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Contractors complain audit agency has gotten too strict

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By Marjorie Censer
Monday, January 31, 2011

The defense industry is facing a changed -- and some say more tense -- relationship with the Defense Contract Audit Agency since the organization, under criticism from the Government Accountability Office, took steps to be more independent.

"While DCAA got criticized for being too lax, now they've gone to the other extreme," said James J. Gallagher, a partner at McKenna Long & Aldridge.

The DCAA conducts audits meant to ensure the government gets a reasonable price for contracted services and supplies and that contractors are using the right methods, including accepted accounting and billing systems, to charge the government.

In fall 2009, the GAO released a report blasting the DCAA's independence as compromised and concluding that the agency was failing to protect the public interest.

"They were trying to accommodate their customer, which is the DOD contracting community," said Asif Khan, the GAO's director for financial management and assurance, who noted that the agency of about 3,600 people was producing about 40,000 annual audits. "When they got pushback from the contractor . . . they let those findings drop."

For instance, in one 2004 audit of a large Pentagon contractor, the DCAA found eight problems in the contractor's accounting system. But the contractor objected, arguing the auditors didn't understand the procedures, and the DCAA dropped the issue and labeled the system adequate. Later, the GAO wrote, the contractor's work led to plumbing failures and electrical fires in an Iraq building.

In late 2009, the DCAA replaced its director with Patrick J. Fitzgerald, who formerly led the Army Audit Agency. Now, contracting attorneys say the DCAA has moved too aggressively.

"What contractors have seen is a reaction -- and arguably an overreaction -- to that criticism," said Richard P. Rector, chairman of DLA Piper's government contracts practice. "There's an increased level of friction in that [DCAA-contractor] relationship that's not really productive for either side."

Fitzgerald said the DCAA has changed its policies and infrastructure, including adding 500 employees over the last two years and conducting fewer audits each year.

As part of the changes, the agency is doing more testing of contractor financial systems, meaning contractors are getting an increased number of requests to provide information.

"We are changing some things, and -- I'll be very upfront -- we are doing more testing, which causes us additional work, but it could result in a contractor having to answer more questions as we dig deeper and do a more comprehensive review," Fitzgerald said. "We're willing to be very transparent on what we're doing and why."

He added that the DCAA issued a "rules of engagement" policy intended to clarify appropriate ways for auditors to communicate with contractors and contracting officers.

"We are not trying to distance ourselves from the defense contractors," Fitzgerald said.

But attorneys said a strained relationship with the DCAA has meant negotiations take longer and contractors no longer feel able to speak candidly with the agency about possible solutions to their problems.

"In the short term, DCAA's doing what they feel like they need to do," Rector said. "In the long term, I think this might be a situation where we look back and say, 'Well, maybe we went a little far.' "

But Khan and Gayle Fischer, the GAO's assistant director for financial management and assurance, said it's unsurprising to see an adjustment period for contractors as the DCAA changes its methods.

Contractors "weren't used to DCAA doing a lot of testing, they weren't asked for a lot of supporting documentation, and now all of a sudden they're being asked to provide that," Fischer said. "It's a new experience."


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