(Editor’s Note.  As we reported last issue and continue here, the General Accountability Office issued a highly publicized critical report on the Defense Contract Audit Agency asserting, in part, its supervisors” intimated, harassed and threatened” its auditors to alter audits in favor of contractors.  We are very concerned that it will become extremely difficult (in fact, we are now seeing it in our consulting practice) for contractors and DCAA management to resolve audit issues once they have been put forth by auditors. This open letter to the Director of DCAA, April Stephenson, is the first time in our 14 year history we have put forth an editorial-like position.)

Dear Ms. Stephenson:

I am writing to you as Publisher of the GCA REPORT and GCA DIGEST to express my concern that the normally good relationship between DCAA and the contractor community may be deteriorating as a result of the recent GAO report. We do not presume to take a position on the GAO assertions about the practices of the Southern California offices addressed in the report but rather want to bring your attention to what I fear may be a destructive aftermath of the report.

I am a former DCAA auditor and supervisor where I have also been CFO, controller and government compliance director for government contractors and consultant with both a large “Big 6” firm and a firm I started. In those positions I have come to respect and appreciate the unique relationship between DCAA and contractors and the internal workings of DCAA. In the past, DCAA put forth its audit opinion and if the contractor disagreed, was able to obtain a fair hearing by a normally informed ACO or CO where differences were usually ironed out. Similarly within DCAA, the auditor, who may have been relatively inexperienced, could take an aggressive approach in finding “questioned costs” (I was certainly one of them) and the contracting community could depend on the more experienced supervisors or branch manager to modify the original opinion to reach a reasonable position. If a faulty audit report fell through the cracks we almost always were able to take up the issue with the supervisor and even the branch manager to reach a fair conclusion both before and even after the audit report was issued. The system worked well where there could be a healthy exchange of ideas between reasonable people resulting in a mutually acceptable conclusion.

Two events, one gradual and one sudden, have occurred to undermine this cooperative process.  First, ACOs and COs have gradually come to rely almost solely on DCAA’s audit reports for their final position on cost accounting matters. Whether the causes are staff shortages (cost and price analysts are hard to find these days), increased workload or retirement of the most experienced the end result is the DCAA audit report has become the default ACO position rather than the starting point to reach a mutually acceptable result. The increased inability to appeal to the ACO has made resolution of issues at the DCAA level more important than ever.  However, in the aftermath of the GAO report such resolution between the government and contractor is becoming more difficult. Though recent DCAA guidelines emphasize the need to “document” disagreements and work more effectively to get it right before a report is issued, in practice, fear of being perceived as reversing an audit opinion in favor of a contractor has made it very difficult to obtain a fair hearing from DCAA management once an audit position is put forth. In at least two recent occasions our request for reconsideration of an initial audit opinion, which was clearly questionable, was rejected out of hand where our position paper was simply sent to the ACO with no meeting or exchange of ideas.  I have contacted several other consultants and attorneys who are in the “trenches” and received, with no exceptions, similar responses.  One audit supervisor we know well has informally told me that it is far better for them to accept the audit position once the auditor surfaces an issue, even if it may be questionable, than to risk being perceived as inappropriately changing an opinion.

I certainly sympathize with your need to be responsive to the GAO assertions and can even understand an inclination to err on the side of caution. However, that excess caution not only can but I fear is beginning to undermine the long time process of effectively resolving audit opinions so that the government and contracting community can reach mutually acceptable results.  We respectfully ask you to ensure that the healthy give and take of ideas expressed once an initial audit position is taken be maintained. In spite of lots of internal controls within DCAA to prevent it the fact of life is that some audit opinions are faulty where supervisors and branch managers do not become aware of errors until the contractor brings it to their attention. DCAA can keep putting forth guidance but as long as management is fearful of being perceived as overruling subordinate auditors (no matter how erroneous the audit position is) or “caving” into contractors the healthy process of resolving audit issues in a reasonable manner will diminish. Erosion of this healthy give and take will be disastrous to the acquisition process.  We have heard from a few contractors that they are on the verge of ending their relationship with the government because they feel there is no way to appeal what they consider to be an unfair audit opinion. The ability of contractors and auditors to come together and resolve their differences is critical to the acquisition process. Let me stress it is in your power to ensure this process continues and so I urge you to do so.

Respectfully, William Lennett, Publisher

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