Report | Dec. 23, 2014

Hotline Complaint Regarding the Defense Contract Audit Agency Examination of a Contractor's Subcontract Costs



We evaluated a DoD Hotline complaint alleging that a Defense Contract Audit Agency (DCAA) field audit office did not comply with professional auditing standards or agency policy when it questioned a DoD contractor’s subcontract costs.


We substantiated the complaint. In Audit Report No. 3311-2009W10170001, the DCAA field audit office did not comply with generally accepted government auditing standards (GAGAS) or agency policy when it questioned $6.6 million in contractor-claimed subcontract costs. The auditor did not obtain sufficient evidence to conclude that the subcontract costs were unsupported, as GAGAS Chapter 5, “Standards for Attestation Engagements,” requires. In addition, the field audit office applied an arbitrary and unsupported 20-percent decrement factor to calculate the questioned costs. Use of the decrement was inconsistent with DCAA policy, and we noted that other DCAA auditors could be using the decrement inappropriately at other field audit offices.

In addition to substantiating the allegation,we noted that the auditor made significant errors on the DCAA Form 1, “Notice of Contract Costs Suspended and/or Disapproved,” that was attached to the DCAA r eport. These errors resulted in DCAA disallowing incorrect amounts on contractor billings and could have led the contracting officer to make an inappropriate final determination.


DCAA should supplement Audit Report No. 3311-2009W10170001 to remove the $6.6 million in questioned subcontract costs and consider reevaluating subcontract costs that are not covered by assist audit requests. Also we recommend that DCAA determine the extent to which other DCAA offices are inappropriately using the 20-percent decrement to question costs. Finally, DCAA should consider revising its policies to clarify that the DCAA Form 1 must exclude qualified and nonreimbursable contract costs.

Management Comments

Comments from the Director of the Defense Contract Audit Agency addressed all the specifics of the recommendations, and no further comments are required.