Effective Management of DCAA Audits  ---------------------- Cost and Pricing Update NCMA Pikes Peak Chapter January 21, 20...
Agenda <ul><li>DCAA Audit Policy Update </li></ul><ul><ul><li>GAO criticisms / new audit policies </li></ul></ul><ul><ul><...
<ul><li>DCAA Audit Policy Update </li></ul>
Background <ul><li>July 2008 GAO report criticized DCAA audit execution: </li></ul><ul><ul><li>Audit work insufficient to ...
Background (cont.) <ul><li>July 2008 GAO report surfaced two issues:  </li></ul><ul><ul><li>Some DCAA auditors are not ful...
Background (cont.) <ul><li>DCAA reaction to July 2008 GAO report </li></ul><ul><ul><li>DCAA issued Policy memoranda in Dec...
Background (cont.) <ul><li>September 2009 GAO audit report again criticized DCAA audit execution </li></ul><ul><ul><li>Fin...
Access to Contractor Records <ul><li>Old DCAM procedures for obtaining documentation required that auditor: </li></ul><ul>...
Access (cont.) <ul><li>December 2008 Policy changed audit access approach: </li></ul><ul><ul><li>Policy states data “shoul...
Access (cont.) <ul><li>When contractor fails to provide documentation, Policy requires auditor to: </li></ul><ul><ul><li>F...
Access (cont.) <ul><li>New “fast track” procedures to obtain information when late and no explanation provided </li></ul><...
Access (cont.) <ul><li>Contractors and DCMA should know: </li></ul><ul><ul><li>Audit clause limits DCAA’s examination to “...
Access (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>CO “may” reduce or suspend payments...
Access (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>Policy ignores relevant case law </...
Access (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>FAR and DFAR Councils issued a Fina...
Internal Control Audits <ul><li>December 2008 Policy changes audit reporting approach: </li></ul><ul><ul><li>Policy purpor...
Internal Control Audits (cont.) <ul><li>Policy builds on prior concept that a “failure to accomplish  any  control objecti...
Internal Control Audits (cont.) <ul><li>Policy now requires: </li></ul><ul><ul><li>DCAA issuance of a Form 1 even when no ...
Internal Control Audits (cont.) <ul><li>Contractors and DCMA should know: </li></ul><ul><ul><li>DCAA’s internal control po...
Internal Control Audits (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>DCAA’s conclusion ...
Other DCAA Reactions <ul><li>Integrated Product Team / SSEB participation prohibition </li></ul><ul><li>Interim billing re...
Results of DCAA Reactions <ul><li>Overbroad demands for access to employees and records </li></ul><ul><li>Widespread suspe...
Results of DCAA Reactions to Criticism (cont.) <ul><li>Key audits delayed </li></ul><ul><li>Increased Form 1 and other dis...
<ul><li>Suggestions for Working  </li></ul><ul><li>with DCAA </li></ul>
General Suggestions <ul><li>Engage local auditors early, even before draft reports written </li></ul><ul><li>Be engaged in...
Specific Actions <ul><li>React quickly and decisively to any DCAA internal control systems audit challenge </li></ul><ul><...
Specific Actions (cont.) <ul><li>Ensure DCAA access requests are appropriate </li></ul><ul><li>Respond promptly to questio...
Resolving Audit (Cost) Disputes
Resolving Disputes <ul><li>When costs questioned initially, DCAA and contractor required to confer to ensure understanding...
Resolving Disputes (cont.) <ul><li>When DCAA and contractor agree, agreement documented and contractor: </li></ul><ul><ul>...
Resolving Disputes (cont.) <ul><li>Form 1 also prompts CO to consider: </li></ul><ul><ul><li>Recouping any disapproved cos...
Resolving Disputes (cont.) <ul><li>Demand Payment Letter </li></ul><ul><ul><li>Request for Deferrel </li></ul></ul><ul><li...
Cost and Pricing Update
No Required Formula to Support Incurred Costs <ul><li>BearingPoint , 09-2 B.C.A. ¶ 37,289 </li></ul><ul><ul><li>Subcontrac...
