory auditor told us that the resident office
administrative employee responsible for archiving workpaper sets for
completed audits did not always do so. The former supervisor also told
us that during 2006, this resident office worked with the Western
Region to reconcile completed audit workpaper sets to final, archived
files for fiscal years 2004 through 2006. According to the former
supervisor, there were about 20 to 30 audits going back to 2004 that
were not closed out properly. He said that there was significant
improvement during 2006, but there were still some problems. GAGAS
state that auditors should collectively possess adequate professional
competence for the tasks required and assistants shall be properly
supervised, and that audit organizations need to adequately safeguard
audit documentation associated with any engagement.[Footnote 75]
DCAA disagreed with our conclusion that trainee auditors had an
inadequate understanding of the electronic workpaper system. In
addition, DCAA Western Region officials stated that they provided us
with results of quarterly reconciliations for 2006 and 2007 that showed
no more than seven assignments per quarter had not been filed timely.
However, the period identified in the allegations covered fiscal years
2004 through 2006. Documentation provided by DCAA Western Region
officials showed that 6 of 520 total audits issued by the resident
office had not yet been archived. The officials did not discuss or
provide documentation for audits that were archived in fiscal years
2004 and 2005. However, based on the limited number of assignments that
had not been archived at the end of fiscal year 2006, we concluded that
this problem had been addressed.
* Pressure to complete audits in short time frames. Moreover, two
former supervisory auditors told us that the volume of requests for the
audits, short time frames demanded by customers for issuing reports to
support contract negotiations (e.g., 20 to 30 days), and limited
resources affected their ability to comply with GAGAS. Both former
supervisors told us that the failure to issue forward pricing audit
reports on time would have negatively affected their performance
appraisals. They told us that they retired from DCAA in 2007 because
they no longer wanted to face the risk associated with performing
forward pricing audits in this environment.
Productivity rate, or contract dollars audited per hour, is a leading
metric DCAA uses to measure the efficiency of its audits. DCAA
supervisory auditors at this location told us that pressure to meet
this metric drives down the amount of time spent auditing, compromises
audit quality, and increases the risk of financial harm to the
government. Auditors said that they felt pressure to complete forward
pricing audits because (1) contracting officers require short
turnaround, generally 30 days, to meet contract negotiation time frames
and (2) DCAA considers meeting customer requirements to be a top
priority. The supervisory auditors said that this does not provide
sufficient time for them to complete all the required audit steps.
Moreover, one supervisor told us that contracting officers would
sometimes tell auditors to issue proposal audit reports in as few as 20
days with whatever information the auditor had at that time, and the
contracting officers would then begin contract negotiations. The
contracting officers would ask the auditors not to cite a scope
limitation in the audit reports, as required by GAGAS,[Footnote 76]
because they could not use such a report in contract negotiations.
Yielding to contracting officer pressure to limit audit scope without
proper disclosure is an impairment to auditor independence. As a
result, the contracting officers could be negotiating contracts with
insufficient information to support the associated rates. The problems
at this location call into question the reliability of at least the 62
forward pricing audits reports signed by the two supervisory auditors
at this office from fiscal years 2004 through 2006, which were related
to pricing proposals totaling over $6.4 billion.
DCAA commented that its agencywide goal is to issue forward pricing
audits in an average of 30 days in order to support the procuring
community with timely audits. Further, DCAA stated that although the
supervisors may have felt pressure to issue forward pricing audits in
20 to 30 days, 5 of the 18 audits were issued in 30 or more days. DCAA
officials stated that executive management continually stresses that
management should provide auditors the appropriate time for completing
the audit in accordance with GAGAS and the goal does not mean that all
audits must be issued within 30 days.
We also learned that in preparation for a DOD IG audit quality review
at the resident office, the DCAA Western Region performed a quality
review of selected audits performed by this resident office to assess
its vulnerability and to take any needed corrective actions before the
upcoming DOD IG review.[Footnote 77] The Western Region's quality
assurance manager and the resident auditor told us that the quality
review had found "a few" errors in issued forward pricing audit
reports. Our review of the Western Region's quality assurance report
showed that the Western Region reported 28 total systemic weaknesses in
9 of 11 selected forward pricing audits performed by the resident
office in fiscal year 2006. Identified systemic deficiencies included:
* no documentation of supervisory review, or supervisory review
comments were not addressed until after report issuance;
* audit criteria not included in the audit documentation;
* no draft report in the working papers, or draft reports not
sufficiently cross-referenced to working papers; and:
* no documentation of approved extensions for audit report issuance
dates.
