Audits, Audits, Audits - Managing
Relations Between Contracting
Officers, Auditors and Contractors
Breakout Session #
Greg Bingham, Vice President, The Kenrich Group
Rich Rector, Partner, DLA Piper
9 December 2010
3:30pm – 4:45pm
1
Overview
1. Historical Context
2. Recent Events Relating to Government
Oversight
3. Major Systems Audited by DCAA & Proposed
DFARS Rule
4. Executive Branch’s Focus on Risk Sharing and
the Acquisition Process for Different Types of
Contracts
5. Disagreements Over Audit Findings
6. Impact of the Changing Landscape
7. Practical Issues in our Future
2
Selected Recent Events
Impacting The DCAA
2008
2009
December 2008
DCAA Guidance on
Access to Records
and Significant
Deficiencies /
Material
Weaknesses in
Audit Opinions
July 2008 GAO
Report GAO08-857
March 2009
Presidential
Memo Indicates
Preference for
Fixed-Price
Contracts
March 2009
DCAA Guidance re
Suspected Fraud
2010
April 2009
DOD IG
Criticism
of DCAA
April 2009
DCAA
Guidance
regarding
Direct
Billing
September
2009
GAO Report
GAO-09-468
July 2009
DCAA
Guidance re
Business
Ethics and
Conduct
July 2009
OMB Memo on Improving Government Acquisition by
Reducing Contracts Awarded Noncompetitively, CostReimbursement Contracts and T&M / LH Contracts
3
3
October 2009
DCAA Director
Resigns
January 15, 2010
Proposed DFARS
Rule Defining
“Business Systems” at
75 Fed. Reg. 2,457
GAO Report to the Committee on Homeland
Security Re: DCAA Audits, U. S. Senate, July
2008
4
GAO Report to the Committee on Homeland
Security Re: DCAA Audits, U. S. Senate,
September 2009
5
Increased Thresholds For Proposal Audits
“…limit contracting officers’ requests for DCAA audit assistance to
Fixed-Price proposals exceeding $10 million and Cost-Type
proposals exceeding $100 million [previously $10 million]…When
future requests for audit are associated with prime contractor
proposals below the revised thresholds, FAO management
personnel should generally refer the requestor to the Defense
Contract Management Agency (DCMA) for appropriate field pricing
assistance.”
Source: DCAA Memorandum, 18 October 2010: Increased Thresholds for Price Proposal Audits
6
Increased Thresholds For Proposal Audits
• “One of the priorities undertaken by
DCAA this year was to better align
workload requirements with available
resources.”
Source: DCAA Memorandum, 18
October 2010: Increased Thresholds for
Price Proposal Audits
7
Increased Thresholds For Proposal Audits
•
•
•
•
•
The guidance states that cost proposals below the new
dollar thresholds for review may be sent instead to the
DCMA.
DCMA is typically less thorough than DCAA . . .
The DCMA also does not specialize in examining and
verifying cost and pricing data.
The reason for this new restriction is DCAA’s attempt to
perfectly comply with Generally Accepted Government
Auditing Standards (GAGAS).
The number of DCAA reports produced annually has
plunged: 33,801 in FY 2007 to 30,352 in FY 2008 to
21,276 reports in FY 2009.
Source: “Pentagon Radically Reducing Oversight of
Contracts Worth Tens of Billions”, October 29,2010,
www.pogo.com
8
Increased Thresholds For Proposal Audits
•
•
•
•
•
. . . some auditors suggested DCAA managers overreacted
to the [GAO] report, and they now have embraced the timeconsuming GAGAS process . . .
The result has been that reports take longer and require a
field office manager's approval.
In fiscal 2008, the average time to complete a contractor
pricing review was 28 days, compared with 72 days in fiscal
2010 . . .
The number of DCAA reports produced annually also has
plunged from about 30,000 in fiscal 2008 to 21,000 in fiscal
2009.
