The Defense Contract Audit Agency (DCAA) independently investigates Department of Defense (DoD) contracts to determine the fairness, accuracy and completeness of financial records and reports, as well as the effectiveness of any transactions the department has made. In other words, the DCAA reviews business deals to make sure everything is aboveboard and acceptably efficient. The agency also provides financial advice to the DoD at every step of the contracting or subcontracting process, from negotiation to final resolution. Contracts for government entities outside the Defense Department may sometimes be audited by the DCAA. Unfortunately, the DCAA itself had been engaged in unethical practices, including allowing Boeing and other defense contractors to influence audit reports.
Prior to the establishment of the Defense Contract Audit Agency (DCAA) on January 9, 1965, the Army, Navy, and Air Force operated their own auditing agencies, each with different accounting practices. Attempts were made as early as 1952 to create uniform auditing practices; however, they were largely unsuccessful.
In May 1962, Defense Secretary Robert S. McNamara launched a study that looked into the feasibility of combining the Defense Department’s auditing programs. The study recommended that auditing be centralized, and three years later, the DCAA was created by order of the deputy secretary of defense. Today, all auditing is performed according to the guidelines laid out in the DCAA Contract Auditing Manual, available on the DCAA web page.
The agency went through an upheaval in 2008 and 2009 as the result of a scandal that resulted from charges in two Government Accountability Office (GAO) reports that the DCAA was engaged in unethical conduct. Under new leadership, the agency has attempted to reform and streamline its operations. In 2010 it hired 500 new auditors, and plans to hire 1,000 more by 2015—a 37% staffing increase.
The Defense Contract Audit Agency (DCAA) audits approximately 10,000 companies that conduct business with the Defense Department each year, producing some 45,000 audit reports. The total value of the audited contracts is currently more than $200 billion. In FY 2011, DCAA audited $19 billion of costs incurred on contracts and reviewed 2,681 forward pricing proposals amounting to $103 billion. As a result of its audit findings that year, the agency reported a net savings of approximately $3.5 billion. Department of Defense Directive 5105.36 (pdf), which serves as the agency’s charter, dictates that auditing Defense Department contracts is the sole responsibility of the DCAA.
The DCAA is headquartered at Fort Belvoir, Virginia. There are five regional offices— located in La Mirada, California; Smyrna, Georgia; Lowell, Massachusetts; Irving, Texas; and Philadelphia, Pennsylvania—that manage more than 300 field audit offices in the United States, Europe, and the Pacific. There is also a Field Detachment Headquarters located in Chantilly, Virginia. Many auditors assigned to field offices perform so-called “mobile audits,” in which they travel to contractor sites to perform their job. Companies that have significant business with the Department of Defense may have permanent DCAA offices established on-site. The DCAA director reports to the Department of Defense comptroller, who is the department’s chief financial officer.
The agency operates the Defense Contract Audit Institute, which trains DCAA auditors, on the campus of the University of Memphis.
A search of USASpending.gov shows that the Defense Contract Audit Agency (DCAA) spent no money on outside contractors between FY 2002 and FY 2012.
The Defense Contract Audit Agency (DCAA) has ignited many controversies through its audits, which sometimes expose wasteful spending or alleged malfeasance on the part of contractors. Unfortunately, the DCAA itself has been accused of unprofessional conduct.
Abusive Behavior by Management
Employees of the Defense Contract Audit Agency (DCAA) repeatedly suffered from abusive managers over a period of several years.
In 2011, the Pentagon’s inspector general substantiated allegations that a field manager in the DCAA’s Central Region office in Irving, Texas, had mistreated subordinates. The IG concluded the manager had created an unprofessional work environment, unnecessarily delayed an employee’s promotion, provided inadequate supervision and improperly removed an audit finding.
The report was just one of several released during the previous three years documenting abusive managerial behavior and other problems at DCAA.
For instance, a 2008 report from the Government Accountability Office said managers at a California field office threatened a senior auditor with personnel action if he did not retract negative findings about a large federal contractor.
