The Defense Contract Audit Agency has issued several significant memos to its auditors.

• Annual Testing of Contractor Eligibility for Direct Billing

The DCAA memo addresses auditors’ annual testing of contractors’ on-going eligibility for direct billing.  The name and focus of the revised audit program is to ascertain whether there can be continued reliance on contractors’ internal controls for direct billing purposes as spelled out in the DCAA Contract Audit Manual (DCAM) 6-1007.6. The guidance includes a proforma memo for the record that provides auditors will select a sample of paid vouchers submitted directly to the government paying offices and will (1) test the contractor’s procedures for preparing vouchers on flexibly priced contracts (including T&M and labor hour contracts) and (2) verify the contractor is current in submitting its incurred cost proposals and final vouchers. The proforma memo will state that the tests were made, continual reliance can be placed on the contractor’s procedures and the incurred cost proposals and final vouchers are submitted on time. If the tests indicate the vouchers cannot be relied upon the memo should state so, a flash billing system report should be issued and the memo should state the direct billing program will be rescinded. Similarly with untimely submittals, the memo should state the incurred cost proposals or final voucher are not timely submitted, a flash estimating system report should be issued and direct billing will be rescinded (08-PPD-034(R). 

• Alert Concerning Compensation Consultant Results

DCAA issued an alert addressing concerns about executive compensation reasonableness when a contractor uses a compensation consultant. The guidance notes contractors frequently use compensation consultants to establish executive pay and states these consultants may not be independent, especially when they perform other services for the contractor. Auditors are told not to rely on the consultant’s determination on reasonableness of compensation without performing a review of the survey data used in establishing the compensation. They are told that the consultant’s data should be “based on reliable and unbiased surveys that are representative of the contractor’s relevant market or industry.” They are also told that no one survey is sufficient to determine the market value of pay for all contractor positions and the memo suggests that a primary survey may be selected with secondary surveys used to collaborate the results of the primary survey. If risk is disclosed, auditors are told to perform their own assessment using available survey data within DCAA by going to regional DCAA compensation specialists (08¬PPD-035(R). (Editor’s Note.  Though the above guidance can be interpreted in various ways we believe it represents a further step away from the traditional practice of allowing contractors to make their own determinations of what is reasonable executive compensation where DCAA primarily validates the controls used to make the determination.  Now, DCAA is getting close to saying contractors should use both the same and number of surveys it uses to determine reasonableness of compensation. Based on our experience of actually participating on DCAA compensation teams, we have discussed in prior articles the shortcomings of DCAA’s approaches and data they use but nonetheless, we fear that DCAA is moving closer to requiring contractors to use their survey data and number of surveys.  DCAA survey data is quite expensive to obtain and often yields less accurate results than other means contractors use.)

• Risk Alerts on Current Economic and Financial Conditions