United States Government Accountability Office

GAO Testimony 

Before the Committee on Homeland 

Security and Governmental Affairs, 

U.S. Senate

DCAA AUDITS

Allegations That Certain 

Audits at Three Locations 

Did Not Meet Professional 

Standards Were 

Substantiated 

Statement of Gregory D. Kutz, Managing Director 

Forensic Audits and Special Investigations 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Wednesday, September 10, 2008

 

GAO-08-993T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 10, 2008

DCAA AUDITS

Allegations That Certain Audits at Three Locations

Did Not Meet Professional Standards Were 

Highlights of GAO-08-993T, testimony Substantiated 

before Committee on Homeland Security

and Governmental Affairs, U.S. Senate 

The Defense Contract Audit 

Agency (DCAA) under the 

Department of Defense (DOD) 

Comptroller plays a critical role in

contractor oversight by providing 

auditing, accounting, and financial 

advisory services in connection 

with DOD and other federal agency 

contracts and subcontracts. DCAA 

has elected to follow generally

accepted government auditing

standards (GAGAS). These 

standards provide guidelines to

help government auditors maintain 

competence, integrity, objectivity, 

and independence in their work. 

GAO investigated hotline 

complaints it received related to 

alleged failures to comply with 

GAGAS on 14 DCAA audits. 

Specifically, it was alleged that 

(1) working papers did not support 

reported opinions, (2) supervisors 

dropped findings and changed 

audit opinions without adequate 

evidence, and (3) sufficient work

was not performed to support audit 

conclusions and opinions. GAO 

also investigated issues related to

the quality of certain forward 

pricing audit reports.

GAO investigators interviewed over 

50 individuals, reviewed working

papers and related documents for

14 audits issued from 2003 through 

2007 by two DCAA offices, and 

reviewed documentation on audit 

issues at a third DCAA office. GAO 

did not reperform the audits to

validate the completeness and

accuracy of DCAA’s findings. 

DCAA did not agree with the

“totality” of GAO’s findings, but it 

did acknowledge shortcomings 

with some audits and agreed to 

take certain corrective actions. 

GAO substantiated the allegations. Although DCAA policy states that its audits

are performed according to GAGAS, GAO found numerous examples where 

DCAA failed to comply with GAGAS in all 13 cases. For example, contractor 

officials and the DOD contracting community improperly influenced the audit 

scope, conclusions, and opinions on three cases—a serious independence 

issue. At two DCAA locations, GAO found evidence that (1) working papers 

did not support reported opinions, (2) DCAA supervisors dropped findings 

and changed audit opinions without adequate evidence for their changes, and 

(3) sufficient audit work was not performed to support audit opinions and 

conclusions. GAO also substantiated allegations of inadequate supervision of 

certain audits at a third DCAA location. The table below contains selected 

details about three cases GAO investigated. 

Selected Details of Audits GAO Investigated

DOD contractor Audit type Significant case study issues

Major aerospace

company 

(DCAA location 1)

Estimating 

system  DCAA made an up-front agreement with the contractor to

limit the scope of work and basis for audit opinion. 

 Contractor was unable to develop compliant estimates, 

leading to a draft opinion of “inadequate in part.” 

 Contractor objected to draft findings, and DCAA 

management assigned a new supervisory auditor. 

 Management threatened the senior auditor with 

personnel action if he did not delete findings from the 

report and change the draft audit opinion to “adequate.” 

Company 

produces and 

supports military 

and satellite 

systems 

(DCAA location 2)

Billing system  Draft audit report identified six significant deficiencies, 

one of which led the contactor to overbill the government 

by $246,000 and another which may have led to 

 $3.5 million in overbillings. 

 First supervisory auditor and auditor were replaced by 

other auditors who dropped the findings and changed the 

draft audit opinion from “inadequate,” to “adequate.” 

 Sufficient testing was not performed to support an

opinion that controls were adequate. 

 DOD Inspector General recommended that DCAA 

rescind the final audit report. Over a year later, at the end 

of GAO’s investigation, DCAA rescinded the final report. 

Major weapons 

system contractor

(DCAA location 3)

Forward pricing  Two supervisors responsible for 62 forward pricing audits 

of over $6.4 billion in government contract negotiations

did not review working papers before report issuance. 

 Inexperienced trainee auditors were assigned to 18 of 

the 62 audits without proper supervision. 

 An internal DCAA audit quality review found 28 systemic 

deficiencies in 9 of 11 selected forward pricing audits. 

 The DCAA field office lost control of final working papers 

because trainee auditors did not always properly enter 

them in the electronic workpaper system. 

Source: GAO. 