Defense Contract Audits Manager Accused of Unprofessional Behavior (by Robert Brodsky, Government Executive)
Hotline Allegations Concerning a Field Audit Office in the Defense Contract Audit Agency Central Region (Department of Defense, Inspector General)
Corruption in Auditing
A July 2008 report by the Government Accountability Office (GAO) concluded that DCAA auditors had allowed Boeing and other contractors to influence the scope and conclusions of audits and that published audit opinions did not match the information in the audits. Sen. Clare McCaskill (D-Missouri), a former state auditor herself, said this “could be the biggest auditing scandal in the history of this town.” A second GAO report released in July 2009 uncovered additional evidence, including auditors whose independence had been compromised, and widespread deficiencies in every document it reviewed, covering a three-year period. GAO representative Gary Kutz said that the original report had merely been “the tip of the iceberg.” As a result of the scandal, DCAA Director April Stephenson—who had spent her entire 22-year career at the agency—was removed from her position in October 2009 and replaced with Army Auditor General Patrick Fitzgerald.
Although Fitzgerald has taken steps to reform the agency, watchdog groups expressed concern that the change in directorship would not fix the problem, suggesting that the DCAA needs greater independence and clout. Although the GAO and members of Congress have reportedly praised improvements made at the DCAA, a 2011 government contractor survey conducted by a contractor consulting firm showed that 100 surveyed companies, by and large, found that DCAA audit reports have, since the scandal, suffered in quality and take longer to generate. But a majority of respondents blame contracting officers rather than auditors for inefficiencies.
A December 2011 GAO report (pdf) on DCAA claims that the biggest problem now is the agency’s lack of access to Defense companies’ internal documents. An email leaked to the press (pdf) in July 2011 revealed that, seven weeks prior to her removal as DCAA Director, Stephenson had sought subpoena authority for obtaining documents from contractors (a proposal subsequently rejected by a Pentagon procurements director). Alan Chvotkin, head of a contractor trade group, conceded that contractors often drag their feet in producing material, but claimed that the DCAA has an “insatiable appetite for records” and sometimes engages in bullying. The DCAA has not used subpoena power in about 25 years.
McCaskill Takes On Military Industrial Complex (by Matt Renner, Truthout)
Inside Washington: Auditors go easy on contractors (by Richard Lardner, Associated Press)
DCAA 'Broken,' Ex-Employees Say (by Nick Schwellenbach, POGO)
Contractors improperly influenced Defense audits, GAO finds (by Robert Brodsky, Government Executive)
DCAA called out again over mismanagement (by Robert Brodsky, Government Executive)
Improving Federal Contract Auditing (Federal News Service) (pdf)
Defense Contractors Block Auditor Access to Records, Insiders Say (by Nick Schwellenbach, Time)
Audit questions $1.4b in Halliburton bills: Expenses at issue from Iraq contracts (by Rick Klein, Boston Globe)
Largest Iraq contract rife with errors (by Matt Kelley, USA Today)
Pentagon approves disputed Iraq costs (by Matt Kelley, USA Today)
GAO: Army improperly awarded $150B contract (by Matt Kelley, USA Today)
Report Adds to Criticism of Halliburton’s Iraq Role (by James Glanz, New York Times)
GAO: Iraq Contract Costs: DOD Consideration of Defense Contract Audit Agency’s Findings (U.S. Government Accountability Office)
Tester, fellow senators call for wartime-contracting probe (by Noelle Straub, Helena Independent Record)
Waste, Fraud, and Abuse in Hurricane Katrina Contracts (U.S. House of Representatives Committee on Government Reform) (pdf)
Pentagon Reports Improper Charges for Consultants (by John H. Cushman Jr., New York Times)
Report Faults TSA Security Contracting: Airport-Screener Spending Ballooned (by Robert O’Harrow Jr., Washington Post)
Homeland Security Contracts Abused (by Griff Witte and Spencer S. Hsu, Washington Post)
U.S. Cannot Manage Contractors in Wars, Officials Testify on Hill: Problem Is Linked to Lack of Trained Service Personnel (by Walter Pincus, Washington Post)
DOD stops subcontract pass-through charges (by Richard Rector, Washington Technology)
March 2012 Report on Reform Ideas for DCAA
With audits down by two-thirds, the Center for American Progress issued a report offering numerous reforms for the Defense Contract Audit Agency (DCAA) to adopt.
The nonprofit noted as of 2009, DCAA completed nearly 30,000 audits of government contracts. By 2012, that total had plunged to 10,000 a year.
Suggested changes included:
Better Auditing for Better Contracting (by Pratap Chatterjee, Center for American Progress)
Backlog of Unaudited Pentagon Contract Costs Could Reach $1 Trillion (by Bryan Rahija, Project on Government Oversight)
Government Contractor Survey Disses GAO, Says DCAA Audits Are of Lower Quality (by Nick Schwellenbach, Before It’s News)
Fitzgerald Talks Changes, Again
As 2012 opened, DCAADirector Patrick Fitzgerald promised to make important changes to the agency’s operations. The promise was warmly greeted by some involved in defense contracting, while others held their breath, given the complaints that arose previously about DCAA not following through on reforms.