DCAA also is planning to shed several low-priority services
and place more emphasis on high-risk contracts.
Source: Government Executive, “Defense Agency Raises Bar for
Reviewing Contractor Cost Proposals”, November 1, 2010,
www.govexec.com
9
Audit Guidance on Auditor Communications
To obtain sufficient evidence, it is essential for
auditors to communicate with the contractor to ensure
that conclusions are based on a full understanding of
all relevant facts.
Source: September 9. 2010 Memo For Regional Directors
Regarding Audit Guidance on Auditor Communications
10
Audit Guidance on Auditor Communications
• At the commencement of the audit, the
contractor should provide Government
representatives (e.g., DCAA, ACO, and PCO)
with a “walk-through” of its assertion (e.g.,
forward pricing proposal, incurred cost
submission).
• At these meetings, the contractor should fully
explain its assertion and allow the audit team
to ask questions to fully understand the
contractor’s assertion.
Source: September 9. 2010 Memo For Regional Directors
Regarding Audit Guidance on Auditor Communications
11
Audit Guidance on Auditor Communications
• The auditor should discuss preliminary audit findings
. . . with the contractor to ensure conclusions are
based on a complete understanding of all pertinent
facts.
• These types of discussions do not impair auditor
independence and are generally necessary to obtain
sufficient evidence to support audit conclusions.
• Upon completion of the field work, the auditor should
hold the exit conference to discuss the audit results
and obtain the contractor’s views concerning the
findings, conclusions, and recommendations for
inclusion in the audit report . . .
Source: September 9. 2010 Memo For Regional Directors
Regarding Audit Guidance on Auditor Communications
12
Audit Guidance on Auditor Communications
• For other than audits involving forecasted costs
subject to negotiations, the auditor should provide
the contractor a copy of the draft report, or at a
minimum, the results of audit section of the draft
report . . .
• To facilitate the discussion of the audit results and
obtaining the contractor’s views of the results, this
information may be provided prior to the exit
conference . . .
Source: September 9. 2010 Memo For Regional Directors
Regarding Audit Guidance on Auditor Communications
13
Audit Management Guidance – Reporting
Suspected Contractor Fraud and Other
Contractor Irregularities, March 2009
Audit Management Guidance – Reporting Suspected
Contractor Fraud and Other Contractor Irregularities
14
Audit Guidance on Federal Acquisition
Regulation Revisions Related to Contractor Code
of Business Ethics and Conduct, July 2009
Audit Guidance on Federal Acquisition Regulation (FAR) Revisions Related
to Contractor Code of Business Ethics and Conduct
15
15
Formal Request for Information from DCAA to
a Contractor
16
Audit Guidance on Denial of Access to Records
Due to Contractor Delays, December 2008
Audit Guidance on Denial of Access to Records Due to
Contractor Delays
17
Audit Guidance on Approving and Rescinding
Contractor’s Authorization to Participate in the
Direct Bill Program for Major Contractors, April
2009
Audit Guidance on Approving and Rescinding Contractor’s
Authorization to Participate in the Direct Bill Program for
Major Contractors
18
Major Systems Audited By DCAA DCAM Page
502 – Accounting & Management Systems
• Control Environment and Overall Accounting
System
• General IT System
• Budget and Planning System
• Purchasing System
• Material System
• Compensation System
• Labor System
• Indirect and ODC System
• Billing System
• Estimating System
DCAA Contract Audit
Manual, 5 April 2010
19
Proposed DFARS Rule
Rule 75 Fed. Reg. 2,475 (January 15, 2010)
Defines “Business Systems”:
• Accounting System
• Earned Value Management System
• Estimating System
• Material Management and Accounting
System
• Property Management System
• Purchasing System
20
Proposed DFARS Rule
Rule 75 Fed. Reg. 2,475 (January 15, 2010)
(cont.)
