Fox Guarding Defense Henhouse

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The Department of Defense’s Defense Contract Audit Agency is responsible for performing all contract audits at the department. Unfortunately, the agency seems to have developed an excessively cozy relationship with the contractors that it is supposed to be overseeing. That is bad news for taxpayers because of the massive size of DoD’s contracting activities.

Yesterday, the Government Accountability Office testified to Congress on the DCAA

GAO found substantial evidence of widespread audit quality problems at DCAA. In the face of this evidence, DOD, Congress, and American taxpayers lack reasonable assurance that billions of dollars in federal contract payments are being appropriately scrutinized for fraud, waste, abuse, and mismanagement. 
For example, while auditing the satellite launch proposal for a major U.S. defense contractor, a DCAA manager experienced pressure from the contractor and the DOD buying command to drop adverse findings. The manager directed his auditors to drop the findings, and DCAA issued a more favorable opinion, allowing the contractor to win a contract that improperly compensated the contractor for hundreds of millions of dollars in commercial business losses. 
For example, of the 69 audits and cost-related assignments GAO reviewed, 65 exhibited serious deficiencies that rendered them unreliable for decisions on contract awards, management, and oversight…GAO determined that quality problems are widespread because DCAA’s management environment and quality assurance structure were based on a production-oriented mission that prevented DCAA from protecting the public interest while also facilitating DoD contracting. 
The GAO also noted: “In fiscal year 2008, the Department of Defense (DOD) obligated over $380 billion to federal contractors, more than doubling the amount it obligated in fiscal year 2002.” As a result, huge sums of taxpayer money are at risk because the agency tasked with preventing contracting abuses has been facilitating them.
 
The GAO findings are just the latest in a string of black eyes for the DCAA. An Associated Press report from last November uncovered similar problems: 
At a meeting of Defense Contract Audit Agency staff in California last May, auditor Acacia Rodriguez used a 24-page PowerPoint briefing to describe how she and her co-workers struggled with the Bechtel Group’s “chronic failure” to provide the financial records required to prove tax dollars were being spent properly…If her bosses were upset over the contractor’s foot-dragging, they didn’t show it, according to an auditor who attended the meeting…Five days later, the agency issued a report rating Bechtel’s internal accounting procedures as “adequate,” a passing grade that meant defense auditors could ease up on the company. The report made no mention of the records delays. 
There is no way to know how often DCAA withholds payments because it does not keep track. And it has not used its subpoena power in 20 years…In 2007 alone, DCAA performed nearly 34,000 audits covering $391 billion in contractor costs. Of that total, auditors challenged $4.6 billion, or 1.2 percent, as lacking necessary documentation. The question is, how much more could they have caught? 
One of the AP’s findings has particular significance: 
Compared with other federal oversight organizations, such as the Government Accountability Office, DCAA’s return on investment is weak. For every dollar GAO spends, it saves taxpayers $94. At DCAA, the ratio is $5 saved for every one spent. 
This indicates that the GAO’s relative independence when conducting oversight is a chief reason why it outperforms the DCAA, which is housed under the DOD chain of command. Thus, an obvious reform would be to have contract auditing at DOD, and perhaps throughout the federal government, performed by an independent agency. 
 
For more on management problems within the federal government and DOD, see this essay on cost overruns.