Defense Contract Audit Agency
|Formed||January 8, 1965|
Fort Belvoir, Virginia
|Employees||4,695 (FY 2015 budget)|
|Annual budget||$556 million (FY 2015)|
|Parent department||Department of Defense|
|Parent agency||Under Secretary of Defense (Comptroller)|
The Defense Contract Audit Agency (DCAA), is an agency of the United States Department of Defense under the direction of the Under Secretary of Defense (Comptroller). It was established in 1965 to perform all contract audits for the Department of Defense. Previously, the various branches of military service were responsible for their own contract audits.
The DCAA's duties include financial and accounting advisory services for the Department of Defense in connection with negotiation, administration and settlement of contracts and subcontracts. To a lesser extent, it also performs audits for other federal agencies.
- 1 DCAA today
- 2 Defense contract audits
- 3 History
- 4 References
- 5 Further reading
- 6 External links
As of September 30, 2013, the Defense Contract Audit Agency had 4,933 employees, located at more than 300 offices throughout the United States, Europe, Asia, and in the Pacific. This workforce consisted of 4,334 auditors and 599 support staff.
The Agency provides standardized contract audit services for the Department of Defense, as well as accounting and financial advisory services regarding contracts and subcontracts to all DoD components responsible for procurement and contract administration. These services are provided in connection with negotiation, administration, and settlement of contracts and subcontracts. DCAA does not provide consulting and advisory services to contractors due to independence requirements.
DCAA also provides contract audit services to other government agencies, as well as other countries under the Foreign Military Sales (FMS) program, on a reimbursable basis. The largest non-DoD agency for which DCAA performs audits is NASA—primarily since the same government contractors do substantial business with both DoD and NASA, especially on major programs.
The DCAA headquarters is located at Fort Belvoir, in the same building as the Defense Logistics Agency. Under headquarters, the agency is organized into five geographic regions and a Field Detachment group, the latter handling contracts involving classified information. As of 2011, the DCAA was organized into the following geographic regions.
- Western region, with a headquarters office at La Mirada, California (Los Angeles area), comprises California, Alaska, Arizona, Hawaii, Idaho, Montana, Oregon, Washington state, the Asian Pacific Rim countries and Australia.
- Central region, with headquarters in Irving, Texas, includes Texas, New Mexico, Utah, Colorado, Wyoming, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, northern Louisiana, Arkansas, Missouri, Iowa, Wisconsin, Illinois, and the Upper Peninsula of Michigan.
- Eastern region, with headquarters in Smyrna, Georgia, covers Georgia, Mississippi, Alabama, Tennessee, Florida, North Caorolina, South Carolina, southern Virginia, Indiana, Ohio, and the Lower Peninsula of Michigan, as well as audits in Central and South American countries.
- Mid-Atlantic region, headquartered at Philadelphia, comprises Pennsylvania, northern Virginia, Maryland, Delaware, the District of Columbia, West Virginia, southern New Jersey.
- Northeastern region, with a headquarters office in Lowell, Massachusetts includes Massachusetts, northern New Jersey, New York, Connecticut, Rhode Island, Maine, Vermont and New Hampshire. Its responsibilities include audits in Europe, Asia (excluding the Pacific Rim) and Africa.
Within each region are 15 to 22 field audit offices. These are referred to as resident offices when dedicated to the audit of one contractor, generally located on the contractor's property. Branches are field audit offices that perform audits of multiple contractors, and may have subordinate sub-offices responsible for audits of a single contractor.
The DCAA also operates the Defense Contract Audit Institute (DCAI), located in Smyrna, Georgia with the Agency's Eastern Region office. Its teaching staff maintain a library of self-study courses as well as providing seminars by live instructors to meet the training requirements of DCAA employees. On a limited basis, the institute also provides training for other government agencies and foreign military employees.
Defense contract audits
Defense contract audits are performed in accordance with Government Auditing Standards. These standards, commonly referred to as the "Yellow Book", are published by the Comptroller General of the United States. Polices and guidelines more specific to defense contract auditing are detailed in the Defense Contract Audit Manual, a continuously updated online publication of the DCAA.
The objective of a contract audit is to express an opinion, in the form of an auditor's report, on a contractor's cost estimates or cost claims, depending on the type of contract. This involves evaluation of the contractor's policies, procedures and other internal controls over contract costs, and examining samples of supporting records for individual transactions. Government Auditing Standards require the contract auditor to maintain strict independence during audits, avoiding relationships and situations that would look questionable to third parties.
