DCAA Audits: Widespread Problems with Audit Quality Require Significant Reform

This testimony discusses our recent audit of the Defense Contract Audit Agency's (DCAA) overall management environment and quality assurance structure. DCAA is charged with 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. DCAA's mission encompasses both audit and nonaudit services in support of DOD contracting and contract payment functions. DCAA audits of contractor internal controls in accounting, billing, estimating, and other key systems support decisions on pricing and contract awards. Internal control audits also impact the planning and reliability of other DCAA audits because DCAA uses the results of these audits to assess risk and plan the nature, extent, and timing of tests for other contractor audits and assignments. Last year, we reported the results of our investigation of allegations about certain DCAA audits at three locations in California, which substantiated claims that (1) audit documentation 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. At that time we were conducting a broader audit of DCAA's overall organizational environment and quality control system. Given the evidence presented at the Committee's September 2008 hearing, you requested that we expand our ongoing assessment. Our current report, which the Committee is releasing today, presents the results of our DCAA-wide audit, including (1) an assessment of DCAA's management environment and quality assurance structure; (2) an analysis of DCAA's corrective actions in response to our July 2008 report and two DOD reviews, and (3) potential legislative and other actions that could improve DCAA's effectiveness and independence.