Throughout GAO’s investigation, auditors at each of the three DCAA locations

told us that the limited number of hours approved for their audits directly 

affected the sufficiency of audit testing. Moreover, GAO’s investigation 

identified a pattern of frequent management actions at two locations that 

served to intimidate auditors, discourage them from speaking with

investigators, and create a generally abusive work environment. 

To view the full product, including the scope 

and methodology, click on GAO-08-993T. 

For more information, contact Gregory D. 

Kutz at (202) 512-6722 or kutzg@gao.gov. 
Mr. Chairman and Members of the Committee: 

Thank you for the opportunity to discuss our recent investigation of 

certain Defense Contract Audit Agency (DCAA) audits. DCAA plays a 

critical role in Department of Defense (DOD) contractor oversight by 

providing auditing, accounting, and financial advisory services in 

connection with the negotiation, administration, and settlement of 

contracts and subcontracts.1

 Although DCAA provides a range of services

to contracting officers and other DOD officials, DCAA’s primary function 

is contract audit services. DCAA contract audits are intended to be a key 

control to help ensure that the “prices paid by the government for needed

goods and services are fair and reasonable.” DCAA also audits contractorproposed estimates used to support contract negotiations and costs 

charged to the government. The amount of testing on these proposal and 

cost-related audits, is based on conclusions in DCAA audits of contractor 

controls in accounting, billing, estimating, and other key systems. In 

performing its work, DCAA states that it follows professional standards, 

known as generally accepted government auditing standards (GAGAS). 2

Today, I will summarize the results of our investigation of allegations 

about certain DCAA audits at the three locations in California. Specifically, 

DCAA auditors alleged that (1) the working papers did not support the 

reported opinions; (2) DCAA supervisors dropped findings and changed 

audit opinions without adequate audit evidence for their changes; and 

(3) sufficient work was not performed to support the audit opinions and 

conclusions. Auditors noted that as a result of these practices, DCAA 

supervisors were issuing reports in which the audit documentation was 

not sufficient or it contradicted the final opinions or conclusions in the 

reports. During our investigation, we received additional allegations that 

raised concerns regarding the quality of forward pricing audit reports 

issued by a third DCAA field office in California. We investigated the 

allegations and concerns we received as 13 separate cases to determine 

 1

DCAA also performs audit services for other federal agencies on a fee-for-service basis. 

2

GAO, Government Auditing Standards: 2003 Revision, GAO-03-673G (Washington, D.C.: 

June 2003). This was the version of GAGAS in effect at the time of all the DCAA audits that

GAO investigated, except for the audit discussed in case 1. The version of GAGAS 

applicable to case 1 was the August 1999 revision. 

Page 1 GAO-08-993T 
whether they could be substantiated. Our investigation is discussed in 

detail in an investigative report we issued in July 2008. 3

We performed an extensive, 2-year investigation in which we conducted 

over 100 interviews of over 50 individuals. In performing our investigation, 

we reviewed applicable DCAA Contract Audit Manual (CAM) guidance and 

relevant requirements in the Federal Acquisition Regulation (FAR), 

Defense FAR Supplement (DFARS), and cost accounting standards (CAS). 

We also obtained and reviewed the working papers related to allegations 

about individual audits at two locations. In addition, we interviewed 

current and former DCAA auditors, supervisors, and managers who 

worked on the audits and interviewed DOD and federal agency contracting 

officers. To investigate allegations about forward pricing audits at the 

third location, we interviewed supervisors who led the audits and signed 

the 62 related forward pricing audit reports. We also reviewed applicable 

documentation and interviewed DCAA managers about corrective actions

taken to address identified weaknesses. In assessing DCAA audits, we 

used GAGAS as our criteria. We learned that the DOD Inspector General 

(IG) was investigating the 10 audits noted in the original allegations we 

received. We therefore coordinated our work closely with DOD IG 

auditors and Defense Criminal Investigative Service (DCIS) investigators. 

DOD IG’s Office of Audit Policy and Oversight, which has oversight 

responsibility for DCAA, issued a memorandum to DCIS on its findings on 

January 24, 2007. We reviewed this memorandum and DCAA’s response. 

We plan to issue a separate report at the request of this Committee 

concerning our broader audit of DCAA’s overall organizational 

environment and quality control system and our review of selected audits 

performed by selected offices within DCAA’s five regions. Our report will 

include recommendations, as appropriate, for strengthening the overall

contract audit environment and assuring compliance with GAGAS. We 

performed our investigation from June 2006 through July 2008 in 

compliance with the standards for investigations prescribed by the 

President’s Council for Integrity and Efficiency. 

 3

GAO, DCAA Audits: Allegations That Certain Audits at Three Locations Did Not Meet 

Professional Standards Were Substantiated, GAO-08-857 (Washington: D.C.: July 22, 2008). 

