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: Open

Comments: DCAA has not yet revised its Contract Audit Manual. However, DCAA continues to perform internal audit quality reviews and has issued policy memorandums to address major findings.

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: Open

Comments: DCAA has implemented a course on Generally Accepted Government Auditing Standards with a goal that all DCAA auditors will complete the course by September 30, 2010.

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: Open

Comments: DOD concurred with our recommendation. On July 30, 2009, DCAA requested the DODIG to perform its external quality review of DCAA's quality control system for audits and attestation engagements for the period ending September 30, 2009. DODIG announced its review on August 5, 2009, and it will perform the review in three or four projects. DODIG will assess whether DCAA's quality control system provides reasonable assurance of compliance with standards in design and effective operation and compliance in practice. The review will follow up on various DCAA corrective actions in response to GAO and DODIG findings and will also consider repeated noncompliances with government auditing standards identified in the May 2007 and December 2003 peer review reports on the DCAA quality control system.

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: Open

Comments: DOD concurred with our recommendation. The DCAA Integrity and Quality Assurance organization has established a process for making recommendations to address annual quality assurance review findings of serious deficiencies and GAGAS noncompliance to the DCAA Director on a real-time basis.

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: Open

Comments: At our April 5, 2010, meeting with the DCAA Director, he stated that the review of invoices prior to payment is not an audit function and that he believes DCAA should discontinue this service.

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.

Agency Affected: Department of Defense

Status: Open

Comments: The DOD IG revisited the May 2007 DCAA peer review report conclusions and has decided not to rescind the flawed report. However, on August 26, 2009, the IG instructed DCAA to qualify its audits with a statement that it no longer complies with the peer review requirements of General Accepted Government Auditing Standards (GAGAS).

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 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: Open

Comments: DOD concurred with our recommendation.

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: Open

Comments: DOD concurred with our recommendation. DCAA has a job opening posted on USAJobs to hire an outside expert on auditing standards.

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: Open

Comments: On April 5, 2010, we met with Pat Fitzgerald, DCAA Director, and DCAA senior managers. At that meeting, Pat Fitzgerald said that DCAA is reviewing its portfolio of audits, discussing the portfolio with stakeholders, and determining if any audits should be transferred to another DOD agency or terminated. DCAA has worked closely with Shay Assad, Director, Defense Procurement and Acquisition Policy, on this effort. Pat explained that DCAA Management had decided to discontinue or combine many of the contractor business system internal control audits. For example, the billing system audit will be done as part of the accounting system audit and the incurred cost audits would cover labor and materials controls. Pat also said that DCAA will focus on proposal and pricing audits and incurred cost audits as the most important. Further, on March 26, 2010, DCAA announced a pilot project to align all audits for one of the top five defense contractors under the Corporate Audit Coordinator and Northeast Regional Director. Pat believes that this revised approach will produce better quality audits as it will allow auditors cognizant of the contractor to work together under an organizational structure to develop and execute a more consistent and comprehensive contract audit approach. Finally, DOD submitted changes to the Defense Federal Acquisition Regulations that will define contractor business systems and will allow the government to withhold payment from contractors with deficient business systems.

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: Open

Comments: DCAA has taken action to review its portfolio of audits, discuss with stakeholders, and determine if any should be transferred to another DOD agency or terminated. DCAA has worked closely with Shay Assad, Director, Defense Procurement and Acquisition Policy, on this issue. On April 5, 2010, Pat Fitzgerald, DCAA Director, explained that DCAA Management had decided to discontinue or combine many of the contractor business system internal control audits. For example, the billing system audit will be done as part of the accounting system audit. The incurred cost audits would cover labor and materials controls. Pat also said that DCAA will focus on proposal and pricing audits and incurred cost audits as the most important.

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.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: DOD concurred with our recommendation and on January 4, 2010, the Deputy Secretary of Defense issued a revised DCAA mission statement in DOD Directive 5105.36 that highlights protecting the public interest as the agency's primary mission focus. Specifically, under the new mission statement, contract audits and advisory services provided on contract negotiation, contract administration, and settlement of contracts are to ensure that taxpayer dollars are spent on fair and reasonable contract prices.

