Dealing with the “NEW” DCAA Business System Rule

Before I start, I know everyone is talking about this, but my perspective as an ex-DCAA auditor may be a little different.  I am a little taken aback by the way the agency is being portrayed, but I haven’t been there in a while, so…

I left federal service in 2005 and a lot has changed in that brief period.  The biggest changes have come since July 2008.  The entire federal contracting arena is still buzzing about how the GAO basically laid the smack-down on DCAA for a lack of independence in their audits (  The findings came out of the “Big Guy” contractors where DCAA has resident offices and eats lunch in the same cafeterias as the contractor’s personnel.  Specifically, GAO mentioned contractors performing on billions of dollars in contract negotiations and millions in overpayments – by MAJOR contractors.  It goes on to mention limited audit hours and management intimidation within DCAA.

In response, DCAA changed policies and procedures and issued guidance letters to help control auditors.  Arguably, December 2008 ( was possibly the biggest change in policy for DCAA.  Internal control systems were at the forefront of the memo issued:

  • DCAA will no longer report “deficient in part” opinions – the system review is now PASS/FAIL
  • Audit reports will no longer include suggestions for improvement of the system
  • When is system is found inadequate, the auditor is required to recommend to the ACO that payments be suspended for affected contracts

I like the idea of Pass/Fail system reviews.  I even like the idea of letting the contractor figure out for themselves what they need to change – and then charging the government through an indirect allocation for the time spent figuring out what DCAA didn’t tell them.  I am not so sure on the suspension of payments, although it does give a little bit of a bite to what had been a de-fanged DCAA.  Kudos!

All in all, DCAA issued 19 memos by the end of 2008, 11 of which were associated directly back to the GAO memo (  No longer would DCAA be part of a solution for government compliance – it would merely be the police issuing a citation.

I don’t want this to be a DCAA-bashing – they get enough of a hard time from contractors, GAO, and really anyone who knows what they do and who they are.  I am here only to question whether DCAA is turning its auditors [back] into robots? 

Think about this for a moment.  If you reach in your pocket and pull out your car keys and drop some change (2 quarters, 3 dimes, and 4 pennies) how much time do you take to find it ALL?  This is a materiality decision.  If the 4 pennies disappear into the sewer, you don’t call public works and ask for someone to remove the storm drain cover so you can go retrieve it, putting on hold everything else you have to do for the rest of the day.  You pick up the quarters and the dimes that are closest and leave the rest because it just isn’t worth it.

What DCAA auditors are now being told is, out of the numerous items that you have checked related to a system’s internal controls, if the contractor misses one the contractor fails the review.  Auditor judgment is what makes an audit go smoothly and causes a collaborative environment between auditor and contractor.  With an adversarial relationship now being posited, contractors will not be as forthcoming and auditors will have to dig deeper – growing audit hour budgets and increasing backlog. 

According to recent estimates, the volume of work that has been paid for by federal departments but that still awaits auditing by the Defense Contract Audit Agency has nearly quadrupled — from $110 billion in 2006 to $405 billion in 2010. But in the same period, the Defense Contract Audit Agency’s staffing grew by only 20 percent.

My cautionary tale through all of this “change” by DCAA is give it time and patience.  I hold a soft spot in my heart for DCAA – they trained me and led me to where I am today in some small way.  Remember they are professionals and they are trying to help show you where you can do better next time – even if they can’t really tell you how to change it [anymore].

About Marty Herbert

With 13 years of government contract administration, analysis, finance, and audit experience, I have established a firm baseline in ethics and a specialization in government contracts that has prepared me to become a subject matter expert in my field. I am currently working on enhancing government contracts management and compliance through workflow tools and product offerings - attempting to make the process proactive as opposed to reactive.
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