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Evaluation of Contracting Officer Actions on Defense Contract Audit Agency Reports that Disclaim an Opinion DODIG-2020-036

Evaluation

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Publicly released: December 2, 2019

 

Objective

The objective of this evaluation was to determine whether the actions taken by DoD contracting officers on Defense Contract Audit Agency (DCAA) audit reports that disclaimed an audit opinion complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy. To accomplish the objective, we evaluated contracting officer actions on 21 DCAA audit reports that disclaimed an opinion but questioned $750 million. Defense Contract Management Agency (DCMA) contracting officers were responsible for taking action on 20 of the reports, and Naval Supply Systems Command (NAVSUP) contracting officers were responsible for taking action on 1 of the reports.

 

Background

DCAA is responsible for auditing DoD contractor annual incurred cost proposals to determine whether the claimed costs are allowable. After completing an audit of an incurred cost proposal, DCAA issues a report that includes the auditor’s opinion on the incurred cost proposal taken as a whole. When DCAA is unable to perform all audit procedures necessary to obtain sufficient appropriate evidence and conclude whether potential noncompliances are material and pervasive, DCAA disclaims an opinion on the incurred cost proposal taken as a whole. When DCAA disclaims an opinion, DCAA is still responsible for reporting on any claimed DoD contractor costs that it determines are not allowable on Government contracts (also referred to as questioned costs).

Contracting officers are responsible for taking action on the questioned costs identified in DCAA audit reports, including those reports that disclaim an audit opinion. After the contracting officers complete their action on a DCAA audit report of an incurred cost proposal, they are required to prepare an indirect cost rate agreement, which establishes the indirect cost rates that the DoD contractor must use to bill the Government and close contracts.

 

Findings

For 19 of the 21 audit reports we selected, we found that contracting officers took appropriate action on DCAA’s audit findings. However, for 2 of the 21 DCAA audit reports, DCMA contracting officers did not document adequate rationale for disagreeing with $219 million in DCAA questioned costs. The contracting officers did not adequately justify why they reimbursed the $219 million to the DoD contractors. As a result, the two contracting officers may have reimbursed up to $219 million to the DoD contractors that were not allowable on Government contracts.

We also found that 11 of the 21 contracting officers prepared indirect cost rate agreements that did not include all of the elements required by the FAR, such as the applicable periods for the indirect rates. Also, five contracting officers could not demonstrate that they had provided the negotiation memorandum to the DCAA offices that provided field pricing support, as the FAR requires.

Finally, some contracting officers did not complete their actions on the audit reports in a timely manner or enter accurate status information in the DoD Contract Audit Follow‑up (CAFU) system. We determined that:

• for 10 of the 21 audit reports, DCMA contracting officers did not complete their actions within the 6-month resolution and 12-month disposition timeframes required by DoD Instruction 7640.02; and

• for 15 audit reports, DCMA contracting officers did not enter accurate information in one or more CAFU system data fields, including the Questioned Costs, Questioned Costs Sustained, Resolution Date, and Disposition Date data fields.

Timely action helps to ensure that the contractor corrects noncompliances and the Government promptly recoups unallowable costs. Errors in the CAFU system diminish the reliability of the system as a tool for monitoring contracting officer actions on DCAA audit reports.

 

Recommendations

 We recommend that the Defense Contract Management Agency Director require the contracting officers to determine if any of the $219 million in questioned costs reported by DCAA are not allowable according to the FAR and take steps to recoup any portion of the $219 million that is not allowed on Government contracts.

We also recommend that the Commander of the Naval Supply Systems Command provide contracting officers with training on the DoD Instruction 7640.02 requirement to document, on a monthly basis, the cause for delays in resolving and dispositioning audit reports, and the actions taken to achieve resolution or disposition. The training should also cover the requirement to report accurate data in the CAFU system.

 

Management Comments and Our Response

 The Defense Contract Management Agency Director agreed with the recommendation. The Director agreed to begin a review of the contracting officers’ decisions for not sustaining the DCAA reported questioned costs.

The Director also stated that the review will address whether the contractor received reimbursement of costs not allowed on Government contracts.

Comments from the Director addressed the specifics of the recommendation; therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify that the Director reviewed the contracting officers’ actions and determined allowability of the questioned costs.

The Chief of Staff from the Office of the Deputy Assistant Secretary of the Navy (Acquisition and Procurement), responding for the Commander of the Naval Supply Systems Command, agreed with the recommendation, stating that users of the CAFU system would receive training on the DoD Instruction 7640.02 requirements.

Comments from the Chief of Staff addressed the specifics of the recommendation; therefore, the recommendation is resolved but will remain open. We will close the recommendation once we verify that the Naval Supply Systems Command has provided training to its contracting officers on the DoD Instruction 7640.02 requirements.

 

 

This report is a result of Project No. D2018-DAPOCF-0169.000)