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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 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.
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 cases—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,
GAO’s 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
kutzg@gao.gov.
[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 kutzg@gao.gov. 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], §
6.27c.
[End of section]
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