[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 111-100]
CAN THE DEPARTMENT OF DEFENSE PROTECT TAXPAYERS WHEN IT PAYS ITS
CONTRACTORS?
__________
HEARING
BEFORE THE
PANEL ON DEFENSE ACQUISITION REFORM
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
OCTOBER 15, 2009
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
U.S. GOVERNMENT PRINTING OFFICE
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PANEL ON DEFENSE ACQUISITION REFORM
ROBERT ANDREWS, New Jersey, Chairman
JIM COOPER, Tennessee K. MICHAEL CONAWAY, Texas
BRAD ELLSWORTH, Indiana DUNCAN HUNTER, California
JOE SESTAK, Pennsylvania MIKE COFFMAN, Colorado
Andrew Hunter, Professional Staff Member
John Wason, Professional Staff Member
Alicia Haley, Staff Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2009
Page
Hearing:
Thursday, October 15, 2009, Can the Department Of Defense Protect
Taxpayers When It Pays Its Contractors?........................ 1
Appendix:
Thursday, October 15, 2009....................................... 29
----------
THURSDAY, OCTOBER 15, 2009
CAN THE DEPARTMENT OF DEFENSE PROTECT TAXPAYERS WHEN IT PAYS ITS
CONTRACTORS?
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Andrews, Hon. Robert, a Representative from New Jersey, Chairman,
Panel on Defense Acquisition Reform............................ 1
Conaway, Hon. K. Michael, a Representative from Texas, Ranking
Member, Panel on Defense Acquisition Reform.................... 4
WITNESSES
Assad, Shay, Director, Defense Procurement and Acquisition
Policy, U.S. Department of Defense............................. 6
Kutz, Gregory D., Managing Director, Forensic Audits and Special
Investigations, U.S. Government Accountability Office.......... 11
Stephenson, April G., Director, Defense Contract Audit Agency,
U.S. Department of Defense..................................... 8
APPENDIX
Prepared Statements:
Andrews, Hon. Robert......................................... 33
Assad, Shay.................................................. 36
Conaway, Hon. K. Michael..................................... 34
Kutz, Gregory D.............................................. 78
Stephenson, April G.......................................... 48
Documents Submitted for the Record:
Defense Contract Audit Agency Performance-Based Actions...... 97
Witness Responses to Questions Asked During the Hearing:
[There were no Questions submitted during the hearing.]
Questions Submitted by Members Post Hearing:
[There were no Questions submitted post hearing.]
CAN THE DEPARTMENT OF DEFENSE PROTECT TAXPAYERS WHEN IT PAYS ITS
CONTRACTORS?
----------
House of Representatives,
Committee on Armed Services,
Defense Acquisition Reform Panel,
Washington, DC, Thursday, October 15, 2009.
The panel met, pursuant to call, at 8:02 a.m., in room
1310, Longworth House Office Building, Hon. Robert Andrews
(chairman of the panel) presiding.
OPENING STATEMENT OF HON. ROBERT ANDREWS, A REPRESENTATIVE FROM
NEW JERSEY, CHAIRMAN, PANEL ON DEFENSE ACQUISITION REFORM
Mr. Andrews. Ladies and gentlemen, good morning. We
appreciate your attendance this morning. Welcome, my colleagues
on the panel.
The panel has been engaged in an investigation of
hypotheses as to the reasons why there is a difference between
the price that the taxpayers pay and the value that those who
wear the uniform of our country and serve our country receive
when we buy goods and services. We start from the proposition
that there is not always a gap between those. There are many
instances where, in fact, we get full value for what we pay.
And we are very grateful for that.
Last week we had an example of that when we looked at the
excellence that occurred in the Mine Resistant Ambush Protected
vehicle (MRAP) program. Good things have happened there.
Suffice it to say, though, that we are concerned that,
whether it is major weapons systems, services, or other kinds
of goods and supplies, that there are too many instances where
we pay a dollar and get 75 or 80 cents worth of value. There is
unanimity on Republicans and Democrats, House and Senate,
executive branch and legislative branch, certainly among the
American people, that we want to do a lot better than that. So
we have engaged in a series of hearings where we have looked at
various hypotheses as to why that gap exists.
For instance, we have looked at the way that we don't, I
think, quite understand the right way to buy information
technology. By using a paradigm that tracks the paradigm we use
for hardware, we make some mistakes in that area.
We have looked at the issue of whether our workforce is not
right-sized and not correctly trained to deal with these
issues. We have looked at questions concerning the supply
chain, whether it is properly organized, properly managed and
so forth.
This morning we are going to look at a question that is a
little narrower than what I just talked about, but certainly
not any less important. And that is, how well are we doing at
auditing the contracts that we let? In other words, if we were
to ask this morning on a contract for a certain communications
system, are we behind in our payments or ahead in our payments?
Have we paid what we should have or not? Has the work that is
supposed to be done for what we have been paid been done or
not?
The Department of Defense (DOD) is charged with an enormous
responsibility in monitoring huge amounts of money and
literally hundreds of thousands of contracts at any given time.
So it is a very important job. But, frankly, work in recent
times by the Government Accountability Office has raised some
serious concerns as to whether we are properly organizing
ourselves to do the auditing and monitoring of contracts.
This morning we are going to hear about the nature of those
concerns, some efforts to address those concerns which are
going on at the Defense Contract Audit Agency (DCAA) and other
instruments of the Department of Defense, and then help the
panel make an assessment of how we can do this whole process
better.
And I want to begin with two cultural snapshots of issues
within the DCAA, which are elucidated in a report done by the
Government Accountability Office last month that I believe was
at the request of Senators Lieberman and Collins, but are
certainly important for the entire Congress.
And I do use the phrase ``cultural snapshot,'' because I
understand that the two instances about which I am going to
refer, or to which I am going to refer, may or may not be
representative of the systemic situation. But whether they are
representative of the systemic situation or unrepresentative,
they are troubling.
The first cultural snapshot is a problem of, I would say,
too much engagement with a contractor. In May of 2005,
according to the Government Accountability Office (GAO), in the
eastern region of DCAA, there was an issue with a billing
system contract. The DCAA reported an inadequate in part
opinion of the billing system internal controls of one of the
five largest DOD contractors.
After issuing the report, DCAA auditors helped the
contractor develop policies and procedures related to the
accounts receivable, overpayments and system monitoring before
performing a required follow-up audit, which is a significant
impairment to the independence of the auditors. So we sort of
have a joint venture, if you will, between the auditors and the
people being audited before there is a follow-up audit.
In June 2006, the DCAA reported an adequate opinion on the
contractor's billing system, internal controls, including the
price, policies and procedures DCAA helped the contractor
develop. So the problem here obviously was the auditor was
auditing in part its own work product. As a result of GAO's
review, the DCAA rescinded the follow-up audit report on March
the 6th of this year of 2009. So there is an instance where the
line between the auditor and the audited was unfortunately
blurred.
The second instance is kind of the opposite problem. This
was in the central region of DCAA, 2006, again involving a
billing system case. A fraud investigation by the Army's
Criminal Investigation Division was under way at the time the
DCAA performed a given contractor's billing system audit. So
the facts are that the contractor is under criminal
investigation at the time, and there is an audit of the
contractor's billing system.
The auditors were aware of the substance of the Army's
investigation. So there is knowledge of the auditors what is
going on. The auditor requested increases in budget audit hours
to perform increased testing because of the fraud risk and the
contractor's use of temporary accounts for charging costs that
had not yet been authorized by the contracting officer. So the
person that DCAA puts in blows the whistle and says, ``I need
more help because there are some things that raise a red flag
here.''