Page 2 GAO-08-993T 
We substantiated the allegations and auditor concerns made on each of 

the 13 cases we investigated, involving 14 audits at two locations4

 and 

forward pricing audit issues at a third location. The 13 cases related to 

seven contractors. In the 12 cases at locations 1 and 2, we substantiated 

the allegations and auditor concerns that (1) workpapers did not support 

reported opinions, (2) DCAA supervisors dropped findings and changed 

audit opinions without adequate audit evidence for their changes, and 

(3) sufficient audit work was not performed to support audit opinions and 

conclusions. We also found that contractor officials and the DOD 

contracting community improperly influenced the audit scope, 

conclusions, and opinions of some audits—a serious independence issue. 

We also substantiated allegations of problems with the audit environment 

and inadequate supervision of certain forward pricing audits at location 3. 

Moreover, during our investigation, DCAA managers took actions against

their staff at two locations that served to intimidate auditors and create an

abusive work environment. 

Results of 

Investigation 

DCAA states that its audits are performed according to professional 

standards (GAGAS). However, in substantiating the allegations, we found 

numerous failures to comply with these standards in all 13 cases we 

investigated. The working papers did not adequately support the final 

conclusion and opinion for any of the 14 audits we investigated. In many 

cases, supervisors changed audit opinions to indicate contractor controls 

or compliance with CAS was adequate when workpaper evidence 

indicated that significant deficiencies existed. We also found that in some 

cases, DCAA auditors did not perform sufficient work to support draft 

audit conclusions and their supervisors did not instruct or allow them to 

perform additional work before issuing final reports that concluded 

contractor controls or compliance with CAS were adequate. At location 1, 

we also found undue contractor influence that impaired auditor 

independence. At location 2, two supervisors were responsible for the 12 

audits we investigated, and 11 of these audits involved insufficient work to 

support the reported opinions. At location 3, we substantiated allegations 

about inadequate supervision of trainees, reports being issued without 

final supervisory review, and contracting officer pressure to issue reports 

before audit work was completed in order to meet contract negotiation 

time frames—a serious independence issue. Noncompliance with GAGAS

in the cases we investigated has had an unknown financial effect on the 

government. Because DCAA auditors’ limited work identified potential 

 4

We handled our investigation of three related audits of one contractor as one case. 

Page 3 GAO-08-993T 
significant deficiencies in contractor systems and accounting practices 

that were not analyzed in sufficient detail to support reportable findings 

and recommendations for corrective action, reliance on data and 

information generated by the audited systems could put users and 

decision makers at risk. 

Tables summarizing our findings for all the audits can be found in 

appendixes I and II. The following examples illustrate problems we found 

at two DCAA locations:

• In conducting a 2002 audit related to a contractor estimating system, 

DCAA auditors reviewed draft basis of estimates (BOE) prepared by 

the contractor and advised the contractor on how to correct significant 

deficiencies. BOEs are the means for providing government contract 

officials with information critical to making contract pricing decisions. 

This process resulted from an up-front agreement between the DCAA 

resident auditor and the contractor—one of the top five government 

contractors based on contract dollar value—that limited the scope of 

work and established the basis for the audit opinion. According to the 

agreement, the contractor knew which BOEs would be selected for 

audit and the audit opinion would be based on the final, corrected 

BOEs after several DCAA reviews. Even with this BOE review effort, 

the auditors found that the contractor still could not produce 

compliant BOEs and labeled the estimating system “inadequate in 

part.” We found that enough evidence had been collected by the 

original supervisory auditor and senior auditor to support this opinion. 

However, after the contractor objected to draft findings and 

conclusions presented at the audit exit conference, the DCAA resident 

auditor replaced the original supervisory auditor assigned to this audit 

and threatened the senior auditor with personnel action if he did not 

change the summary workpaper and draft audit opinion. The second 

supervisory auditor issued the final report with an “adequate” opinion 

without documenting adequate support for the changes. This audit did 

not meet GAGAS for auditor objectivity and independence because of 

the up-front agreement, and it did not meet standards related to 

adequate support for audit opinions. 

• The draft report for a 2005 billing system audit identified six significant 

deficiencies, one of which allowed the contractor to overbill the 

government by $246,000 and another that may have led to $3.5 million 

in overbillings. DCAA managers replaced the supervisory auditor and 

auditor, and the new staff worked together to modify working papers 

and change the draft audit opinion from “inadequate,” to “inadequate in 

part,” and, finally, to “adequate.” Sufficient testing was not documented 

Page 4 GAO-08-993T 
to support this opinion. The DOD IG concluded that DCAA should 

rescind the final report for this audit, but DCAA did not do so. Billing 

system audits are conducted to assess contractor controls for assuring 

that charges to the government are appropriate and compliant and to 

support decisions on whether to approve contractors for direct billing. 

