Defense Contract Audit Agency
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). DCAA is primarily responsible for performing all contract audits for the Defense Department (and, to a lesser extent, for other agencies outside DoD), and providing cost 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/advisory services to contractors due to independence requirements.
Today, the Defense Contract Audit Agency consists of approximately 4,000 people, located at more than 300 field audit offices throughout the United States, Europe, and in the Pacific. 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/advisory services to contractors due to independence requirements.
DCAA also provides contract audit services to some other Government Agencies, as well as to 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, especially on major programs, do substantial business with both DoD and NASA).
DCAA's headquarters are located at Fort Belvoir, in the same building as the Defense Logistics Agency. DCAA also operates the Defense Contract Audit Institute (DCAI) training facility on the Park Avenue Campus of the University of Memphis; however, this facility will soon close as DCAI will be transferring to a new facility located in Atlanta, GA as of the GFY 2015.
Under headquarters DCAA is organized into five geographic regions and a Field Detachment group, the latter handling contracts involving classified information. The five geographic regions, the location of the regional office, and the (as of 2011) general area of responsibilities are as follows:
- Western--La Mirada, California (Los Angeles area)
- Central--Irving, Texas (DFW Metroplex area)
- 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--Smyrna, Georgia (Atlanta area)
- Georgia, Mississippi, Alabama, Tennessee, Florida, North Carolina, South Carolina, southern Virginia, Indiana, Ohio, and the Lower Peninsula of Michigan, as well as audits in Central and South American countries
- Mid-Atlantic--Philadelphia, Pennsylvania
- Pennsylvania, northern Virginia, Maryland, Delaware, the District of Columbia, West Virginia, southern New Jersey, and all audits relating to Northrup Grumman regardless of the physical location of the segment or division.
- Northeastern--Lowell, Massachusetts (Boston area)
- Massachusetts, northern New Jersey, New York, Connecticut, Rhode Island, Maine, Vermont, and New Hampshire, plus audits in Europe, Asia (including Israel and the Middle East, but excluding the Pacific Rim), and Africa, and all audits relating to Raytheon regardless of the physical location of the segment or division.
Within each region are between 15-22 field audit offices, referred to as resident offices (if auditing only one contractor, generally used at major facilities or corporate offices) or branch offices if auditing more than one contractor. Branch offices may have sub-offices under them, which have auditors dedicated to one contractor, but not enough to establish a separate office.
In response to prior years allegations of poor performance, the agency has gone through a recent major overhaul in how it operates. Under the new leadership of Patrick Fitzgerald, the agency is changing on a number of levels including changes in its hiring process, revamping employee training and organizing committees dedicated to promoting change in specific areas of weakness. The new training places heavy emphasis on government auditing standards of quality or Generally Accepted Government Auditing Standards (GAGAS). A new agency culture has emerged centered around critical values such as independence, quality of work, documentation, and timeliness. As a result of this new culture, companies that are subject to DCAA audits today should expect a more thorough audit that has increased audit testing and higher levels of evidence requirements. In addition, adherence to independence requirements prevents DCAA auditors from providing consulting and accounting advisory services to contractors.
Current DCAA audits
Companies that are subject to DCAA audits today should expect a more thorough audit that has increased audit testing and higher levels of evidence requirements. This means contractors will have to provide more supporting documentation for claimed and/or proposed costs. Auditors will be looking closer at costs and testing more items than before.
Companies that are awarded Cost Type Contracts, Time and Materials Contracts, and other flexibly priced contracts are subject to annual DCAA audits and are required to submit incurred cost claims annually to DCAA. When these claims are audited, contractors are required to maintain and supply detailed supporting documentation for all claimed costs that are selected for testing. This means auditors will be looking at source documents for claimed costs such as original purchase orders, invoices, receipts, timesheets, 941's, general ledgers by contract, and the year end trial balance. In order to prepare for annual incurred cost audits, contractors must maintain and organize accounting records so that they are easily available when requested. This means collecting all these items at each year end and having them available as soon as the audit commences. This is required by FAR 31.201-2 (d): "A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported."
