Nondefense agencies and defense contractors should be formulating alternate ways to obtain audits for their non–Department of Defense (DOD) contracts now that the Defense Contract Audit Agency (DCAA) is prohibited from providing audit support to them.

Effective immediately after being passed in November 2015, Section 893, Improving Audits of Contracts—which is part of the National Defense Authorization Act (NDAA)—commits all the DCAA’s resources to reducing its significant backlog of incurred-cost audits, but only for DOD contracts. To give an idea of scope, consider that the DOD awarded $278 billion in contracts in 2015 while nondefense agencies were awarded $158 billion in contracts, according to www.usaspending.gov. The backlog stretches as far back as seven years.

This also extends to prime contractors and subcontractors. While prime contractors have similar options to nondefense agencies when considering how to conduct audits of their nondefense subcontracts, it will likely cost more than obtaining DCAA reports funded solely by the government. 

Obligation and Benefit

Federal agencies that award cost-reimbursable contracts are still obligated to ensure a contract audit is completed for contract closeout—this hasn’t changed. Based on the backlog and the number of audits still incomplete, there’s an overwhelming amount of federal funds that still need to be audited before the contracts can be closed.

In addition, an audit is beneficial. It’s a vital safeguard in the contract closeout process. It serves as evidence the contract is completed and verifies that the costs were claimed in accordance with the contract terms and the Federal Acquisition Regulation (FAR). The audit reports the final allowable and reasonable costs, and it provides a basis for final negotiation. The report also may present findings that allow the federal government to recover funds, or it may show the contractor has outstanding funds due from the government.

How to Proceed

The Section 893 audit predicament presents an interesting situation for nondefense agencies and defense contractors. Here are some options:

Hire Independent Consultants

Agencies were already going down this road with certified public accounting (CPA) firms due to the DCAA’s backlog.

The National Aeronautics and Space Agency’s (NASA) Office of Inspector General (OIG) issued report number IG-15-010 in December 2014 recommending that NASA allow independent CPA firms to provide audit coverage where the DCAA can’t meet audit needs. Similarly, the Department of Energy’s (DOE) OIG report number IG-0934, issued in February 2015, found that the existing backlog of incurred cost audits exposed the DOE to an unacceptable level of financial risk and recommended supplemental audit coverage.

Many CPA firms, including Moss Adams, employ teams of prior DCAA auditors that can address risk and provide quality audits in a responsive and timely manner.

Dedicate Resources

A second option may be for nondefense agencies to dedicate more resources to existing or new internal or contract audit groups to accommodate this work. The advantage to these options is that these agencies will have more control over the audit process; however, these aren’t cost-free solutions. It’s possible that nondefense agencies will need to acquire funding for whatever strategy they develop to meet audit needs in lieu of DCAA services. It’s also hard to find resources with the experience and skill set to perform these audits in an efficient and compliant manner.

Silver Lining

These are positive options for nondefense agencies and defense contractors. Before, there wasn’t much choice for high-risk contractors such as NASA, which had its contracts pushed through the DCAA in an attempt to meet obligations. Now, agencies can identify their risks through an incurred-cost audit and address them in a timely manner.

The faster turnaround will also affect an agency’s ability to de-obligate funds. Very simply, agencies can’t de-obligate funds unless contracts are closed out and they have the correct figure. If an agency de-obligates the wrong amount of funds, it risks finding itself in a difficult situation where it isn’t able to pay the contractor. A timely audit turnaround helps to solve this issue.

Looking Forward

Only time will tell the impact of NDAA Section 893, but it’s clear that immediate action is required to fill the audit void that’s been left by this legislation. There’s no guarantee the DCAA will perform nondefense agency audits in the future; instead, there’s potential this change will become permanent.

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