DCAA Audits: Allegations That Certain Audits at Three Locations  
Did Not Meet Professional Standards Were Substantiated		 
(10-SEP-08, GAO-08-993T).					 
                                                                 
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 audit reports. GAO investigators	 
interviewed over 50 individuals, reviewed working papers and	 
related documents for 14 audits issued from 2003 through 2007 by 
two DCAA 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	 
certain corrective actions.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-993T					        
    ACCNO:   A84111						        
  TITLE:     DCAA Audits: Allegations That Certain Audits at Three    
Locations Did Not Meet Professional Standards Were Substantiated 
     DATE:   09/10/2008 
  SUBJECT:   Accountability					 
	     Audit authority					 
	     Audit oversight					 
	     Audit reports					 
	     Auditing procedures				 
	     Auditing standards 				 
	     Contract negotiations				 
	     Contract oversight 				 
	     Contractor violations				 
	     Defense audits					 
	     Department of Defense contractors			 
	     Documentation					 
	     Independent contractors				 
	     Internal auditors					 
	     Internal audits					 
	     Internal controls					 
	     Investigations by federal agencies 		 
	     Noncompliance					 
	     Prices and pricing 				 
	     Standards						 

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GAO-08-993T

   

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Testimony: 

Before the Committee on Homeland Security and Governmental Affairs, 
U.S. Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Wednesday, September 10, 2008: 

DCAA Audits: 

Allegations That Certain Audits at Three Locations Did Not Meet 
Professional Standards Were Substantiated: 

Statement of Gregory D. Kutz, Managing Director: Forensic Audits and 
Special Investigations: 

GAO-08-993T: 

GAO Highlights: 

Highlights of GAO-08-993T, testimony before Committee on Homeland 
Security and Governmental Affairs, U.S. Senate. 

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 audit reports. 

GAO investigators interviewed over 50 individuals, reviewed working 
papers and related documents for 14 audits issued from 2003 through 
2007 by two DCAA 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 DCAAï¿½s findings. DCAA did not agree with 
the ï¿½totalityï¿½ of GAOï¿½s findings, but it did acknowledge shortcomings 
with some audits and agreed to take certain corrective actions. 

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 in all 13 cases. For example, 
contractor officials and the DOD contracting community improperly 
influenced the audit scope, conclusions, and opinions on three casesï¿½a 
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 ï¿½inadequate in part.ï¿½ 
* 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 ï¿½adequate.ï¿½ 

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 
ï¿½inadequate,ï¿½ to ï¿½adequate.ï¿½ 
* 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 GAOï¿½s 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 GAOï¿½s 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, 
GAOï¿½s investigation identified a pattern of frequent management actions 
at two locations that served to intimidate auditors, discourage them 
from speaking with investigators, and create 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-08-993T]. For more 
information, contact Gregory D. Kutz at (202) 512-6722 or 
[email protected]. 

[End of section] 

Mr. Chairman and Members of the Committee: 

Thank you for the opportunity to discuss our recent investigation of 
certain Defense Contract Audit Agency (DCAA) audits. DCAA plays a 
critical role in Department of Defense (DOD) contractor oversight by 
providing auditing, accounting, and financial advisory services in 
connection with the negotiation, administration, and settlement of 
contracts and subcontracts.[Footnote 1] Although DCAA provides a range 
of services to contracting officers and other DOD officials, DCAA's 
primary function is contract audit services. DCAA contract audits are 
intended to be a key control to help ensure that the "prices paid by 
the government for needed goods and services are fair and reasonable." 
DCAA also audits contractor-proposed estimates used to support contract 
negotiations and costs charged to the government. The amount of testing 
on these proposal and cost-related audits, is based on conclusions in 
DCAA audits of contractor controls in accounting, billing, estimating, 
and other key systems. In performing its work, DCAA states that it 
follows professional standards, known as generally accepted government 
auditing standards (GAGAS). [Footnote 2] 

Today, I will summarize the results of our investigation of allegations 
about certain DCAA audits at the three locations in California. 
Specifically, DCAA auditors alleged that (1) the working papers did not 
support the reported opinions; (2) DCAA supervisors dropped findings 
and changed audit opinions without adequate audit evidence for their 
changes; and (3) sufficient work was not performed to support the audit 
opinions and conclusions. 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 in 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 to determine whether they could be substantiated. Our 
investigation is discussed in detail in an investigative report we 
issued in July 2008. [Footnote 3] 