Gov. Defective Pricing Claim Time-Barred <ul><li>McDonnell Douglas , ASBCA No. 56568, 2009 WL 4774620 </li></ul><ul><ul><l...
Airfare Costs <ul><li>New rule, effective January 11, 2010, clarifies that “lowest customary standard, coach, or equivalen...
Business Systems/Withholds <ul><li>Proposed DFARS rule </li></ul><ul><ul><li>75 Fed. Reg. 2,457 (Jan. 15, 2010) </li></ul>...
Conclusions / Questions <ul><li>Steven M. Masiello [email_address] </li></ul><ul><li>Taylor M. Menlove </li></ul><ul><li>[...
Upcoming SlideShare
Loading in …5
×

Recent Trends in Government Contract Cost Recovery and DCAA Audit Issues

2,791 views

Published on

Summarizes Recent Government Contract DCAA Audit Trend and Updates on Cost Recovery Developments

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
2,791
On SlideShare
0
From Embeds
0
Number of Embeds
5
Actions
Shares
0
Downloads
31
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Recent Trends in Government Contract Cost Recovery and DCAA Audit Issues

  1. 1. Effective Management of DCAA Audits ---------------------- Cost and Pricing Update NCMA Pikes Peak Chapter January 21, 2010 Steven M. Masiello Taylor M. Menlove McKenna Long & Aldridge LLP
  2. 2. Agenda <ul><li>DCAA Audit Policy Update </li></ul><ul><ul><li>GAO criticisms / new audit policies </li></ul></ul><ul><ul><li>Discussion of selected audit policies </li></ul></ul><ul><li>Recommendations for working with DCAA </li></ul><ul><li>Resolving Audit Disputes </li></ul><ul><li>Cost and Pricing Update (Case Law/Regulatory) </li></ul>
  3. 3. <ul><li>DCAA Audit Policy Update </li></ul>
  4. 4. Background <ul><li>July 2008 GAO report criticized DCAA audit execution: </li></ul><ul><ul><li>Audit work insufficient to support opinions </li></ul></ul><ul><ul><li>Work papers do not support opinions </li></ul></ul><ul><ul><li>DCAA supervisors drop findings and change opinions without adequate evidence </li></ul></ul>
  5. 5. Background (cont.) <ul><li>July 2008 GAO report surfaced two issues: </li></ul><ul><ul><li>Some DCAA auditors are not fully qualified (e.g., not certified public accountants) and have limited supervision </li></ul></ul><ul><ul><li>Issues not being resolved by DCAA in a timely manner  </li></ul></ul>
  6. 6. Background (cont.) <ul><li>DCAA reaction to July 2008 GAO report </li></ul><ul><ul><li>DCAA issued Policy memoranda in December 2008 aggressively targeting: </li></ul></ul><ul><ul><ul><li>Access to contractor records </li></ul></ul></ul><ul><ul><ul><li>Internal control audit opinions </li></ul></ul></ul>
  7. 7. Background (cont.) <ul><li>September 2009 GAO audit report again criticized DCAA audit execution </li></ul><ul><ul><li>Findings </li></ul></ul><ul><ul><ul><li>65 of 69 audits contained significant deficiencies, and remaining 4 failed to comply with GAGAS </li></ul></ul></ul><ul><ul><ul><li>Failure to protect public interest </li></ul></ul></ul><ul><ul><li>Recommendations </li></ul></ul><ul><ul><ul><li>Establish DCAA internal review organization </li></ul></ul></ul><ul><ul><ul><li>Review audit policies, including DCAA Contract Audit Manual (“DCAM”) </li></ul></ul></ul>
  8. 8. Access to Contractor Records <ul><li>Old DCAM procedures for obtaining documentation required that auditor: </li></ul><ul><ul><li>Verbally request documentation during normal course of business with contractor </li></ul></ul><ul><ul><li>Discuss with contractor the basis for the request </li></ul></ul>
  9. 9. Access (cont.) <ul><li>December 2008 Policy changed audit access approach: </li></ul><ul><ul><li>Policy states data “should be readily available” (e.g., same day unless off-site or analysis required) </li></ul></ul><ul><ul><li>Policy requires auditors obtain data “directly from person responsible for the information” and disapprove contractor use of “liaisons” as justification for delays </li></ul></ul>
