Summary: The Defense Contract Audit Agency (DCAA) under the Department of Defense (DOD) Comptroller plays a critical role in contractor oversight by providing auditing, accounting, and financial advisory services in connection with DOD and other federal agency contracts and subcontracts. Last year, GAO found numerous problems with DCAA audit quality at three locations in California, including the failure to meet professional auditing standards. This report addresses audit quality issues at DCAA offices nationwide. GAO was asked to (1) conduct a broad assessment of DCAA's management environment and audit quality assurance structure, (2) evaluate DCAA actions to date to correct previously identified problems, and (3) identify potential legislative and other actions for improving DCAA effectiveness and independence. To achieve these objectives, GAO analyzed DCAA's mission, strategic plan, audit policies, and quality assurance program; conducted interviews; reviewed selected audits at DCAA offices; and analyzed legislative and other actions.
GAO found audit quality problems at DCAA offices nationwide, including compromise of auditor independence, insufficient audit testing, and inadequate planning and supervision. GAO's conclusions stem from a review of 69 audit assignments supporting contract award and administrative decisions; an assessment of DCAA's audit quality assurance structure, which found similar audit quality problems but gave satisfactory ratings to deficient audits; and DCAA's rescission of 80 problem audit reports. The rescinded audits supported decisions on pricing and contract awards and impacted the planning and reliability of hundreds of other DCAA audits, representing billions of dollars in DOD expenditures. GAO found DCAA's management environment and quality assurance structure were based on a production-oriented mission that put DCAA in the role of facilitating DOD contracting without also protecting the public interest. DCAA has taken several positive steps. However, DOD and DCAA have not yet addressed fundamental weaknesses in DCAA's mission, strategic plan, metrics, audit approach, and human capital practices that had a detrimental effect on audit quality. To improve DCAA oversight, the DOD Comptroller requested Defense Business Board and "tiger team" reviews and established a DCAA Oversight Committee. In addition, in the short-term, Congress could provide DCAA with certain legislative protections and authorities similar to those available to IGs. In the longer term, Congress may wish to consider organizational changes to elevate DCAA to a component agency reporting to the Deputy Secretary or to establish an independent governmentwide contract audit agency.