The issues identified in the Western Region's quality review
demonstrate noncompliance with several GAGAS standards, which state
that assistants shall be properly supervised, suitable criteria must be
available to users of the engagement, audit documentation should
support the audit conclusions, and audit documentation should contain
evidence of supervisory review before report issuance.[Footnote 78]
DCAA does not agree that the quality review identified systemic
deficiencies in forward pricing audits most of which relate to GAGAS
noncompliance and stated that our conclusion overstates the results of
the review. DCAA noted that the review disclosed that the overall
compliance rate for forward pricing audits was 93 percent based on
"yes" and "no" responses to over 1,000 questions. We disagree with
DCAA's review methodology, which formed the basis for DCAA's
conclusions. For example, because the design of questionnaires and
tabulations of "yes" and "no" responses can bias the results, we
analyzed the individual findings of systemic deficiencies that were
documented in the DCAA quality review report. Our analysis showed that
the review identified a total of 28 systemic deficiencies, including
one or more systemic deficiencies on 9 of the 11 audits reviewed. Of
the 28 systemic deficiencies, 23 related to the allegations we
investigated.
DCAA management noted that since fiscal year 2006 they have taken
several steps to address the issues noted above. For example, after a
Western Region quality assurance review found that audit reports at
this location were being issued without proper workpaper review, the
resident auditor counseled the two supervisory auditors and sent a
notice to audit personnel that this practice was not acceptable. In
addition, the Western Region began temporarily assigning more
experienced auditors from other field offices to work at this location.
Further, Western Region officials acknowledged that there was a period
of time when working papers were not being archived timely. The
officials told us that they made improvements and now have effective
controls in place.
DCAA Management Actions Intimidated Auditors, Impaired Some Audits, and
Created a Generally Abusive Environment:
During the DOD IG and GAO investigations, we documented a pattern of
frequent management actions that served to intimidate some of the
auditors and create an abusive environment at two of the three
locations covered in our investigation--locations 1 and 2. These
actions were documented in e-mail guidance from the Western Region and
FAO managers and supervisors, instructions at staff meetings, and
meetings with individuals. Our review of the documentation and
interviews with numerous current and former auditors, supervisors, and
managers concluded that they set an authoritative and abusive tone in
which several auditors told us they preferred to speak with us on a
confidential basis without their management or supervisors present. A
few auditors were hesitant to speak with us even on a confidential
basis. Examples of specific management actions include the following:
* We learned of reassignments of auditors and were told of verbal
admonishments and threats of disciplinary action against auditors who
raised questions about management guidance or who spoke with or
contacted GAO, contracting officers, or investigators within DOD
without prior management approval. As a result, at least two DCAA
auditors have filed complaints as whistleblowers with the Office of
Special Counsel.
* During one of the audits we investigated, a field office manager
threatened a senior auditor with personnel action if he did not change
a draft audit opinion to "adequate." An Air Force official, who was
aware of this situation, told us that he advised the auditor to make
the requested changes rather than risk losing his job.
* During the DOD IG investigation, management provided notices to
auditors regarding release of audit information to outside parties. For
example, we were told that management at one FAO instructed auditors
not to provide any internal documents to investigative units.
Management at this location also advised auditors in staff meetings
that they could be suspended or terminated for speaking ill of the
agency or making false accusations against a coworker or speaking ill
of a coworker. This guidance was perceived by some audit staff as
including submission of hotline referrals and discussions with
investigators.
* During our on-site interviews, management at all three locations
required documentation requested by GAO to be provided through them.
This is a normal management procedure to ensure the consistency and
accuracy of information provided to outside parties. However, at one
location, some auditors were permitted to give us information directly
while others were required to submit information through their
management. At two locations, several auditors indicated that they
wanted to provide us certain information, but they were afraid of
reprisals if their management learned they had done so.
* After our investigative interviews, supervisory auditors and the
branch manager at one location asked some of the auditors, including
trainees who were in probationary positions, to disclose to them what
they told us. Some of the probationary trainees told us that this
questioning made them feel pressured or uncomfortable.
* Excessive written documentation was required following some auditor
meetings with our auditors and investigators. Although DCAA's CAM
requires that contacts with GAO and other outside parties be documented
to keep management informed, we learned of examples where auditors had
been required to write memorandums up to 30 pages in length to document
the details of their discussions. The requirement to document
discussions with GAO discouraged some auditors from talking to us
because it affected time frames for completing their audit assignments.
For example, one auditor had to stay late on a Friday and use personal
time to meet this requirement. The auditor was subsequently told that
his shorter memorandum was sufficient.
Corrective Action Briefing and Agency Response:
On June 20, and 25, 2008, we briefed DCAA and DOD on the results of our
investigation. On July 3, 2008, DCAA provided a response to our
briefing that stated that the three FAOs whose audits we investigated
are currently operating at a satisfactory level of compliance with
GAGAS. DCAA's response also stated that it did not agree with the
"totality" of our overall conclusions. However, DCAA acknowledged that
shortcomings existed in the working paper evidence and documentation to
support the final audit conclusions in several of the assignments we
investigated. DCAA's response noted that the rationale for dropping
many of the significant deficiencies from audit reports was not
adequately supported or documented and stated that DCAA has no evidence
that the supervisor "willfully" removed findings from the audit
reports. DCAA also acknowledged that in some cases additional work
should have been performed to support the final audit opinion. In
response to our investigation, DCAA rescinded audit reports related to
Cases 4 and 5, and removed one contractor's authority to directly bill
the government without review of invoices prior to payment (Case 11).
