Summary: This testimony discusses our recent audit of the Defense Contract Audit Agency's (DCAA) overall management environment and quality assurance structure. DCAA is charged with a critical role in Department of Defense (DOD) contractor oversight by providing auditing, accounting, and financial advisory services in connection with the negotiation, administration, and settlement of contracts and subcontracts. DCAA's mission encompasses both audit and nonaudit services in support of DOD contracting and contract payment functions. DCAA audits of contractor internal controls in accounting, billing, estimating, and other key systems support decisions on pricing and contract awards. Internal control audits also impact the planning and reliability of other DCAA audits because DCAA uses the results of these audits to assess risk and plan the nature, extent, and timing of tests for other contractor audits and assignments. Last year, we reported the results of our investigation of allegations about certain DCAA audits at three locations in California, which substantiated claims that (1) audit documentation did not support the reported opinions; (2) DCAA supervisors dropped findings and changed audit opinions without adequate audit evidence for their changes; and (3) sufficient work was not performed to support the audit opinions and conclusions. At that time we were conducting a broader audit of DCAA's overall organizational environment and quality control system. Given the evidence presented at the Committee's September 2008 hearing, you requested that we expand our ongoing assessment. Our current report, which the Committee is releasing today, presents the results of our DCAA-wide audit, including (1) an assessment of DCAA's management environment and quality assurance structure; (2) an analysis of DCAA's corrective actions in response to our July 2008 report and two DOD reviews, and (3) potential legislative and other actions that could improve DCAA's effectiveness and independence.
A management environment and agency culture that focused on facilitating the award of contracts and an ineffective audit quality assurance structure are at the root of the agencywide audit failures we identified. DCAA's focus on a production-oriented mission led DCAA management to establish policies, procedures, and training that emphasized performing a large quantity of audits to support contracting decisions and gave inadequate attention to performing quality audits. An ineffective quality assurance structure, whereby DCAA gave passing scores to deficient audits compounded this problem. DCAA initiated a number of actions to address findings in our July 2008 report, the DOD Comptroller/CFO August 2008 "tiger team" review, and the Defense Business Board study, which was officially released in January 2009. Examples of key DCAA actions to date include the following. (1) Eliminating production metrics and implementing new metrics intended to focus on achieving quality audits. (2) Establishing an anonymous Web site to address management and hotline issues. DCAA's Assistant Director for Operations has been proactive in handling internal DCAA Web site hotline complaints. (3) Revising policy guidance to address auditor independence, assure management involvement in key decisions, and address audit quality issues. DCAA also took action to halt auditor participation in nonaudit services that posed independence concerns. In addition to correcting the fundamental weaknesses in DCAA's mission and overall management environment, we believe certain legislative measures as well as other actions could enhance DCAA's effectiveness and independence. For example, granting DCAA certain authorities and protections--similar to those offered to presidentially appointed inspectors general (IG) under the IG Act--could enhance DCAA's independence. In the longer term, Congress could consider changes in organizational placement after DCAA has had sufficient opportunity to effectively implement current reform efforts.