The auditor then drafts an inadequate opinion on the
contractor's billing system, which was overturned by the
supervisor and Field Audit Office (FAO) manager. So the person
who is on site reaches the conclusion that an inadequate report
is the right result. Her opinion is overturned.
Despite a reported $2.8 million in fraud for the contractor
in question, the DCAA reported an inadequate in part opinion
related to three significant deficiencies in the contractor's
billing system on August 31, 2005 and an adequate opinion then
on September 11, 2006, regarding a follow-up audit. The auditor
on the ground, the initial auditor, whose performance appraisal
was lowered for performing too much testing and exceeding
budgeted hours, was assigned to and then removed from the
follow-up audit. This auditor then left the agency in March of
2007.
So then to briefly review the facts, the person who is on
the ground sees the red flag, asks for more help, renders an
opinion that is, frankly, a negative opinion of the contractor.
That opinion is essentially reversed in a follow-up audit. And
the person who is on the ground is excluded from the follow-up
audit and, in effect, disciplined and sanctioned because she
put too much time into the first audit and asked for too much
help.
Following the GAO's review of this matter, the DCAA
rescinded both audit reports on November 20th of 2008. Now,
again, I am not claiming that these are systemic examples. I
think that is research that is yet to be done and an analysis
that is yet to be done.
But I think the members of the panel would agree that they
are disturbing examples because on the one hand, there is an
example of blurring the line between the auditor and the
audited. The other case there is an example of someone who is
quite aggressive as an auditor, who it appears was sanctioned
for her appropriate behavior, and that an unfortunate and
incorrect result was reached in the end.
The importance of these examples is self-evident for the
facts of the example. But the importance goes beyond that. It
is sort of the fruit of the poisonous tree doctrine because
once there is a finding, that finding then spreads through the
system.
For example, once a contractor is put into the green light
list, the good guy list, the level of attention and auditing
that is paid to that contractor diminishes. There is sort of a
presumption that the contractor is okay. So a mistake that is
made in one audit has potentially negative consequences for
many, many contracting decisions down the road. This is not
simply a contract-by-contract decision.
It is a big job that the DCAA has. But what we are
interested in hearing this morning is its reaction to and
improvements as a result of the work of the GAO and suggestions
that each of our three witnesses would have on how this panel
can aid that effort so that we can reach a point where we have
a high confidence with good reason in our auditing system.
At this time, I am going to ask my friend, the senior
Republican on the panel, Mr. Conaway, for his opening
statement.
[The prepared statement of Mr. Andrews can be found in the
Appendix on page 33.]
STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE FROM
TEXAS, RANKING MEMBER, PANEL ON DEFENSE ACQUISITION REFORM
Mr. Conaway. Well, thank you, Mr. Chairman.
And, witnesses, thank you all for being here this morning.
Today's hearing examines an area of acquisition that is near
and dear to my heart: auditing. I am a Certified Public
Accountant (CPA). And I spent my early part of my career doing
that often thankless task.
The basic question is how vulnerable is the Department to
overpaying its contractors on acquisition programs and how
robust are its systems for preventing overpayments. The Defense
Contracting Audit Agency provides the department's primary
internal means of detecting, preventing or correcting the
majority of potential contractor overpayments.
There have been recent articles based on GAO findings
regarding the DCAA. Based on written testimony, there are major
disagreements between the Department and the GAO. And I would
only add that we are here today to learn all points of view. We
have a group of very qualified witnesses. And we are glad that
you are here to help us understand these issues.
Finally, I would say that once again a recurring theme has
been consistent. It has been consistent with our previous panel
hearings in regards to workforce. In fiscal 2008, DCAA
performed over 30,000 audits with approximately 4,200
employees. I believe it is Mr. Assad in his written statement
that stated, ``Rebuilding the DCAA workforce, while a
challenge, can and must be done.''
We learned from previous hearings that increasing the
workforce isn't always the answer. But in this case, it does
appear that the workforce is one of the major areas that needs
to be addressed.
Looking forward to our witnesses. Let us hear from them.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Conaway can be found in the
Appendix on page 34.]
Mr. Andrews. Thank you very much.
Without objection, opening statements from other members of
the panel will be made a part of the record.
I am now going to proceed to read a brief biography of our
witnesses. I think each of you has had extensive experience on
the Hill. So you know that, without objection, your written
statements will be entered into the record of the proceeding.
And we will ask you to give us about a five-minute oral
synopsis of your written testimony so we can maximize the time
for question and answers from the panelists.
Mr. Shay Assad is the Director of Defense Procurement. He
assumed that role on April 3rd of 2006. In that position, he is
responsible for all acquisition and procurement policy matters
in the Department of Defense. He is the functional leader for
contracting workforce within the Department of Defense and is
also responsible for overseeing all strategic sourcing
activities within the department.
Before assuming this position, Mr. Assad was the Assistant
Deputy Commandant, Installations and Logistics for Contractors
at headquarters of the Marine Corps here in Washington, D.C.
Upon graduating with distinction from the U.S. Naval Academy in
1972, he served two tours of duty aboard the U.S. Navy
destroyers and won recognition as the outstanding junior
officer of the 5th Naval District.
He has received numerous federal service awards, which
include the Secretary of Defense Medal for Exceptional Civilian
Service, Secretary of Defense Medal for Meritorious Service,
the Department of Defense Inspector General Joseph H. Sherick
Award, which is the highest award given to a non-IG employee,
the 24th annual Gilbert A. Cuneo Lecturer and the inaugural
recipient of the 2008 Osborne A. ``Oz'' Day Award as the
federal executive who has done the most to increase the
awareness of Ability One employment opportunities for those who
are blind or severely disabled.
Mr. Assad, thank you for your service and welcome to the
panel this morning.
April G. Stephenson is the director of the DCAA. She is
responsible for all matters related to the management of the
agency and its resources. She began her career in the agency in
1987 as an auditor trainee in Mountain View, California.
She progressed through DCAA holding various positions, such
as supervisory auditor, program manager, branch manager,
various positions in the Policy Directorate at headquarters.
She assumed the responsibility as Director in February of 2008,
and she serves as the Secretary's appointee on the Cost
Accounting Standards Board.
She has her B.S. degree in Business Administration from
California State University at Chico and has a Masters in
Administration from Central Michigan University.
She is licensed, Michael, as a CPA in the state of North
Carolina. That will make you happy.
She is a member of several professional organizations,
including the American Institute of Certified Public
Accountants (AICPA) and the Institute of Management
Accountants. She has received numerous awards and recognition
throughout her DCAA career. She resides in Alexandria,
Virginia. And in her spare time, which I assume is very scarce,
given your responsibilities, she enjoys bird watching,
gardening and reading.
Welcome, Ms. Stephenson. We appreciate your service and
glad you are here this morning.
And Greg Kutz----
Did I get that, Greg, right? I am sorry--is the managing
director of GAO's Forensic Audits and Special Investigations
Unit. The mission of that unit is to provide us in the Congress
with high quality forensic audits and investigations of fraud,
waste and abuse and evaluations of security vulnerabilities and
other requested investigative services.
He is a graduate of Penn State in 1983. He joined the D.C.
office of KPMG Peat Marwick after graduation. He worked there
for eight years. In 1991 he joined the GAO. As a senior
executive at GAO, Mr. Kutz has been responsible for reports
issued by GAO in testimony regarding the credit card and travel
fraud and abuse, improper sales of sensitive military and dual
use technology, a number of areas.
Most recently, he and I had the chance to work together on
some disturbing issues of children being subjected to physical
restraints in certain educational settings and did a great work
in that regard.
Mr. Kutz is a Certified Public Accountant and Certified
Fraud Examiner, and we welcome him to the panel and appreciate
his service.