As a result of the 2005 audit, DCAA authorized this contractor for 

direct billing of its invoices without prior government review, thereby 

providing quicker payments and improved cash flow to the contractor. 

On June 20, 2008, when we briefed DOD on the results of our 

investigation, DCAA advised us that a DCAA Western Region review of 

this audit in 2008 concluded that the $3.5 million finding was based on 

a flawed audit procedure. As a result, it rescinded the audit report on 

May 22, 2008. However, DCAA officials said that they did not remove 

the contractor’s direct-billing privileges because other audits did not 

identify billing problems. 

• The draft report for a 2005 CAS 4035 compliance audit requested by a

Department of Energy administrative contracting officer (ACO) 

identified four deficiencies related to corporate cost allocations to 

government business segments. However, a DCAA supervisory auditor 

directed a member of her staff to write a “clean opinion” report in 1 

day using “boilerplate” language and without reviewing the existing set 

of working papers developed by the original auditor. The supervisory 

auditor appropriately dropped two significant deficiencies from the 

draft report, but did not adequately document the changes in the 

workpapers. In addition, the supervisory auditor improperly referred 

two other significant deficiencies to another DCAA office that does not 

have audit jurisdiction, and therefore, did not audit the contractor’s 

corporate costs or CAS 403 compliance. The final opinion was later 

contradicted by a September 21, 2007, DCAA report that determined 

that this contractor was in fact not in compliance with CAS 403 during 

the period of this audit. 

We also substantiated allegations that there were problems with the audit 

environment at a third DCAA location—a resident office responsible for 

auditing another of the five largest government contractors. For example, 

the two supervisors, who approved and signed 62 of the 113 audit reports 

performed at the resident office location during fiscal years 2004 through 

 5

CAS 403 establishes criteria for allocation of the expenses of a home office to the

segments of the organization. 

Page 5 GAO-08-993T 
2006,

6

 said that trainees were assigned to complex forward pricing audits

as their first assignments even though they had no institutional knowledge 

about the type of materials at risk of overcharges, how to look at related

sources of information for cost comparisons, or how to complete the 

analysis of complex cost data required by FAR. The supervisors, who did 

not always have the benefit of experienced auditors to assist them in 

supervising the trainees, admitted that they generally did not review 

workpapers in final form until after reports were issued. Moreover, 

because the trainee auditors did not have an adequate understanding of 

DCAA’s electronic workpaper filing system, they did not always enter 

completed workpapers in the system, resulting in a loss of control over 

official workpapers. In addition, one of the two supervisory auditors told 

us that contracting officers would sometimes tell auditors to issue 

proposal audit reports in as few as 20 days with whatever information the 

auditor had at that time and not to cite a scope limitation in the audit 

reports, so that they could begin contract negotiations. If the available 

information was insufficient, GAGAS7

 would have required the auditors to 

report a scope limitation. Where scope limitations existed, but were not 

reported, the contracting officers could have negotiated contracts with 

insufficient information. Moreover, a 2006 DCAA Western Region quality 

review reported 28 systemic deficiencies on 9 of 11 forward pricing audits

reviewed, including a lack of supervisory review of the audits. The 

problems at this location call into question the reliability of the 62 forward 

pricing audit reports issued by the two supervisors responsible for 

forward pricing audits at the resident office location from fiscal years 2004 

through 2006, connected with over $6.4 billion in government contract 

negotiations. 

Throughout our investigation, auditors at each of the three DCAA 

locations told us that the limited number of hours approved for their 

audits directly affected the sufficiency of audit testing. At the third DCAA 

location we investigated, two former supervisory auditors told us that the 

volume of requests for the audits, short time frames demanded by 

customers for issuing reports to support contract negotiations (e.g., 20 to 

30 days), and limited audit resources affected their ability to comply with 

 6

The two supervisors were responsible for all forward pricing audits at the resident office 

location. The remaining 51 of the 113 audits were performed by separate suboffice 

locations of the resident office and were signed by the supervisory auditors at those 

locations. 

7

GAO-03-673G, § 6.27c. 

Page 6 GAO-08-993T 
GAGAS. Our review of DCAA performance data showed that DCAA 

measures audit efficiency and productivity as a factor of contract dollars 

audited divided by audit hours. In addition, because customer-requested 

assignments—such as forward pricing audits requested by contracting 

officers—which are referred to as demand work by DCAA, take priority, 

other work, such as internal control and CAS compliance audits, are often 

performed late in the year. Auditors told us that there is significant 

management pressure to complete these nondemand audits by the end of 

the fiscal year to meet field audit office (FAO) performance plans. 