Federal Acquisition Regulations (FAR) assign responsibility to the contractor for maintaining sufficient records to support claimed costs. FAR 31.201-2(d) requires the contractor to keep "records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocatable to the contract, and comply with applicable cost principles". The same FAR provision allows a government agency's contracting officer to "disallow all or part of a claimed cost that is inadequately supported."
A major area of emphasis in a DCAA audit is determining the adequacy and reliability of the contractor's records to prove the accuracy and reasonableness of contract costs. FAR 4.703(a) requires contractors to "make available records, which includes books, documents, accounting procedures and practices, and other data ... to satisfy contract negotiation, administration, and audit requirements".
The Defense Contract Audit Agency was established on January 8, 1965. Previously, the various branches of the military were responsible for their own contract audits and there was little consistency in contract administration and auditing.
The first efforts to perform joint audits began with the U.S. Navy and Army Air Corps in 1939. Audit coordination committees were formed by the Navy and Army Air Corps in December 1942 for contracts involving more than one service branch. A single contract audit manual was issued on June 18, 1952, serving the three military service branches existing at that time. However, writing standard guidelines was difficult, due to differences in the organization and practice of procurement between the services.
Defense contract audits became the responsibility of a single agency, the DCAA, in response to a feasibility study directed by Secretary of Defense Robert S. McNamara in 1962. William B. Petty, former Deputy Comptroller of the U.S. Air Force, was appointed in 1965 as the new agency's director and Edward T. Cook, former Director of Contract Audit for the Navy, was selected as the deputy director.
In the 1990s, DCAA supported a nine-agency Federal Task Force investigation, led by NASA's Office of Inspector General, into an elaborate multi-million dollar embezzlement and money laundering scheme perpetrated by Ralph Montijo, owner of Omniplan Corporation. Omniplan was a NASA prime contractor and subcontractor under Rockwell Space Operations Company. This investigation led to the largest-count indictment and conviction in NASA's history. Ralph Montijo was indicted on 285 counts and convicted of 179 felonies. Five of his companies were also convicted of felonies; they were: Omniplan, Papa Primo's of Texas, Papa Primo's of Arizona, Omnipoint Production Services, and Mercury Trust. These five companies, together with two unincorporated companies, Space Industries Leasing and Space Industries Properties, were ordered liquidated. Each embezzlement count was associated with a corresponding money laundering count which resulted in dozens of convictions for money laundering. In a New York Times story NASA's Office of Inspector General Senior Special Agent Joseph Gutheinz, who led the Omniplan task force investigation, was quoted as saying: "We didn't get any pizzas, but we got the bills", referring to the fact that some of the alleged mischarging to the NASA contract also involved costs associated with two of Ralph Montijo's pizza companies: Papa Primo's of Texas, and Papa Primo's of Arizona. According to Agent Gutheinz, it was the space agency's "most significant" case.
Allegations of intimidation, retaliation, lax oversight, and poor performance
A report released by the Government Accountability Office (GAO) on July 23, 2008 alleged that DCAA managers threatened a senior auditor with personnel action if he did not remove negative findings from a report criticizing a large federal contractor. The report found a too-cozy relationship between management at the DCAA and some of the contractors they are assigned to audit, including Boeing. GAO also said auditors who complied with the investigation were subject to harassment and intimidation from their supervisors.
The DCAA responded on July 25 that it had asked the US Department of Defense's (DoD) Inspector General (IG) office to investigate the GAO's claims. "We take the GAO report very seriously," said April Stephenson, DCAA's director. US Senator Claire McCaskill said GAO may have uncovered the "biggest auditing scandal in the history of this town," and asked the DoD to immediately fire the supervisors cited in the report.
An Associated Press report on November 10, 2008 revealed that DCAA challenged $4.6 billion, or only 1.2 percent, of the contracts it audited as lacking necessary documentation. The agency has not used its subpoena authority in over 20 years to produce the required paperwork from defense contractors under audit. According to the Associated Press, in contrast to the GAO, which saves taxpayers $94 for every dollar it spends, DCAA's return on investment is only $7. As an example, the Associated Press reported that a May 2008 audit of Bechtel Group, supervised by DCAA regional director Christopher Andrezze, showed a "chronic failure" by Bechtel to produce the required documentation for the audit. In spite of this, DCAA issued a report rating Bechtel's internal accounting procedures as "adequate," a passing grade which meant DoD auditors could ease up on the company. The DCAA report did not mention the company's failure to produce the required documentation.