So, Mr. Assad, we will begin with you. Welcome.
STATEMENT OF SHAY ASSAD, DIRECTOR, DEFENSE PROCUREMENT AND
ACQUISITION POLICY, U.S. DEPARTMENT OF DEFENSE
Mr. Assad. Thank you, Mr. Chairman.
First of all, let me say that I am very appreciative of the
panel's focus and concern about this issue of getting a better
deal for the taxpayers. I couldn't be more supportive and more
aligned with that thought. We call it--I call it--the quality
of the deal when I go out and speak to our employees in the
field, and I have spoken to well in excess of 10,000 of them
about this issue of getting a better deal for the taxpayers.
There is a disparity in far too many instances between what
we are paying and the quality we are getting. We need to get a
better deal. And that is why we have taken the actions that we
have with regard to our workforce. That is why we are focused
on improving the cost estimating and pricing capability within
the department.
It is absolutely essential and critical that we improve the
quality of the deal. With budgets the way they are, we have got
to get better value for every dollar that we spend for the
taxpayers.
Thank you for the opportunity to appear today and to
participate in today's discussion. As a senior leader of the
defense contracting workforce, I cannot stress enough the
crucial role that DCAA plays in the department's procurement. I
assure you that all of our contracting officers value and rely
significantly upon the professional advice rendered by DCAA.
We recognize that the Government Accountability Office has
recently identified needed improvements in DCAA's auditing
processes. To assist DCAA in addressing the concerns
identified, Under Secretary Hale established an oversight
committee to provide advice and recommendations concerning DCAA
matters.
As the department's senior procurement executive, I am also
a member of the DCAA oversight committee. The senior group will
assess DCAA's activities and the actions taken to correct
problems identified by GAO and others.
As Under Secretary Hale has pointed out in his testimony
before the Senate Homeland Security and Government Affairs
Committee last month, in my role as the Director of Defense
Procurement, I represent the key customer for DCAA. Given that,
I would like to offer you just a few thoughts on a few areas
identified for improvement by GAO.
First of all, with regard to this term called ``production
auditing,'' it has been suggested that the challenges at DCAA
center around production oriented auditing and that audits have
been rushed to meet contracting officer requirements. This sets
up a real tension and a dichotomy between getting quality
audits and getting timely audits.
An audit not delivered in a timely manner is of limited
value to the government. On the other hand, it has got to be
quality work or it doesn't achieve the objective, which is
getting the best deal we can for the taxpayers.
But a good audit in time is better than an extraordinary
audit that is late and never used. An audit is the tool of a
contracting officer used to negotiate a contract, but in order
to realize those benefits, it has to be of a quality nature,
and it has to be timely.
While the GAO report cites examples of poor quality audits
and some poor decisions that may have been made by DCAA in the
past, most would seem to be heavily focused and influenced by
inadequate staffing.
Based on our discussions with contracting officers,
contractors and auditors, some--and possibly most--of the
reductions in audit scope and responsiveness by DCAA is a
direct result of the staffing draw down while workload
increased. Until the staffing issues are resolved, it will not
be possible for DCAA to perform at the level of quality and
efficiency that is desired. Rebuilding the DCAA workforce,
while a challenge, can and must be done.
The Panel on Contracting Integrity, which was really
established at the initiation of the House Armed Services
Committee, has proved to be a very productive and successful
forum for making progress in eliminating vulnerabilities that
lead to fraud, waste and abuse.
Given the success of that panel, we have recently
established a new interdepartmental subcommittee that will
address the adequacy of DCAA and the Defense Contract
Management Agency--DCMA--oversight of contractor business
systems. They both serve in that function. We expect this
subcommittee to make a number of recommendations to improve the
oversight with regard to business systems.
Again, I would like to thank the panel for holding this
hearing, and I can assure you that we are focused on the
quality of the deal and getting a better deal for our
taxpayers. Thank you.
[The prepared statement of Mr. Assad can be found in the
Appendix on page 36.]
Mr. Andrews. Thank you, Mr. Assad. Thank you very much.
Ms. Stephenson. Welcome to the panel.
STATEMENT OF APRIL G. STEPHENSON, DIRECTOR, DEFENSE CONTRACT
AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE
Ms. Stephenson. Members of the panel, thank you for the
opportunity to be here today, and I sincerely appreciate your
concerns in the matters regarding DCAA and the issues that we
have had with quality and other issues.
And I assure you we are taking every effort we can to
improve this audit process to ensure, as Mr. Assad said, the
contracting officers are getting the quality product they need
in order to make the best decisions for the best fair and
reasonable prices the government can have, because ultimately
what we need is the best value for the warfighter. That is what
we are all here for.
My testimony today has two parts. First, I will briefly
describe the role of DCAA in the acquisition process,
challenges in auditing contractor costs, and vulnerabilities in
acquisition. Second, I will briefly describe several of the
improvements we have made in findings to the GAO reviews.
DCAA is a distinct agency in the Department of Defense that
reports to the Under Secretary Comptroller. The DCAA mission is
to perform all the necessary contract audits of contractors. We
don't audit government organizations. We audit the contractors
for the DOD components that are responsible for negotiation,
administration and settlement of contracts. Under the
acquisition regulations, not all contracts are subject to DCAA
audits.
In 2009 DCAA performed over 21,000 audits covering $330
billion in contractor costs. These audits recommended
reductions in proposed or build costs of $20 billion, and $12
billion in estimated costs where the contractor did not provide
sufficient information to support the costs.
DCAA has about 4,400 employees at 105 field offices around
the world. Decision-making authority on DCAA recommendations
resides with contracting officers within the procurement
organizations that work closely with DCAA throughout the
contracting process. The type and extent of DCAA audit work
varies, depending on the type of contract awarded.
DCAA performs audits of contractor bid proposals prior to
award for both fixed price and cost reimbursable contracts when
cost data is provided and contracting officials determine the
need for an audit. After contract award, audit effort is
concentrated on cost reimbursable contracts. These contracts
pose an increased risk of overspending, often with little
incentive to control costs.
Regulations covering acquisitions using competitive
procedures and commercial item procedures rarely involve DCAA
audit services. The regulations generally prohibit contracting
officials from obtaining cost data from contractors to support
the bid estimate.
In theory, when cost data is not required, DCAA audit
support is not required. This theory holds true when the
government is one of many buyers of identical goods and
services in the marketplace. However, there are instances
where, due to the magnitude of complexity of the government's
requirements, the marketplace is limited or nonexistent, and
consequently, market forces are not driving contract prices.
DCAA has faced a number of challenges in auditing
contractors. I have detailed these more in my written
statement, but in essence there are three major challenges that
we have.
The first one Mr. Assad briefly mentioned, and that is the
contracting officers' need for speed, as we call it, in
awarding contracts is often at times at odds with the time
necessary for DCAA to perform sufficient testing and auditing
procedures.
Second, DCAA auditors are often faced with delays in
obtaining data from contractors, and this has resulted in some
audits taking longer than is necessary. Such delays in
providing information from contractors is sometimes an attempt
to stall the timely completion of the audits, knowing that we
do have a need for speed in awarding these contracts. Such
delays are unacceptable.
We often face challenges for contractors' commitment to
correct business system deficiencies. And as Mr. Assad stated,
this is going to be addressed under the new subcommittee under
the Panel on Contracting Integrity.
As far as contracting vulnerabilities, we have mentioned
three in our testimony, one being the commercial item
definition has two areas of vulnerability of a type and offered
for sale. This is also being addressed by the Adequate Pricing
Subcommittee of the Panel on Contracting Integrity and which I
chair.