In addition, DCAA performed new audits related to several of our cases.
New audits related to Cases 7, 9, and 12 overturned previously reported
"adequate" opinions by reporting "inadequate in part opinions," and
noting several significant deficiencies. According to DCAA officials a
new audit related to Case 13 validated the earlier unsupported
"adequate" opinion. We did not review the support for the new audits.
For Cases 3, 6, and 10, DCAA officials told us that although work paper
documentation could have been better, they believe that the reported
opinions are correct. GAGAS[Footnote 79] require that opinions rendered
for these types of attestation engagements (assessments of contractor
controls and compliance with CAS) be supported by sufficient testing
and workpaper documentation.
DCAA officials did not agree with our conclusions on Cases 1, 2, and 8.
For example, DCAA officials did not agree that the audit in Case 1 was
based on an up-front agreement. However, the workpaper documentation of
the audit entrance conference and the "letter of understanding" sent to
the contractor a few days later are clear evidence that there was an
agreement between DCAA and the contractor on scope of work at the
beginning of the audit that gave the contractor advance notice of the
BOEs that would be covered in the estimating system audit. Further, the
agreement that DCAA auditors would review BOEs at three phases, provide
corrections, and base the audit opinion on the final, corrected BOEs
served as an agreement on the basis for the audit opinion.
With regard to Case 2, documentary evidence obtained from multiple
sources, including the contractor's own definition of lot costing,
substantiated that the cost and pricing data provided in the
contractor's ELC proposal did not comply with CAS. Further,
documentation by multiple sources of meetings between SMC, the Air
Force buying command; DCMA; DCAA; and the contractor evidenced pressure
to resolve CAS compliance issues and obtain a favorable audit opinion
so that the ELC contract could be awarded. The former DCAA RAM told us
that she concluded that there were no CAS compliance issues based on a
contractor accounting demonstration. However, the former RAM did not
provide any evidence that the contractor's assertion was independently
tested and confirmed. Further, DCAA auditors told us that the DCAA RAM
instructed them not to include documentation on CAS compliance issues
in the audit workpapers and directed the resident auditor to change the
opinion in the draft report.
DCAA partially concurred with our conclusions on Case 8, involving
forward pricing issues at a third DCAA location. DCAA agreed that the
two former supervisory auditors did not always properly review the
working papers prior to report issuance. DCAA disagreed that the
forward pricing proposal audits were complex, but did not provide
sufficient documentation to support its position. DCAA also stated, but
did not provide adequate documentation to support its position, that
trainees worked on 18 of the 62 forward pricing audits. Further,
although DCAA noted that other auditors charged time to some of the
assignments the trainees worked on, DCAA did not provide evidence that
the other individuals performed a supervisory role. Finally, DCAA's
assertion that the Western Region's quality review of forward pricing
audits at location 3 found a 93 percent compliance rate and that the
systemic deficiencies did not represent noncompliance with GAGAS is
based on a flawed methodology. This methodology involved "yes" and "no"
responses to over 1,000 questions. Because questionnaire design can
bias study results, we analyzed the specific findings of systemic
deficiencies that were documented in the DCAA quality review report.
Our analysis showed that the review identified a total of 28 systemic
deficiencies, including one or more systemic deficiencies on 9 of the
11 audits reviewed. Of the 28 systemic deficiencies, 23 related to the
allegations we investigated, most of which were GAGAS noncompliance
issues.
Finally, DCAA management stated that they found no evidence to support
our conclusions that DCAA managers at locations 1 and 2 took actions
against their staff that created a generally abusive work environment.
DCAA management's response stated that we did not provide their
management with specific evidence or notify DCAA headquarters of this
problem during our investigation. Our conclusions are based on numerous
confidential interviews of numerous DCAA auditors and supervisors as
well as e-mail documentation. Several statements made during our
interviews were corroborated by other interviewees as well as e-mail
communication. We advised DCAA headquarters of our conclusions in
February 2008. Because of the fear of retaliation expressed by several
interviewees, we have not provided DCAA with names of individuals or
specific incidents. DCAA indicated that it has begun actions to assess
the existence of management abuse.
Conclusions:
In the cases we investigated, pressure from the contracting community
and buying commands for favorable opinions to support contract
negotiations impaired the independence of three audits involving two of
the five largest government contractors. In addition, DCAA management
pressure to (1) complete audit work on time in order to meet
performance metrics and (2) report favorable opinions so that work
could be reduced on future audits and contractors could be approved for
direct-billing privileges led the three DCAA FAOs to take inappropriate
short cuts--ultimately resulting in noncompliance with GAGAS and
internal DCAA CAM guidance. Although it is important for DCAA to issue
products in a timely manner, the only way for auditors to determine
whether "prices paid by the government for needed goods and services
are fair and reasonable" is by performing sufficient audit work to
determine the adequacy of contractor systems and related controls, and
contractors' compliance with laws, regulations, CAS, and contract
terms. Further, it is important that managers and supervisory auditors
at the three locations we investigated work with their audit staff to
foster a productive, professional relationship and ensure that auditors
have the appropriate training, knowledge, and experience.