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: Open

Comments: DOD concurred with our recommendation. DCAA expects to finalyze its strategic plan at the October 2010 Executive Steering Committee meeting.

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: Open

Comments: DOD concurred with our recommendation. However, DCAA has not yet developed a revised strategic plan. DCAA has implemented revised metrics but until a new strategic plan is developed, the metrics are not aligned with DCAA's revised mission statement.

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: Open

Comments: On April 5, 2010, we met with Pat Fitzgerald, DCAA Director, and DCAA senior managers. At that meeting, Pat Fitzgerald said that DCAA is reviewing its portfolio of audits, discussing the portfolio with stakeholders, and determining if any audits should be transferred to another DOD agency or terminated. DCAA has worked closely with Shay Assad, Director, Defense Procurement and Acquisition Policy, on this effort. Pat explained that DCAA Management had decided to discontinue or combine many of the contractor business system internal control audits. For example, the billing system audit will be done as part of the accounting system audit and the incurred cost audits would cover labor and materials controls. Pat also said that DCAA will focus on proposal and pricing audits and incurred cost audits as the most important. Further, on March 26, 2010, DCAA announced a pilot project to align all audits for one of the top five defense contractors under the Corporate Audit Coordinator and Northeast Regional Director. Pat believes that this revised approach will produce better quality audits as it will allow auditors cognizant of the contractor to work together under an organizational structure to develop and execute a more consistent and comprehensive contract audit approach. Finally, DOD submitted changes to the Defense Federal Acquisition Regulations that will define contractor business systems and will allow the government to withhold payment from contractors with deficient business systems.

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: Closed - Implemented

Comments: In August 2008, DCAA established the position of Assistant Director, Integrity and Quality Assurance with responsibility for DCAA's quality assurance program. On July 9, 2009, this position was approved as an SES-level position. The position was filled internally through promotion of the DCAA Field Detachment Deputy Director, on March 28, 2010.

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: Open

Comments: DCAA established a separate internal review organization to conduct critical internal inspector general functions related to DCAA hotline complaints. To ensure that specific problems come to the attention of senior leaders, DCAA assigned management of the hotline to an SES member and assigned personnel to resolve problems.

Recommendation: The Department of Defense Inspector General should determine whether the May 2007 DOD IG report on the audit of DCAA's quality control system should be rescinded or modified.

Agency Affected: Department of Defense

Status: Open

Comments: The DOD IG has decided not to rescind the flawed DCAA peer review report. However, on August 26, 2009, the IG instructed DCAA to qualify its audits with a statement that it no longer complies with the peer review requirements of General Accepted Government Auditing Standards (GAGAS).

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.

Agency Affected: Congress

Status: Open

Comments: The House Armed Services Acquisition Committee introduced H.R. 5013 to Congress, which would amend United States Code Title 10 to include the following provisions: (1) establish a separate Defense Contract Audit Agency Office of General Counsel; (2) require that any contractor business system review carried out by a military department, a Defense Agency, or a Department of Defense Field Activity (a) comply with generally accepted government auditing standards (GAGAS), (b) is performed by an audit team that does not engage any other official activity involving the contractor, (c) is performed in a time and manner consistent with a documented assessment of the risk to the Federal Government, and (d) involves testing a representative sample of transactions sufficient to fully examine the integrity of the system; (3) the Secretary of Defense shall issue guidance relating to contract audits that are not contractor business system reviews that (a) requires that such audits comply with GAGAS and are performed in a time and manner consistent with a documented assessment of risk to the Federal Government, (b) establishes guidelines for discussions of the scope of the audit with the contractor concerned that ensure that such scope is not improperly influenced by the contractor, (c) provides for withholding of contract payments when necessary to compel the submission of documentation from the contractor, and (d) requires that the results of contract audits performed on behalf of an agency of the Department of Defense be shared with other Federal agencies upon request, without reimbursement.