Second is competitive pricing when only one bid is
submitted. In one of these cases, and one case that I discuss
in my testimony, we had an instance where a contractor received
profit in excess of 30 percent on a competitively awarded firm
fixed-price contract where only one bid was submitted.
Time and material contracts have also been an area of risk
and continue to be looked at for the Department.
Now, regarding the GAO's review, in my written testimony I
have detailed a number of improvements we have taken. We have
taken over 50 specific improvement actions in the past year to
address these issues, but there are two in which I want to
briefly discuss. I realize my time is close, and I just ask if
you would let me just briefly discuss these two----
Mr. Andrews. Yes, of course. Please take the time. Yes,
ma'am.
Ms. Stephenson [continuing]. The first being in the
independence issue, as you mentioned, Mr. Chairman.
Independence is really at the heart at what an auditor
performs. I am sure that anyone that is familiar with the
auditing standards knows that that is the basic tenet of what
an auditor does, and we were certainly quite appalled at some
of the things in which the GAO discovered, both in 2008, 2009,
regarding independence.
There were two major areas that led to the independence
concerns, and unfortunately, these were processes that were not
only supported, but also encouraged by the Department, and
which we have now ceased.
First was involvement in what is called an integrated
product team, which is where the government would team with the
contractor, and that government, including DCAA, would often
sit at the table as the contractor was putting together their
bid estimate or an improvement plan or whatever else it is that
they are working with the government.
DCAA would often be at the table and offer suggestions on
draft procedures or draft parts of the proposal as a contractor
was putting it together and then audit that proposal once it
was submitted. We have ceased that process. That process was
stopped in August of 2008.
We no longer sit at the table. We no longer participate in
joint meetings with the contractors prior to an audit. We will
support the contracting officer, but we will not be involved
with anything related to a draft. We will only perform audits
once the contractor has said this is a final submission for the
government.
That was a major change we made in the summer of 2008, and
we worked with Mr. Assad and the service acquisition chiefs in
an attempt to have a smooth transition from that process,
because that was a major change.
A second change that led to independence were in areas such
as what you described, Mr. Chairman, in your opening statement
about when a contractor had inadequate systems. We would often
review their draft policies and procedures to offer comments as
to whether it was headed in the right direction. It wasn't as
though we prepared them, but we did provide feedback as to
whether, yes, we think this would correct it, or, no, you are
off base, you need to do something more.
That was something that was also supported by the
department in an attempt to try to resolve system deficiencies
on a timely basis and try to get them corrected sooner rather
than waiting till a complete system was put in place and DCAA
come in and audit.
We realized that that could have--and as the GAO said--
could impair auditors' objectivity to give feedback on a draft
policy and procedure, and then audit that policy and procedure.
We have ceased that process as well. We will no longer offer
any sort of comments on a draft procedure. Only once it is
completed and implemented and actually had transactions run
through the system for several periods, then we will test that.
It will result in some delay in resolving these issues. But
we feel that that will improve our independence.
The last one I want to discuss is risk-based planning. And
this was an area that the GAO had suggested that we implement,
and we have in 2010.
We have staffing to cover about 65 percent of the required
audits that need to be done. Because of that, we have had to
focus our audit efforts in 2010 with those audits that are the
highest risk to the Department.
One area we define as high risk is the greatest rate of
return back to the Department--that being war-related effort,
that being bid proposal, and also the accounting and billing
systems at our largest contractors.
And in closing, Mr. Chairman and members of the panel,
thank you for this hearing today. We do appreciate being part
of the panel's efforts on acquisition issues, and we would not
mind coming back again and talking about other issues with you.
But I do want to leave you with a thought. We have taken
all these issues with the utmost seriousness, because our
audits have to stand on their own. They have to be in
accordance with the auditing standards. But at the same time,
we need to make sure contracting officers get them in a timely
basis, so they can make good decisions.
Mr. Chairman, thank you for the extra time.
[The prepared statement of Ms. Stephenson can be found in
the Appendix on page 48.]
Mr. Andrews. Thank you, Ms. Stephenson. We appreciate your
efforts and your contribution.
Mr. Kutz, welcome to the panel.
STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. Kutz. Mr. Chairman and members of the panel, thank you
for the opportunity to discuss defense acquisition reform.
My testimony has two parts. First, I will discuss our
recent work related to the Defense Contract Audit Agency. And
second, I will briefly discuss our high-risk acquisition areas.
First, our recent work on DCAA began with allegations we
received on our hotline in 2006. In July of 2008, we reported
that these allegations were accurate. Specifically, 14 audits
of 3 California locations we found did not meet professional
audit standards.
In our second report issued last month, we found that 65 of
the 69 engagements that we reviewed also did not meet
professional standards. To date, DCAA has rescinded 81 audit
reports.
Our two reports and recent Inspector General (IG) reports
clearly show widespread audit quality problems. Key themes from
our two reports include, as everyone has mentioned here, the
lack of independence, insufficient audit work and removal of
findings from draft reports by DCAA management without
sufficient evidence.
Examples of these issues include, first, contractor and
buying command pressure resulted in a DCAA manager dropping
adverse findings for a satellite launch proposal. The inspector
general recently reported that this flawed audit may have
resulted in the contractor recovering $271 million of
unallowable cost.
Second, DCAA issued an adequate opinion on a billing system
with insufficient audit work. One auditor told us that testing
was limited in this case, because--and I quote--``the
contractor would not appreciate it.''
And finally, another auditor wrote in a memo--and I quote
again--``We are not holding this contractor with a history of
questioned costs, poor internal controls and shoddy practices
to a high standard by downgrading what are clearly significant
deficiencies.''
We have made 15 recommendations to DOD with the intent of
strengthening DCAA's independence and effectiveness. One key
recommendation is to develop a risk-based audit approach,
focused on the quality of audits rather than the quantity of
audits. We found audits of accounting and billing systems
completed in two or three weeks. These audits often consisted
of conversations with the contractor and a quick look at a few
transactions.
Further evidence of the need to cut corners is the 22,000
reports issued in 2008 by DCAA's 3,600 auditors. That is 60
reports issued every day of the year, including weekends and
holidays. If all 22,000 reports are truly necessary, then
clearly, 3,600 auditors is not enough.
And I agree with Mr. Assad, what he said in our
recommendations, for DOD to address this clear imbalance
between resources and requirements.
We reported contract management of weapons system
acquisition as high-risk areas since the early 1990s. These
high-risk areas leave hundreds of billions of dollars
vulnerable to fraud, waste and abuse. I have Mr. Bill Woods
with me today, who would also be available to answer any
questions you have on our past high-risk work.
In conclusion, our longstanding high-risk areas highlight
the importance of strengthening DCAA's audits. I believe the
DCAA has thousands of good auditors that have been trapped in a
bad system. Positive steps have been taken or are under way to
address many of the issues. We look forward to working with
this panel and DOD to help DCAA achieve its full potential.
Mr. Chairman, I look forward to answering your questions.
And that is my statement.
[The prepared statement of Mr. Kutz can be found in the
Appendix on page 78.]
Mr. Andrews. Thank you very much. I thank each of the
witnesses, and we will begin with the questioning session.
Mr. Kutz, I want to go back and talk about these hotline
examples that came up. It is my understanding that in July of
2006, there were reports at--was it several offices? Or was it
only California?
Mr. Kutz. There were three offices in California,
primarily.
Mr. Andrews. So, three offices in California. And the GAO
wound up reporting about these examples. I guess last year was
the report?
Mr. Kutz. In July of 2008 was the report, and then the
Senate had a hearing on that in September of last year.