We performed an extensive, 2-year investigation in which we conducted 
over 100 interviews of over 50 individuals. In performing our 
investigation, we reviewed applicable DCAA Contract Audit Manual (CAM) 
guidance and relevant requirements in the Federal Acquisition 
Regulation (FAR), Defense FAR Supplement (DFARS), and cost accounting 
standards (CAS). We also obtained and reviewed the working papers 
related to allegations about individual audits at two locations. In 
addition, we interviewed current and former DCAA auditors, supervisors, 
and managers who worked on the audits and interviewed DOD and federal 
agency contracting officers. To investigate allegations about forward 
pricing audits at the third location, we interviewed supervisors who 
led the audits and signed the 62 related forward pricing audit reports. 
We also reviewed applicable documentation and interviewed DCAA managers 
about corrective actions taken to address identified weaknesses. In 
assessing DCAA audits, we used GAGAS as our criteria. We learned that 
the DOD Inspector General (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. 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. 

We plan to issue a separate report at the request of this Committee 
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, as appropriate, for strengthening 
the overall contract audit environment and assuring compliance with 
GAGAS. 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. 

Results of Investigation: 

We substantiated the allegations and auditor concerns made on each of 
the 13 cases we investigated, involving 14 audits at two locations 
[Footnote 4] and forward pricing audit issues at a third location. The 
13 cases 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. 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 that served to intimidate auditors and create an abusive work 
environment. 

DCAA states that its audits are performed according to professional 
standards (GAGAS). However, in substantiating the allegations, we found 
numerous failures to comply with these standards in all 13 cases we 
investigated. 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. At 
location 1, we also found undue contractor influence that impaired 
auditor independence. At location 2, two supervisors were responsible 
for the 12 audits we investigated, and 11 of these audits involved 
insufficient work to support the reported opinions. At location 3, we 
substantiated allegations about inadequate supervision of trainees, 
reports being issued without final supervisory review, and contracting 
officer pressure to issue reports before audit work was completed in 
order to meet contract negotiation time frames--a serious independence 
issue. 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. 

Tables summarizing our findings for all the audits can be found in 
appendixes I and II. The following examples illustrate problems we 
found 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. The DOD IG concluded that 
DCAA should rescind the final report for this audit, but DCAA did not 
do so. 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 5] 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 auditing 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 
during fiscal years 2004 through 2006,[Footnote 6] 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 7] 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 Western 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 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 field audit 
office (FAO) performance plans. 

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 and DCAA officials on the 
results of our investigation on June 20 and 25, 2008. We summarized 
DCAA's comments on our corrective action briefing in our investigative 
report, and we included relevant details of DCAA's comments at the end 
of our case discussions. 

DCAA Response to Investigation: 

In response to our investigation, DCAA rescinded two audit reports and 
removed a contractor's direct billing authorization related to a third 
audit. DCAA also performed subsequent audits related to three 
additional cases that resulted in audit opinions that contradicted 
previously reported adequate ("clean") opinions and included numerous 
significant deficiencies. For other cases, DCAA officials told us that 
although workpaper documentation could have been better, on the basis 
of other audits DCAA performed, they do not believe the reported 
opinions were incorrect or misleading. 

Concluding Remarks: 

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 
their compliance with laws, regulations, cost accounting standards, 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 assure that 
auditors have the appropriate training, knowledge, and experience. 

Mr. Chairman and Members of the Committee, this concludes my statement. 
I would be pleased to answer any questions that you or other members of 
the committee may have at this time. 

Contacts and Staff Acknowledgments: 

For further information about this testimony, please contact me at 202- 
512-6722 or [email protected]. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this statement. Major contributors to this testimony include 
Gayle L. Fischer, Assistant Director; Andrew O'Connell, Assistant 
Director and Supervisory Special Agent; F. Abe Dymond, Assistant 
General Counsel; Richard T. Cambosos; Jeremiah F. Cockrum; Andrew J. 
McIntosh; and Ramon J. Rodriguez, Senior Special Agent. 