We are sending copies of this report to interested congressional
committees, the Secretary of Defense, the Under Secretary of Defense
(Comptroller), the Under Secretary of Defense for Logistics and
Materiel Readiness, the Secretary of the Army, the Secretary of the
Navy, the Secretary of the Air Force, the Director DCAA, the Director
of DCMA, and the Director of the Office of Management and Budget. We
will make copies available to others upon request. In addition, this
report will be available at no charge on the GAO Web site at [hyperlink
http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations, at (202) 512-6722 or [email protected] or McCoy Williams,
Managing Director, Financial Management and Assurance, at (202) 512-
2600 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. Major contributors to this report are acknowledged
in appendix III.
Signed by:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
Signed by:
McCoy Williams:
Managing Director:
Financial Management and Assurance:
[End of section]
Appendix I: Comments from the Department of Defense:
Defense Contract Audit Agency:
Office Of The Director:
Department Of Defense:
8725 John J. Kingman Road, Suite 2135:
Fort Belvoir, VA 22060-6219"
July 11, 2008:
Mr. Gregory Kutz:
Managing Director for Forensic Audits and Special Investigations:
U.S. Government Accountability Office (GAO):
441 G. St., NW:
Washington, DC 20548:
Subject: Response to GAO Correction Action Briefing of June 20 and 25,
2008 on GAO Investigation of Hotline Allegations Regarding Certain
Defense Contract Audit Agency (DCAA) Audits (Code 195132):
Dear Mr. Kutz:
This is the Department of Defense (DoD) response to the GAO corrective
action briefing, GAO Investigations of Hotline Allegations Regarding
Certain DCAA Audits, dated June 20, 2008 (195132).
Thank you for the opportunity to respond to the subject briefings
provided by the GAO. This response is being submitted without the
opportunity for DCAA to review the draft report as the GAO has denied
DoD a copy of the report. However, we have been permitted to submit our
July 3, 2008, written comments in response to the GAO briefing of June
20, 2008, provided the response is redacted for For Official Use Only
data. As a result, enclosed is DCAA's previous response appropriately
redacted. We request DCAA comments be included as part of GAO's final
report.
As discussed with you on July 7, 2008, although we do not concur with
the totality of the GAO's overall conclusions, DCAA has taken prompt
and immediate action to correct the issues and is committed to promptly
addressing any remaining significant issues identified by the GAO. We
believe the three field audit offices at issue are currently operating
at a satisfactory level of compliance with Generally Accepted
Government Auditing Standards.
Regarding the GAO's finding that "DCAA managers took actions against
their staff that hindered their investigations and creating a generally
abusive work environment," we were provided no facts that support this
conclusion. As I discussed with you on July 7, 2008, in order to
properly address this management issue, we request that the GAO provide
the specific facts supporting this finding. Please be assured that DCAA
is committed to supporting any GAO review or investigation and is
prepared to take the necessary actions to address and resolve the
findings.
Any questions regarding this memorandum should be directed to the
undersigned at (703) 767-3200.
Sincerely,
Signed by:
April G. Stephenson:
Director:
Enclosure:
DCAA Policy and Plans' Response to GAO Corrective Action Briefing
(Project No. 195132):
Document redacted on 7/9/08 to remove FOUO data and markings. For
unredacted copy, contact DCAA, Policy and Plans Directorate.
Defense Contract Audit Agency:
Department Of Defense:
8725 John J. Kingman Road, Suite 2135:
Fort Belvoir, Va 22060-6219:
In reply, refer to: PQA 225.4 (GAO 195132):
July 3, 2008:
Mr. Gregory Kutz:
Managing Director for Forensic Audits and Special Investigations:
Government Accountability Office (GAO):
441 G. St., NW:
Washington, DC 20548:
Subject: Response to GAO Correction Action Briefing of June 20 and 25,
2008 on GAO Investigation of Hotline Allegations Regarding Certain
Defense Contract Audit Agency (DCAA) Audits (Code 195132)
Dear Mr. Kutz:
Thank you for the opportunity to respond to the subject briefings and
talking points provided by the GAO. This response is being submitted
without the opportunity for DCAA to review the draft report. DoD has
requested a copy of the draft report to ensure our comments are
responsive to the issues presented by the GAO, however, the GAO has
denied DoD a copy of the report. Please be assured that based on the
briefings provided and information shared throughout the review, DCAA
has taken prompt and immediate action to correct the issues and is
committed to promptly addressing any remaining significant issues
identified by the GAO.
We believe the three field audit offices (FAOs) at issue are currently
operating at a satisfactory level of compliance with GAGAS. For
example, in FY 2008 the DCAA Headquarters Quality Assurance Division
performed PCIE-based reviews of internal control audits at [redacted]
and [redacted] Resident Offices and found those offices to be operating
at a satisfactory level of compliance with GAGAS.