Mr. Andrews. And is your testimony that you looked
initially at 14 audits, and each one of them failed to meet the
standards of professionalism that you would articulate?
Mr. Kutz. That is correct.
Mr. Andrews. And you said 65 to 69 engagements. What does
an engagement mean in this----
Mr. Kutz. In the second report we issued, which was a
broader look, I believe 40 or 50 of them were considered
audits. The other ones were not characterized as audits meeting
government auditing standards. They were still important work,
but we called them engagements. That includes mostly audits,
but some other not-audit engagements also.
Mr. Andrews. And you have given us some illustrative
examples of the weaknesses here, that the work papers did not
support the conclusions frequently. Is that one of the
examples?
Mr. Kutz. Yes. And in fact, related to that I mentioned the
changing of the opinions, too, where management would go in.
And there would be, let us say, eight significant findings, and
they would basically get rid of all the findings and issue an
adequate opinion without any additional work. And you mentioned
that, I think, in your opening statement.
Mr. Andrews. Is it fair to characterize it, then, that some
of the audit conclusions were just not supportable by the work
papers? And then others, the work papers actually, took you in
a different direction, and that the agency should not have
reached the conclusion that it did. Is that----
Mr. Kutz. I would say those are both true, yes----
Mr. Andrews. Okay.
Mr. Kutz [continuing]. In some of the cases we looked at.
Mr. Andrews. You used, I think, an interesting phrase a
minute ago, that we have thousands of good auditors trapped in
a bad system. And I would take that as a premise from which we
would start.
I mean, I assume that the vast majority of the 4,400
employees and 3,600 auditors are very highly ethical people who
are trying to do the right thing for their country. I would
just start with that as a presumption.
But I would then want to look at why we have this
deficiency that was reported here. I mean, it strikes me that
there would be a standards problem, which is to say that the
auditors are being asked to not do the wrong thing, but the
standards that are governing their work are not the right ones.
And that would go to this quantitative issue rather than
qualitative.
The second would be that there is a competence problem,
that people want to do the right thing, but don't know how to
do it. And then the third would be a motivation problem, where
perhaps some of the people don't have the right motivation.
If you were to look at that threesome of causes, which one
is the predominant cause of the problems that you found on the
hotline investigations that you did?
Mr. Kutz. Well, the overall problem, I think, is the
production environment, trying to issue 22,000 reports or
30,000 audits with 3,600 people. And that leads to inadequate
auditing.
In some of the cases, it may have led to management trying
to--I will use the word ``whitewash.'' These reports got
whitewashed, basically, these reports, because it is quicker to
get a report out with no issues and no findings than it is to
get one out that has a ton of findings.
Mr. Andrews. Is it fair to characterize your conclusion
that there is too much of a quantitative emphasis, you have to
get ``X'' number of audits out, rather than an emphasis on the
quality of the audits that you do? Do you think that is a fair
statement?
Mr. Kutz. It was a requirement, and it was something that
was built into the performance standards for staff. And so,
there was a lot of pressure.
And, you know, the public accounting world--I think we have
another accountant here, too--you know, eating hours, working
on weekends and not charging the time actually to the job, so
it makes it look like the job costs less than it really did,
which creates a cycle the next time someone comes back to do
that audit. It took 200 hours, but it really should have taken
300, because they worked weekends and late nights, and didn't
charge the actual cost----
Mr. Andrews. Now----
Mr. Kutz. So it created that kind of an environment.
Mr. Andrews. Mr. Assad and/or Ms. Stephenson, do you agree
or disagree with that characterization of the environment in
which the auditors are operating?
Ms. Stephenson. I can address this, Shay.
Yes, I do believe that there were a considerable number of
pressures put on DCAA with the advent of acquisition reform in
the mid-1990s. There was certainly the auditor's need to do it
cheaper, faster. And that was something that we heard at all
levels within the organization, and it was something that was
supported within the department as well.
Part of it is, we do need to get the audits quickly to
contracting officers. I think what happened in that instance,
then, we were not putting the sufficient hours on the
assignments. And often, what got compromised was the
documentation.
Mr. Andrews. Do you agree with the hypothesis that 60
audits a day couldn't possibly be done in a high level of
quality by personnel this size?
Ms. Stephenson. Yes and no. The reason I say ``no'' is,
many of those assignments are quite small. It might be a 40-
hour assignment to review a $10,000 interim progress payment on
a fixed-price contract. They are not all a multibillion-dollar
Logistics Civilian Augmentation Program (LOGCAP) proposal,
which would take thousands of hours. So, there is a mix.
And I think when you look at, if we were to take all the
small assignments and all the low-risk assignments, such as
what we have done for 2010, in which we will not be doing a
great many of those, and looking at the higher risk, there is a
vastly reduced number of assignments.
At one point, this agency was doing 35,000, if not up to
40,000 assignments. We have now made that down to about 25,000,
now probably to 20,000. So, just in the last year or so of not
performing some of these low-risk assignments to put the effort
into the high risk, we are performing fewer assignments.
Mr. Andrews. I am sorry, Mr. Assad, what do you think? Do
you think that the culture in which the agency has been
operating over-stresses quantity of audits done to the
detriment of quality?
Mr. Assad. I think that there is a tremendous pressure to
get contracts awarded. And in some cases for good reason. I
mean, we are at war. We need to get this equipment to our
warfighters. On the other hand, you know, we have got to get a
good deal for the taxpayers. So, one of the things that we are
doing with DCAA----
Mr. Andrews. If I may, though, is your answer ``yes'' or
``no''? Do you think that the environment in which the agency
is operating is unduly slanted toward the quantity, or not?
Mr. Assad. I think it is, yes, the environment is one that
stresses timeliness.
Mr. Andrews. Okay. I am going to yield to the senior
Republican, Mr. Conaway, for his questions.
Mr. Conaway. Thank you, Mr. Chairman.
What happens to a contract officer who can't get an audit
on time? Do we put those into a special higher risk category?
In other words, if you can't get the report done, and the
contract officer needs to move forward with the contract, do
our systems put that into a higher risk category that we follow
up with later in a different regard?
Mr. Assad. I think two things happen, Mr. Congressman. Most
times, it just means that the contract award is delayed.
Because, you know, there is only a small number of our
contracting officers percentage-wise who can actually move
forward without the assistance of a DCAA audit, who would have
the skills and the capability to be able to go forward and
still get a fair deal for the taxpayer.
So, most of the time, it results in a delayed award. And in
those cases where----
Mr. Conaway. Well, is that an inadequacy in training for
the contracting officers?
Mr. Assad. Oh, yes.
Mr. Conaway. Okay.
Mr. Assad. You know, no doubt about it.
Mr. Conaway. April, you know, one of the allegations is
undue pressure from the top from, you know, partners, in
effect, on the managers. What are you doing to address that?
Because that is systemic to public accounting firms everywhere.
What are you doing to address and protect the auditors from
upper management, so to speak, in these issues where you have
got overrides that occur?
Ms. Stephenson. Sir, there are two things that we are
doing. First, everyone was under the pressure with the prior
metrics that we had had in place that were supported by the
Department. Those metrics were changed in September of 2008.
Those metrics were based on productivity, hours per assignment,
et cetera.
We completely removed all of those. So people do not have
the budget hour constraints. We removed from the performance
plans the requirement to meet budget hours. We have given the
staff the hours that they need. And we have emphasized you need
to take the hours necessary to do a complete audit, even if it
means one versus three for that particular month.
So we have tried to reiterate the highest level down to the
lowest level by removing it from the performance plan, removing
the metrics. Budget hours will no longer drive these
assignments. Quality will drive them. We have put more metrics
in related to quality.
