Defense Authorization Bill Addresses DCAA Audit Backlog

November 17, 2015

The proposed Section 893, in pertinent part, states that “[e]ffective on the date of the enactment of this Act, the Defense Contract Audit Agency may not provide audit support for non-Defense Agencies unless the Secretary of Defense certifies that the backlog for incurred cost audits is less than 18 months of incurred cost inventory.”

The Defense Contract Audit Agency, despite its name, has for decades provided audit support services for civilian agency contracts and contractors and has been compensated for those services through various arrangements by those agencies. In testimony before a House committee in December 2014, the director of the DCAA estimated that approximately 10 percent of DCAA’s work was on behalf of non-defense agencies.

As a result of this provision, the DCAA will theoretically have more resources available to focus on Department of Defense (DOD) contractors, contracts and proposals. This may mean an increase in audit activity for companies contracting primarily with DOD as the DCAA resources are refocused. But for contractors doing significant business with civilian agencies, the opposite could be true. Those contractors are likely to see a quick drop-off in audit activity, at least until the civilian agencies develop a workaround (likely an increase in outsourced third-party audit support) and may see a slowdown in awards of cost-type contracts to the extent that proposal audits become less timely. As written, the provision takes effect immediately upon enactment and does not contain any exception by which DCAA can continue work on a non-Defense agency audit – even audits already in process prior to enactment of the statute.

Civilian agencies will obviously have to supplement their audit capabilities to compensate for the loss of DCAA resources. While some agencies may have internal audit staff available to take on additional work, at least in the short run some agencies may increase their reliance on contracted external audit resources rather than hire and train internal audit staff. For civilian agency contractors, this could mean that their most sensitive proprietary information will be reviewed by contractor personnel instead of government employees. Just as they might when providing sensitive company financial information to Systems Engineering and Technical Assistance (SETA) contractors acting for the government, contractors dealing primarily with civilian agencies might also want to start thinking about what kinds of nondisclosure/proprietary information agreements might be acceptable when outsourced auditors come knocking.

Of course the devil is always in the details, and in this instance, it may come down to the definition of “backlog” for incurred cost audits. As DCAA has been under scrutiny regarding its workload for many years, it has concluded that a “steady state” of two fiscal years’ worth of incurred cost proposals awaiting review is the ordinary course of business for the agency. In other words, until a proposal has been waiting for audit for more than 24 months, DCAA does not consider it to be “backlog.” (See, e.g., GAO-13-131, December 12, 2012, DOD Initiative to Address Audit Backlog Shows Promise, but Additional Management Attention Needed to Close Aging Contracts). So with that as the definition, DCAA may not have as large a “backlog” of audits as it might appear.

A second part of Section 893 may be even more immediately impactful as it would eliminate any perceived financial incentive for DCAA to take on civilian agency audit work. This second part states that “[t]he amount appropriated and otherwise available to the Defense Contract Audit Agency for a fiscal year beginning after September 30, 2016, shall be reduced by an amount equivalent to any reimbursements received by the Agency from non-Defense Agencies for audit support provided.”

Eliminating the benefit of funding associated with civilian agency audit work could have a more immediate and negative effect, though. To the extent that DCAA budget planners anticipated continuing business as usual and benefiting from some additional dollars flowing from civilian agencies, the agency may now have to find way to reduce FY 2016 spending to accommodate this new budget reality. Certainly all government agencies have budget realities to face, and DCAA should be no different. But if DCAA finds that it must reduce audit staff or audit-related travel, for example, in order to achieve the budget, this new requirement may have the perverse and unintended consequence of making DCAA’s audit “backlog” worse instead of better.

If you have questions or would like specific information about the GAO decision discussed in this issue of GovCon Now, please visit the McGuireWoods’ government contracts group.