Potential Contractor Payments at Issue Include:
• Interim Payments under
Cost-Reimbursement Contracts
• Progress Payments
• Performance-Based Payments
21
Memo From President Obama On Government
Contracting, March 2009
Excessive reliance by executive agencies on
sole-source contracts (or contracts with a limited
number of sources) and cost-reimbursement
contracts creates a risk that taxpayer funds will
be spent on contracts that are wasteful,
inefficient, subject to misuse
22
22
OMB Memo Improving Government
Acquisition, July 2009
…cost-reimbursement contracts, and time-andmaterials and labor-hour (T&M/LH) contracts
pose special risks of overspending.
23
OMB Memo Improving Government
Acquisition, July 2009
• …agencies should aim to reduce by at
least 10 percent the combined share of
dollars obligated through new contracts in
FY 2010 that are: (1) awarded
noncompetitively and/or receive only one
bid in response to a solicitation or a
request for a quote, (2) costreimbursement contracts or (3) T&M/LH
contracts.
24
June 28, 2010 Memorandum from
Undersecretary of Defense for Acquisition,
Technology and Logistics, Ashton Carter
Today, I write to give direction on another
important priority: delivering better value to the
taxpayer and improving the way the
Department does business.
25
June 28, 2010 Memorandum Continued
• It has taken years for excessive costs and
unproductive overhead to creep into our
business processes, and it will take years
to take them out.
Providing Incentives For Greater Efficiency
In Industry:
• Using Proper Contract Type …
• Using Proper Type for Services
• Aligning Policy on Profit and Fee To
Circumstances
26
Contract Type Comparison
Firm-Fixed-Price
Cost-Plus
 Reasonable Price
Comparisons
 Adequate Price
Competition
 Reporting Requirements
Not As Rigorous
 Minimum Administrative
Burden On Contracting
Officer
 “Handsoff” Government
Oversight
 Requires Change Orders
To Be Submitted
 Scope Of Work Must Be
Well-Defined
 Uncertainties May Not
Allow Accuracy In
Estimating Costs
 Potential Uncertainty
Regarding Required Level
Of Effort And Price
 Requires Sophisticated
Accounting System
 High Government
Surveillance
 Allows Micro-Management
 Rigorous And In-Depth
Cost Tracking
 Well-Defined Scope Of
Work Not Required
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Audit Requirements
1. Will Audit Requirements be Increased or
More Rigorously Enforced?
2. Will DCAA’s Current Resources Be
Inadequate?
3. Will Private Accounting Firms Play A Larger
Role?
4. Impact on Contract Audit Manual and
“Standard” Audit Programs?
28
Disagreements Over Audit Findings
1. Ultimate Authority of Contracting Officer
2. DCAA “Whistleblowers”
3. Audit Opinions by DCAA and Private
Accounting Firms
4. Audits of “Business Systems”
5. No More “Adequate-In-Part”
6. Incurred Cost Submissions
7. Indirect Rates
29
Quantum Issues in Claims
1. Audits of Requests for Equitable Adjustments
2. Audits of Termination Settlement Proposals
3. Other Audits Which are Contested
4. DCAA Auditors as Expert Witnesses
5. Allegations Involving Contract Type (e.g.,
Fixed Price Contract with Poorly Defined Scope
of Work)
30
Practical Issues In Our Future
1. Cooperation Between Contractor and
Government Personnel
2. Decision-Making when Lines of Authority are
Unclear
3. “Collaborating” to Resolve Audit and Other
Issues
4. Working “Together” when Contractor Systems
have been Found Inadequate
5. Cash Flow and Payment Withholdings
31
Practical Issues In Our Future
6. Participation by Contractors in Direct Billing
Programs
7. Disputes over Access to Records
8. Overworked Auditors and Audit Delays
9. Reliance on Auditors Other Than DCAA
10. Audits of Contractor Ethics & Compliance
Processes
32
Reference Materials
1.
2.
3.
4.
5.
6.