During the DOD IG and GAO investigations, we identified a pattern of 

frequent management actions that served to intimidate the auditors and 

create an abusive environment at two of the three locations covered in our 

investigation. In this environment, some auditors were hesitant to speak to 

us even on a confidential basis. For example, supervisory auditors and the

branch manager at one DCAA location we visited pressured auditors, 

including trainees who were in probationary status, to disclose to them 

what they told our investigators. Some probationary trainees told us this 

questioning made them feel pressured or uncomfortable. Further, we 

learned of verbal admonishments, reassignments, and threats of 

disciplinary action against auditors who raised questions about 

management guidance to omit their audit findings and change draft 

opinions or who spoke with or contacted our investigators, DOD 

investigators, or DOD contracting officials. We briefed cognizant DCAA 

region and headquarters officials on the results of our investigation in 

February 2008 and reviewed additional documentation they provided. We 

briefed DOD and DCAA officials on the results of our investigation on 

June 20 and 25, 2008. We summarized DCAA’s comments on our corrective 

action briefing in our investigative report, and we included relevant details

of DCAA’s comments at the end of our case discussions. 

In response to our investigation, DCAA rescinded two audit reports and 

removed a contractor’s direct billing authorization related to a third audit.

DCAA also performed subsequent audits related to three additional cases 

that resulted in audit opinions that contradicted previously reported 

adequate (“clean”) opinions and included numerous significant 

deficiencies. For other cases, DCAA officials told us that although 

workpaper documentation could have been better, on the basis of other 

audits DCAA performed, they do not believe the reported opinions were 

incorrect or misleading. 

DCAA Response to 

Investigation 

Page 7 GAO-08-993T 
In the cases we investigated, pressure from the contracting community 

and buying commands for favorable opinions to support contract 

negotiations impaired the independence of three audits involving two of 

the five largest government contractors. In addition, DCAA management 

pressure to (1) complete audit work on time in order to meet performance 

metrics and (2) report favorable opinions so that work could be reduced

on future audits and contractors could be approved for direct billing 

privileges led the three DCAA FAOs to take inappropriate short cuts—

ultimately resulting in noncompliance with GAGAS and internal DCAA 

CAM guidance. Although it is important for DCAA to issue products in a 

timely manner, the only way for auditors to determine whether “prices 

paid by the government for needed goods and services are fair and 

reasonable” is by performing sufficient audit work to determine the 

adequacy of contractor systems and related controls, and their compliance 

with laws, regulations, cost accounting standards, and contract terms. 

Further, it is important that managers and supervisory auditors at the 

three locations we investigated work with their audit staff to foster a 

productive, professional relationship and assure that auditors have the 

appropriate training, knowledge, and experience.

Mr. Chairman and Members of the Committee, this concludes my 

statement. I would be pleased to answer any questions that you or other 

members of the committee may have at this time. 

For further information about this testimony, please contact me at 202-

512-6722 or kutzg@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this statement. Major contributors to this testimony include Gayle L.

Fischer, Assistant Director; Andrew O’Connell, Assistant Director and 

Supervisory Special Agent; F. Abe Dymond, Assistant General Counsel; 

Richard T. Cambosos; Jeremiah F. Cockrum; Andrew J. McIntosh; and 

Ramon J. Rodriguez, Senior Special Agent. 

Concluding Remarks 

Contacts and Staff 

Acknowledgments 

Page 8 GAO-08-993T 
Page 9 GAO-08-993T 

Case 

Impairment to 

auditor

independence

Working papers 

did not support

reported opinions

Draft audit opinions

changed without 

sufficient 

documentation

Auditor did not 

perform 

sufficient work 

to support 

conclusions Significant problems

1 X X X The DCAA resident office and contractor 

made an up-front agreement on audit 

scope, which had the effect of 

predetermining an “adequate” audit 

opinion. 

2 X X X On the basis of pressure from contractor 

and buying command to resolve CAS 

compliance issues and issue a favorable 

opinion, a DCAA region official directed 

the auditors not to include CAS 

compliance problems in the audit 

workpapers. 

3 X X X Branch manager and supervisory auditor 

terminated audit work and issued 

opinions without sufficient documentation 

based on their view that defective pricing 

did not exist on the related contracts. 

4 X X X Supervisory auditor dropped preliminary 

findings based on a flawed audit 

procedure instead of requiring auditors to 

perform sufficient testing to conclude on

the adequacy of billing system controls. 

5 X X X Auditor was excluded from the exit 

conference, findings were dropped 

without adequate support, and supervisor 

made contradictory statements on her 

review of the audit. 

6 X X X Dropped findings on corporate accounting 

were referred to another field audit office 

(FAO), which does not review corporate 

costs. Supervisor prepared and approved 

key working papers herself, without 

required supervisory review. 

7 X X X Supervisor directed another auditor to 

write a clean opinion report without 

reviewing the working papers. Supervisor 

then changed the working papers without 

support and referred two dropped findings 

to another FAO, which does not review

corporate overhead allocations. 