  10. 10. Access (cont.) <ul><li>When contractor fails to provide documentation, Policy requires auditor to: </li></ul><ul><ul><li>Follow new denial of access to records “procedures” </li></ul></ul><ul><ul><li>Question unsupported costs in audit </li></ul></ul><ul><ul><li>Issue Form 1 to suspend or withhold unsupported costs billed, until data received and cost allowability determination made </li></ul></ul><ul><ul><li>Follow policy even if contractor concurs with questioned costs (because penalties may apply) </li></ul></ul><ul><ul><li>Consider whether internal control deficiency exists </li></ul></ul>
  11. 11. Access (cont.) <ul><li>New “fast track” procedures to obtain information when late and no explanation provided </li></ul><ul><ul><li>Auditor makes written request to management within 5 days </li></ul></ul><ul><ul><li>If contractor fails to provide information or explanation within 1 week , auditor notifies Contractor of formal denial of records </li></ul></ul><ul><ul><li>After additional efforts by CO or DCAA, DCAA may issue subpoena under 10 U.S.C § 2313(b) contract audit authority </li></ul></ul><ul><ul><li>DoD IG also may issue subpoena under “broad” subpoena authority in 5 U.S.C. App. § 8 for fraud-related issues </li></ul></ul>
  12. 12. Access (cont.) <ul><li>Contractors and DCMA should know: </li></ul><ul><ul><li>Audit clause limits DCAA’s examination to “records and other evidence sufficient to reflect” costs, and at “reasonable times” </li></ul></ul><ul><ul><ul><li>Audit clause does not provide DCAA right to interview employees </li></ul></ul></ul>
  13. 13. Access (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>CO “may” reduce or suspend payments if CO finds: </li></ul></ul><ul><ul><ul><li>Unallowable costs; or </li></ul></ul></ul><ul><ul><ul><li>“Substantial evidence” of a failure to comply with contract “material requirement,” but DCAA not permitted to withhold costs pursuant to a policy </li></ul></ul></ul><ul><ul><li>No contract provision authorizes “penalty” for lack of access </li></ul></ul>
  14. 14. Access (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>Policy ignores relevant case law </li></ul></ul><ul><ul><ul><li>Failure to reimburse costs based upon a denial of access to records is improper, absent cost and record relationship </li></ul></ul></ul><ul><ul><ul><li>DCAA subpoena power does not authorize access to all records that might relate directly or indirectly to a contract (e.g., does not extend to internal audit reports) </li></ul></ul></ul><ul><ul><li>Contractors properly may resist improper records requests </li></ul></ul>
  15. 15. Access (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>FAR and DFAR Councils issued a Final Rule that modifies audit clause to allow GAO to interview “any current” employees (74 Fed. Reg. 52,851 (Oct 17, 2009)) </li></ul></ul><ul><ul><ul><li>Implements FY 2009 DoD Authorization Act </li></ul></ul></ul><ul><ul><ul><li>Inconsistent with case law that only permits limited access to inspect those items directly pertinent to cost and pricing </li></ul></ul></ul>
  16. 16. Internal Control Audits <ul><li>December 2008 Policy changes audit reporting approach: </li></ul><ul><ul><li>Policy purports to “clarify” definition of “significant deficiency/material weakness” </li></ul></ul><ul><ul><li>Audits on internal controls that report “any significant deficiencies/material weaknesses” for any control element now will include an opinion that the overall system is inadequate (e.g., no “inadequate in part”) </li></ul></ul>