Some contractors fail to document the purpose of a trip with enough information for auditors to establish allowability of the trip. Contractors can easily fail to keep this level of documentation for each travel expense, and as a result, be denied reimbursement for such costs. For consulting/outside services costs, contractors should expect to be asked for service agreements and invoices that explain what services were performed.
Access to records
Federal Acquisition Regulations (FAR) give DCAA auditors the right to view contractor records. Per FAR 4.703 (a) "contractors shall make available records, which includes books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form, and other supporting evidence to satisfy contract negotiation, administration, and audit requirements of the contracting agencies and the Comptroller General". Given the oversight authority granted to DCAA, auditors are trained to spot access to records violations. Access to records violations are not limited to failure to provide auditors access to requested documents. Access to records violations also include delaying the audit process by not providing records in a timely manner.
DCAA independence requirements
Independence requirements prevent DCAA auditors from providing consulting and accounting advisory services to contractors. This means DCAA auditors are not able to provide guidance to contractors regarding how accounting systems should be set up, how costs should be treated, or how claims should be compiled. The DCAA auditor's primary role is to express an audit opinion. Contractors that are not familiar with the federal acquisition process should consult private companies that provide advisory services in this field, or view the resources of information available online.
Audits of military contracts can be traced back 60 years or more. Initially, the various branches of the military had their own contract audit function and associated instructions and accounting rulings. Uniformity was non-existent. Contractors and government personnel recognized the need for consistency in the areas of contract administration and audit.
The U.S. Navy and Army Air Corps made the first attempt to perform joint audits in 1939. By December 1942, the Navy, Army Air Corps, and Ordnance Department had established audit coordination committees for selected areas where plants were producing different items under contracts for more than one service.
On 18 June 1952, the three military services jointly issued a Contract Audit Manual (CAM). The Manual prescribed detailed policies and procedures for use in auditing procurement contracts. Because of differences between the procurement organizations and practices of the services, finalizing standard guidelines was difficult.
In May 1962, Secretary, Department of Defense, Robert S. McNamara instituted "Project 60" to examine the feasibility of centrally managing the field activities concerned with contract administration and audit. An outcome of this study was the decision to establish a single contract audit capability.
On 8 January 1965, the Defense Contract Audit Agency (DCAA) was formed. Mr. William B. Petty, formerly the Deputy Comptroller of the U.S. Air Force, was selected as the Director with Mr. Edward T. Cook, formerly Director of Contract Audit for the Navy, selected as the Deputy Director.
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. The GAO noted that the agency lacks independence from the contractors it audits and the DoD agencies doing business with those contractors. The GAO concluded that pressure from outside groups helped create a hostile work environment which caused agency auditors to rush reviews of contractor billing systems, falsify audit reports, and appease contractors when auditing their business methods and systems. Said Senator Joe Lieberman in response to the report, "This organization needs bold changes. The larger question … is whether, as [GAO] suggested, we ought to take a look at creating a totally independent auditing agency for the federal government overall and go back to the idea of an auditor general."
The DoD IG released a report of its investigation into the agency on August 31, 2009. The IG found that the DCAA has an "environment not conducive to performing quality audits." The IG report cited an audit of Boeing 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.
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. "Mr. Gutheinz said the Montijo case was the most significant (case) the space agency had had." 
- 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". 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.
- Castelli, Elise, "GAO: Give troubled DoD audit agency more independence", Federal Times, September 23, 2009.
- Waterman, Shaun, "Senators Threaten To Scrap Defense Auditor", Washington Times, October 5, 2009, p. 1.
- 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.
- Allen R. Myerson (January 17, 1996). "Businessman Is Sentenced For Bilking Space Agency". The New York Times.
- 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.
- "Defense Contract Audit Agency". Retrieved January 17, 2006.