	Widespread DCAA Management Environment and Audit Quality Problems

Our investigation of DCAA hotline allegations and our DCAA-wide follow- up audit document systemic weaknesses in DCAA’s management  environment and structure for assuring audit quality. Last year, our  investigation of hotline allegations substantiated auditor concerns made  on all 14 audits we reviewed at two locations and 62 forward pricing  reports we investigated at a third location. In addition, we found that contractor officials  and the DOD contracting community improperly influenced the audit  scope, conclusions, and opinions of some audits—a serious independence  issue. This year, our follow-on audit found DCAA-wide audit quality  problems similar to those identified in our investigation, including  compromise of auditor independence, insufficient audit testing to support  conclusions and opinions, and inadequate planning and supervision. For example, of the 69 audits and cost-related assignments we reviewed,  65 exhibited serious GAGAS and other deficiencies that rendered them  unreliable for decisions on contract awards and contract management and  oversight. DCAA has rescinded 81 audit reports in response to our work and the  DOD Inspector General’s (IG) follow-up audit because the audit evidence  was outdated, insufficient, or inconsistent with reported conclusions and  opinions and reliance on these reports for contracting decisions could  pose a problem. Because the conclusions and opinions in  the rescinded reports were used to assess risk in planning subsequent  audits, they impact the reliability of hundreds of other audits and  contracting decisions covering billions of dollars in DOD expenditures. The DOD IG recommended that the Air Force buying  command withhold the balance of $271 million for unabsorbed PM&HS  costs (of which $101 million had already been paid) and that the Air  Force cease negotiations with the launch services contractor on a $114  million proposal for unabsorbed costs. For a billing system audit of a contractor with $168 million in annual  billings to the government, the field office manager allowed the original  auditor to work on the audit after being assured that the auditors  would help the contractor correct billing system deficiencies during the  performance of the audit. DCAA-wide Audit Identified Widespread Audit Quality Problems Requiring Significant Reform

Our follow-up audit found that a management environment and agency  culture that focused on facilitating the award of contracts and an  ineffective audit quality assurance structure are at the root of the DCAA- wide audit failures that we identified for the 69 audits and cost related  assignments that we reviewed. DCAA’s mission  statement, strategic plan, and metrics all focused on producing a large  number of audit reports and provided little focus on assuring quality audits  that protect taxpayer interest. Contract Management Issues That Require Greater Oversight

For fiscal year 2008, DOD reported that it obligated over $380 billion for  payments to federal contractors, more than double the amount it obligated  for fiscal year 2002. With hundreds of billions in taxpayer dollars at stake,  the government needs strong controls to provide reasonable assurance  that these contract funds are not being lost to fraud, waste, abuse, and  mismanagement. Moreover, effective contract audit capacity is  particularly important as DOD continues its use of high-risk contracting  strategies. For example, we have found numerous issues with DOD’s use  of time-and-materials contracts, which are used to purchase billions of  dollars of services across the government. Examples of recent DCAA and DOD actions  include the following. Further, in March 2009, the new DOD Comptroller/CFO established a  DCAA Oversight Committee to monitor and advise on DCAA corrective  actions. While these are positive steps, much more needs to be done to address  fundamental weaknesses in DCAA’s mission, strategic plan, metrics, audit  approach, and human capital practices that have resulted in widespread  audit quality problems. DCAA’s production-oriented culture is deeply  imbedded and will likely take several years to change. To address these issues, our September 2009  report contained 15 recommendations to improve the quality of DCAA’s  audits and strengthen auditor effectiveness and independence. DCAA Audits: Allegations That Certain Audits at Three Locations Did Not  Meet Professional Standards Were Substantiated, GAO-08-857,  Washington, D.C.: July 22, 2008.
Why GAO Did This Study

In fiscal year 2008, the Department of Defense (DOD) obligated over $380 billion to federal contractors, more than doubling the amount it obligated in fiscal year 2002. With hundreds of billions of taxpayer dollars at stake, the government needs strong controls to provide reasonable assurance that contract funds are not being lost to fraud, waste, abuse, and mismanagement. The Defense Contract Audit Agency (DCAA) is charged with 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. However, last year GAO found numerous problems with DCAA audit quality at three locations in California, including the failure to meet professional auditing standards. In a follow-up audit issued this September, GAO found that these problems existed agencywide. Today's testimony describes widespread audit quality problems at DCAA and provides information about continuing contract management challenges at DOD, which underscore the importance of DCAA audits that meet professional standards. It also discusses some of the corrective actions taken by DCAA and DOD and key GAO recommendations to improve DCAA audit quality. In preparing this testimony, GAO drew from issued reports and testimonies. These products contained statements regarding the scope and methodology GAO used.

What GAO Found

GAO found substantial evidence of widespread audit quality problems at DCAA. In the face of this evidence, DOD, Congress, and American taxpayers lack reasonable assurance that billions of dollars in federal contract payments are being appropriately scrutinized for fraud, waste, abuse, and mismanagement. An initial investigation of hotline allegations at three DCAA field office locations in California revealed that all 14 audits and 62 forward pricing reports GAO examined were not performed in accordance with professional auditing standards. For example, while auditing the satellite launch proposal for a major U.S. defense contractor, a DCAA manager experienced pressure from the contractor and the DOD buying command to drop adverse findings. The manager directed his auditors to drop the findings, and DCAA issued a more favorable opinion, allowing the contractor to win a contract that improperly compensated the contractor for hundreds of millions of dollars in commercial business losses. Specifically, of $271 million in unallowable costs related to commercial losses, the contractor has already been paid $101 million. This incident is under criminal investigation by the DOD Inspector General (IG). In September of this year, GAO followed up on its initial investigation and identified audit quality problems agencywide at DCAA. Audit quality problems included insufficient audit testing, inadequate planning and supervision, and the compromise of auditor independence. For example, of the 69 audits and cost-related assignments GAO reviewed, 65 exhibited serious deficiencies that rendered them unreliable for decisions on contract awards, management, and oversight. DCAA has rescinded 81 audit reports to date as a result of GAO's and DOD IG's work. Because the rescinded reports were used to assess risk in planning subsequent audits, they affect the reliability of hundreds of other audits and contracting decisions covering billions of dollars in DOD contract expenditures. GAO determined that quality problems are widespread because DCAA's management environment and quality assurance structure were based on a production-oriented mission that prevented DCAA from protecting the public interest while also facilitating DOD contracting. GAO has designated both contract management and weapon systems acquisition as high-risk areas since the early 1990s. DOD acquisition and contract management weaknesses create vulnerabilities to fraud, waste, abuse, and mismanagement that leave hundreds of billions of taxpayer dollars at risk, and underscore the importance of a strong contract audit function. In response to GAO's findings and recommendations, DCAA has taken several steps to improve metrics, policies, and processes, and the DOD Comptroller has established a DCAA oversight committee. To ensure quality audits for contractor oversight and accountability, DOD and DCAA will also need to address the fundamental weaknesses in DCAA's mission, strategic plan, metrics, audit approach, and human capital practices that have had a detrimental effect on audit quality.