A Government Accountability Office (GAO) report in September 2009 found that agency auditors failed to follow "basic auditing standards" in 65 of 69 audits. In its report, the GAO noted that the agency lacks sufficient independence from the contractors and the DoD agencies doing business with those contractors. The GAO concluded that pressure from outside groups creates a hostile work environment in which audit reports are falsified to appease contractors. In response to the GAO report, Senator Joe Lieberman said, “Perhaps it’s time for us to consider separating DCAA from the Department of Defense and … making it an independent auditing agency.”
The DoD IG released a report of its investigation into the agency on August 31, 2009. It found that the DCAA has an "environment not conducive to performing quality audits." An audit of Boeing was cited in which the company was allowed to keep $217 million in taxpayer's money, because a DCAA regional auditor did not perform his/her duties properly. When Boeing was unresponsive to a request for information, the regional auditor ordered a subordinate to change the audit report in Boeing's favor. Said Senator Tom Coburn about the agency in response to the report, "It’s atrocious. Several of those people ought to be fired." Added Senator Claire McCaskill, "This report is just further confirmation that DCAA is fundamentally broken. I certainly hope the Department of Defense takes these accusations seriously. As I said before, if somebody is not held accountable for the shoddy audits the DCAA has produced, nobody should take this agency or their work seriously in the future." DCAA director Stephenson stated in the IG report that her agency concurred with the IG's recommendations.
In the wake of the investigations, Stephenson was removed from her position as director of the agency by DoD comptroller Robert Hale and reassigned to Hale's staff effective November 9, 2009. She was replaced by Patrick Fitzgerald, previously the Auditor General of the United States Army Audit Agency.
Kellog Brown & Root Services Inc. (KBR) filed a $12.5 million suit, on 17 September 2014, against the U.S. Government (acting through DCAA, its agent) in Federal Court (the U.S. District Court for the District of Delaware). The lawsuit seeks to recover legal fees incurred by KBR in defending against what were ultimately determined to be "defective" DCAA audits.
On 18 September 2014 top DCAA management was accused of “whitewashing” an audit of the National Ecological Observatory Network (NEON), a $500 million National Science Foundation (NSF) climate change research project. An initial DCAA audit concluded that NEON and the NSF had conspired to use taxpayer funds to pay for extravagant Christmas parties, alcohol, lobbying, and foreign travel under the guise of a sham “management fee”. The audit found that the NSF and NEON had created the “management fee” for the explicit purpose of evading Federal regulations that prohibit the use of Federal funds for such expenses; an allegation supported by a 2008 letter from NEON to the NSF requesting funds specifically to spend on “unallowable” expenses. The initial audit was approved by two levels of DCAA management, but was overruled by DCAA’s top management, which approved the use of funds – claiming that the designation of the expenditures as “management fees” prevented it from disallowing the expenses. A whistle-blower at DCAA brought both the initial audit findings and allegations of a cover up by DCAA management to Senators Charles Grassley (R-IA) and Rand Paul (R-KY), who are jointly investigating the matter. Government sources later identified the whistleblower as J. Kirk McGill a senior auditor of the agency's Denver branch office.
Recent audits by Inspector General
On 21 August 2014 the Office of the Inspector General of the Department of Defense (DoD IG) released a peer review audit evaluation of DCAA’s quality control system. The review found that in 11 of 92 audits, the auditors failed to properly document audit conclusions and did not fully comply with the agency's Contract Audit Manual. This condition resulted in DCAA receiving a rate of “Pass with Deficiencies", indicating that agency was generally in compliance with standards, but needed serious work to reach full compliance with the relevant professional standards. In an audit report issued on September 8, 2014, the DoD IG found "1 or more significant inadequacies" in 13 of 16 sample DCAA audits tested from fiscal years 2012 and 2013.
Record performance results in 2013
In the DCAA Year in Review, DCAA Director Patrick J. Fitzgerald reported that the agency completed about 6,200 audits, reviewing $163 billion in contract costs, which resulted in a net savings of $4.4 billion to the government during fiscal year 2013. According to Mr. Fizgerald, this was a new record in the agency's history, an increase of more than 75 percent over savings realized in fiscal years 2003 through 2009. Particularly notable during fiscal year 2013 was the withdrawal of a $228 million indemnification claim by a contractor as the result of an audit of the Air Force's short range missile contracts.