The GAO briefings relate to a two-year investigation of hotline
complaints about certain audits at three DCAA southern California field
audit offices (FAO). The subject briefings did not contain any
recommendations. Our comments and positions relating to the GAO
conclusions and findings are summarized below and detailed by GAO case
number in the enclosed memorandum, dated July 3, 2008, from the
Regional Director, Western Region.
The GAO states that it substantiated hotline complaints relating to
certain assignments that alleged (1) DCAA supervisors dropped findings
and changed audit opinions without adequate audit evidence for their
changes, (2) sufficient audit work was not performed to support audit
opinions and conclusions, and (3) inadequate supervision existed of
certain forward pricing audits. The GAO also concluded that during the
audits as well as during the GAO and DODIG investigations, DCAA
managers took actions against their staff that hindered their
investigations and created a generally abusive work environment.
We do not concur with the totality of the GAO's overall conclusions.
However, we do acknowledge that shortcomings existed in the working
paper evidence and documentation to support the final audit conclusions
in several of the reviewed assignments. We found in many of the cases
cited by the GAO, the deficiencies originally cited by the DCAA auditor
(that the GAO contends where dropped) were not supported with
sufficient evidence required by the auditing standards. We have no
evidence that the supervisor willfully removed findings from the audit
reports. We acknowledge that in some cases additional work should have
been performed to support the final audit opinion. As detailed in the
enclosed memorandum, we have taken the necessary actions to correct
these deficiencies to protect the Government's interests (e.g., perform
additional audit work to support audit opinion).
In addition to the actions noted in the enclosed response from the
Western Region, it should be noted that DCAA Headquarters has taken
subsequent actions that relates to the performance of internal control
audits. In February 2008, DCAA revised its DCAA Regulation 5600.1,
Delegation of Signature Authority for Audit Reports and Other Audit
Related Documents, to require FAO managers to sign all internal control
audit reports. Previously, FAO managers could delegate this
responsibility to supervisors. Many of the assignments reviewed by the
GAO were internal control audit reports signed by the supervisor.
We found no evidence to support the GAO's conclusions that "DCAA
managers took actions against their staff that hindered their
investigations and creating a generally abusive work environment." The
GAO has not provided any evidence to support these assertions and did
not notify DCAA Headquarters during the investigations that its review
was being "hindered." DCAA is committed to supporting any GAO review or
investigation and is prepared to take the necessary actions once
apprised by the GAO of the factual information supporting its
statements. In the interim, due to the significance of these alleged
issues, DCAA has already commenced actions to assess the existence of
an "abusive work environment." These actions will include a management
visit to the Western Region by the Director, DCAA within the next two
months.
In summary, although we don't agree with the totality of the GAO's
conclusions, we appreciate the GAO identifying certain shortcomings
with these 13 cases. We would like to point out that these 13
assignments represent a very small portion of the audit work performed
by these FAOs. For the three offices involved in this investigation,
the FAOs completed over 2800 assignments from Fiscal Years 2005 through
2007. As stated above, we believe the three field audit offices (FAOs)
are currently operating at a satisfactory level of compliance with
GAGAS.
Any questions regarding this memorandum should be directed to the
undersigned at (703) 767-3280.
Sincerely,
/s/
Kenneth J. Saccoccia:
Assistant Director:
Policy and Plans Directorate
Enclosure:
Western Region's response to GAO Corrective Action Briefing (Project
No. 195132).
[End of section]
Appendix II: Additional Investigative Case Study Results:
Table 3 provides details of the additional five case studies we
examined from location 2, a Defense Contract Audit Agency (DCAA) branch
office in Southern California. As with the five cases discussed in the
body of this report, none of these audits complied with generally
accepted government auditing standards (GAGAS). We found that reported
opinions were not supported because findings of significant
deficiencies were dropped or downgraded to suggestions for improvement
without audit evidence, or the work performed was not sufficient to
support the reported opinion. For example, on the audit of Contractor
F's billing system, which was reviewed and approved by Western Region
management, we found a lack of audit evidence to support dropping six
of eight findings of significant deficiencies. Further, although the
branch office reported an "inadequate in part opinion," it used the
audit as support for maintaining this contractor's direct-billing
privileges. The branch office justification for maintaining Contractor
F's direct-billing status was not supported given the significant
deficiencies that were identified but not reported. As a result of this
decision, the government was put at risk of paying Contractor F for
overbilled amounts with no government review of its invoices prior to
payment. On March 12, 2008, after we met with Western Region officials
on this issue, the branch office rescinded Contractor F's direct-
billing privileges.
