Mark Roberts is a partner with Argy, Wiltse & Robinson, P.C. (Argy), a full-service, independent public accounting firm. He has over 25 years of experience in government contracts having worked in private industry, public accounting and at a law firm serving as a consultant and litigation specialist.
We continue to see a fundamental shift in the DCAA’s approach to contract audits, a shift that is making it increasingly more difficult to do business with the DCAA. In July 2008, GAO issued a report criticizing the DCAA for its failure to properly follow Generally Accepted Government Auditing Standards. This report and subsequent guidance has had an adverse effect on many contractors’ relationships with the DCAA. Many contractors report that the DCAA is less willing to work closely with them to resolve issues fearing it may violate the DCAA’s need for independence. In the wake of Gov 2.0 and the Government’s initiative to promote transparency concerning federal spending, it is no wonder that the DCAA is taking a strict approach to conducting contractor audits.
In December 2008, the DCAA issued revised audit guidance on “Denial of Access to Records Due to Contractor Delays”. The prior audit guidance stated that supporting information should be provided to the auditors within a reasonable period of time, but did not include guidance on expected or required timeframes for response. The revised guidance defines a reasonable time period and requires auditors to take swift and punitive action (i.e., subpoenas, suspension of costs) if contractors fail to provide information in a timely manner. The revised guidance also makes clear that the DCAA strongly believes that access to records includes access to people.
In reaction to the revised guidance, many contractors are moving to more formal and structured policies and procedures around DCAA requests for information. Many contractors are also implementing automated tracking systems to document the requests and responses for information. Some contractors are also using shared access Web sites to better control and manage the process.
To summarize the revised guidance:
- Supporting documentation should be readily available and should be provided immediately on request unless there are extenuating circumstances.
- If there are extenuating circumstances, the auditor should allow the contractor additional time and agree on a due date.
- If the due date is missed, the auditor is to prepare a formal written request to senior management within five days of the missed due date. Senior management is defined as the CFO or VP within the company.
- The formal request should state that the information is required by a specific date, but that date should not exceed one week.
- If the information is not provided within one week, the auditor must notify the contractor that a denial of access to records situation exists and it is being reported to the appropriate government personnel, including ACO.
- If those efforts by the auditor and ACO fail, the DCAA Regional Director should consider issuing a subpoena for the records.
- The DCAA should consider issuing a DCAA Form 1 and suspending unsupported costs on cost reimbursement contracts.
- The DCAA should consider whether an internal control deficiency exists.
- Even if the contractor agrees to disallow questioned costs based on a lack of adequate support, the auditor should pursue access to the records and report the contractor’s denial of access.
- Access to records includes access to Company personnel.
- Contractor’s use of liaisons should not delay or inhibit auditor’s access to personnel.
- Generally, auditors should obtain support directly from the person responsible for the information.
While the DCAA considers this revised guidance “clarifying” guidance, many in the industry disagree and view this as a fundamental change, especially with respect to access to people. Compliance officers from several industry associations are already reporting that DCAA auditors are demanding direct access to employees in conducting their audits. It appears that the DCAA is quickly moving beyond the contractor’s liaison personnel.
Interestingly, several attorneys we’ve consulted agree that the DCAA should only has access to Company personnel in very limited circumstances and those situations are normally around time reporting and labor classification. According to these attorneys, the DCAA should not expect unfettered access to contractor personnel.
Typically contractor liaison personnel play a critical role in ensuring that the DCAA is getting current, accurate and complete information in conducting their audits. The liaison understands the applicable rules and regulations and is critical to managing the process for the contractor. By involving less experienced personnel in the audit process, it becomes highly likely that the DCAA will receive information that is not always accurate and that misunderstandings may occur.
Staff may offer inaccurate information while trying to answer questions when he or she does not possess first hand knowledge. When the DCAA discovers that the information is incorrect, the DCAA may increase its audit scrutiny. Another concern is that staff are not always required to talk to the DCAA and may refuse. How the DCAA will react to such a refusal is unclear. If a company decides to allow unfettered access to staff, it may want to consider having a compliance representative present for each interview.
As discussed above, many contractors now have to invest additional resources in their DCAA audit support processes due to these changes. Many are revising policies and procedures as well as, implementing new systems to better track and manage the process.