- "Operations and maintenance budget, FY 2015" (PDF). Comptroller, Department of Defense. March 2014.
- "Report to Congress on FY 2013 Activities at the Defense Contract Audit Agency" (PDF). Defense Contract Audit Agency. March 24, 2014. p. 2.
- "Contract Audit Objective" (PDF). Contract Audit Manual Section 1-104.2. Retrieved January 27, 2015.
- "Information for Contractors" (PDF). Defense Contract Audit Agency. June 26, 2012. pp. 6–10.
- "About DCAI" (PDF). Defense Contract Audit Agency. Retrieved January 26, 2015.
- "Defense Contract Audit Manual, Section 2-101" (PDF). Retrieved January 27, 2015.
- "Introduction to the Contract Audit Manual" (PDF). Defense Contract Audit Agency. April 17, 2014.
- "GAGAS Independence" (PDF). Contract Audit Manual, Section 2-203. Retrieved January 27, 2015.
- DCAA Employee Orientation Handbook (PDF). Defense Contract Audit Agency. April 2001. p. 1.
- "Contract Audits: Role in Helping Ensure Effective Oversight and Reducing Improper Payments". GAO Highlights (U.S. General Accounting Office). February 1, 2011. p. 5.
- "About DCAA". DCAA official website. Retrieved September 22, 2014.
- Allen R. Myerson (January 17, 1996). "Businessman Is Sentenced For Bilking Space Agency". The New York Times.
- Brodsky, Robert (July 23, 2008). "Contractors improperly influenced Defense audits, GAO finds". Government Executive.
- "Allegations That Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated" (PDF). Report to Congressional Addressees (General Accounting Office). July 2008.
- Robert O'Harrow, Jr. and Dana Hedgpeth (September 10, 2008). "Contracting Audit Agency Target of Investigations". Washington Post. p. D1.
- Brodsky, Robert, "Report of Defense audit scandal makes waves", GovernmentExecutive.com, July 28, 2008.
- "DCAA Products and Services". Defense Contract Audit Agency. February 22, 2011.
- Lardner, Richard, (Associated Press) "Auditors Can Be Easy On Defense Contractors", Boston Globe, November 10, 2008.
- Elise Castelli (September 23, 2009). "GAO: Give troubled DoD audit agency more independence". Federal Times.
- "Pentagon auditor deemed serial failure". The Washington Times. October 5, 2009.
- Donnelly, John M., "Pentagon Auditors Blasted By New Report", Congressional Quarterly Today, Sep 30, 2009.
- Associated Press, "Chief Auditor Is Reassigned", Washington Post, October 27, 2009, p. 2; Castelli, Elise, "Top Pentagon auditor reassigned", Military Times, October 27, 2009.
- Paul D. Cederwall (September 18, 2014). "Defense Contractor Sues DCAA for Defective Auditing". PNWC's Government Contracting Update.
- Kimberly Kindy (September 18, 2014). "Sens. Paul, Grassley challenge climate group’s spending on lobbying, alcohol and parties". The Washington Post.
- Kimberly Kindy (September 18, 2014). "Rand Paul, Chuck Grassley shine a light on the nonprofit climate-change group NEON". The Washington Post.
- "Statement of Chairman Lamar Smith (R-Texas)" (PDF). Committee on Science, Space, and Technology. December 3, 2014.
- "DCAA Peer Review: System Review Report" (PDF). U.S. Department of Defense Inspector General. August 21, 2014.
- "Review of Audits Issued by the Defense Contract Audit Agency in FY 2012 and FY 2013" (PDF). U.S. Department of Defense Inspector General. September 8, 2014.
- "DCAA Year in Review 2013" (PDF). Defense Contract Audit Agency. March 2014. pp. 3, 8.
- Scot J. Paltrow (November 18, 2013), "Faking It: Behind the Pentagon’s Doctored Ledgers, a Running Tally of Epic Waste", Unaccountable: the High Cost of the Pentagon's Bad Bookkeeping (Reuters) (2) — The "second installment in a series in which Reuters delves into the Defense Department’s inability to account for itself." Reports on the U.S. Defense Contract Audit Agency.