  17. 17. Internal Control Audits (cont.) <ul><li>Policy builds on prior concept that a “failure to accomplish any control objective. . . could result in unallowable costs” </li></ul><ul><ul><li>DCAA claims it only audits major contractor systems, so any internal control (e.g., ethics control objective) deficiency is material </li></ul></ul><ul><ul><li>No direct relationship to cost required for DCAA to report “a significant deficiency/material weakness” </li></ul></ul><ul><ul><li>Policy states “[i]t is not necessary to demonstrate actual questioned cost to report a significant deficiency/material weakness” </li></ul></ul>
  18. 18. Internal Control Audits (cont.) <ul><li>Policy now requires: </li></ul><ul><ul><li>DCAA issuance of a Form 1 even when no disagreement exists or system is inadequate in part </li></ul></ul><ul><ul><li>Audits identify affected system and recommend </li></ul></ul><ul><ul><ul><li>CO disapprove system, and </li></ul></ul></ul><ul><ul><ul><li>Pursue suspension of a percentage of progress payments or reimbursement of costs (Form 1) </li></ul></ul></ul><ul><ul><li>Internal control audits not to contain suggestions to improve system (apparently to avoid confusion) </li></ul></ul>
  19. 19. Internal Control Audits (cont.) <ul><li>Contractors and DCMA should know: </li></ul><ul><ul><li>DCAA’s internal control position contrary to current standards regarding “material” deficiency </li></ul></ul><ul><ul><li>Previous policy consistent with SOX where material deficiency relates to controls adversely affecting ability to record, process, summarize and report financial data </li></ul></ul>
  20. 20. Internal Control Audits (cont.) <ul><li>Contractors and DCMA should know (cont.): </li></ul><ul><ul><li>DCAA’s conclusion that any deficiency supports reductions in progress payments and cost reimbursements is wrong </li></ul></ul><ul><ul><ul><li>Disallowance improper unless relates to specific costs </li></ul></ul></ul><ul><ul><ul><li>Progress payments clause requires payment absent a CO finding of a failure to maintain an “adequate” accounting system, not a “perfect” system </li></ul></ul></ul>
  21. 21. Other DCAA Reactions <ul><li>Integrated Product Team / SSEB participation prohibition </li></ul><ul><li>Interim billing review procedures </li></ul><ul><li>Direct billing suspension standards </li></ul><ul><li>New DCAA Director (Nov. 9, 2009) </li></ul>
  22. 22. Results of DCAA Reactions <ul><li>Overbroad demands for access to employees and records </li></ul><ul><li>Widespread suspensions of contractor direct billing authority </li></ul><ul><li>Approved internal control systems now deemed “inadequate” </li></ul>
  23. 23. Results of DCAA Reactions to Criticism (cont.) <ul><li>Key audits delayed </li></ul><ul><li>Increased Form 1 and other disallowance activity </li></ul><ul><li>CO indecision / emerging disputes </li></ul><ul><ul><li>DCAA will not discuss issues </li></ul></ul><ul><ul><li>COs reluctant to reject DCAA conclusion </li></ul></ul>
  24. 24. <ul><li>Suggestions for Working </li></ul><ul><li>with DCAA </li></ul>
  25. 25. General Suggestions <ul><li>Engage local auditors early, even before draft reports written </li></ul><ul><li>Be engaged in the audit process </li></ul><ul><li>React decisively to DCAA overreaching; do not create pattern of acquiescence </li></ul>
  26. 26. Specific Actions <ul><li>React quickly and decisively to any DCAA internal control systems audit challenge </li></ul><ul><ul><li>Work with CO concerning any audit findings </li></ul></ul><ul><ul><li>Submit rebuttal and corrective action plan immediately </li></ul></ul><ul><ul><li>Draft solicitation requirements to maximize competition </li></ul></ul>
  27. 27. Specific Actions (cont.) <ul><li>Ensure DCAA access requests are appropriate </li></ul><ul><li>Respond promptly to questioned costs </li></ul><ul><li>Understand relevant dispute / litigation options </li></ul>
  28. 28. Resolving Audit (Cost) Disputes
