Center for American Progress

Putting Federal Contract Auditing in the Spotlight

Putting Federal Contract Auditing in the Spotlight

Better Auditing Could Save Taxpayers Billions

Senators at today’s subcommittee hearing need to tackle certain key issues to help improve the federal contract auditing process.

Defense Contract Audit Agency recruiters talk with job fair participants during a job fair at Roosevelt University in Chicago. DCAA's oversight of contract dollars has expanded manifold since its inception 46 years ago, but its staff has shrunk. (AP/Charles Rex Arbogast)
Defense Contract Audit Agency recruiters talk with job fair participants during a job fair at Roosevelt University in Chicago. DCAA's oversight of contract dollars has expanded manifold since its inception 46 years ago, but its staff has shrunk. (AP/Charles Rex Arbogast)

The Senate Subcommittee on Contracting Oversight hearing today to improve the way federal government agencies audit the half-trillion dollars given to contractors each year is a step toward making our government more efficient and competitive, as President Barack Obama proposed to do in his State of the Union address last week. But senators need to ask the right questions to make sure the auditing process is as effective as possible and taxpayer dollars are not being wasted.

The subcommittee will hear testimony from federal agencies and watchdog groups on how the government audits the $530 billion it doles out to contractors each year. In the spotlight will be the Defense Contract Audit Agency, or DCAA, which is the primary federal authority that audits contracts including defense and most civilian ones.

The senators will consider whether DCAA should be replaced by a more powerful independent agency—perhaps a Federal Contract Audit Agency—that reports to Congress and the White House. Such a move would not be unprecedented: The U.S. Treasury and subsequently the General Accounting Office, which is now the Government Accountability Office, once audited all federal contracts.

DCAA’s oversight of contract dollars has expanded manifold since its inception 46 years ago. It has a formidable role to play with federal procurement at well more than $500 billion. Yet the number of DCAA audit staff has shrunk from a high of some 7,000 in the early 1990s to a low of 4,114 auditors today.

Despite this, the agency considers itself to be a profitable investment for taxpayers. Each dollar spent on DCAA returned $5.10 for a total of $2.7 billion, according to the agency’s own estimates in fiscal 2010.

Patrick Fitzgerald, the director of DCAA, was appointed by Secretary of Defense Robert Gates. He reports to the Defense Department comptroller. Each of the other major federal agencies are responsible for auditing their own contracts. But almost all of them pay DCAA to audit for them because of a lack of capacity. Indeed, even contracts issued by the Government Accountability Office, or GAO, which conducts oversight for Congress, are audited by DCAA staff.

DCAA has its problems, however. The agency has been investigated twice in the past three years after the GAO received anonymous complaints. The final reports found that DCAA staff could not provide evidence to support their own working conclusions on contractor billings. Providing this evidence is required under generally accepted government auditing standards, known as GAGAS. DCAA also has been attacked in subsequent congressional hearings for an obsession with “metrics” or finishing as many audits as possible in the shortest possible time.

Perhaps as a result of these issues DCAA’s return on investment is much lower today than it was in the past when it hit a high of $50 for each dollar invested. Even though contractors are less likely to be involved in fraud, waste, and abuse today, we need to make sure taxpayer money is wisely spent in tight fiscal times.

The Center for American Progress plans to track this issue closely and issue a report on this matter. From our preliminary research, here are some key issues we believe senators should take into account when questioning witnesses to help decide whether DCAA should continue its role as the primary federal contract auditor, be reformed, or be replaced with a Federal Contract Audit Agency:

  • The subcommittee’s research suggests most contracts are audited by DCAA. This makes a powerful case to create one single federal audit agency.Preliminary data released today by subcommittee staff indicates that in 2009 federal agencies conducted approximately 17,000 contract audits. On average that amounts to one audit for every $489.3 million spent through contracts. Some 76 percent of nondefense audits were performed by DCAA. Some unusual examples stand out—the Department of Health and Human Services hired DCAA to do 90 percent of their contract audits. And the State Department and Department of Justice conducted less than one audit for every billion dollars spent through contracts.
  • If nondefense agencies are deterred from using DCAA services because they have to pay DCAA for its services, it may also make sense to create an independent agency available to the entire federal government.
  • Inspectors general of federal agencies do not answer to the senior management of their agencies so they can be truly independent. Since the director of DCAA reports to, and is rated by, the comptroller of the Department of Defense, there is a perception of bias. Allowing DCAA or an FCAA to report directly to Congress may allow auditors freedom to examine contractors more critically.
  • Contractors are required to certify no major defects exist in their internal “business systems” such as accounting systems, estimating systems, purchasing systems, earned value management systems, material management and accounting systems, and property management systems. A surprising number of major contractors have not been able to provide this certification.Former DCAA Director April Stephenson proposed to automatically withhold 10 percent or more in payments to contractors who do not maintain adequate internal control systems. This has met with howls of protestsfrom contractor lobbyists who want the amount reduced to as little as 1 percent.DCAA needs to make a final decision on this matter as soon as possible to convince taxpayers it is serious about reform. The names of the companies that do not comply are not public but they should be. A name and shame campaign of the top 100 contractors with inadequate internal control systems could be a powerful incentive to give the Pentagon the ammunition to limit payouts to companies that do not comply.
  • DCAA does not have its own general counsel to provide it with independent legal advice that is free and clear of their agencies’ general counsel’s legal advice. This could be an important reform mechanism in the absence of creating a new audit agency. (It should be noted that the Pentagon Inspector General was recently provided with a general counsel for that very reason.)Providing DCAA with good legal support would allow it to subpoena contractors for billing records, something it has rarely done in the last 20 years. Without access to company documents, effective auditing is very difficult. A question that senators may want to ask DCAA is: When were the last five DCAA subpoenas for records and which contractors were subpoenaed?
  • Recent data indicates DCAA has canceled far more assignments than it issued in the last fiscal year. DCAA’s new director Patrick Fitzgerald has said he is allowing his auditors to spend more time looking at contractor books. Today the time spent on these “contractor pricing reviews” has gone from 28 days on average to 72 days.While this suggests the agency is spending more time on doing fewer audits better, senators should look for evidence to make sure this is working as intended. Contract managers have complained that so much time is being spent on pricing reviews that the information takes too long to be of practical use. How does DCAA plan to resolve this issue?

Last week President Obama noted that the federal government needed to be overhauled: “We live and do business in the information age, but the last major reorganization of the government happened in the age of black and white TV,” said the president in his State of the Union. “In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America.”

If done right the Senate’s hearing tomorrow can help achieve that goal by finding the most efficient way to audit federal contracts and save the government money.

Pratap Chatterjee is a Visiting Fellow at American Progress.

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