May 29, 2012

DoD’s contract audit agency hobbled by backlog


Billions of dollars in defense contract costs could go unaudited because of a mounting backlog at the Pentagon’s audit agency.

The number of audits performed by the Defense Contract Audit Agency, which ensures that costs charged to the government by contractors are allowable and reasonable, has plummeted in recent years. Last year, the agency performed roughly a quarter the number of audits it did in 2008.

DCAA officials attribute the slowdown to their focus on quality and thoroughness in their audits.

DCAA already has a backlog of $560 billion in unaudited contracts that agencies have already paid, called incurred cost audits.

The longer DCAA lingers on audits, the more difficult it becomes to track information and people, which could result in billions of dollars that cannot be disputed, Richard Loeb, a former federal procurement official.

“It is almost incomprehensible how DCAA could just stop performing so many audits, especially as contracting actions and dollars awarded have not decreased in any material way,” Loeb, now an adjunct professor of government contract law at the University of Baltimore law school, said in a recent legal industry newsletter about government contract costs and pricing.

Also, agencies have six years after a contractor submits its final invoice or cost rates to conduct an audit and assert a claim if it overpaid, said Joe Newman, spokesman for the Project On Government Oversight.

“If DCAA audits occur more than six years after a cost has been incurred and paid, the government may lack a basis for disallowing the cost even if it should not have been paid,” Newman said in an email.

DCAA disputes this definition of the six-year limitation. In some cases, the exact nature of the charges cannot be determined until DCAA examines the underlying records, spokeswoman Lt. Col. Elizabeth Robbins said in an e-mail.

In either case, few audits in the current backlog are at risk of running up against the six-year limitation, she said. An exact number could not be immediately determined, she said.

DCAA is prioritizing the oldest audits to reduce the chances of exceeding the limitation, she said.

DCAA has hired hundreds of auditors and staff in the last few years and plans to hire hundreds more. The agency is also sharing some of its contract review responsibilities with the Defense Contract Management Agency, which typically watches to make sure companies stay within the terms and conditions of the contract.

While DCAA is issuing fewer audit reports than in the past, the agency is questioning more costs and producing greater net savings, Robbins said.

For example, in 2003, DCAA issued 29,780 audits and auditors questioned $8 billion in costs that the contractor charged the government and realized a net savings of $2 billion, she said.

In 2011, the 7,390 audit reports issued called to question nearly $12 billion and resulted in a net savings of $3.5 billion.

“Clearly, 2011 was more effective for the taxpayer,” Robbins said.

Loeb said he doubts that more auditors will fix the problem. DCAA’s audit numbers decreased between 2008 and 2011 despite the addition of 577 employees during that time, he said.

Also, DCAA’s focus has been mostly on pre-award proposals, not costs charged to the government after award.

Of the nearly $12 billion that auditors questioned in audits, $9.6 billion was on forward pricing audits, which evaluates a contractor’s cost estimates before award. Incurred cost audits turned up $440 million in questioned costs.

Self-identified DCAA employees who commented on a POGO blog post Thursday about Loeb’s article also showed concern that the agency’s push for more thorough audits leaves the government at risk of overpayments.

“We do nothing but document files to an insane level,” one commenter named “DCAA Auditor” wrote. “Managers have work piling up on their desks as they agonize over approving a risk assessment.”

“The risk of overpayments has sky-rocketed because the traffic cop is not auditing the costs,” said another commenter named “Ed.”