Table 3: Additional Case Studies of DCAA Audits at Location 2:
Case: 9;
Type of audit: Compensation system (2005);
Contractor: Contractor D;
Case details:
* Three different auditors worked on this audit;
* Original auditor did not follow DCAA guidance when developing audit
plan and was reassigned after audit work began;
* Second auditor was inexperienced and noted in her working papers that
she was "floundering" and could not finish the audit by the September
30, 2005, deadline;
* Third auditor was assigned 10 calendar days before the audit was due
to be completed;
* Although audit was issued with an "adequate" opinion, insufficient
work was performed on this audit and, therefore, working papers do not
support the final opinion;
* Significant system deficiencies noted in the working papers were not
reported;
* The Department of Defense Office of Inspector General recommended
that DCAA rescind the final report for this audit, but DCAA did not do
so. Instead, DCAA initiated another audit during 2007;
* DCAA agreed with our finding that this audit did not include
sufficient testing of executive compensation. In June 2008, the branch
office issued a new audit report on Contractor D's compensation system
which identified seven significant deficiencies and an "inadequate in
part" opinion;
* DCAA stated that it is currently assessing the impact of these
deficiencies in current incurred cost audits.
Case: 10;
Type of audit: Purchasing system (2005);
Contractor: Contractor F;
Case details:
* Auditor found that the contractor was not fulfilling its Federal
Acquisition Regulation-related obligations to ensure that
subcontractors' cost claims were audited;
* This issue was not reported as a significant deficiency in the
contractor's purchasing system. The opinion on the system was
"adequate";
* The working papers did not include sufficient evidence to support the
final opinion. DCAA relied on a 2004 Defense Contract Management Agency
(DCMA) review in which the conclusions were based word for word on the
contractor's response to a questionnaire without independent testing of
controls;
* DCAA stated that the overall opinion was not based on DCMA's review.
However, DCAA stated that it will address the issue of the contractor's
procedures for ensuring subcontract audits are performed during the
next purchasing system audit, which is expected to be completed by
December 30, 2008.
Case: 11;
Type of audit: Billing system (2006);
Contractor: Contractor F;
Case details:
* The branch manager allowed the original auditor to work on this audit
after being assured that the auditors would help the contractor correct
billing system deficiencies during the performance of the audit;
* After the original auditor identified 10 significant billing system
deficiencies, the branch manager removed her from the audit and
assigned a second auditor to the audit;
* With approval by the field audit office (FAO) and region management,
the second auditor dropped 8 of the 10 significant deficiencies and
reported 1 significant deficiency and one suggestion to improve the
system. The final opinion was "inadequate in part";
* Six of the findings were dropped without adequate support, including
a finding that certain contract terms were violated and a finding that
the contractor did not audit subcontract costs;
* Despite issuing an "inadequate in part" opinion, the FAO decided to
retain the contractor's direct-billing privileges. After we brought
this to the attention of region officials, the FAO rescinded the
contractor's direct-billing status;
* DCAA did not agree with our finding that the working papers did not
contain adequate support for dropping six draft findings of significant
deficiencies.
Case: 12;
Type of audit: Labor floor check (2005);
Contractor: Contractor C;
Case details:
* Auditor performed sampling to determine whether sufficient controls
over employee time cards existed;
* Although the work was based on a limited judgmental sample, the
auditor found three errors out of 18 employee time cards tested and
concluded that controls over time cards were inadequate;
* Supervisory auditor initially agreed with the findings, but later
modified working papers to change the draft audit conclusion from
"certain labor practices require corrective actions" to "no significant
deficiencies";
* Working papers did not properly document the reason for the change in
conclusion and therefore, do not support the reported conclusion;
* Supervisory auditor later stated that the initial sampling plan was
flawed, but eliminated the deficiency finding rather than asking the
auditor to redo the work;
* On April 9, 2008, DCAA issued a new labor floor check audit for this
contractor that identified eight significant deficiencies and concluded
that corrective actions were needed in the contractor's labor
accounting system.
Case: 13;
Type of audit: Compliance, Cost Accounting Standard (CAS) 418 (2006);
Contractor: Contractor G;
Case details:
* After original auditor was transferred to another audit, a second
auditor significantly limited the scope of the audit with supervisory
approval, deleting most of the standard audit steps;
* Second auditor performed very limited testing and relied on
contractor assertions with little or no independent verification;
* Supervisory auditor approved issuance of the final audit with an
opinion that the contractor complied with CAS 418 in all material
respects;
* Insufficient work was performed on this audit and therefore the scope
of work and the working paper documentation does not support the
opinion;
* Region officials acknowledged that work was insufficient and stated
that another CAS 418 audit has been initiated; however, DCAA did not
rescind the misleading report;
* On June 25, 2008, DCAA officials told us that the new CAS 418 audit
was completed with an "adequate" opinion.
Source: GAO analysis.
[End of table]
[End of section]
Appendix III GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Gregory D. Kutz, (202) 512-6722 or [email protected] McCoy Williams, (202)
512-2600 or [email protected]:
Acknowledgments:
In addition to the contacts named above, Gayle L. Fischer, Assistant
Director; Andrew O'Connell, Assistant Director and Supervisory Special
Agent; F. Abe Dymond, Assistant General Counsel; Barbara C. Lewis,
Assistant General Counsel; Richard T. Cambosos; Jeremiah F. Cockrum; J.