7.
8.
9.
Government Executive, “Defense Agency Raises Bar for Reviewing Contractor
Cost Proposals”, 1 November 2010, www.govexec.com
“Pentagon Radically Reducing Oversight of Contracts Worth Tens of Billions”, 29
October 2010, www.pogo.com
DCAA Memorandum: “Increased Thresholds for Price Proposal Audits”, 18
October 2010
Federal Acquisition Regulation Part 2 -- Definitions of Words and Terms 1
October 2010
Memorandum For Regional Directors Regarding Audit Guidance on Auditor
Communications, 9 September 2010
Federal Register Vol. 75, 30 August 2010
“Embattled DCAA Director Resigns”, by Elise Castelli, Government Executive,
26 October 2009
Testimony of April G. Stephenson, Director, Defense Contract Audit Agency
before the House Committee on Armed Services Defense Acquisition Reform
Panel, 15 October 2009.
GAO Report “DCAA AUDITS -- Widespread Problems with Audit Quality
Require Significant Reform”, GAO-09-468, September 2009
33
Reference Materials (cont.)
10. OMB Memorandum on “Improving Government Acquisition” to Heads of
Executive Departments and Agencies, 29 July 2009
11. “Audit Guidance on Federal Acquisition Regulation (FAR) Revisions Related to
Contractor Code of Business Ethics and Conduct”, 23 July 2009, DCAA
Memorandum for Regional Directors 09-PAS-014(R)
12. “Audit Guidance on Approving and Rescinding Contractor’s Authorization to
Participate in the Direct Bill Program for Major Contractors”, 15 April 2009,
DCAA Memorandum for Regional Directors 09-PPD-006(R)
13. U.S. Department of Defense Inspector General, Oversight Review, 8 April 2009
– “Defense Contract Management Agency Actions on Audits of Cost Accounting
Standards and Internal Control Systems at DoD Contractors Involved in Iraq
Reconstruction Activities”
14. “Audit Guidance on Reporting Significant/Sensitive Unsatisfactory Conditions
Related to Actions of Government Officials,” 13 March 2009, DCAA
Memorandum for Regional Directors 09-PAS-004(R)
15. “Memorandum on Government Contracting” from President Obama to the Heads
of Executive Departments and Agencies, 4 March 2009
16. “Audit Management Guidance – Reporting Suspected Contractor Fraud and
Other Contractor Irregularities”, 3 March 2009, DCAA Memorandum for Regional
Directors 09-OO-010(R)
34
Reference Materials (cont.)
17. “Audit Guidance on Significant Deficiencies/Material Weaknesses and Audit
Opinions on Internal Control Systems,” 19 December 2008, DCAA
Memorandum for Regional Directors 08-PAS-043(R)
18. GAO Report “DCAA AUDITS -- Allegations That Certain Audits at Three
Locations Did Not Meet Professional Standards Were Substantiated”, GAO-08857, July 2008
19. “Ninth Circuit Reverses District Court in GD Federal Tort Claims Act Suit
Involving DIVAD Contract”, Fried Frank 1 April 1998 Government Contracts
Flash Alert No. 98-4-1
20. DCAA Handbook on Fraud Indicators for Contract Auditors, Section II (31 March
1993)
21. “DCAA Contract Audit Manual Chapter 9—Audit of Cost Estimates And Price
Proposals”, 30 June 2010. See http://www.dcaa.mil/
22. “DCAA Contract Audit Manual Chapter 12—Auditing Contract Termination,
Delay/Disruption, And Other Price Adjustment Proposals Or Claims”, 30 June
2010. See http://www.dcaa.mil/
23. Five-Volume Set Of Contract Pricing Reference Guides Prepared Jointly By The
Air Force Institute Of Technology And The Federal Acquisition Institute. See
Volume IV “Advanced Issues In Contract Pricing” Referenced At FAR 15.404-1 - Proposal Analysis Techniques (a)(7). See
http://www.acq.osd.mil/dpap/cpf/contract_pricing_reference_guides.html.