Appendix I: GAGAS Compliance Problems 

Associated with Hotline Case Investigations 
Case 

Impairment to 

auditor

independence

Working papers 

did not support

reported opinions

Draft audit opinions

changed without 

sufficient 

documentation

Auditor did not 

perform 

sufficient work 

to support 

conclusions Significant problems

8 X X X Inexperienced trainees assigned to 

complex forward pricing audits without 

proper supervision. Reports issued with

unqualified opinions before supervisory 

review was completed due to pressure 

from contracting officers. 

9 X X Significant deficiency and FAR 

noncompliance related to the lack of 

contractor job descriptions for executives 

not reported. 

10 X X Significant deficiency related to

subcontract management not reported. 

11 X X Second auditor and supervisor dropped 6 

of 10 significant deficiencies without 

adequate documentation to show that 

identified weaknesses were resolved. 

12 X X X Supervisor identified problems with test 

methodology but dropped findings instead 

of requiring tests to be reperformed. 

13 X X Second auditor and supervisor deleted

most audit steps and performed limited 

follow-up work that did not support the 

reported opinion of overall compliance 

with CAS. 

Source: GAO analysis.

Page 10 GAO-08-993T 
Page 11 GAO-08-993T 

Case Type of audit Contractor Location Case details 

1 Estimating system

survey follow-on 

(2002) 

Contractor A DCAA 

Location 1a

• Purpose of audit was to review the corrective action plan (CAP) 

developed by Contractor A in response to prior findings of 

inadequate basis of estimates (BOE) related to labor hours. 

• In the face of pressure from DOD’s contracting community to 

approve Contractor A’s estimating system, we found evidence 

there was an up-front agreement between DCAA and Contractor 

A to limit the scope of work and basis of the audit opinion (a 

significant impairment of auditor independence). 

• Auditors found significant deficiencies with the CAP 

implementation plan, that is, the contractor could not develop

compliant BOEs without DCAA’s assistance at the initial, 

intermediate, and final stages of the estimates. 

• Original supervisory auditor was reassigned; the resident auditor 

and new supervisory auditor directed the draft opinion be 

changed from “inadequate in part” to “adequate” after the 

contractor objected to DCAA draft findings and opinion. 

• The working papers did not contain audit evidence to support the 

change in opinion. 

• Field office management threatened the senior auditor with 

personnel action if he did not change the draft audit opinion to

“adequate.” 

2 Proposal audit 

(2006) 

Contractor A DCAA 

Location 1 

• Audit related to a revised proposal submitted after DCAA reported 

an adverse (inadequate) opinion on Contractor A’s 2005 

proposal. 

• At beginning of the audit, buying command and Contractor A 

officials met with a DCAA regional audit manager to determine 

how to resolve cost accounting standard (CAS) compliance 

issues and obtain a favorable audit opinion. 

• Contractor A did not provide all cost information requested for 

audit. 

• Contrary to DCAA Contract Audit Manual guidance, the regional 

audit manager instructed auditors that they could not base an 

“adverse” (inadequate) audit opinion on the lack of information to 

audit certain costs. 

• On the basis of an “inadequate in part” opinion reported in May 

2006, the buying command negotiated a $937 million contract, 

which has grown to $1.2 billion. 

Appendix II: Summary of GAO Findings on 

Hotline Investigations of Selected Audits 
Case Type of audit Contractor Location Case details 

3 Three defective

pricing audits (2005) 

Contractor B DCAA 

Location 2a

• Branch manager and supervisory auditor predetermined that 

there was no defective pricing; however, the auditor concluded 

that Contractor B’s practice potentially constituted defective

pricing and obtained technical guidance that specific contracts 

would need to be analyzed to make a determination. The branch 

manager disagreed. 

• Supervisory auditor and branch manager subsequently issued 

three reports stating that Contractor B’s practice at three divisions 

did not constitute defective pricing. 

• Insufficient work was performed on these audits to come to any 

conclusion about defective pricing and as a result, the final 

opinions on all three audit reports are not supported. 

• Absent DCAA audit support for defective pricing, the contracting 

officer pursued a CAS 405 noncompliance at 3 contractor 

divisions and recovered $71,000. 

• On July 17, 2008, Contractor B settled on a Defense Criminal 

Investigative Service defective pricing case for $620,900. 

4 Billing system 

(2005) 

Contractor C DCAA 

Location 2 

• Draft audit report identified six significant deficiencies, one of 

which led Contractor C to overbill the government by $246,000 

and another which potentially led to $3.5 million in overbillings, 

but audit work was incomplete. The contractor had refunded the 

$246,000. 

• The original auditor reported that the $3.5 million was for 

subcontractor costs improperly billed to the government. The 

supervisor deleted the finding based on a flawed audit procedure, 

but did not require additional testing. 