Andrew Long; Andrew J. McIntosh; Ramon J. Rodriguez, Senior Special
Agent; and Daniel E. Silva made key contributions to this report.
[End of section]
Footnotes:
[1] GAO, High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-07-310] (Washington, D.C.:
January 2007).
[2] DCAA Contract Audit Manual (CAM), DCAAM 7640.1.
[3] GAO, Government Auditing Standards: 2003 Revision, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G] (Washington, D.C.: June
2003). This was the version of GAGAS in effect at the time of all the
DCAA audits that GAO investigated, except for the audit discussed in
case 1. The version of GAGAS applicable to case 1 was the August 1999
revision.
[4] Certain assignments covered in case 8 were performed as agreed-upon
procedures assignments. No opinion is issued on these types of
assignments.
[5] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.02a.
[6] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], � 6.22.
[7] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.24e.
[8] We handled our investigation of 3 related audits of one contractor
as one case.
[9] DCIS is a component of the DOD IG.
[10] CAS 403 establishes criteria for allocation of the expenses of a
home office to the segments of the organization.
[11] The two supervisors were responsible for all forward pricing
audits at the Resident Office location. The remaining 51 of the 113
audits were performed by separate suboffice locations of the Resident
Office and were signed by the supervisory auditors at those locations.
[12] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.27c.
[13] DCAA auditors and workpaper documentation use the terms deficiency
and significant deficiency interchangeably. For consistency, we use the
term significant deficiency throughout this report.
[14] CAM 5-109d.
[15] DCAA Regulation 5600.1. On December 3, 2007, the DCAA Western
Region changed its policy to require branch manager or resident auditor
signature on all internal control audit reports. DCAA adopted this
policy change agencywide on February 13, 2008.
[16] FAR 42.101 and DFARS 242.803.
[17] FAR 42.803(b); DFARS 242.803; and CAM 6-1007.
[18] CAM 6-1008.
[19] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
3.03.
[20] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.02a, 6.04a, and 6.04b.
[21] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
3.34.
[22] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.22.
[23] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
3.39 and 6.04a.
[24] Case 3 involved three related defective pricing audits at the same
contractor.
[25] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.02a, 6.04a, and 6.04b.
[26] CAM 5-1215a.
[27] FAR 15.404-1, 15.407-3, and 15.407-5, table 15-2.
[28] GAO, Government Auditing Standards, August 13, 1999, update, ��
3.17a-b.
[29] GAO, DOD Contracting: Efforts Needed to Address Air Force
Commercial Acquisition Risk, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-995] (Washington, D.C.: Sept. 29, 2006).
[30] The original Buy 3 launch capability proposal totaled nearly $2.6
billion for the 3-year period from October 1, 2005, through September
30, 2008, and the revised proposal was reduced to a little over $1.1
billion for the 2-year period from October 1, 2005, through September
30, 2007.
[31] CAM 9-212 explains the four types of audit opinions used in price
proposal audit reports, including (1) an unqualified opinion (submitted
cost or pricing data or cost information other than cost or pricing
data are considered by the auditor to be adequate, acceptable, and in
compliance with applicable FAR, DFARS, and CAS provisions); (2) a
qualified opinion (cannot be issued when there are inadequacies with
the cost or pricing data or cost information other than cost or pricing
data, noncompliance with FAR, DFARS, and CAS provisions, or other
problems not related to contractor actions or inactions), (3) an
adverse opinion (used when there is denial of access to records or data
having a significant effect on the examination, or when significant
inadequacies or significant noncompliance requiring corrective action
by the contractor prior to negotiation is noted); and (4) a disclaimer
(when the auditor does not express an opinion on the cost or pricing
data or information audited because the auditor has not performed an
audit of sufficient scope to form an overall opinion).
[32] CAM 10-304.8b defines questioned costs as those amounts on which
audit action has been completed and which are not considered acceptable
as a contract cost.
[33] CAM 10-304.8c defines unsupported costs as costs for which a
contractor does not furnish sufficient documentation to enable a
definitive conclusion.
[34] FAR 9904.406.40a states that a contractor is to use a fiscal year
as its cost accounting period except as provided in 9904.406.50(d) when
the government agrees that a contractor may use a fixed annual period
other than a fiscal year.
[35] Our review of DCAA documentation on meetings with the contractor
identified Contractor A's definition of its lot accounting methodology.
Contractor A defines lot accounting as synonymous with lot costing and
states that its use of lot costing is a method of accounting that is
applicable to products manufactured for delivery under multiple
production-type contracts over multiple years. Under lot accounting,
direct charge costs and associated indirect expense allocations are
accumulated and charged to units or contracts at the average cost
determined for the production lot. A lot consists of the total
estimated number of units (accounting quantity) of a product to be
produced in a continuing, long-term production effort for delivery
under existing and anticipated contracts. To establish the average cost
to be assigned from inventory to individual units or contracts under
lot accounting, the number of units to be produced in a lot is
established as the denominator, and the total cost estimated to
complete the units in the lot is established as the numerator.