35
Reference Materials (cont.)
24. DCAA Contract Audit Manual 5-1100 Section 11—Audit of Billing System
Internal Controls
25. Estimating Systems
A. DFARS 215.407-5 Estimating systems.
B. DCAA Contract Audit Manual 5-1200 Section 12—Audit of
Estimating System Internal Controls
36
Greg Bingham
Greg Bingham is a Vice President with The Kenrich Group, LLC. He has over 24 years of experience in the
fields of business and litigation consulting including investigation of allegations of fraud or overbilling.
Professional Experience
Mr. Bingham has assisted clients on Government Contract matters including: 1) regulatory consulting on
allowable costs issues arising from the Cost Principles found at Part 31 of the Federal Acquisition
Regulation (“FAR”) as well as allocation of cost issues associated with the Cost Accounting Standards
(“CAS”), 2) consulting on matters involving allegations of defective pricing, false claims, mischarges and
other improper billings to the Government, 3) the Earned Value Management Systems requirements of
Department of Defense regulation 5000.2-R, 4) financial statement and special purpose auditing, 5)
management consulting and 6) Foreign Military Sales issues and foreign sales issues. This experience has
provided him with substantial knowledge of the program management, financial and accounting records
and systems maintained by companies who sell to the Federal Government.
Greg’s work has included the quantification of cost impacts and negotiation with Government auditors and
oversight personnel. Greg has planned and performed reviews of various defense contractors’ systems
including Internal Controls, Accounting, Billing and Estimating as well as policies and procedures.
Contact Information:
1250 Connecticut Avenue NW, Suite
650
Washington, DC 20036
Tel: (202) 420-7680
Fax: (202) 429-5673
gbingham@kenrichgroup.com
Masters of Business Administration
University of Texas at Austin
Bachelor of Science in Electrical
Engineering
University of Kentucky
37
Rich Rector
Rich Rector chairs DLA Piper's Government Contracts practice and focuses his practice on federal, state,
and local procurement issues. He has litigated contract actions and bid protests before the Court of Appeals
for the Federal Circuit, the Court of Federal Claims, federal district courts, state and federal boards of
contract appeals, and the US Government Accountability Office. He also has represented prime contractors
and subcontractors in breach-of-contract and protest actions in state and federal courts, as well as prepared
contract claims and requests for equitable adjustment.
Mr. Rector also counsels clients on a broad range of federal and state procurement matters, including IT
contracts and transactions, infrastructure projects, state procurement laws and issues, commercial-item
contracting, terminations for convenience, US Postal Service procurement, and compliance with
procurement integrity and ethics laws.
Prior to entering private practice, Mr. Rector worked for Litton Industries, Inc. for eight years in a variety of
business development and legal positions. During that period, he gained valuable experience in the
preparation and management of new business proposals, as well as in the review and preparation of
subcontracts and teaming agreements.
The respected English research firm Chambers & Partners cites Mr. Rector in Chambers USA: America's
Leading Lawyers for Business. In 2007, it termed him "an expert on the process" and "strategic thinker" and
commented that "clients dubbed him 'as good as a crystal ball'"; in 2008, it noted his "numerous successes"
and called him "knowledgeable and highly proficient"; in 2009, it said he delivers "reasonable and creative
solutions to tough issues" and "excels at anticipating the other side's next move and deconstructing their
arguments" and in 2010, it said clients regard him as "a thorough, precise litigator and an all-around
superstar."
In 2007 and 2008, Mr. Rector was named to Washington SmartCEO's Legal Elite.
Contact Information:
500 Eighth Street, NW
Washington, DC 20004
Tel: 1 202 799 4400
Fax: 1 202 799 5400
richard.rector@dlapiper.com
J.D., University of Maryland 1987
B.A., University of Maryland 1981
38