Number two, we have put in a place a Web site, anonymous
Web site in which employees can file complaints with us when
they feel that findings have been removed or other issues have
happened. We have an active program on that in which we will
set up an investigation for every complaint and assess whether
that indeed has happened.
Mr. Conaway. Yes. How often has that been used so far?
Ms. Stephenson. It has been used quite frequently since we
have set it up.
Mr. Conaway. Okay. That is meaningless to me. How many
numbers? How many times?
Ms. Stephenson. I am going to guess that we have probably
had 400, at least.
Mr. Conaway. Okay. One of the GAO's allegations is that
failure to meet general accepted governmental accounting
standards--or auditing standards. Excuse me. There are 3,600
auditors. How many training hours are they provided each year?
Ms. Stephenson. We are required under the auditing
standards to meet every 2 years the 80-hour requirement for
continuing professional education and at least 20 hours every
year in accounting. We far exceed that.
Mr. Conaway. Accounting or auditing?
Ms. Stephenson. In auditing. I am sorry. In auditing.
Mr. Conaway. Okay.
Ms. Stephenson. We far exceed that. I think our average
hours that people have in training----
Mr. Conaway. You track those requirements?
Ms. Stephenson. Absolutely. We have an entire training
system that tracks by class, by type of assignment.
Mr. Conaway. Who provides the training?
Ms. Stephenson. A vast majority of the auditing training,
the technical auditing training, is provided by DCAA through
our Audit Institute in which we have course developers and
instructors. And we also have on staff education specialists.
Mr. Conaway. Yes. Are those--I mean, you are training
yourself, and you are providing your own training--are you in a
loop where the, you know, where the problems with the training
is not adequate so that the folks being trained don't get the
right kind of training? Are you----
Ms. Stephenson. That is definitely a concern. And when the
GAO issued the report in 2008, we did a--we are in the process
of completely revamping the training to ensure that we are
providing the training that we need to. We are consulting with
the Inspector General (IG) and, when necessary, with the GAO to
ensure that we are getting the type of training that we need to
our people so there isn't that loop of people that didn't learn
how to do it right are now training people not to do it right.
Mr. Conaway. Right. Right.
Ms. Stephenson. That is a concern.
Mr. Conaway. Mr. Assad, you mentioned there is yet a panel,
a panel that is the subcommittee that is working on looking at
some of these recommendations. What is the timing for their
report?
Mr. Assad. Well, we usually come out once a quarter with
recommendations. I think it is going to take us about 6 months
because we are really focusing on two different things. The
first is the evaluation of business systems, which is a problem
where we have DCMA responsible for the overall cognizance of a
business system. I mean, DCMA and DCAA doing the auditing. We
need to reconcile that.
And the second is this whole issue of risk-based auditing.
You know, how many audits should we be doing? What is the
quality of those audits? Do we really need DCAA to be doing all
this work? And how do we focus them in an area, from a customer
point of view, to a more focused work establishment.
Mr. Conaway. Yes.
Mr. Assad. I would say about 180 days.
Mr. Conaway. Okay.
Mr. Kutz, is the director of DCAA report high enough up in
the food chain at DOD to protect it from whatever it needs to
be protected from?
Mr. Kutz. I can't answer that fully. I mean, one of the
things that the Senate had asked us to do was to provide
alternative organizational placement options. We weren't for or
against them. We just put them out there as either elevating
them in the organization or possibly moving it outside of DOD
and having some sort of government-wide audit agency. But we
didn't really study those in depth. We laid out some pros and
cons.
Mr. Conaway. Okay.
Mr. Kutz. But that is a potential issue.
Mr. Conaway. Yes. Okay.
Ms. Stephenson, one final thing: audits. I know your
testimony said you guys covered $330 billion in costs, 10
percent error rate. Is that an expected error rate?
Ms. Stephenson. Yes, that is about what we run. I think if
we were to take the contractor bid proposals--those are the
ones we do before award--it is actually higher than that. It is
probably running about 15 percent on average that we have
questioned in bid proposals.
Mr. Conaway. Okay. That is a startling number that we would
have 10 percent--we will call it waste rather than fraud--but
10 percent. Will you follow up on the $32 billion findings
here? What ultimately winds up happening with that $32 billion?
Ms. Stephenson. In the first part of it, which was the
contractor bid proposals, that is what the contracting officer
is going to use to negotiate the price.
Mr. Conaway. Okay, so it is not necessarily a dollar?
Ms. Stephenson. No. Where we have the vast majority of our
findings or the actual dollars associated with them are before
contract award. After contract award we probably have about 5
to 8 percent related to the findings. On contractor business
systems we are running right now where we have got at least one
segment of the top 100 defense contractors one location.
A Lockheed Martin, for example, may have multiple
locations. But of all those, at least of the top 100, 69
percent have one location with at least one deficient system,
to put some perspective on it. But our dollar savings comes in
the vast majority prior to contract award.
Mr. Conaway. So afterwards we are--okay. That----
Ms. Stephenson. After contract award we are----
Mr. Conaway. How much can you bifurcate your workload
before contracts are signed versus follow-on auditing to make
sure it was done correctly?
Ms. Stephenson. That is right. We do. We do about half of
it. The cost reimbursable contracts are primarily what we
review after contract award.
Mr. Conaway. Okay.
Ms. Stephenson. And that would be ensuring that the
business systems, earned value management systems, those type
of things are in place to ensure that we are not being
overcharged throughout the contract process. That is about half
of the audits that we do are prior to contract award.
Mr. Conaway. And your expected error rate in that regard
is?
Ms. Stephenson. Is about five to eight percent.
Mr. Conaway. Okay. And you theoretically would allow
somebody a five--the system allows people to continue having an
eight percent error rate year after year? Or how does that
work?
Ms. Stephenson. No, we would hope not. In fact, this is one
of the areas----
Mr. Conaway. Hope is not a real good credit----
Ms. Stephenson. Well, what I would say is with the business
systems----
Mr. Conaway [continuing]. As we have seen.
Ms. Stephenson [continuing]. For example--and I am sorry to
be doom and gloom, but this is one of the areas that we had
addressed with the Commission on Wartime Contracting--is
oftentimes we will report a contractor business system as
inadequate. In fact, we had had some that were several years of
inadequacies that continued and not a lot was done.
And that is an issue that this new subcommittee that has
been set up by Mr. Assad is going to look at, is what is needed
both within the regulations and the statute to strengthen the
contracting officer's ability to make things such as an interim
withhold on payments to be an incentive for contractors to fix
these systems. That is one of the challenges that I have
mentioned in my testimony, is that contractors have not had a
lot of incentive to correct these systems. So we have issued
reports, and not a lot may happen to them.
Mr. Conaway. Okay. Well, the best lines an old audit
partner I heard said that it is about a photographer. And the
photographer said if you want a prettier picture, you have got
to bring me a prettier face. So the fact that you are, you
know, telling us things that are wrong with the system is--you
know, we are not going to shoot the messenger because the----
Thank you, Mr. Chairman.
Mr. Andrews. Thank you.
The gentleman from Indiana, Mr. Ellsworth, is recognized.
Mr. Ellsworth. Thank you, Mr. Chairman.
Ms. Stephenson, can you tell me what triggers the pre-award
audit versus the post-award audit? Is it dollar amount? Is it
new contractors? What actually triggers if you do a pre-award
contract?
Ms. Stephenson. The pre-award is----
Mr. Ellsworth. Or audit contract.
Ms. Stephenson [continuing]. Is governed by two aspects.
First is primarily the contracting officer's request for an
audit. What will trigger their request for an audit is the
submission of cost data from a contractor. And I will give you
an example.