  29. 29. Resolving Disputes <ul><li>When costs questioned initially, DCAA and contractor required to confer to ensure understanding of issues </li></ul><ul><ul><li>DCAA provides contractor preliminary findings </li></ul></ul><ul><ul><li>Contractor permitted 30 days to provide rebuttal for inclusion in audit </li></ul></ul><ul><ul><li>Exit conference may include CO, and provide contractor with opportunity to submit additional information within 30 days </li></ul></ul><ul><ul><li>DCAA given 30 days to audit additional information </li></ul></ul>
  30. 30. Resolving Disputes (cont.) <ul><li>When DCAA and contractor agree, agreement documented and contractor: </li></ul><ul><ul><li>Excludes costs from vouchers, or </li></ul></ul><ul><ul><li>Credits cost in next voucher submitted </li></ul></ul><ul><li>When DCAA and contractor disagree, DCAA issues Form 1, and contractor may: </li></ul><ul><ul><li>Request CO pay costs, or </li></ul></ul><ul><ul><li>File a Claim </li></ul></ul>
  31. 31. Resolving Disputes (cont.) <ul><li>Form 1 also prompts CO to consider: </li></ul><ul><ul><li>Recouping any disapproved costs paid when no future billings </li></ul></ul><ul><ul><li>Issuing Final Decision with a demand for payment, and/or </li></ul></ul><ul><ul><li>Authorizing DCAA disapprove costs on separate contract if no payment in 30 days </li></ul></ul>
  32. 32. Resolving Disputes (cont.) <ul><li>Demand Payment Letter </li></ul><ul><ul><li>Request for Deferrel </li></ul></ul><ul><li>Contractor Certified Claim/CO Written Decision </li></ul><ul><li>Contractor Appeal </li></ul>
  33. 33. Cost and Pricing Update
  34. 34. No Required Formula to Support Incurred Costs <ul><li>BearingPoint , 09-2 B.C.A. ¶ 37,289 </li></ul><ul><ul><li>Subcontractor provided security in Iraq for BearingPoint to provide financial services; lost timesheets </li></ul></ul><ul><ul><li>Government argued contractor required to produce all “hard” documents and maintain “nice neat little files” to support costs </li></ul></ul><ul><ul><li>Board found costs could be supported in a variety of ways, including use of “other evidence” (e.g., witness testimony) </li></ul></ul>
  35. 35. Gov. Defective Pricing Claim Time-Barred <ul><li>McDonnell Douglas , ASBCA No. 56568, 2009 WL 4774620 </li></ul><ul><ul><li>DCAA issued preliminary audit findings more than 6 years before government asserted defective pricing claim, but DCAA issued final audit findings (with increased amount) less than 6 years before </li></ul></ul><ul><ul><li>Government defective pricing claim time-barred under CDA statute of limitations </li></ul></ul><ul><ul><ul><li>“ [N]o requirement that a sum certain be established” to begin tolling of 6-year period </li></ul></ul></ul><ul><ul><ul><li>Statute applies equally to government and contractor claims </li></ul></ul></ul>
  36. 36. Airfare Costs <ul><li>New rule, effective January 11, 2010, clarifies that “lowest customary standard, coach, or equivalent airfare” means lowest priced airfare available to the contractor </li></ul><ul><ul><li>74 Fed. Reg. 65,612 (December 10, 2009) </li></ul></ul><ul><li>When contractors obtain discounted airfare prices not available to the general public, airfare only is allowable for the discounted prices </li></ul>
  37. 37. Business Systems/Withholds <ul><li>Proposed DFARS rule </li></ul><ul><ul><li>75 Fed. Reg. 2,457 (Jan. 15, 2010) </li></ul></ul><ul><li>Procedures for government withholds based on deficiencies in contractor “business systems” </li></ul><ul><ul><li>“Business systems” defined broadly </li></ul></ul><ul><li>Administrative requirements </li></ul><ul><ul><li>Timekeeping (Accounting System) </li></ul></ul><ul><li>Ambiguous requirements </li></ul><ul><ul><li>Maintain “complete history files” (Estimating System) </li></ul></ul>
  38. 38. Conclusions / Questions <ul><li>Steven M. Masiello [email_address] </li></ul><ul><li>Taylor M. Menlove </li></ul><ul><li>[email_address] </li></ul><ul><li>1400 Wewatta St, Suite 700 Denver, CO 80202 (303) 634-4000 </li></ul>DN 32165298

×