• First supervisory auditor and auditor were replaced after draft 

audit was completed. 

• New auditor and supervisory auditor worked together to modify 

working papers and alter draft audit opinion from “inadequate,” to 

“inadequate in part,” and, finally, to “adequate.” 

• Sufficient testing was not performed to determine if the contractor 

had systemic weaknesses or to support an opinion that contractor 

billing system controls were adequate. 

• On the basis of the “adequate” opinion, the field audit office (FAO) 

approved the contractor for direct billing. 

• DOD IG recommended that DCAA rescind the final report for this 

audit, but DCAA did not do so. 

• Following the briefing on our investigation, the DCAA Western 

Region rescinded the audit report on May 22, 2008. 

Page 12 GAO-08-993T 
Case Type of audit Contractor Location Case details 

5 Estimating system

(2005) 

Contractor C DCAA 

Location 2 

• Auditor identified five deficiencies and concluded the contractor’s 

system was “inadequate in part.” 

• Auditor did not perform sufficient work to support some findings, 

but supervisory auditor did not direct the auditor to gather 

additional evidence. 

• After consulting with the branch manager, the supervisory auditor 

modified documents and eliminated significant deficiencies,

changing the draft audit opinion from “inadequate in part” to 

“adequate.” 

• Working papers did not properly document the reason for the 

change in opinion and therefore do not support the final opinion. 

• DOD IG recommended that DCAA rescind the final report for this 

audit, but DCAA did not do so. 

• On June 27, 2008, the DCAA Western Region informed us that it 

was rescinding this audit report. 

6 Accounting system

(2005) 

Contractor D DCAA 

 Location 2 

• Auditor believed audit evidence related to a 24 percent error rate 

in a small sample of cost pools supported an “inadequate in part” 

opinion and suggested testing be expanded, but supervisory

auditor disagreed. 

• Auditor and supervisory auditor documented their disagreement 

in the working papers. 

• Supervisory auditor subsequently modified documents to change 

the draft audit opinion from “inadequate in part” to “adequate” 

before issuing the final report.

• Certain final working papers were prepared and approved by the 

supervisory auditor, without proper supervision. 

• Branch manager and supervisory auditor determined that findings 

of corporate accounting problems should be referred to another 

FAO for future audit. However, the other FAO does not audit 

corporate costs. 

• Working papers do not support the final opinion. 

7 Compliance, CAS

403 (2005) 

Contractor D DCAA 

Location 2 

• Auditor identified four potential instances of noncompliance with 

CAS 403. 

• Auditor was transferred to a different team before supervisory

review of her working papers. Three months later, the supervisory 

auditor requested that another auditor write a “clean (“adequate”) 

opinion” report.

• Second auditor used “boilerplate” (i.e., standardized) language to 

write the final report and never reviewed the working papers.

• The supervisor correctly deleted two findings and referred two 

findings of corporate-level non-compliances to another FAO for 

future audit. The other FAO does not audit corporate-level costs. 

• Working papers do not support the final “clean opinion,” which 

was later contradicted by a September 21, 2007, DCAA report 

that determined Contractor D was in fact not in compliance with 

CAS 403 during the period of this audit. 

Page 13 GAO-08-993T 
Case Type of audit Contractor Location Case details 

8 Forward pricing

audits (2004 through 

2006) 

Contractor E DCAA 

Location 3c

• Two location 3 supervisors issued 62 forward pricing audits 

related to Contractor E between 2004 and 2006. 

• Supervisors responsible for the 62 forward pricing audits admitted 

to us that they did not have time to review working papers before 

report issuance. 

• According to the DCAA region, inexperienced trainee auditors 

were assigned to 18 of the 62 audits without proper supervision. 

However, the region did not provide assignment documentation 

for the 62 audits. 

• An internal DCAA Region audit quality review found audits where 

the audit working papers did not support the final audit report, 

working paper files were lost, and working paper files were not 

archived in the DCAA-required time period. 

• The 62 forward pricing audits were connected with over 

$6.4 billion in government contract negotiations. 

9 Compensation

system (2005)

Contractor D DCAA 

Location 2 

• Three different auditors worked on this audit.

• Original auditor did not follow DCAA guidance when developing 

the audit plan and was reassigned after audit work began. 

• Second auditor lacked experience with compensation system

audits and noted in her working papers that she was “floundering” 

and could not finish the audit by the September 30, 2005, 

deadline. 

• Third auditor was assigned 10 calendar days before the audit was 

due to be completed. 

• Although audit was issued with an “adequate” opinion, insufficient 

work was performed on this audit and, therefore, working papers 

do not support the final opinion. 

• Significant system deficiencies noted in the working papers were 

not reported. 

• The DOD Office of Inspector General recommended that DCAA 

rescind the final report for this audit, but DCAA did not do so. 