In a sole source negotiated procurement, the regulations
would call for the submission of cost data. In that case, we
would be involved in performing an audit, given a dollar
amount. It is $10 million cost-type. That is the threshold. And
for fixed price it is $650,000.
For procurements in which there is no cost data such as the
competitive and the commercial item procurements, we would
generally not be involved. I say generally. It is very rare
that DCAA would be involved when there is not the submission of
cost data. So that is what would trigger the bid proposal, a
contracting officer request and cost data.
After contract award under the regulations, it is the cost
reimbursable contracts. And in that case, there is no
threshold. We do an annual audit of all contractors that have
cost reimbursable contracts. We audit the costs for those
years, whether it is a $10,000 contract or $1 billion contract.
Regarding business systems, we only audit the business system
at the largest contractors, those that have $100 million or
more of cost-type contracts in a given year.
Mr. Ellsworth. Thank you very much.
Mr. Chairman, in 2004, 2005, I was sitting at home before I
ever thought about running for Congress. And I was reading an
article that was talking about defense contractors that didn't
pay their--their federal income tax. And that kind of shocked
me, sitting at my kitchen table, that they continue to get
defense contracts even though they weren't paying their taxes.
I know we all hate to pay taxes. But it is a necessary
evil.
One of my first meetings with Mr. Kutz when I came to
Congress was about this. And the report said that in 2005
33,000 civilian agency contractors owed over $3 billion in
unpaid taxes. In 2004, same 27,000 owed over $3 billion in
taxes and yet continued to receive federal contracts.
I think, Mr. Kutz--and correct me if I am wrong--when we
sat in our meeting, I asked why we would award contracts to
people who weren't paying their fair share of their taxes. And
it was not you. It was somebody else in the room said that some
were hoping that they would pay the taxes from the first
contract with the second contract profits. Didn't seem like
good business sense to me.
But I guess my question to you is--and thank you very much
for your work--is it getting any better since our meeting? I
filed some legislation to try to prevent this. It died in the
Senate, or there was no action in the Senate. I filed that
again. But have you seen any improvement since we talked and
going into now 2006, 2007 and 2008?
Mr. Kutz. No, I don't think so. And it is interesting that
you mention that. And Ms. Stephenson mentioned five to ten
percent before. But about six percent of government contractors
have known tax problems. So it is not a small issue. And it
still continues.
Most of the efforts are done on the back end levying
payments, as you mentioned, the logic being, of course, well,
let us keep giving them money so that they can actually pay the
taxes that they already owe us versus preventing them from
paying taxes. So more of the effort has been on the back end,
not a whole lot on the front end.
Mr. Ellsworth. Have we done anything about the resources to
the disbarment list from--about giving to increase, to pay
closer attention to the disbarment list or done anything, any
improvement in that area?
Mr. Kutz. Not with respect to taxes because the Internal
Revenue Service (IRS)--I mean, people can't get information on
taxpayer problems like that. That is something that can't be
shared across agencies. Section 6103 of the Internal Revenue
Code does not allow IRS to share that with the Department of
Defense, for example. So even when we did our investigations,
we couldn't tell the Air Force and Army who the tax cheats were
that we had investigated.
Mr. Ellsworth. Mr. Chairman?
Thank you, Mr. Kutz.
Mr. Chairman, as complex as this issue is that we are
studying--it has been going on for years--this seems like one
that we could almost simply take care of, of not letting people
who aren't paying their taxes participate in the procurement
system. And like I said, we will continue to work on that.
But----
Mr. Andrews. If the gentleman will yield? As we discussed
before, the intention of the committee is to spend time in
December and January meeting among the members to discuss ideas
for legislative recommendations that we would forward to the
full committee and then, frankly, to the leadership because
there would be some jurisdictional issues here.
I would encourage you to bring that up during those
discussions. I have made a note of it now. But I would be
strongly inclined to include your recommendation in our report
and try to get it enacted.
Mr. Ellsworth. Thank you. I would yield back.
Thank you all, the witnesses.
Mr. Andrews. The gentleman from Colorado is recognized.
Mr. Coffman. Thank you, Mr. Chairman.
First of all, I am stunned.
I think, Ms. Stephenson, you had mentioned that there is
little leverage when a contractor isn't performing, when the
audit shows the contractor isn't performing in terms of interim
steps, withholding payment in order to get contract compliance.
Could you elaborate on that?
Ms. Stephenson. Yes. When it comes to the business
systems--and I will give you an example--let us take the system
that is used for preparing billings to the government. We refer
to that as the billing system. If we find that there are
deficiencies, and a common deficiency that we often find is
that the billing has costs that are either in excess or in non-
compliance with the contract terms and conditions; the
contracts may have their own unique terms and conditions, which
sometimes are not caught by contractors when they bill costs.
That is a common finding.
In those instances, contractors will submit a corrective
action plan. And oftentimes--and I would say probably most, if
not all the time--the corrective action plan itself is often
viewed as enough versus saying does this corrective action
plan--do we need to do something in the meantime for this
contractor to have an incentive to put this plan in place.
Sometimes plans come in 6 to 12 or if not more after the
deficiencies have been reported.
During that period of time, we think that there needs to be
some leverage. There needs to be some withholdings to
incentivize a contractor to put those actions in place a whole
lot sooner because in the meantime that system is still
vulnerable to overpayments to the government.
What we have done in those instances is we don't permit the
contractor to submit billings directly to payment offices. They
must come through DCAA, in which we will then review those
interim payments to ensure that that problem is not continuing.
Mr. Coffman. Okay.
Ms. Stephenson. And we think there does need to be
incentives. And as I said earlier, Mr. Assad completely agrees
with this and has quickly set up this subcommittee to assess
what more can be done in the interim.
Mr. Coffman. Okay.
Would anybody else like to respond to that? Okay.
It would seem that on a fixed price versus a variable or a
cost plus contract that the auditing requirements would be much
less than you are really auditing on the basis of outcome in
terms of meeting those performance metrics. But it seems that
when you are in a variable cost structure in terms of
contractual arrangement, that has got to be pretty tough
because you are measuring inputs and as well as making sure
that they achieve the outcome.
Has there been a trend in either direction? It would seem
to me that we ought to move to fixed price whenever possible.
Mr. Assad. Mr. Congressman, it is actually a little bit of
the opposite way. When we get fixed price contracts, we need
more audit assistance because at that point once we decide on
what the price is, there is no more recourse for the taxpayers.
We are going to pay that price. And if there is a disparity
between what we have agreed to and the value we are getting,
the taxpayer has no recourse.
In redeterminable type of contract, on the other hand, if
there is some incentive for the contractor to actually under-
run the contract, yes, it does require post-contract award
administration. But, in fact, the taxpayer is going to get a
little of that money back. And one of the things that we are
looking at right now while there is certainly a desire for the
department to move to fixed price contracting when we can, in
those instances where we are not satisfied that the fixed price
is going to, in fact, provide value to the taxpayers, we are
going to revert to a fixed price incentive contract where it is
redeterminable.
It says, look, we are just not happy that we are getting a
good deal for the taxpayers. So we are going to establish a
ceiling price. And then underneath that price we are going to
share it. And so, that, in fact, may even add to DCAA's
workload a little bit. But we have got an issue with, you know,
our ability to ensure at the outset of this committee hearing--
to ensure that the price we are paying and the value that the
taxpayers and warfighters are getting is fair and reasonable to
the taxpayers.
And so, you know, it is a problem. And, in fact, again, in
fixed price contracting we require more audit services.
Mr. Coffman. Thank you, Mr. Chairman. I yield back.
Mr. Andrews. Thank you, Mr. Coffman.