In January, Fitzgerald said he wanted to improve the pre-proposal process, so that smaller businesses receive more guidance from DCAA in creating compliant proposals. The director added the change would help reduce the back-and-forth between auditors and contractors during this stage.
Fitzgerald also noted that in 2010, a policy was established to create what he called “rules of engagement” for DCAA to follow, which included a series of meetings to “get ahead of the process early since there are less options for making changes [to the proposal]” later on.
Mentioning 2010 was a sore point for some DCAA observers. When Fitzgerald took over as director in the previous year, he was given a mandate for change by the Obama administration.
But by the following year, some consultants complained no reforms had been implemented. “The status remains quo; the course seems unchanged; and it’s business as usual,” Apogee Consulting, Inc. wrote in an open letter to Fitzgerald.
Apogee’s criticism followed that of the Project On Government Oversight (POGO), which applauded Congress for taking a closer look at DCAA’s problems. At the same time, POGO expressed concerns that the agency was only focusing on “superficial fixes in order to alleviate political pressure.”
Watchdog Group Says DCAA Not Implementing Meaningful Reforms (Apogee Consulting)
POGO Letter to Senate Committees Regarding DCAA Reforms (Project on Government Oversight)
Should DCAA Be Disbanded?
Unhappy with the performance of the Defense Contract Audit Agency (DCAA), government watchdogs have been seeking dramatic changes.
A primary criticism of the agency has been its shrinking rate of audits conducted each year. Critics also have complained about the DCAA not performing more audits outside the Department of Defense, which the agency’s mandate permits.
Few if any observers favor no changes for the DCAA. Rather, it is a matter of degree as far as what is done to the embattled agency. The choices range from disbanding it altogether in favor of a new, broader federal audit agency to reforming and expanding the current DCAA.
Pro (Disband It):
The most radical calls for change involve folding the DCAA and creating a new Federal Contract Audit Agency (FCAA). Under this proposal, the FCAA would be independent and report directly to the president. It would execute audits not only for the Pentagon but all Executive Branch offices. Government agencies would be prohibited from hiring outside contractors and have to use FCAA experts, which would require a necessary level of funding for the new agency to meet this goal.
Fix the Pentagon Part I: Create an Independent Audit Agency (by Charles M. Smith, Truthout)
Should DCAA Be Disbanded? The Clock is Ticking … (by Nick Sanders, Apogee Consulting)
Con (Keep It):
Other critics want something done, but not so far as to eliminate the DCAA. The Project on Government Oversight (POGO) wants the auditing of defense and civilian contracts to belong to a single, independent agency that resides outside the Defense Department. POGO disagrees that a new bureaucracy is the answer. Instead, the Obama administration should expand the duties of the DCAA, while moving it beyond the reach of Pentagon leaders. Reconfiguring DCAA would make it more efficient than the current system, as long as Congress gives it enough resources and authority to succeed.
Federal Government Needs Strong, Independent Auditor to Oversee Billions in Contract Spending, POGO Tells Senate Panel (Project on Government Oversight)
Is it Time to Disband DCAA? Media Pundits and PWACs Weigh-in (by Nick Sanders, Apogee Consulting)
In the wake of April Stephenson’s removal in late October 2009 as head of the Defense Contract Audit Agency, U.S. Army Auditor General Patrick J. Fitzgerald was chosen by President Barack Obama to take over the embattled agency. Fitzgerald, who has spent his entire career in the Army’s auditing wing, will be expected to clean up DCAA’s reputation following numerous controversies that included auditors whitewashing their investigations to appease military contractors.
April G. Stephenson served as Director of the Defense Contract Audit Agency (DCAA) from July 2008 October 26, 2009. Stephenson earned a B.S. in Business Administration from California State University, Chico, in 1987, and an M.A. in Administration from Central Michigan University. She began her career with DCAA in 1987 as an auditor trainee in Mountain View, California, and progressed through various positions such as supervisory auditor, program manager, branch manager, and various positions in the policy directorate at DCAA Headquarters. She served as Deputy Director from June 2005 through January 2008, and assumed the responsibilities of Director in February 2008, although she did not obtain the title until July 2008. She also served as the Defense Secretary’s appointee on the Cost Accounting Standards Board.