DCAA Audits: Allegations That Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated
Published: 2008-09-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. 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.

section_title: Letter
paragraphs: 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. 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 contractor- proposed 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).
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  whether they could be substantiated. Our investigation is discussed in  detail in an investigative report we issued in July 2008.
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.
subsections: section_title: Results of Investigation
paragraphs: We substantiated the allegations and auditor concerns made on each of  the 13 cases we investigated, involving 14 audits at two locations 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.
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  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  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 403 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  2006, 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, GAGAS 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  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.
section_title: DCAA Response to Investigation
paragraphs: 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.
section_title: Concluding Remarks
paragraphs: 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.
section_title: Contacts and Staff Acknowledgments
paragraphs: 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.
section_title: Appendix I: GAGAS Compliance Problems Associated with Hotline Case Investigations
paragraphs: The DCAA resident office and contractor  made an up-front agreement on audit  scope, which had the effect of  predetermining an “adequate” audit  opinion.
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.
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.
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.
Auditor was excluded from the exit  conference, findings were dropped  without adequate support, and supervisor  made contradictory statements on her  review of the audit.
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.
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.
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.
Significant deficiency and FAR  noncompliance related to the lack of  contractor job descriptions for executives  not reported.
Significant deficiency related to  subcontract management not reported.
Second auditor and supervisor dropped 6  of 10 significant deficiencies without  adequate documentation to show that  identified weaknesses were resolved.
Supervisor identified problems with test  methodology but dropped findings instead  of requiring tests to be reperformed.
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.
section_title: Appendix II: Summary of GAO Findings on Hotline Investigations of Selected Audits
paragraphs: 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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Location 2 is a DCAA branch office.
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