[End of section] 

Appendix I: 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: On the basis of 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 
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 the 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 field audit office (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: X; 
Draft audit opinions changed without sufficient documentation: [Empty]; 
Auditor did not perform sufficient work to support conclusions: X; 
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] 

[End of section] 

Appendix II: Summary of GAO Findings on Hotline Investigations of 
Selected Audits: 

[End of section] 

Case: 1; 
Type of audit: Estimating system survey follow-on (2002); 
Contractor: Contractor A; Location: DCAA; 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 
basis of estimates (BOE) related to labor hours; 
* In the face of pressure from DOD's contracting community to approve 
Contractor A's estimating system, we found evidence there was an up-
front agreement between DCAA and Contractor A to limit the scope of 
work and basis of 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 stages of the 
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; 
Location: DCAA; 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 cost 
accounting standard (CAS) compliance issues and obtain a favorable 
audit opinion; 
* Contractor A did not provide all cost information requested for 
audit; 
* Contrary to DCAA Contract Audit Manual 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 $937 million contract, which has grown 
to $1.2 billion. 

Case: 3; 
Type of audit: Three defective pricing audits (2005); 
Contractor: Contractor B; 
Location: DCAA; Location 2[A]; 
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 3 contractor divisions and 
recovered $71,000; 
* On July 17, 2008, Contractor B settled on a Defense Criminal 
Investigative Service defective pricing case for $620,900. 

Case: 4; 
Type of audit: Billing system; (2005); 
Contractor: Contractor C; 
Location: DCAA; 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 reported 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 
was completed; 
* New auditor and supervisory auditor worked together to modify working 
papers and alter 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 field audit office (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; 
Location: DCAA; 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; 
Location: DCAA; 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, without proper supervision; 
* 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; 
Location: DCAA; 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 non-compliances 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 
Contractor D was in fact not in compliance with CAS 403 during the 
period of this audit. 

Case: 8; 
Type of audit: Forward pricing audits (2004 through 2006); 
Contractor: Contractor E; 
Location: DCAA; Location 3[C]; 
Case details: 
* Two location 3 supervisors issued 62 forward pricing audits related 
to Contractor E between 2004 and 2006; 
* Supervisors responsible for the 62 forward pricing audits admitted to 
us that they did not 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 without proper supervision. 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. 

Case: 9; 
Type of audit: Compensation system (2005); 
Contractor: Contractor D; 
Location: DCAA; Location 2; 
Case details: 
* Three different auditors worked on this audit; 
* Original auditor did not follow DCAA guidance when developing the 
audit plan and was reassigned after audit work began; 
* Second auditor lacked experience with compensation system audits 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 DOD 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 on current incurred cost audits. 

Case: 10; 
Type of audit: Purchasing system (2005); 
Contractor: Contractor F; 
Location: DCAA; Location 2; 
Case details: 
* Auditor found that the contractor was not fulfilling its FAR-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; 
Location: DCAA; Location 2; 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 
any 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 FAO and region management, the second auditor 
dropped 8 of the 10 significant deficiencies and reported 1 significant 
deficiency and 1 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 in March 2008; 
* 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; 
Location: DCAA; Location 2; 
Case details: 
* Auditor performed sampling to determine whether sufficient controls 
over employee timecards existed; 
* Although the work was based on a limited judgmental sample, the 
auditor found 3 errors out of 18 employee timecards tested and 
concluded that controls over timecards 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 final audit 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 audit report which identified 8 
significant deficiencies and concluded that corrective actions were 
needed on the contractor's labor accounting system. 

Case: 13; 
Type of audit: Compliance, CAS 418 (2006); 
Contractor: Contractor G; 
Location: DCAA; Location 2; 
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 was 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. 

[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] 

[End of section] 

Footnotes: 

[1] DCAA also performs audit services for other federal agencies on a 
fee-for-service basis. 

[2] 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. 

[3] GAO, DCAA Audits: Allegations That Certain Audits at Three 
Locations Did Not Meet Professional Standards Were Substantiated, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-857] (Washington: 
D.C.: July 22, 2008). 

[4] We handled our investigation of three related audits of one 
contractor as one case. 

[5] CAS 403 establishes criteria for allocation of the expenses of a 
home office to the segments of the organization. 

[6] 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. 

[7] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-673G], ï¿½ 
6.27c. 

[End of section] 

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