Summary
The Defense Contract Audit Agency (DCAA) under the Department of Defense (DOD) Comptroller plays a critical role in contractor oversight by providing auditing, accounting, and financial advisory services in connection with DOD and other federal agency contracts and subcontracts. Last year, GAO found numerous problems with DCAA audit quality at three locations in California, including the failure to meet professional auditing standards. This report addresses audit quality issues at DCAA offices nationwide. GAO was asked to (1) conduct a broad assessment of DCAA's management environment and audit quality assurance structure, (2) evaluate DCAA actions to date to correct previously identified problems, and (3) identify potential legislative and other actions for improving DCAA effectiveness and independence. To achieve these objectives, GAO analyzed DCAA's mission, strategic plan, audit policies, and quality assurance program; conducted interviews; reviewed selected audits at DCAA offices; and analyzed legislative and other actions.
GAO found audit quality problems at DCAA offices nationwide, including compromise of auditor independence, insufficient audit testing, and inadequate planning and supervision. GAO's conclusions stem from a review of 69 audit assignments supporting contract award and administrative decisions; an assessment of DCAA's audit quality assurance structure, which found similar audit quality problems but gave satisfactory ratings to deficient audits; and DCAA's rescission of 80 problem audit reports. The rescinded audits supported decisions on pricing and contract awards and impacted the planning and reliability of hundreds of other DCAA audits, representing billions of dollars in DOD expenditures. GAO found DCAA's management environment and quality assurance structure were based on a production-oriented mission that put DCAA in the role of facilitating DOD contracting without also protecting the public interest. DCAA has taken several positive steps. However, DOD and DCAA have not yet addressed fundamental weaknesses in DCAA's mission, strategic plan, metrics, audit approach, and human capital practices that had a detrimental effect on audit quality. To improve DCAA oversight, the DOD Comptroller requested Defense Business Board and "tiger team" reviews and established a DCAA Oversight Committee. In addition, in the short-term, Congress could provide DCAA with certain legislative protections and authorities similar to those available to IGs. In the longer term, Congress may wish to consider organizational changes to elevate DCAA to a component agency reporting to the Deputy Secretary or to establish an independent governmentwide contract audit agency.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Team:
Phone:
Gregory D. Kutz
Government Accountability Office: Financial Management and Assurance
(202) 512-9505
Matters for Congressional Consideration
Recommendation: In addition to our recommendations to DOD for improving DCAA audit quality and auditor objectivity, integrity, and independence, Congress may wish to consider the following legislative actions for enhancing DCAA's effectiveness and independence. In considering these options, the Congress would need to weigh DCAA's ability to accomplish significant reforms within its current environment and the cost and administrative effort involved with the alternative options along with the potential benefits. Timing would also need to be considered, given significant reforms that DCAA is already undertaking and the additional burden that a change in organizational placement would add at this time. (1) In the short term, as DCAA makes progress in correcting fundamental weaknesses that have impacted audit quality, Congress could consider enhancing DCAA reform efforts by enacting legislation to grant it protections and authorities similar to those embodied in the Inspector General Act, as amended. (2) In the medium term, Congress could consider elevating the contract audit function within DOD by moving DCAA from under the DOD Comptroller/CFO and placing it under the Deputy Secretary of Defense. (3) In the longer term, depending on the outcome of acquisition management reform initiatives under way and the success of DCAA management reforms, Congress could consider creating an independent, governmentwide contract audit agency. Legislation to move DCAA should incorporate the protections and authorities similar to those embodied in the Inspector General Act, if these have not already been granted to DCAA.
Status: In process
Comments: When we determine what steps the Congress has taken, we will provide updated information.
Recommendations for Executive Action
Recommendation: To improve the quality of the agency's audits and strengthen auditor integrity, objectivity, and independence, including recommendations for actions on findings in this report that are aligned with certain Defense Business Board (DBB) findings and recommendations, the Secretary of Defense should revise DCAA's mission statement to reflect the need for quality contract audits and related nonaudit services that take into account serving the public interest. Also, the Secretary of Defense should require the Under Secretary of Defense (Comptroller/CFO) to establish milestones for completing DCAA corrective actions and monitor and regularly report on DCAA progress to assure timely completion of critical actions.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA, in concert with the revised mission statement, to develop a strategic plan with short-term and long-term outcome-related goals.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to measure progress in achieving strategic goals, ensure that metrics are tied to the revised mission statement and strategic plan and support the agency's annual work plan.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to consult with DOD stakeholders and engage outside experts to develop a risk-based contract audit approach that identifies resource requirements and focuses on performing quality audits that meet generally accepted government auditing standards (GAGAS).
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to establish an SES-level position with responsibility for audit quality assurance that requires demonstrated knowledge and experience in applying professional audit standards.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: Consistent with DBB report observations, the Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to establish a separate DCAA internal review organization to conduct critical internal inspector general functions, including performing periodic internal evaluations and reviews and addressing DCAA hotline complaints.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA in consultation with DOD stakeholders, to review DCAA's current portfolio of audit and nonaudit services to determine if any should be transferred or reassigned to another DOD agency or terminated in order for DCAA to comply with GAGAS integrity, objectivity, and independence requirements.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA based on the risk-based audit approach, to develop a staffing plan that identifies auditor resource requirements as well as auditor skill levels and training needs.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to establish a position for an expert on auditing standards or consult with an outside expert on auditing standards to assist in revising contract audit policy, providing guidance on sampling and testing, and developing training on professional auditing standards.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to revise DCAA audit policy to provide appropriate guidance on what constitutes sufficient testing to comply with GAGAS. Update DCAA's Contract Audit Manual, as appropriate.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to develop agencywide training on government audit standards. This training should emphasize the level of assurance intended by the various types of engagements and provide detailed guidance on auditor independence, planning, fraud risk, level of testing, supervision, auditor judgment, audit documentation, and reporting.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to conduct a comprehensive, independent review of DCAA's revised audit quality assurance function. This review should focus on the consistent application of criteria used for assessing audit quality and assuring timely, consistent, and appropriate reporting of review results.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to make appropriate recommendations to address annual quality assurance review findings of serious deficiencies and GAGAS noncompliance, provide training, and follow-up to assure that appropriate corrective actions have been taken.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Secretary of Defense should direct the Under Secretary of Defense (Comptroller/CFO) to require the Director of the DCAA to establish policies and procedures to ensure that auditors who make direct bill decisions are independent of DCAA employees who perform a DOD management function by reviewing vouchers of contractors not eligible for the direct billing program, thereby reducing situations where DCAA auditors are encouraged to reduce their office workload by approving contractors for the direct-bill program.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Department of Defense Inspector General should reconsider its overall conclusions in the May 2007 DOD IG report on the audit of DCAA's quality control system in which it reported an adequate ("clean") opinion on DCAA system of quality control in light of the serious deficiencies and findings included in that report and the additional evidence identified in our audit. The Department of Defense Inspector General, based on the above, should determine whether the report should be rescinded or modified.
Agency Affected: Department of Defense
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
