For contractors, the audit process can be stressful, confusing and fraught with risk and the frequent changes in the practices and policies of the Defense Contract Audit Agency (DCAA) make it particularly difficult to keep up. The result is a cloud of uncertainty affecting contractors and lawmakers alike, with bitter disagreements over what makes for effective policy and big dollars at stake.
At the crux of the issue are two competing agendas; the federal government wants to drastically cut spending on contractors (at least 10 percent over the next three years), reduce fraud and waste while simultaneously slashing budgets and staff at DCAA to reduce overall spending. The process of accurately and efficiently auditing complex contracts is labor intensive and requires highly skilled individuals, usually CPAs.
According to a recently released report by the Center for American Progress (CAP), the DCAA, which audits 89% of all federal contracts has adopted policies that are at odds with both the successful completion of their mission and corporate private-sector best practices. Audit staff are now pressured to complete even the most complex audits in under 30 days; a speed at which auditors are often unable to fully substantiate their conclusions. This culture of haste has led to a steep decline in the quality of audits performed by the DCAA and backlash from the private contracting industry.
If rushing through complex contract audits isn’t enough of a problem, the DCAA is woefully understaffed. In most instances, DCAA managers that sign off on audits are not CPAs. This fact is startling because in the private sector this practice would be illegal.
Despite these issues DCAA is still the most highly respected auditing body for federal contracts. Agency personnel strongly prefer DCAA audits to similar audits performed by the Big Four. Contractors however, are becoming more and more weary of a process they simply feel they cannot trust.
A bad audit can significantly damage the bottom line of a contractor. The CAP report states that “some 70 percent of the Defense Contract Audit Agency’s withholds are sustained,” meaning that more often than not if the DCAA decides a contractor should be denied payment the contractor suffers lost earnings.
Ultimately, contractors are coming to the conclusion that they must be prepared for DCAA audits. The failure to put in place adequate business systems can be catastrophic and any missteps in reporting, billing, or accounting for contracts could result in significant hits to their bottom line.
For a more in-depth discussion of DCAA Audits and compliance requirements for contractors, view this webinar: DCAA Audit and Compliance Issues for Federal Contractors