Contractors wary as DCAA seeks more internal documents

September 9, 2012

The Defense Contract Audit Agency has issued new guidance meant to help its auditors access contractors’ internal documents, a move that industry advocates say could worsen an already tense relationship.

The agency, which conducts audits to make sure contractors use the right methods to charge the government, has beefed up its staff and increased its tests of companies’ systems in recent years. Industry advocates have complained that the agency has become too strict.

The new guidance, issued Aug. 14, responds to a Government Accountability Office recommendation that the audit agency better ensure it has needed access to contractors’ internal audits.

In a report released late last year, the GAO found that the DCAA’s ability to see and use companies’ internal audit information was generally limited. The GAO found that the sample of companies it reviewed generally worked on a case-by-case basis and required that the internal information directly relate to a specific DCAA audit.

“When companies determined that such a request is not relevant, the companies have denied DCAA’s requests,” the GAO wrote, criticizing the agency for not “making full use of internal audits” to meet its oversight goals.

These internal audits, the accountability office wrote, help government auditors plan the scope of their work while also pointing to areas where companies have already made fixes.

In the new memo, the audit agency called on its field offices to set up a process to monitor and obtain internal audits and working papers, when needed. If contractors deny access, the agency says the office manager will act to get copies, even by subpoena if necessary.

Thomas A. Lemmer, a partner at McKenna Long & Aldridge who specializes in government contracting, said contractors will bristle at sharing more internal papers.

“They view it as private, core information that they need to do internally to make sure that their house is in order,” Lemmer said. “There’s going to be more fights over what DCAA’s entitled to.”

Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry association, said the audit agency’s focus on working papers — or the documents being used to put together a report — will be particularly controversial.

“Going down that path seems far more intrusive than possibly necessary,” Chvotkin said. Pursuing internal reports puts “additional pressure or tension into a relationship that, in order to be successful, there’s got to be elements of trust in there.”

In a statement, the audit agency disagreed, saying the new guidance will lead to a better working relationship.

“[U]se of these internal audit reports enables DCAA to better analyze risk and conduct audits more efficiently, which benefits both the contractor and the government,” the statement said. “DCAA is only requesting internal audits that are clearly pertinent to their audit objectives.”

Vincent J. Napoleon, counsel at Nixon Peabody, said contractors want auditors to be accurate but fear the DCAA having unchecked access to their paperwork.

What’s needed, he said, “is more openness between both DCAA and the contractor. Part of that is ... educating the DCAA audit force as they go out and begin to seek certain information.”

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