Instead, DCAA initiated another audit during 2007. 

• DCAA agreed with our finding that this audit did not include 

sufficient testing of executive compensation. In June 2008, the 

branch office issued a new audit report on Contractor D’s 

compensation system which identified seven significant 

deficiencies and an “inadequate in part” opinion. 

• DCAA stated that it is currently assessing the impact of these 

deficiencies on current incurred cost audits. 

Page 14 GAO-08-993T 
Case Type of audit Contractor Location Case details 

10 Purchasing system

(2005) 

Contractor F DCAA 

Location 2 

• Auditor found that the contractor was not fulfilling its FAR-related 

obligations to ensure that subcontractors’ cost claims were 

audited. 

• This issue was not reported as a significant deficiency in the 

contractor’s purchasing system. The opinion on the system was 

“adequate.” 

• The working papers did not include sufficient evidence to support 

the final opinion. DCAA relied on a 2004 Defense Contract 

Management Agency (DCMA) review in which the conclusions 

were based word-for-word on the contractor’s response to a 

questionnaire without independent testing of controls. 

• DCAA stated that the overall opinion was not based on DCMA’s 

review. However, DCAA stated that it will address the issue of the 

contractor’s procedures for ensuring subcontract audits are

performed during the next purchasing system audit, which is 

expected to be completed by December 30, 2008. 

11 Billing system (2006) Contractor F DCAA 

Location 2 

• The branch manager allowed the original auditor to work on this 

audit after being assured that the auditors would help the 

contractor correct any billing system deficiencies during the 

performance of the audit. 

• After the original auditor identified 10 significant billing system 

deficiencies, the branch manager removed her from the audit and 

assigned a second auditor to the audit. 

• With approval by the FAO and region management, the second 

auditor dropped 8 of the 10 significant deficiencies and reported 1 

significant deficiency and 1 suggestion to improve the system. 

The final opinion was “inadequate in part.” 

• Six of the findings were dropped without adequate support,

including a finding that certain contract terms were violated and a 

finding that the contractor did not audit subcontract costs. 

• Despite issuing an “inadequate in part” opinion, the FAO decided 

to retain the contractor’s direct-billing privileges. After we brought 

this to the attention of region officials, the FAO rescinded the 

contractor’s direct billing status in March 2008. 

• DCAA did not agree with our finding that the working papers did 

not contain adequate support for dropping six draft findings of 

significant deficiencies. 

Page 15 GAO-08-993T 
Case Type of audit Contractor Location Case details 

12 Labor floor check 

(2005) 

Contractor C DCAA 

Location 2 

• Auditor performed sampling to determine whether sufficient 

controls over employee timecards existed. 

• Although the work was based on a limited judgmental sample, the 

auditor found 3 errors out of 18 employee timecards tested and 

concluded that controls over timecards were inadequate. 

• Supervisory auditor initially agreed with the findings, but later

modified working papers to change the draft audit conclusion from 

“certain labor practices require corrective actions” to “no 

significant deficiencies.” 

• Working papers did not properly document the reason for the 

change in conclusion and, therefore, do not support the final audit 

conclusion. 

• Supervisory auditor later stated that the initial sampling plan was 

flawed, but eliminated the deficiency finding rather than asking 

the auditor to redo the work. 

• On April 9, 2008, DCAA issued a new audit report which identified 

8 significant deficiencies and concluded that corrective actions 

were needed on the contractor’s labor accounting system. 

13 Compliance, CAS

418 (2006) 

Contractor G DCAA 

Location 2 

• After original auditor was transferred to another audit, a second 

auditor significantly limited the scope of the audit with supervisory 

approval, deleting most of the standard audit steps. 

• Second auditor performed very limited testing and relied on

contractor assertions with little or no independent verification. 

• Supervisory auditor approved issuance of the final audit with an 

opinion that the contractor complied with CAS 418 in all material 

respects. 

• Insufficient work was performed on this audit and, therefore, the 

scope of work and the working paper documentation does not 

support the opinion. 

• Region officials acknowledged that work was insufficient and

stated that another CAS 418 audit was initiated; however, DCAA 

did not rescind the misleading report. 

• On June 25, 2008, DCAA officials told us that the new CAS 418 

audit was completed with an “adequate” opinion. 

Source: GAO analysis.

a

Location 1 is a DCAA resident office located at facilities run by one of the five largest DOD 

contractors (Contractor A). The audit in Case 1 was performed at a suboffice location and the audit in 

Case 2 was performed at the resident office. 

b

Location 2 is a DCAA branch office. 

c

Location 3 is a DCAA resident office located at facilities run by another of the five largest DOD 

contractors (Contractor E). 

Page 16 GAO-08-993T (192290) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “E-mail Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, DC 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, DC 20548 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER