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i 

57–697 2010

[H.A.S.C. No. 111–100] 

CAN THE DEPARTMENT OF DEFENSE 

PROTECT TAXPAYERS WHEN IT PAYS 

ITS CONTRACTORS? 

HEARING 

BEFORE THE

PANEL ON DEFENSE ACQUISITION REFORM 

OF THE

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

OCTOBER 15, 2009 
(II) 

PANEL ON DEFENSE ACQUISITION REFORM 

ROBERT ANDREWS, New Jersey, Chairman 

JIM COOPER, Tennessee 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

K. MICHAEL CONAWAY, Texas 

DUNCAN HUNTER, California 

MIKE COFFMAN, Colorado 

ANDREW HUNTER, Professional Staff Member 

JOHN WASON, Professional Staff Member 

ALICIA HALEY, Staff Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2009 

Page 

HEARING: 

Thursday, October 15, 2009, Can the Department Of Defense Protect Taxpayers When It Pays Its Contractors? ................................................................ 1 

APPENDIX: 

Thursday, October 15, 2009 .................................................................................... 29 

THURSDAY, OCTOBER 15, 2009 

CAN THE DEPARTMENT OF DEFENSE PROTECT TAXPAYERS WHEN IT 

PAYS ITS CONTRACTORS? 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

Andrews, Hon. Robert, a Representative from New Jersey, Chairman, Panel 

on Defense Acquisition Reform ........................................................................... 1 

Conaway, Hon. K. Michael, a Representative from Texas, Ranking Member, 

Panel on Defense Acquisition Reform ................................................................ 4 

WITNESSES 

Assad, Shay, Director, Defense Procurement and Acquisition Policy, U.S. 

Department of Defense ........................................................................................ 6 

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office ................................................... 11 

Stephenson, April G., Director, Defense Contract Audit Agency, U.S. Department of Defense .................................................................................................... 8 

APPENDIX 

PREPARED STATEMENTS: 

Andrews, Hon. Robert ...................................................................................... 33 

Assad, Shay ....................................................................................................... 36 

Conaway, Hon. K. Michael .............................................................................. 34 

Kutz, Gregory D. ............................................................................................... 78 

Stephenson, April G. ........................................................................................ 48 

DOCUMENTS SUBMITTED FOR THE RECORD: 

Defense Contract Audit Agency Performance-Based Actions ....................... 97 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

[There were no Questions submitted during the hearing.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 

(1) 

CAN THE DEPARTMENT OF DEFENSE PROTECT 

TAXPAYERS WHEN IT PAYS ITS CONTRACTORS? 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, DEFENSE ACQUISITION REFORM PANEL, Washington, DC, Thursday, October 15, 2009. 

The panel met, pursuant to call, at 8:02 a.m., in room 1310, 

Longworth House Office Building, Hon. Robert Andrews (chairman 

of the panel) presiding. 

OPENING STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM NEW JERSEY, CHAIRMAN, PANEL ON 

DEFENSE ACQUISITION REFORM 

Mr. ANDREWS. Ladies and gentlemen, good morning. We appreciate your attendance this morning. Welcome, my colleagues on the 

panel. 

The panel has been engaged in an investigation of hypotheses as 

to the reasons why there is a difference between the price that the 

taxpayers pay and the value that those who wear the uniform of 

our country and serve our country receive when we buy goods and 

services. We start from the proposition that there is not always a 

gap between those. There are many instances where, in fact, we get 

full value for what we pay. And we are very grateful for that. 

Last week we had an example of that when we looked at the excellence that occurred in the Mine Resistant Ambush Protected vehicle (MRAP) program. Good things have happened there. 

Suffice it to say, though, that we are concerned that, whether it 

is major weapons systems, services, or other kinds of goods and 

supplies, that there are too many instances where we pay a dollar 

and get 75 or 80 cents worth of value. There is unanimity on Republicans and Democrats, House and Senate, executive branch and 

legislative branch, certainly among the American people, that we 

want to do a lot better than that. So we have engaged in a series 

of hearings where we have looked at various hypotheses as to why 

that gap exists. 

For instance, we have looked at the way that we don’t, I think, 

quite understand the right way to buy information technology. By 

using a paradigm that tracks the paradigm we use for hardware, 

we make some mistakes in that area. 

We have looked at the issue of whether our workforce is not 

right-sized and not correctly trained to deal with these issues. We 

have looked at questions concerning the supply chain, whether it 

is properly organized, properly managed and so forth. 

This morning we are going to look at a question that is a little 

narrower than what I just talked about, but certainly not any less 
2 

important. And that is, how well are we doing at auditing the contracts that we let? In other words, if we were to ask this morning 

on a contract for a certain communications system, are we behind 

in our payments or ahead in our payments? Have we paid what we 

should have or not? Has the work that is supposed to be done for 

what we have been paid been done or not? 

The Department of Defense (DOD) is charged with an enormous 

responsibility in monitoring huge amounts of money and literally 

hundreds of thousands of contracts at any given time. So it is a 

very important job. But, frankly, work in recent times by the Government Accountability Office has raised some serious concerns as 

to whether we are properly organizing ourselves to do the auditing 

and monitoring of contracts. 

This morning we are going to hear about the nature of those concerns, some efforts to address those concerns which are going on 

at the Defense Contract Audit Agency (DCAA) and other instruments of the Department of Defense, and then help the panel make 

an assessment of how we can do this whole process better. 

And I want to begin with two cultural snapshots of issues within 

the DCAA, which are elucidated in a report done by the Government Accountability Office last month that I believe was at the request of Senators Lieberman and Collins, but are certainly important for the entire Congress. 

And I do use the phrase ‘‘cultural snapshot,’’ because I understand that the two instances about which I am going to refer, or 

to which I am going to refer, may or may not be representative of 

the systemic situation. But whether they are representative of the 

systemic situation or unrepresentative, they are troubling. 

The first cultural snapshot is a problem of, I would say, too much 

engagement with a contractor. In May of 2005, according to the 

Government Accountability Office (GAO), in the eastern region of 

DCAA, there was an issue with a billing system contract. The 

DCAA reported an inadequate in part opinion of the billing system 

internal controls of one of the five largest DOD contractors. 

After issuing the report, DCAA auditors helped the contractor develop policies and procedures related to the accounts receivable, 

overpayments and system monitoring before performing a required 

follow-up audit, which is a significant impairment to the independence of the auditors. So we sort of have a joint venture, if you will, 

between the auditors and the people being audited before there is 

a follow-up audit. 

In June 2006, the DCAA reported an adequate opinion on the 

contractor’s billing system, internal controls, including the price, 

policies and procedures DCAA helped the contractor develop. So 

the problem here obviously was the auditor was auditing in part 

its own work product. As a result of GAO’s review, the DCAA rescinded the follow-up audit report on March the 6th of this year of 

2009. So there is an instance where the line between the auditor 

and the audited was unfortunately blurred. 

The second instance is kind of the opposite problem. This was in 

the central region of DCAA, 2006, again involving a billing system 

case. A fraud investigation by the Army’s Criminal Investigation 

Division was under way at the time the DCAA performed a given 

contractor’s billing system audit. So the facts are that the con-
3 

tractor is under criminal investigation at the time, and there is an 

audit of the contractor’s billing system. 

The auditors were aware of the substance of the Army’s investigation. So there is knowledge of the auditors what is going on. 

The auditor requested increases in budget audit hours to perform 

increased testing because of the fraud risk and the contractor’s use 

of temporary accounts for charging costs that had not yet been authorized by the contracting officer. So the person that DCAA puts 

in blows the whistle and says, ‘‘I need more help because there are 

some things that raise a red flag here.’’ 

The auditor then drafts an inadequate opinion on the contractor’s 

billing system, which was overturned by the supervisor and Field 

Audit Office (FAO) manager. So the person who is on site reaches 

the conclusion that an inadequate report is the right result. Her 

opinion is overturned. 

Despite a reported $2.8 million in fraud for the contractor in 

question, the DCAA reported an inadequate in part opinion related 

to three significant deficiencies in the contractor’s billing system on 

August 31, 2005 and an adequate opinion then on September 11, 

2006, regarding a follow-up audit. The auditor on the ground, the 

initial auditor, whose performance appraisal was lowered for performing too much testing and exceeding budgeted hours, was assigned to and then removed from the follow-up audit. This auditor 

then left the agency in March of 2007. 

So then to briefly review the facts, the person who is on the 

ground sees the red flag, asks for more help, renders an opinion 

that is, frankly, a negative opinion of the contractor. That opinion 

is essentially reversed in a follow-up audit. And the person who is 

on the ground is excluded from the follow-up audit and, in effect, 

disciplined and sanctioned because she put too much time into the 

first audit and asked for too much help. 

Following the GAO’s review of this matter, the DCAA rescinded 

both audit reports on November 20th of 2008. Now, again, I am not 

claiming that these are systemic examples. I think that is research 

that is yet to be done and an analysis that is yet to be done. 

But I think the members of the panel would agree that they are 

disturbing examples because on the one hand, there is an example 

of blurring the line between the auditor and the audited. The other 

case there is an example of someone who is quite aggressive as an 

auditor, who it appears was sanctioned for her appropriate behavior, and that an unfortunate and incorrect result was reached in 

the end. 

The importance of these examples is self-evident for the facts of 

the example. But the importance goes beyond that. It is sort of the 

fruit of the poisonous tree doctrine because once there is a finding, 

that finding then spreads through the system. 

For example, once a contractor is put into the green light list, the 

good guy list, the level of attention and auditing that is paid to 

that contractor diminishes. There is sort of a presumption that the 

contractor is okay. So a mistake that is made in one audit has potentially negative consequences for many, many contracting decisions down the road. This is not simply a contract-by-contract decision. 
4 

It is a big job that the DCAA has. But what we are interested 

in hearing this morning is its reaction to and improvements as a 

result of the work of the GAO and suggestions that each of our 

three witnesses would have on how this panel can aid that effort 

so that we can reach a point where we have a high confidence with 

good reason in our auditing system. 

At this time, I am going to ask my friend, the senior Republican 

on the panel, Mr. Conaway, for his opening statement. 

[The prepared statement of Mr. Andrews can be found in the Appendix on page 33.] 

STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE FROM TEXAS, RANKING MEMBER, PANEL ON DEFENSE 

ACQUISITION REFORM 

Mr. CONAWAY. Well, thank you, Mr. Chairman. 

And, witnesses, thank you all for being here this morning. Today’s hearing examines an area of acquisition that is near and dear 

to my heart: auditing. I am a Certified Public Accountant (CPA). 

And I spent my early part of my career doing that often thankless 

task. 

The basic question is how vulnerable is the Department to overpaying its contractors on acquisition programs and how robust are 

its systems for preventing overpayments. The Defense Contracting 

Audit Agency provides the department’s primary internal means of 

detecting, preventing or correcting the majority of potential contractor overpayments. 

There have been recent articles based on GAO findings regarding 

the DCAA. Based on written testimony, there are major disagreements between the Department and the GAO. And I would only 

add that we are here today to learn all points of view. We have a 

group of very qualified witnesses. And we are glad that you are 

here to help us understand these issues. 

Finally, I would say that once again a recurring theme has been 

consistent. It has been consistent with our previous panel hearings 

in regards to workforce. In fiscal 2008, DCAA performed over 

30,000 audits with approximately 4,200 employees. I believe it is 

Mr. Assad in his written statement that stated, ‘‘Rebuilding the 

DCAA workforce, while a challenge, can and must be done.’’ 

We learned from previous hearings that increasing the workforce 

isn’t always the answer. But in this case, it does appear that the 

workforce is one of the major areas that needs to be addressed. 

Looking forward to our witnesses. Let us hear from them. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Conaway can be found in the Appendix on page 34.] 

Mr. ANDREWS. Thank you very much. 

Without objection, opening statements from other members of 

the panel will be made a part of the record. 

I am now going to proceed to read a brief biography of our witnesses. I think each of you has had extensive experience on the 

Hill. So you know that, without objection, your written statements 

will be entered into the record of the proceeding. And we will ask 

you to give us about a five-minute oral synopsis of your written tes-
5 

timony so we can maximize the time for question and answers from 

the panelists. 

Mr. Shay Assad is the Director of Defense Procurement. He assumed that role on April 3rd of 2006. In that position, he is responsible for all acquisition and procurement policy matters in the Department of Defense. He is the functional leader for contracting 

workforce within the Department of Defense and is also responsible 

for overseeing all strategic sourcing activities within the department. 

Before assuming this position, Mr. Assad was the Assistant Deputy Commandant, Installations and Logistics for Contractors at 

headquarters of the Marine Corps here in Washington, D.C. Upon 

graduating with distinction from the U.S. Naval Academy in 1972, 

he served two tours of duty aboard the U.S. Navy destroyers and 

won recognition as the outstanding junior officer of the 5th Naval 

District. 

He has received numerous federal service awards, which include 

the Secretary of Defense Medal for Exceptional Civilian Service, 

Secretary of Defense Medal for Meritorious Service, the Department of Defense Inspector General Joseph H. Sherick Award, 

which is the highest award given to a non-IG employee, the 24th 

annual Gilbert A. Cuneo Lecturer and the inaugural recipient of 

the 2008 Osborne A. ‘‘Oz’’ Day Award as the federal executive who 

has done the most to increase the awareness of Ability One employment opportunities for those who are blind or severely disabled. 

Mr. Assad, thank you for your service and welcome to the panel 

this morning. 

April G. Stephenson is the director of the DCAA. She is responsible for all matters related to the management of the agency and 

its resources. She began her career in the agency in 1987 as an 

auditor trainee in Mountain View, California. 

She progressed through DCAA holding various positions, such as 

supervisory auditor, program manager, branch manager, various 

positions in the Policy Directorate at headquarters. She assumed 

the responsibility as Director in February of 2008, and she serves 

as the Secretary’s appointee on the Cost Accounting Standards 

Board. 

She has her B.S. degree in Business Administration from California State University at Chico and has a Masters in Administration from Central Michigan University. 

She is licensed, Michael, as a CPA in the state of North Carolina. 

That will make you happy. 

She is a member of several professional organizations, including 

the American Institute of Certified Public Accountants (AICPA) 

and the Institute of Management Accountants. She has received 

numerous awards and recognition throughout her DCAA career. 

She resides in Alexandria, Virginia. And in her spare time, which 

I assume is very scarce, given your responsibilities, she enjoys bird 

watching, gardening and reading. 

Welcome, Ms. Stephenson. We appreciate your service and glad 

you are here this morning. 

And Greg Kutz—— 

Did I get that, Greg, right? I am sorry—is the managing director 

of GAO’s Forensic Audits and Special Investigations Unit. The mis-
6 

sion of that unit is to provide us in the Congress with high quality 

forensic audits and investigations of fraud, waste and abuse and 

evaluations of security vulnerabilities and other requested investigative services. 

He is a graduate of Penn State in 1983. He joined the D.C. office 

of KPMG Peat Marwick after graduation. He worked there for 

eight years. In 1991 he joined the GAO. As a senior executive at 

GAO, Mr. Kutz has been responsible for reports issued by GAO in 

testimony regarding the credit card and travel fraud and abuse, 

improper sales of sensitive military and dual use technology, a 

number of areas. 

Most recently, he and I had the chance to work together on some 

disturbing issues of children being subjected to physical restraints 

in certain educational settings and did a great work in that regard. 

Mr. Kutz is a Certified Public Accountant and Certified Fraud 

Examiner, and we welcome him to the panel and appreciate his 

service. 

So, Mr. Assad, we will begin with you. Welcome. 

STATEMENT OF SHAY ASSAD, DIRECTOR, DEFENSE PROCUREMENT AND ACQUISITION POLICY, U.S. DEPARTMENT OF DEFENSE 

Mr. ASSAD. Thank you, Mr. Chairman. 

First of all, let me say that I am very appreciative of the panel’s 

focus and concern about this issue of getting a better deal for the 

taxpayers. I couldn’t be more supportive and more aligned with 

that thought. We call it—I call it—the quality of the deal when I 

go out and speak to our employees in the field, and I have spoken 

to well in excess of 10,000 of them about this issue of getting a better deal for the taxpayers. 

There is a disparity in far too many instances between what we 

are paying and the quality we are getting. We need to get a better 

deal. And that is why we have taken the actions that we have with 

regard to our workforce. That is why we are focused on improving 

the cost estimating and pricing capability within the department. 

It is absolutely essential and critical that we improve the quality 

of the deal. With budgets the way they are, we have got to get better value for every dollar that we spend for the taxpayers. 

Thank you for the opportunity to appear today and to participate 

in today’s discussion. As a senior leader of the defense contracting 

workforce, I cannot stress enough the crucial role that DCAA plays 

in the department’s procurement. I assure you that all of our contracting officers value and rely significantly upon the professional 

advice rendered by DCAA. 

We recognize that the Government Accountability Office has recently identified needed improvements in DCAA’s auditing processes. To assist DCAA in addressing the concerns identified, Under 

Secretary Hale established an oversight committee to provide advice and recommendations concerning DCAA matters. 

As the department’s senior procurement executive, I am also a 

member of the DCAA oversight committee. The senior group will 

assess DCAA’s activities and the actions taken to correct problems 

identified by GAO and others. 
7 

As Under Secretary Hale has pointed out in his testimony before 

the Senate Homeland Security and Government Affairs Committee 

last month, in my role as the Director of Defense Procurement, I 

represent the key customer for DCAA. Given that, I would like to 

offer you just a few thoughts on a few areas identified for improvement by GAO. 

First of all, with regard to this term called ‘‘production auditing,’’ 

it has been suggested that the challenges at DCAA center around 

production oriented auditing and that audits have been rushed to 

meet contracting officer requirements. This sets up a real tension 

and a dichotomy between getting quality audits and getting timely 

audits. 

An audit not delivered in a timely manner is of limited value to 

the government. On the other hand, it has got to be quality work 

or it doesn’t achieve the objective, which is getting the best deal we 

can for the taxpayers. 

But a good audit in time is better than an extraordinary audit 

that is late and never used. An audit is the tool of a contracting 

officer used to negotiate a contract, but in order to realize those 

benefits, it has to be of a quality nature, and it has to be timely. 

While the GAO report cites examples of poor quality audits and 

some poor decisions that may have been made by DCAA in the 

past, most would seem to be heavily focused and influenced by inadequate staffing. 

Based on our discussions with contracting officers, contractors 

and auditors, some—and possibly most—of the reductions in audit 

scope and responsiveness by DCAA is a direct result of the staffing 

draw down while workload increased. Until the staffing issues are 

resolved, it will not be possible for DCAA to perform at the level 

of quality and efficiency that is desired. Rebuilding the DCAA 

workforce, while a challenge, can and must be done. 

The Panel on Contracting Integrity, which was really established 

at the initiation of the House Armed Services Committee, has 

proved to be a very productive and successful forum for making 

progress in eliminating vulnerabilities that lead to fraud, waste 

and abuse. 

Given the success of that panel, we have recently established a 

new interdepartmental subcommittee that will address the adequacy of DCAA and the Defense Contract Management Agency— 

DCMA—oversight of contractor business systems. They both serve 

in that function. We expect this subcommittee to make a number 

of recommendations to improve the oversight with regard to business systems. 

Again, I would like to thank the panel for holding this hearing, 

and I can assure you that we are focused on the quality of the deal 

and getting a better deal for our taxpayers. Thank you. 

[The prepared statement of Mr. Assad can be found in the Appendix on page 36.] 

Mr. ANDREWS. Thank you, Mr. Assad. Thank you very much. 

Ms. Stephenson. Welcome to the panel. 
8 

STATEMENT OF APRIL G. STEPHENSON, DIRECTOR, DEFENSE 

CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE 

Ms. STEPHENSON. Members of the panel, thank you for the opportunity to be here today, and I sincerely appreciate your concerns 

in the matters regarding DCAA and the issues that we have had 

with quality and other issues. 

And I assure you we are taking every effort we can to improve 

this audit process to ensure, as Mr. Assad said, the contracting officers are getting the quality product they need in order to make the 

best decisions for the best fair and reasonable prices the government can have, because ultimately what we need is the best value 

for the warfighter. That is what we are all here for. 

My testimony today has two parts. First, I will briefly describe 

the role of DCAA in the acquisition process, challenges in auditing 

contractor costs, and vulnerabilities in acquisition. Second, I will 

briefly describe several of the improvements we have made in findings to the GAO reviews. 

DCAA is a distinct agency in the Department of Defense that reports to the Under Secretary Comptroller. The DCAA mission is to 

perform all the necessary contract audits of contractors. We don’t 

audit government organizations. We audit the contractors for the 

DOD components that are responsible for negotiation, administration and settlement of contracts. Under the acquisition regulations, 

not all contracts are subject to DCAA audits. 

In 2009 DCAA performed over 21,000 audits covering $330 billion in contractor costs. These audits recommended reductions in 

proposed or build costs of $20 billion, and $12 billion in estimated 

costs where the contractor did not provide sufficient information to 

support the costs. 

DCAA has about 4,400 employees at 105 field offices around the 

world. Decision-making authority on DCAA recommendations resides with contracting officers within the procurement organizations that work closely with DCAA throughout the contracting 

process. The type and extent of DCAA audit work varies, depending on the type of contract awarded. 

DCAA performs audits of contractor bid proposals prior to award 

for both fixed price and cost reimbursable contracts when cost data 

is provided and contracting officials determine the need for an 

audit. After contract award, audit effort is concentrated on cost reimbursable contracts. These contracts pose an increased risk of 

overspending, often with little incentive to control costs. 

Regulations covering acquisitions using competitive procedures 

and commercial item procedures rarely involve DCAA audit services. The regulations generally prohibit contracting officials from 

obtaining cost data from contractors to support the bid estimate. 

In theory, when cost data is not required, DCAA audit support 

is not required. This theory holds true when the government is one 

of many buyers of identical goods and services in the marketplace. 

However, there are instances where, due to the magnitude of complexity of the government’s requirements, the marketplace is limited or nonexistent, and consequently, market forces are not driving contract prices. 
9 

DCAA has faced a number of challenges in auditing contractors. 

I have detailed these more in my written statement, but in essence 

there are three major challenges that we have. 

The first one Mr. Assad briefly mentioned, and that is the contracting officers’ need for speed, as we call it, in awarding contracts 

is often at times at odds with the time necessary for DCAA to perform sufficient testing and auditing procedures. 

Second, DCAA auditors are often faced with delays in obtaining 

data from contractors, and this has resulted in some audits taking 

longer than is necessary. Such delays in providing information 

from contractors is sometimes an attempt to stall the timely completion of the audits, knowing that we do have a need for speed in 

awarding these contracts. Such delays are unacceptable. 

We often face challenges for contractors’ commitment to correct 

business system deficiencies. And as Mr. Assad stated, this is going 

to be addressed under the new subcommittee under the Panel on 

Contracting Integrity. 

As far as contracting vulnerabilities, we have mentioned three in 

our testimony, one being the commercial item definition has two 

areas of vulnerability of a type and offered for sale. This is also 

being addressed by the Adequate Pricing Subcommittee of the 

Panel on Contracting Integrity and which I chair. 

Second is competitive pricing when only one bid is submitted. In 

one of these cases, and one case that I discuss in my testimony, we 

had an instance where a contractor received profit in excess of 30 

percent on a competitively awarded firm fixed-price contract where 

only one bid was submitted. 

Time and material contracts have also been an area of risk and 

continue to be looked at for the Department. 

Now, regarding the GAO’s review, in my written testimony I 

have detailed a number of improvements we have taken. We have 

taken over 50 specific improvement actions in the past year to address these issues, but there are two in which I want to briefly discuss. I realize my time is close, and I just ask if you would let me 

just briefly discuss these two—— 

Mr. ANDREWS. Yes, of course. Please take the time. Yes, ma’am. 

Ms. STEPHENSON [continuing]. The first being in the independence issue, as you mentioned, Mr. Chairman. Independence is really at the heart at what an auditor performs. I am sure that anyone 

that is familiar with the auditing standards knows that that is the 

basic tenet of what an auditor does, and we were certainly quite 

appalled at some of the things in which the GAO discovered, both 

in 2008, 2009, regarding independence. 

There were two major areas that led to the independence concerns, and unfortunately, these were processes that were not only 

supported, but also encouraged by the Department, and which we 

have now ceased. 

First was involvement in what is called an integrated product 

team, which is where the government would team with the contractor, and that government, including DCAA, would often sit at 

the table as the contractor was putting together their bid estimate 

or an improvement plan or whatever else it is that they are working with the government. 
10 

DCAA would often be at the table and offer suggestions on draft 

procedures or draft parts of the proposal as a contractor was putting it together and then audit that proposal once it was submitted. 

We have ceased that process. That process was stopped in August 

of 2008. 

We no longer sit at the table. We no longer participate in joint 

meetings with the contractors prior to an audit. We will support 

the contracting officer, but we will not be involved with anything 

related to a draft. We will only perform audits once the contractor 

has said this is a final submission for the government. 

That was a major change we made in the summer of 2008, and 

we worked with Mr. Assad and the service acquisition chiefs in an 

attempt to have a smooth transition from that process, because 

that was a major change. 

A second change that led to independence were in areas such as 

what you described, Mr. Chairman, in your opening statement 

about when a contractor had inadequate systems. We would often 

review their draft policies and procedures to offer comments as to 

whether it was headed in the right direction. It wasn’t as though 

we prepared them, but we did provide feedback as to whether, yes, 

we think this would correct it, or, no, you are off base, you need 

to do something more. 

That was something that was also supported by the department 

in an attempt to try to resolve system deficiencies on a timely basis 

and try to get them corrected sooner rather than waiting till a complete system was put in place and DCAA come in and audit. 

We realized that that could have—and as the GAO said—could 

impair auditors’ objectivity to give feedback on a draft policy and 

procedure, and then audit that policy and procedure. We have 

ceased that process as well. We will no longer offer any sort of comments on a draft procedure. Only once it is completed and implemented and actually had transactions run through the system for 

several periods, then we will test that. 

It will result in some delay in resolving these issues. But we feel 

that that will improve our independence. 

The last one I want to discuss is risk-based planning. And this 

was an area that the GAO had suggested that we implement, and 

we have in 2010. 

We have staffing to cover about 65 percent of the required audits 

that need to be done. Because of that, we have had to focus our 

audit efforts in 2010 with those audits that are the highest risk to 

the Department. 

One area we define as high risk is the greatest rate of return 

back to the Department—that being war-related effort, that being 

bid proposal, and also the accounting and billing systems at our 

largest contractors. 

And in closing, Mr. Chairman and members of the panel, thank 

you for this hearing today. We do appreciate being part of the panel’s efforts on acquisition issues, and we would not mind coming 

back again and talking about other issues with you. 

But I do want to leave you with a thought. We have taken all 

these issues with the utmost seriousness, because our audits have 

to stand on their own. They have to be in accordance with the auditing standards. But at the same time, we need to make sure con-
11 

tracting officers get them in a timely basis, so they can make good 

decisions. 

Mr. Chairman, thank you for the extra time. 

[The prepared statement of Ms. Stephenson can be found in the 

Appendix on page 48.] 

Mr. ANDREWS. Thank you, Ms. Stephenson. We appreciate your 

efforts and your contribution. 

Mr. Kutz, welcome to the panel. 

STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. KUTZ. Mr. Chairman and members of the panel, thank you 

for the opportunity to discuss defense acquisition reform. 

My testimony has two parts. First, I will discuss our recent work 

related to the Defense Contract Audit Agency. And second, I will 

briefly discuss our high-risk acquisition areas. 

First, our recent work on DCAA began with allegations we received on our hotline in 2006. In July of 2008, we reported that 

these allegations were accurate. Specifically, 14 audits of 3 California locations we found did not meet professional audit standards. 

In our second report issued last month, we found that 65 of the 

69 engagements that we reviewed also did not meet professional 

standards. To date, DCAA has rescinded 81 audit reports. 

Our two reports and recent Inspector General (IG) reports clearly 

show widespread audit quality problems. Key themes from our two 

reports include, as everyone has mentioned here, the lack of independence, insufficient audit work and removal of findings from 

draft reports by DCAA management without sufficient evidence. 

Examples of these issues include, first, contractor and buying 

command pressure resulted in a DCAA manager dropping adverse 

findings for a satellite launch proposal. The inspector general recently reported that this flawed audit may have resulted in the 

contractor recovering $271 million of unallowable cost. 

Second, DCAA issued an adequate opinion on a billing system 

with insufficient audit work. One auditor told us that testing was 

limited in this case, because—and I quote—‘‘the contractor would 

not appreciate it.’’ 

And finally, another auditor wrote in a memo—and I quote 

again—‘‘We are not holding this contractor with a history of questioned costs, poor internal controls and shoddy practices to a high 

standard by downgrading what are clearly significant deficiencies.’’ 

We have made 15 recommendations to DOD with the intent of 

strengthening DCAA’s independence and effectiveness. One key 

recommendation is to develop a risk-based audit approach, focused 

on the quality of audits rather than the quantity of audits. We 

found audits of accounting and billing systems completed in two or 

three weeks. These audits often consisted of conversations with the 

contractor and a quick look at a few transactions. 

Further evidence of the need to cut corners is the 22,000 reports 

issued in 2008 by DCAA’s 3,600 auditors. That is 60 reports issued 

every day of the year, including weekends and holidays. If all 
12 

22,000 reports are truly necessary, then clearly, 3,600 auditors is 

not enough. 

And I agree with Mr. Assad, what he said in our recommendations, for DOD to address this clear imbalance between resources 

and requirements. 

We reported contract management of weapons system acquisition 

as high-risk areas since the early 1990s. These high-risk areas 

leave hundreds of billions of dollars vulnerable to fraud, waste and 

abuse. I have Mr. Bill Woods with me today, who would also be 

available to answer any questions you have on our past high-risk 

work. 

In conclusion, our longstanding high-risk areas highlight the importance of strengthening DCAA’s audits. I believe the DCAA has 

thousands of good auditors that have been trapped in a bad system. Positive steps have been taken or are under way to address 

many of the issues. We look forward to working with this panel 

and DOD to help DCAA achieve its full potential. 

Mr. Chairman, I look forward to answering your questions. And 

that is my statement. 

[The prepared statement of Mr. Kutz can be found in the Appendix on page 78.] 

Mr. ANDREWS. Thank you very much. I thank each of the witnesses, and we will begin with the questioning session. 

Mr. Kutz, I want to go back and talk about these hotline examples that came up. It is my understanding that in July of 2006, 

there were reports at—was it several offices? Or was it only California? 

Mr. KUTZ. There were three offices in California, primarily. 

Mr. ANDREWS. So, three offices in California. And the GAO 

wound up reporting about these examples. I guess last year was 

the report? 

Mr. KUTZ. In July of 2008 was the report, and then the Senate 

had a hearing on that in September of last year. 

Mr. ANDREWS. And is your testimony that you looked initially at 

14 audits, and each one of them failed to meet the standards of 

professionalism that you would articulate? 

Mr. KUTZ. That is correct. 

Mr. ANDREWS. And you said 65 to 69 engagements. What does 

an engagement mean in this—— 

Mr. KUTZ. In the second report we issued, which was a broader 

look, I believe 40 or 50 of them were considered audits. The other 

ones were not characterized as audits meeting government auditing 

standards. They were still important work, but we called them engagements. That includes mostly audits, but some other not-audit 

engagements also. 

Mr. ANDREWS. And you have given us some illustrative examples 

of the weaknesses here, that the work papers did not support the 

conclusions frequently. Is that one of the examples? 

Mr. KUTZ. Yes. And in fact, related to that I mentioned the 

changing of the opinions, too, where management would go in. And 

there would be, let us say, eight significant findings, and they 

would basically get rid of all the findings and issue an adequate 

opinion without any additional work. And you mentioned that, I 

think, in your opening statement. 
13 

Mr. ANDREWS. Is it fair to characterize it, then, that some of the 

audit conclusions were just not supportable by the work papers? 

And then others, the work papers actually, took you in a different 

direction, and that the agency should not have reached the conclusion that it did. Is that—— 

Mr. KUTZ. I would say those are both true, yes—— 

Mr. ANDREWS. Okay. 

Mr. KUTZ [continuing]. In some of the cases we looked at. 

Mr. ANDREWS. You used, I think, an interesting phrase a minute 

ago, that we have thousands of good auditors trapped in a bad system. And I would take that as a premise from which we would 

start. 

I mean, I assume that the vast majority of the 4,400 employees 

and 3,600 auditors are very highly ethical people who are trying to 

do the right thing for their country. I would just start with that 

as a presumption. 

But I would then want to look at why we have this deficiency 

that was reported here. I mean, it strikes me that there would be 

a standards problem, which is to say that the auditors are being 

asked to not do the wrong thing, but the standards that are governing their work are not the right ones. And that would go to this 

quantitative issue rather than qualitative. 

The second would be that there is a competence problem, that 

people want to do the right thing, but don’t know how to do it. And 

then the third would be a motivation problem, where perhaps some 

of the people don’t have the right motivation. 

If you were to look at that threesome of causes, which one is the 

predominant cause of the problems that you found on the hotline 

investigations that you did? 

Mr. KUTZ. Well, the overall problem, I think, is the production 

environment, trying to issue 22,000 reports or 30,000 audits with 

3,600 people. And that leads to inadequate auditing. 

In some of the cases, it may have led to management trying to— 

I will use the word ‘‘whitewash.’’ These reports got whitewashed, 

basically, these reports, because it is quicker to get a report out 

with no issues and no findings than it is to get one out that has 

a ton of findings. 

Mr. ANDREWS. Is it fair to characterize your conclusion that there 

is too much of a quantitative emphasis, you have to get ‘‘X’’ number 

of audits out, rather than an emphasis on the quality of the audits 

that you do? Do you think that is a fair statement? 

Mr. KUTZ. It was a requirement, and it was something that was 

built into the performance standards for staff. And so, there was 

a lot of pressure. 

And, you know, the public accounting world—I think we have another accountant here, too—you know, eating hours, working on 

weekends and not charging the time actually to the job, so it makes 

it look like the job costs less than it really did, which creates a 

cycle the next time someone comes back to do that audit. It took 

200 hours, but it really should have taken 300, because they 

worked weekends and late nights, and didn’t charge the actual 

cost—— 

Mr. ANDREWS. Now—— 

Mr. KUTZ. So it created that kind of an environment. 
14 

Mr. ANDREWS. Mr. Assad and/or Ms. Stephenson, do you agree 

or disagree with that characterization of the environment in which 

the auditors are operating? 

Ms. STEPHENSON. I can address this, Shay. 

Yes, I do believe that there were a considerable number of pressures put on DCAA with the advent of acquisition reform in the 

mid-1990s. There was certainly the auditor’s need to do it cheaper, 

faster. And that was something that we heard at all levels within 

the organization, and it was something that was supported within 

the department as well. 

Part of it is, we do need to get the audits quickly to contracting 

officers. I think what happened in that instance, then, we were not 

putting the sufficient hours on the assignments. And often, what 

got compromised was the documentation. 

Mr. ANDREWS. Do you agree with the hypothesis that 60 audits 

a day couldn’t possibly be done in a high level of quality by personnel this size? 

Ms. STEPHENSON. Yes and no. The reason I say ‘‘no’’ is, many of 

those assignments are quite small. It might be a 40-hour assignment to review a $10,000 interim progress payment on a fixed-price 

contract. They are not all a multibillion-dollar Logistics Civilian 

Augmentation Program (LOGCAP) proposal, which would take 

thousands of hours. So, there is a mix. 

And I think when you look at, if we were to take all the small 

assignments and all the low-risk assignments, such as what we 

have done for 2010, in which we will not be doing a great many 

of those, and looking at the higher risk, there is a vastly reduced 

number of assignments. 

At one point, this agency was doing 35,000, if not up to 40,000 

assignments. We have now made that down to about 25,000, now 

probably to 20,000. So, just in the last year or so of not performing 

some of these low-risk assignments to put the effort into the high 

risk, we are performing fewer assignments. 

Mr. ANDREWS. I am sorry, Mr. Assad, what do you think? Do you 

think that the culture in which the agency has been operating 

over-stresses quantity of audits done to the detriment of quality? 

Mr. ASSAD. I think that there is a tremendous pressure to get 

contracts awarded. And in some cases for good reason. I mean, we 

are at war. We need to get this equipment to our warfighters. On 

the other hand, you know, we have got to get a good deal for the 

taxpayers. So, one of the things that we are doing with DCAA—— 

Mr. ANDREWS. If I may, though, is your answer ‘‘yes’’ or ‘‘no’’? Do 

you think that the environment in which the agency is operating 

is unduly slanted toward the quantity, or not? 

Mr. ASSAD. I think it is, yes, the environment is one that stresses 

timeliness. 

Mr. ANDREWS. Okay. I am going to yield to the senior Republican, Mr. Conaway, for his questions. 

Mr. CONAWAY. Thank you, Mr. Chairman. 

What happens to a contract officer who can’t get an audit on 

time? Do we put those into a special higher risk category? In other 

words, if you can’t get the report done, and the contract officer 

needs to move forward with the contract, do our systems put that 
15 

into a higher risk category that we follow up with later in a different regard? 

Mr. ASSAD. I think two things happen, Mr. Congressman. Most 

times, it just means that the contract award is delayed. Because, 

you know, there is only a small number of our contracting officers 

percentage-wise who can actually move forward without the assistance of a DCAA audit, who would have the skills and the capability 

to be able to go forward and still get a fair deal for the taxpayer. 

So, most of the time, it results in a delayed award. And in those 

cases where—— 

Mr. CONAWAY. Well, is that an inadequacy in training for the 

contracting officers? 

Mr. ASSAD. Oh, yes. 

Mr. CONAWAY. Okay. 

Mr. ASSAD. You know, no doubt about it. 

Mr. CONAWAY. April, you know, one of the allegations is undue 

pressure from the top from, you know, partners, in effect, on the 

managers. What are you doing to address that? Because that is 

systemic to public accounting firms everywhere. What are you 

doing to address and protect the auditors from upper management, 

so to speak, in these issues where you have got overrides that 

occur? 

Ms. STEPHENSON. Sir, there are two things that we are doing. 

First, everyone was under the pressure with the prior metrics that 

we had had in place that were supported by the Department. Those 

metrics were changed in September of 2008. Those metrics were 

based on productivity, hours per assignment, et cetera. 

We completely removed all of those. So people do not have the 

budget hour constraints. We removed from the performance plans 

the requirement to meet budget hours. We have given the staff the 

hours that they need. And we have emphasized you need to take 

the hours necessary to do a complete audit, even if it means one 

versus three for that particular month. 

So we have tried to reiterate the highest level down to the lowest 

level by removing it from the performance plan, removing the 

metrics. Budget hours will no longer drive these assignments. 

Quality will drive them. We have put more metrics in related to 

quality. 

Number two, we have put in a place a Web site, anonymous Web 

site in which employees can file complaints with us when they feel 

that findings have been removed or other issues have happened. 

We have an active program on that in which we will set up an investigation for every complaint and assess whether that indeed has 

happened. 

Mr. CONAWAY. Yes. How often has that been used so far? 

Ms. STEPHENSON. It has been used quite frequently since we 

have set it up. 

Mr. CONAWAY. Okay. That is meaningless to me. How many 

numbers? How many times? 

Ms. STEPHENSON. I am going to guess that we have probably had 

400, at least. 

Mr. CONAWAY. Okay. One of the GAO’s allegations is that failure 

to meet general accepted governmental accounting standards—or 
16 

auditing standards. Excuse me. There are 3,600 auditors. How 

many training hours are they provided each year? 

Ms. STEPHENSON. We are required under the auditing standards 

to meet every 2 years the 80-hour requirement for continuing professional education and at least 20 hours every year in accounting. 

We far exceed that. 

Mr. CONAWAY. Accounting or auditing? 

Ms. STEPHENSON. In auditing. I am sorry. In auditing. 

Mr. CONAWAY. Okay. 

Ms. STEPHENSON. We far exceed that. I think our average hours 

that people have in training—— 

Mr. CONAWAY. You track those requirements? 

Ms. STEPHENSON. Absolutely. We have an entire training system 

that tracks by class, by type of assignment. 

Mr. CONAWAY. Who provides the training? 

Ms. STEPHENSON. A vast majority of the auditing training, the 

technical auditing training, is provided by DCAA through our 

Audit Institute in which we have course developers and instructors. 

And we also have on staff education specialists. 

Mr. CONAWAY. Yes. Are those—I mean, you are training yourself, 

and you are providing your own training—are you in a loop where 

the, you know, where the problems with the training is not adequate so that the folks being trained don’t get the right kind of 

training? Are you—— 

Ms. STEPHENSON. That is definitely a concern. And when the 

GAO issued the report in 2008, we did a—we are in the process of 

completely revamping the training to ensure that we are providing 

the training that we need to. We are consulting with the Inspector 

General (IG) and, when necessary, with the GAO to ensure that we 

are getting the type of training that we need to our people so there 

isn’t that loop of people that didn’t learn how to do it right are now 

training people not to do it right. 

Mr. CONAWAY. Right. Right. 

Ms. STEPHENSON. That is a concern. 

Mr. CONAWAY. Mr. Assad, you mentioned there is yet a panel, a 

panel that is the subcommittee that is working on looking at some 

of these recommendations. What is the timing for their report? 

Mr. ASSAD. Well, we usually come out once a quarter with recommendations. I think it is going to take us about 6 months because we are really focusing on two different things. The first is the 

evaluation of business systems, which is a problem where we have 

DCMA responsible for the overall cognizance of a business system. 

I mean, DCMA and DCAA doing the auditing. We need to reconcile 

that. 

And the second is this whole issue of risk-based auditing. You 

know, how many audits should we be doing? What is the quality 

of those audits? Do we really need DCAA to be doing all this work? 

And how do we focus them in an area, from a customer point of 

view, to a more focused work establishment. 

Mr. CONAWAY. Yes. 

Mr. ASSAD. I would say about 180 days. 

Mr. CONAWAY. Okay. 
17 

Mr. Kutz, is the director of DCAA report high enough up in the 

food chain at DOD to protect it from whatever it needs to be protected from? 

Mr. KUTZ. I can’t answer that fully. I mean, one of the things 

that the Senate had asked us to do was to provide alternative organizational placement options. We weren’t for or against them. We 

just put them out there as either elevating them in the organization or possibly moving it outside of DOD and having some sort of 

government-wide audit agency. But we didn’t really study those in 

depth. We laid out some pros and cons. 

Mr. CONAWAY. Okay. 

Mr. KUTZ. But that is a potential issue. 

Mr. CONAWAY. Yes. Okay. 

Ms. Stephenson, one final thing: audits. I know your testimony 

said you guys covered $330 billion in costs, 10 percent error rate. 

Is that an expected error rate? 

Ms. STEPHENSON. Yes, that is about what we run. I think if we 

were to take the contractor bid proposals—those are the ones we 

do before award—it is actually higher than that. It is probably running about 15 percent on average that we have questioned in bid 

proposals. 

Mr. CONAWAY. Okay. That is a startling number that we would 

have 10 percent—we will call it waste rather than fraud—but 10 

percent. Will you follow up on the $32 billion findings here? What 

ultimately winds up happening with that $32 billion? 

Ms. STEPHENSON. In the first part of it, which was the contractor 

bid proposals, that is what the contracting officer is going to use 

to negotiate the price. 

Mr. CONAWAY. Okay, so it is not necessarily a dollar? 

Ms. STEPHENSON. No. Where we have the vast majority of our 

findings or the actual dollars associated with them are before contract award. After contract award we probably have about 5 to 8 

percent related to the findings. On contractor business systems we 

are running right now where we have got at least one segment of 

the top 100 defense contractors one location. 

A Lockheed Martin, for example, may have multiple locations. 

But of all those, at least of the top 100, 69 percent have one location with at least one deficient system, to put some perspective on 

it. But our dollar savings comes in the vast majority prior to contract award. 

Mr. CONAWAY. So afterwards we are—okay. That—— 

Ms. STEPHENSON. After contract award we are—— 

Mr. CONAWAY. How much can you bifurcate your workload before 

contracts are signed versus follow-on auditing to make sure it was 

done correctly? 

Ms. STEPHENSON. That is right. We do. We do about half of it. 

The cost reimbursable contracts are primarily what we review after 

contract award. 

Mr. CONAWAY. Okay. 

Ms. STEPHENSON. And that would be ensuring that the business 

systems, earned value management systems, those type of things 

are in place to ensure that we are not being overcharged throughout the contract process. That is about half of the audits that we 

do are prior to contract award. 
18 

Mr. CONAWAY. And your expected error rate in that regard is? 

Ms. STEPHENSON. Is about five to eight percent. 

Mr. CONAWAY. Okay. And you theoretically would allow somebody a five—the system allows people to continue having an eight 

percent error rate year after year? Or how does that work? 

Ms. STEPHENSON. No, we would hope not. In fact, this is one of 

the areas—— 

Mr. CONAWAY. Hope is not a real good credit—— 

Ms. STEPHENSON. Well, what I would say is with the business 

systems—— 

Mr. CONAWAY [continuing]. As we have seen. 

Ms. STEPHENSON [continuing]. For example—and I am sorry to 

be doom and gloom, but this is one of the areas that we had addressed with the Commission on Wartime Contracting—is oftentimes we will report a contractor business system as inadequate. 

In fact, we had had some that were several years of inadequacies 

that continued and not a lot was done. 

And that is an issue that this new subcommittee that has been 

set up by Mr. Assad is going to look at, is what is needed both 

within the regulations and the statute to strengthen the contracting officer’s ability to make things such as an interim withhold 

on payments to be an incentive for contractors to fix these systems. 

That is one of the challenges that I have mentioned in my testimony, is that contractors have not had a lot of incentive to correct 

these systems. So we have issued reports, and not a lot may happen to them. 

Mr. CONAWAY. Okay. Well, the best lines an old audit partner I 

heard said that it is about a photographer. And the photographer 

said if you want a prettier picture, you have got to bring me a 

prettier face. So the fact that you are, you know, telling us things 

that are wrong with the system is—you know, we are not going to 

shoot the messenger because the—— 

Thank you, Mr. Chairman. 

Mr. ANDREWS. Thank you. 

The gentleman from Indiana, Mr. Ellsworth, is recognized. 

Mr. ELLSWORTH. Thank you, Mr. Chairman. 

Ms. Stephenson, can you tell me what triggers the pre-award 

audit versus the post-award audit? Is it dollar amount? Is it new 

contractors? What actually triggers if you do a pre-award contract? 

Ms. STEPHENSON. The pre-award is—— 

Mr. ELLSWORTH. Or audit contract. 

Ms. STEPHENSON [continuing]. Is governed by two aspects. First 

is primarily the contracting officer’s request for an audit. What will 

trigger their request for an audit is the submission of cost data 

from a contractor. And I will give you an example. 

In a sole source negotiated procurement, the regulations would 

call for the submission of cost data. In that case, we would be involved in performing an audit, given a dollar amount. It is $10 million cost-type. That is the threshold. And for fixed price it is 

$650,000. 

For procurements in which there is no cost data such as the competitive and the commercial item procurements, we would generally not be involved. I say generally. It is very rare that DCAA 

would be involved when there is not the submission of cost data. 
19 

So that is what would trigger the bid proposal, a contracting officer 

request and cost data. 

After contract award under the regulations, it is the cost reimbursable contracts. And in that case, there is no threshold. We do 

an annual audit of all contractors that have cost reimbursable contracts. We audit the costs for those years, whether it is a $10,000 

contract or $1 billion contract. Regarding business systems, we only 

audit the business system at the largest contractors, those that 

have $100 million or more of cost-type contracts in a given year. 

Mr. ELLSWORTH. Thank you very much. 

Mr. Chairman, in 2004, 2005, I was sitting at home before I ever 

thought about running for Congress. And I was reading an article 

that was talking about defense contractors that didn’t pay their— 

their federal income tax. And that kind of shocked me, sitting at 

my kitchen table, that they continue to get defense contracts even 

though they weren’t paying their taxes. 

I know we all hate to pay taxes. But it is a necessary evil. 

One of my first meetings with Mr. Kutz when I came to Congress 

was about this. And the report said that in 2005 33,000 civilian 

agency contractors owed over $3 billion in unpaid taxes. In 2004, 

same 27,000 owed over $3 billion in taxes and yet continued to receive federal contracts. 

I think, Mr. Kutz—and correct me if I am wrong—when we sat 

in our meeting, I asked why we would award contracts to people 

who weren’t paying their fair share of their taxes. And it was not 

you. It was somebody else in the room said that some were hoping 

that they would pay the taxes from the first contract with the second contract profits. Didn’t seem like good business sense to me. 

But I guess my question to you is—and thank you very much for 

your work—is it getting any better since our meeting? I filed some 

legislation to try to prevent this. It died in the Senate, or there was 

no action in the Senate. I filed that again. But have you seen any 

improvement since we talked and going into now 2006, 2007 and 

2008? 

Mr. KUTZ. No, I don’t think so. And it is interesting that you 

mention that. And Ms. Stephenson mentioned five to ten percent 

before. But about six percent of government contractors have 

known tax problems. So it is not a small issue. And it still continues. 

Most of the efforts are done on the back end levying payments, 

as you mentioned, the logic being, of course, well, let us keep giving 

them money so that they can actually pay the taxes that they already owe us versus preventing them from paying taxes. So more 

of the effort has been on the back end, not a whole lot on the front 

end. 

Mr. ELLSWORTH. Have we done anything about the resources to 

the disbarment list from—about giving to increase, to pay closer attention to the disbarment list or done anything, any improvement 

in that area? 

Mr. KUTZ. Not with respect to taxes because the Internal Revenue Service (IRS)—I mean, people can’t get information on taxpayer problems like that. That is something that can’t be shared 

across agencies. Section 6103 of the Internal Revenue Code does 

not allow IRS to share that with the Department of Defense, for 
20 

example. So even when we did our investigations, we couldn’t tell 

the Air Force and Army who the tax cheats were that we had investigated. 

Mr. ELLSWORTH. Mr. Chairman? 

Thank you, Mr. Kutz. 

Mr. Chairman, as complex as this issue is that we are studying— 

it has been going on for years—this seems like one that we could 

almost simply take care of, of not letting people who aren’t paying 

their taxes participate in the procurement system. And like I said, 

we will continue to work on that. But—— 

Mr. ANDREWS. If the gentleman will yield? As we discussed before, the intention of the committee is to spend time in December 

and January meeting among the members to discuss ideas for legislative recommendations that we would forward to the full committee and then, frankly, to the leadership because there would be 

some jurisdictional issues here. 

I would encourage you to bring that up during those discussions. 

I have made a note of it now. But I would be strongly inclined to 

include your recommendation in our report and try to get it enacted. 

Mr. ELLSWORTH. Thank you. I would yield back. 

Thank you all, the witnesses. 

Mr. ANDREWS. The gentleman from Colorado is recognized. 

Mr. COFFMAN. Thank you, Mr. Chairman. 

First of all, I am stunned. 

I think, Ms. Stephenson, you had mentioned that there is little 

leverage when a contractor isn’t performing, when the audit shows 

the contractor isn’t performing in terms of interim steps, withholding payment in order to get contract compliance. Could you 

elaborate on that? 

Ms. STEPHENSON. Yes. When it comes to the business systems— 

and I will give you an example—let us take the system that is used 

for preparing billings to the government. We refer to that as the 

billing system. If we find that there are deficiencies, and a common 

deficiency that we often find is that the billing has costs that are 

either in excess or in non-compliance with the contract terms and 

conditions; the contracts may have their own unique terms and 

conditions, which sometimes are not caught by contractors when 

they bill costs. That is a common finding. 

In those instances, contractors will submit a corrective action 

plan. And oftentimes—and I would say probably most, if not all the 

time—the corrective action plan itself is often viewed as enough 

versus saying does this corrective action plan—do we need to do 

something in the meantime for this contractor to have an incentive 

to put this plan in place. Sometimes plans come in 6 to 12 or if 

not more after the deficiencies have been reported. 

During that period of time, we think that there needs to be some 

leverage. There needs to be some withholdings to incentivize a contractor to put those actions in place a whole lot sooner because in 

the meantime that system is still vulnerable to overpayments to 

the government. 

What we have done in those instances is we don’t permit the contractor to submit billings directly to payment offices. They must 
21 

come through DCAA, in which we will then review those interim 

payments to ensure that that problem is not continuing. 

Mr. COFFMAN. Okay. 

Ms. STEPHENSON. And we think there does need to be incentives. 

And as I said earlier, Mr. Assad completely agrees with this and 

has quickly set up this subcommittee to assess what more can be 

done in the interim. 

Mr. COFFMAN. Okay. 

Would anybody else like to respond to that? Okay. 

It would seem that on a fixed price versus a variable or a cost 

plus contract that the auditing requirements would be much less 

than you are really auditing on the basis of outcome in terms of 

meeting those performance metrics. But it seems that when you 

are in a variable cost structure in terms of contractual arrangement, that has got to be pretty tough because you are measuring 

inputs and as well as making sure that they achieve the outcome. 

Has there been a trend in either direction? It would seem to me 

that we ought to move to fixed price whenever possible. 

Mr. ASSAD. Mr. Congressman, it is actually a little bit of the opposite way. When we get fixed price contracts, we need more audit 

assistance because at that point once we decide on what the price 

is, there is no more recourse for the taxpayers. We are going to pay 

that price. And if there is a disparity between what we have agreed 

to and the value we are getting, the taxpayer has no recourse. 

In redeterminable type of contract, on the other hand, if there is 

some incentive for the contractor to actually under-run the contract, yes, it does require post-contract award administration. But, 

in fact, the taxpayer is going to get a little of that money back. And 

one of the things that we are looking at right now while there is 

certainly a desire for the department to move to fixed price contracting when we can, in those instances where we are not satisfied 

that the fixed price is going to, in fact, provide value to the taxpayers, we are going to revert to a fixed price incentive contract 

where it is redeterminable. 

It says, look, we are just not happy that we are getting a good 

deal for the taxpayers. So we are going to establish a ceiling price. 

And then underneath that price we are going to share it. And so, 

that, in fact, may even add to DCAA’s workload a little bit. But we 

have got an issue with, you know, our ability to ensure at the outset of this committee hearing—to ensure that the price we are paying and the value that the taxpayers and warfighters are getting 

is fair and reasonable to the taxpayers. 

And so, you know, it is a problem. And, in fact, again, in fixed 

price contracting we require more audit services. 

Mr. COFFMAN. Thank you, Mr. Chairman. I yield back. 

Mr. ANDREWS. Thank you, Mr. Coffman. 

Mr. Cooper is recognized. 

Mr. COOPER. Thank you. I love the troops, but we have to recognize that year in, year out the Department of Defense is considered 

by both the Treasury Department and GAO to be the least 

auditable of all government agencies. It dramatically falls short 

even of the standards set by some of our other agencies that have 

been non-compliant. And in war time you might make excuses. But 

this has happened year in, year out. 
22 

Here we are focusing just on the procurement side of things. And 

the news is really no better. To have an error rate of 64, 69, you 

know, approximates like 93 percent flaws, mistakes, problems. And 

this is a field that is pretty well circumscribed. 

My friend from Texas knows better than I there are traditional 

rules that auditors are supposed to obey: independence, all the criteria. And for those to have been flouted in so high a percentage 

of cases is truly amazing. And to have findings hidden or obscured 

or lost is truly stunning. 

So I am wondering if hiring 700 new people in an organization 

like this is helpful or that is just going to create more problems. 

Everyone who testifies before Congress promises to do better. And, 

you know, this is an agency that has been in place since 1965. 

So I am wondering about a lot of the issues, including it almost 

seems like some of these audits are kind of like a doctor that only 

can get a health report by doing an autopsy. It is too late. You 

know, maybe we need folks who are embedded in these large organizations because, as my colleague from Indiana pointed out, the 

simple fact of tax non-compliance is stunning. And yet we have 

found ourselves in such red tape, we are not even able to find out 

the facts on that. So maybe we do need to amend Section 6103. 

But given 144 previous reports on reforming Pentagon procurement since World War II, almost none of which have been successful, the challenge for this panel is to take up new solutions, come 

up with something that really might be effective instead of repeating the high error rate of congressional reforms in past years. We 

issue a report. You people look at it. Nothing changes. And we keep 

on wasting taxpayer dollars. 

That is not the answer I want to see. So I would like to encourage each one of you to help us think of new solutions, not just hiring more people. In most bureaucratic circles being able to expand 

your payroll a significant percent like 20 percent would be a sign 

that, hey, the organization is growing and successful. Well, in this 

case, it is a troubled organization that needs all sorts of help. 

Now, perhaps there are, you know, reporting problems or other 

bureaucratic things getting the boxes right so that the Pentagon 

pays sufficient attention or so that you have the resources or the 

independence so you can be more authoritative. But the basic 

blocking and tackling today seems simply not to be done. 

And I think that the taxpayers deserve a better deal. But, you 

know, in a bureaucracy everyone wants to keep their job. No one 

wants to be punished. 

And I would like to ask Ms. Stephenson: What is your dismissal 

rate in your department for problem auditors or problem audits? 

What disciplinary actions have you taken within your ranks to encourage better performance? What sort of training programs do you 

have to make sure that people know and follow real auditing standards instead of giving these defense contractors a slap on the hand 

and a little gold star that contradicts the findings of the audit that 

has just been conducted? So what really is going on inside your 

agency? 

Ms. STEPHENSON. Let me first address the issue of the 700 employees over the next 3 years. We recognize that is only a piece. 
23 

Throwing more auditors solely at this issue is not the solution. And 

we don’t say that that is the solution. 

It has to be a complete revamping of how we perform the audits, 

what our work paper requirements are, what the requirements are 

when there is a disagreement over audit findings, how we address 

our quality assurance organization, which had been getting a clean 

opinion on our peer reviews from the IG for some time, how we revamp each piece in the DCAA chain. 

And I don’t mean just management. I mean each piece of how we 

perform our audits, how we interact with contractors, how we get 

access to records, how we interact with contracting officers. Each 

piece of that has had to have been addressed and is being addressed. 

We also had to address our training. We had to address the infrastructure of DCAA to say what broke down in these processes. 

Mr. COOPER. Excuse me. My time is running out. How many 

auditors have you let go for incompetence? 

Ms. STEPHENSON. I do not know, sir. But I would be happy to get 

that data and enter it for the record. 

[The information referred to can be found in the Appendix on 

page 97.] 

Mr. COOPER. Thank you. 

Thank you, Mr. Chairman. I see my time is expired. 

Mr. ANDREWS. Thank you, Mr. Cooper. 

Mr. Conaway, any closing remarks or follow-up? 

Mr. CONAWAY. Well, I do have some follow-up questions, if you 

don’t mind. 

Mr. ANDREWS. Sure. 

Mr. CONAWAY. Mr. Kutz, have you been requested to do a follow 

up at some point in time on your recommendations for DCAA? 

Mr. KUTZ. Not formally at this point. Certainly, we will continue 

to work with the Senate committee. And we would be happy to 

work with you also. I am sure that they would have no problem 

jointly working with you on these matters. I am certain of that. 

Mr. CONAWAY. Okay. 

Ms. Stephenson, Mr. Assad, who sets the budget for DCAA? 

Ms. STEPHENSON. It goes through the Office of the Secretary of 

Defense. 

Mr. CONAWAY. Okay. But Bob Gates says that is enough money 

for you? 

Ms. STEPHENSON. You know, to be honest, I am not sure, once 

it leaves the comptroller’s office, how all that comes into Congress. 

Mr. CONAWAY. Okay. Right. So part of where DCAA shows up in 

the org chart is that review. 

And Mr. Assad, I hope, would say that whoever that person is 

has the right authority to say that they are getting the right allocation of resources. 

Mr. ASSAD. Yes, I believe it is accurate to say that Under Secretary Hale is responsible for establishing the budget for DCAA. 

Mr. CONAWAY. And so, part of your committee findings will decide if whether or not that is for under secretary or—I don’t know 

what all the layers are of where that is in the—— 

Mr. ASSAD. No, I—— 
24 

Mr. CONAWAY. But the point is is if the person who has got ultimate responsibility for deciding what the budget of the DCAA 

should be doesn’t have enough stroke in the overall system, then 

it will be under-resourced. 

Mr. ASSAD. I think Under Secretary Hale of the comptroller is, 

from my personal opinion as well as the department’s opinion, is 

that organizationally DCAA is properly placed under his auspices. 

Mr. CONAWAY. Mr. Kutz, what are the auditing standards that 

are missed? I mean, I spent 7.5 years on a state board of accountancy. And we had a constant flow of CPA firms who have come 

through the system who had failed to confirm receivables or, you 

know, confirm bank accounts, those kinds of things. Can you give 

us a sense of what these failed audits—what auditing standards 

were not adhered to? 

Mr. KUTZ. Well, primarily the sufficient, competent evidential 

matter necessary for an audit. For example, if you are testing a 

system—and we saw this a lot—they might be looking at a oneyear period and may have picked one or two transactions from one 

day, sometimes that the contractor even selected for them, and 

then gave an opinion on a system over a whole period of time. So 

that clearly doesn’t meet sufficient, competent evidence standards 

for giving an opinion on a system. 

Mr. CONAWAY. Ms. Stephenson, how does that occur? I mean, you 

and I both know that is enough work to be done to support an opinion like that. How do you determine those levels of testing? 

Ms. STEPHENSON. Yes, the transaction testing and work paper 

documentation were the two primary areas in the auditing standards in which we had the difficulties with. In some instances, there 

were a few in which they had tested a few transactions during the 

actual billing system audit and had used testing that was done in 

other assignments of contractor costs to augment the testing within 

that particular assignment. 

I am not saying that is right or wrong. That is what happened. 

Mr. CONAWAY. Okay. 

Ms. STEPHENSON. We no longer do that. We are now requiring 

the testing on a billing system to be done within that billing system assignment. 

Mr. CONAWAY. The timeline for analysis, the risk-based management, risk-based auditing focus is what? 

Ms. STEPHENSON. We have instituted that right now. That started in October of 2010. 

Mr. CONAWAY. And we will determine later whether GAO believes that is the right model. I mean, Ms. Stephenson, quite frankly, to have a system that allows one transaction to be tested and 

then you issue an audit opinion on that, to allow that to go forward, then to have the same group of people tell us that they now 

have the right risk-based auditing standards in place—you know, 

it is a trust and verify thing. So I am not real comfortable with the 

statements that, you know, we have now put in a risk-based auditing system, because it is the same people who decided that one 

transaction was okay. 

Ms. STEPHENSON. Well, one transaction didn’t happen very 

often—— 

Mr. CONAWAY. But then that is an anomaly, but nevertheless—— 
25 

Ms. STEPHENSON. But what I will say to you that we did is we 

stopped the manner in which we have previously done system reviews. We have completely revamped it. And part of this risk-based 

approach that we announced on October 1st is we are not going to 

start any system reviews this year until we have the revised guidance out in the field. That process is being pilot tested right now 

in which we will look at significantly more transactions across the 

entire system. 

And we are working with the IG to ensure that that process will 

indeed meet the auditing standards. So, yes, you are right. And in 

looking at this to say, well, how can I give you assurance that isn’t 

going to continue this year. It is because I have stopped it. 

Mr. CONAWAY. Okay. 

Ms. STEPHENSON. And I have issued it to the workforce saying 

we are not going to do them until I give you revised guidance that 

has the sufficient testing necessary to express an opinion on these 

systems. 

Mr. CONAWAY. Okay. You mentioned quality assurance system 

with DCAA. Can you briefly describe that to us? 

Ms. STEPHENSON. Our quality assurance organization has two 

parts. One, we use the DOD Inspector General to perform our peer 

reviews, which are done on a three-year basis. Every three years 

it will look at three years’ worth of audits that we do. 

Mr. CONAWAY. Yes. Why would you not use senior management 

within the other offices to audit? You know, in public accounting 

firms, one of the things that we did was we had audit partners 

from one office audit the work that was done within the firm by 

other auditors. I mean I don’t—go ahead. Why don’t you discuss 

this? 

Ms. STEPHENSON. That is right. We have two pieces. One is the 

external, which is what the DOD Inspector General does for us. 

The other piece is internal, which is we have a separate Assistant 

Director for Quality Assurance at our headquarters that performs 

quality assurance reviews across the agency. 

Mr. CONAWAY. Okay. And that person is new? 

Ms. STEPHENSON. That person is a senior executive. 

Mr. CONAWAY. No, no, no. We have a new person there, given the 

problems we have had with the systems? 

Ms. STEPHENSON. Yes, that person is new and has just been put 

in place this month. 

Mr. CONAWAY. The position is just put in place, or the new person has been in place ? 

Ms. STEPHENSON. Both. We had the position at a 15 level, and 

we had it performed by each of our regions. Regions would be similar to the partners—— 

Mr. CONAWAY. Right. 

Ms. STEPHENSON [continuing]. In a firm. Each of the regions performed reviews of other regions, and it was more decentralized. We 

in 2008 brought that up to the headquarters level and stood up a 

new division in which I filled the position last year, but I have got 

it an Assistant Director senior executive position now. 

Mr. CONAWAY. Okay. Is this person in a position that if Mr. Kutz 

or his follow-on folks bring us a GAO report that looks like the one 

we just got, that person would be fired? 
26 

Ms. STEPHENSON. I don’t know if they would be fired. I mean the 

reason I say that is I don’t know if it was during their timeframe. 

We would have to say whether these assignments happened during 

their timeframe. 

Mr. CONAWAY. Yes, that is fine, but I am just saying if under 

that person’s tutelage, the system doesn’t get any better. 

Ms. STEPHENSON. I would certainly say if we don’t catch these 

areas ourselves and instantly correct them, yes. 

Mr. CONAWAY. Okay. 

Mr. Assad, elevating the DCAA’s findings and recommendations 

that would actually have some teeth and prevent these going on— 

what are you going to do to elevate those findings so that either 

we keep track of them from the congressional side or the system 

itself uses that data and information to actually improve the process? 

Mr. ASSAD. Well, we are going to provide you a report on an annual basis to Congress on the findings of the Contracting Integrity 

Panel, so you will know exactly what it is that we are recommending and exactly the action—including there will be the action 

plans as to when we will put in place. 

Mr. CONAWAY. Okay. 

Mr. Chairman, just one final comment on Mr. Cooper’s earlier 

comments. This year’s Defense Authorization Act—the House attempted to accelerate the timeframe in which the DOD is auditable 

from 2017 to 2013. And our colleagues on the other side of the 

building were a lot more lenient than what our position was, and 

somehow we wound up with the lenient version in this year’s 

round. 

This is an important issue, auditing across the entire system, not 

just the auditing work Ms. Stephenson and her team does, and we 

are going to continue to shine a light on it, because this is important to the system, so—— 

And I yield back. 

Mr. ANDREWS. If the gentleman would yield, I would say to him 

what I said to Mr. Ellsworth. I certainly would want that recommendation included as part of this panel’s report, that if anything, the hearing today and the other work that we have done 

points out the compelling need for a systemic audit of the Department of Defense as soon as practicable. And I think that is an issue 

that we should revisit very aggressively. I agree with you. 

Mr. CONAWAY. And I would also recommend that we somehow 

work our side of the system to make sure that the GAO comes back 

on a follow on behind the DCAA audits that they have already 

done. 

Mr. ANDREWS. I agree, and I just want to sum up this morning 

with that in mind, that the panel will consider the evidence that 

we have derived from these hearings over the course of the next 

three months or so, and we will meet among the members of the 

panel and discuss recommendations that we have and generate for 

public review a series of policy recommendations which, if adopted 

by the panel, would then be forwarded to the full committee for 

consideration as part of next year’s reauthorization. 
27 

Dr. Assad, we would certainly—Mr. Assad, excuse me—we would 

welcome the subcommittee that you are involved with, its recommendations, so we could evaluate them. 

Ms. Stephenson, any input you would like to give us we would 

like as well. 

And certainly, I want to formally extend to GAO our request for 

your recommendations, based upon the work that you have done, 

that we would then work with Senators Lieberman and Collins to 

find a common position. I would personally like to see those recommendations focus on altering the standards from standards 

which encourage an increase in the quantity of audits to those that 

increase the quality. 

We really shouldn’t be surprised when we get a defective work 

product, if the organization is tilted toward simply getting the reports out. And I think that we need to track that question very, 

very closely. 

The record of the proceeding will remain open for anyone who 

would like to supplement any of their comments today. I know that 

there are a couple of questions pending for Ms. Stephenson that 

Mr. Cooper would ask. The same would go for the members. 

We appreciate everyone’s involvement. 

And with that, the hearing is adjourned. 

[Whereupon, at 9:20 a.m., the panel was adjourned.] 

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