Contractor A's definition referred specifically to the program in Case
2.
[36] FAR 9904.418.20 states the purpose of CAS 418, which is to provide
for consistent determination of direct and indirect costs and
accumulation of indirect costs and provide guidance on selection of
allocation measures between an indirect cost pool and cost objectives.
[37] FAR 9904.411 states the purpose of CAS 411, which is to provide
criteria for accounting for the acquisition costs of material and the
consistent measurement and assignment of costs to cost objectives,
including direct and indirect cost allocations (CAS 411.40).
[38] CAM 9-212 and 9-213.
[39] FOB-origin is used to describe a shipment in which the buyer of
the goods--in this case, the government--assumes risk of loss for the
goods at the point of shipment. It is contrasted with FOB-destination,
in which the buyer does not assume this risk until receipt of the
goods.
[40] FAR � 47.104-2(b).
[41] CAS 405--Expressly Unallowable Costs.
[42] This supervisory auditor subsequently managed the audits
associated with Cases 5, 6, 7, 9, and 12.
[43] CAM 14-102b.
[44] CAM 14-102a states that defective pricing occurs when a contractor
does not submit or disclose to the government cost or pricing data that
are accurate, complete, and current prior to reaching a price
agreement. Generally, the auditor establishes the existence of
defective pricing in a postaward audit by examining and analyzing the
records and data available to the contractor as of the date of prime
contract price agreement and comparing them with the submitted cost or
pricing data. Defective pricing occurs when a contractor does not
submit or disclose to the Government cost or pricing data that is
accurate, complete, and current prior to reaching a price agreement.
Generally, the auditor establishes the existence of defective pricing
in a postaward audit by examining and analyzing the records and data
available to the contractor as of the date of prime contract price
agreement and comparing them with the submitted cost or pricing data.
[45] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.02a and 6.04b.
[46] The Armed Services Board of Contract Appeals (ASBCA) has held that
disclosure to the government can be adequate if relevant cost or
pricing data are made available to a person who participates in
negotiations and if the significance of those data should be "obvious"
to that person. (ASBCA Nos. 50447, 50448, 50449, Aug. 29, 2000.)
[47] CAM 14-120.2.
[48] CAM 5-1104a-b.
[49] FAR 32.504(b).
[50] FAR 52.216-7e and FAR 42.704 (b) and (c).
[51] This supervisory auditor also managed the audits associated with
cases 9, 10, and 13.
[52] One of the other two originally documented deficiencies had been
reviewed by the original acting supervisor as part of the risk
assessment process. The other documented deficiency was not approved by
a supervisor at that time.
[53] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.02a, 6.04b, and 6.22.
[54] FAR 15.403-4(b) requires contractors to provide support for
estimates, including cost and pricing data and a certification from the
contractor that those data are accurate, complete, and current. FAR 15,
table 15-2, provides instructions for submitting pricing proposals, to
include judgmental factors, mathematical methods, and, depending on the
system, support for labor, materials, and other costs.
[55] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.24e.
[56] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.39 and 6.04a.
[57] DFARS 15.407-5-70(d)(3)(i).
[58] The supervisor for this audit was the same supervisory auditor in
Cases 5, 7, 9, and 12 and the replacement supervisor in Case 3.
[59] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.22.
[60] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.24e.
[61] The False Claims Act (31 U.S.C. �� 3729-3733) establishes civil
penalties against persons who commit certain acts, for example,
knowingly presenting a false or fraudulent claim for payment to the
United States. In addition to the Attorney General, private persons may
enforce the False Claims Act in a qui tam action and be paid a
percentage of the proceeds of such the action or settlement. 31 U.S.C.
� 3730 (b), (d).
[62] The second and third findings noted were also identified during
the accounting system audit discussed in Case 5.
[63] CAS 403-40(b)(3).
[64] CAS 403-40(a)(1).
[65] Ibid.
[66] CAS 403-40(b)(4).
[67] CAM 4-403f(2).
[68] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.22.
[69] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.02a, 6.04b, and 6.22.
[70] As defined in CAM 9-001, forward pricing audits involve the
evaluation of cost elements used in contractor estimates supporting
price proposals in connection with the award, administration,
modification, and repricing of government contracts. Although DCAA
generally uses the term audits, it performed some of these forward
pricing assignments as examination-level attestation engagements and
others as agreed-upon procedures assignments. No opinion is issued on
agreed-upon procedures work.
[71] According to DCAA headquarters officials, the Defense Contract
Audit Institute is registered with the National Association of State
Boards of Accountancy.
[72] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.24e.
[73] FAR 15.404-1, 15.407-3, and 15.407-5, table 15-2.
[74] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
3.39 and 6.04a.
[75] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
3.39, 6.04a, and 6.26.
[76] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], �
6.27c.
[77] This is not the same review as discussed in the DOD IG's January
24, 2007, memorandum of investigation.
[78] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.04a, 6.03, 6.22, and 6.24e.
[79] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ��
6.02a and 6.22.
[End of section]
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