Mr. Cooper is recognized.
Mr. Cooper. Thank you. I love the troops, but we have to
recognize that year in, year out the Department of Defense is
considered by both the Treasury Department and GAO to be the
least auditable of all government agencies. It dramatically
falls short even of the standards set by some of our other
agencies that have been non-compliant. And in war time you
might make excuses. But this has happened year in, year out.
Here we are focusing just on the procurement side of
things. And the news is really no better. To have an error rate
of 64, 69, you know, approximates like 93 percent flaws,
mistakes, problems. And this is a field that is pretty well
circumscribed.
My friend from Texas knows better than I there are
traditional rules that auditors are supposed to obey:
independence, all the criteria. And for those to have been
flouted in so high a percentage of cases is truly amazing. And
to have findings hidden or obscured or lost is truly stunning.
So I am wondering if hiring 700 new people in an
organization like this is helpful or that is just going to
create more problems. Everyone who testifies before Congress
promises to do better. And, you know, this is an agency that
has been in place since 1965.
So I am wondering about a lot of the issues, including it
almost seems like some of these audits are kind of like a
doctor that only can get a health report by doing an autopsy.
It is too late. You know, maybe we need folks who are embedded
in these large organizations because, as my colleague from
Indiana pointed out, the simple fact of tax non-compliance is
stunning. And yet we have found ourselves in such red tape, we
are not even able to find out the facts on that. So maybe we do
need to amend Section 6103.
But given 144 previous reports on reforming Pentagon
procurement since World War II, almost none of which have been
successful, the challenge for this panel is to take up new
solutions, come up with something that really might be
effective instead of repeating the high error rate of
congressional reforms in past years. We issue a report. You
people look at it. Nothing changes. And we keep on wasting
taxpayer dollars.
That is not the answer I want to see. So I would like to
encourage each one of you to help us think of new solutions,
not just hiring more people. In most bureaucratic circles being
able to expand your payroll a significant percent like 20
percent would be a sign that, hey, the organization is growing
and successful. Well, in this case, it is a troubled
organization that needs all sorts of help.
Now, perhaps there are, you know, reporting problems or
other bureaucratic things getting the boxes right so that the
Pentagon pays sufficient attention or so that you have the
resources or the independence so you can be more authoritative.
But the basic blocking and tackling today seems simply not to
be done.
And I think that the taxpayers deserve a better deal. But,
you know, in a bureaucracy everyone wants to keep their job. No
one wants to be punished.
And I would like to ask Ms. Stephenson: What is your
dismissal rate in your department for problem auditors or
problem audits? What disciplinary actions have you taken within
your ranks to encourage better performance? What sort of
training programs do you have to make sure that people know and
follow real auditing standards instead of giving these defense
contractors a slap on the hand and a little gold star that
contradicts the findings of the audit that has just been
conducted? So what really is going on inside your agency?
Ms. Stephenson. Let me first address the issue of the 700
employees over the next 3 years. We recognize that is only a
piece. Throwing more auditors solely at this issue is not the
solution. And we don't say that that is the solution.
It has to be a complete revamping of how we perform the
audits, what our work paper requirements are, what the
requirements are when there is a disagreement over audit
findings, how we address our quality assurance organization,
which had been getting a clean opinion on our peer reviews from
the IG for some time, how we revamp each piece in the DCAA
chain.
And I don't mean just management. I mean each piece of how
we perform our audits, how we interact with contractors, how we
get access to records, how we interact with contracting
officers. Each piece of that has had to have been addressed and
is being addressed.
We also had to address our training. We had to address the
infrastructure of DCAA to say what broke down in these
processes.
Mr. Cooper. Excuse me. My time is running out. How many
auditors have you let go for incompetence?
Ms. Stephenson. I do not know, sir. But I would be happy to
get that data and enter it for the record.
[The information referred to can be found in the Appendix
on page 97.]
Mr. Cooper. Thank you.
Thank you, Mr. Chairman. I see my time is expired.
Mr. Andrews. Thank you, Mr. Cooper.
Mr. Conaway, any closing remarks or follow-up?
Mr. Conaway. Well, I do have some follow-up questions, if
you don't mind.
Mr. Andrews. Sure.
Mr. Conaway. Mr. Kutz, have you been requested to do a
follow up at some point in time on your recommendations for
DCAA?
Mr. Kutz. Not formally at this point. Certainly, we will
continue to work with the Senate committee. And we would be
happy to work with you also. I am sure that they would have no
problem jointly working with you on these matters. I am certain
of that.
Mr. Conaway. Okay.
Ms. Stephenson, Mr. Assad, who sets the budget for DCAA?
Ms. Stephenson. It goes through the Office of the Secretary
of Defense.
Mr. Conaway. Okay. But Bob Gates says that is enough money
for you?
Ms. Stephenson. You know, to be honest, I am not sure, once
it leaves the comptroller's office, how all that comes into
Congress.
Mr. Conaway. Okay. Right. So part of where DCAA shows up in
the org chart is that review.
And Mr. Assad, I hope, would say that whoever that person
is has the right authority to say that they are getting the
right allocation of resources.
Mr. Assad. Yes, I believe it is accurate to say that Under
Secretary Hale is responsible for establishing the budget for
DCAA.
Mr. Conaway. And so, part of your committee findings will
decide if whether or not that is for under secretary or--I
don't know what all the layers are of where that is in the----
Mr. Assad. No, I----
Mr. Conaway. But the point is is if the person who has got
ultimate responsibility for deciding what the budget of the
DCAA should be doesn't have enough stroke in the overall
system, then it will be under-resourced.
Mr. Assad. I think Under Secretary Hale of the comptroller
is, from my personal opinion as well as the department's
opinion, is that organizationally DCAA is properly placed under
his auspices.
Mr. Conaway. Mr. Kutz, what are the auditing standards that
are missed? I mean, I spent 7.5 years on a state board of
accountancy. And we had a constant flow of CPA firms who have
come through the system who had failed to confirm receivables
or, you know, confirm bank accounts, those kinds of things. Can
you give us a sense of what these failed audits--what auditing
standards were not adhered to?
Mr. Kutz. Well, primarily the sufficient, competent
evidential matter necessary for an audit. For example, if you
are testing a system--and we saw this a lot--they might be
looking at a one-year period and may have picked one or two
transactions from one day, sometimes that the contractor even
selected for them, and then gave an opinion on a system over a
whole period of time. So that clearly doesn't meet sufficient,
competent evidence standards for giving an opinion on a system.
Mr. Conaway. Ms. Stephenson, how does that occur? I mean,
you and I both know that is enough work to be done to support
an opinion like that. How do you determine those levels of
testing?
Ms. Stephenson. Yes, the transaction testing and work paper
documentation were the two primary areas in the auditing
standards in which we had the difficulties with. In some
instances, there were a few in which they had tested a few
transactions during the actual billing system audit and had
used testing that was done in other assignments of contractor
costs to augment the testing within that particular assignment.
I am not saying that is right or wrong. That is what
happened.
Mr. Conaway. Okay.
Ms. Stephenson. We no longer do that. We are now requiring
the testing on a billing system to be done within that billing
system assignment.
Mr. Conaway. The timeline for analysis, the risk-based
management, risk-based auditing focus is what?
Ms. Stephenson. We have instituted that right now. That
started in October of 2010.
Mr. Conaway. And we will determine later whether GAO
believes that is the right model. I mean, Ms. Stephenson, quite
frankly, to have a system that allows one transaction to be
tested and then you issue an audit opinion on that, to allow
that to go forward, then to have the same group of people tell
us that they now have the right risk-based auditing standards
in place--you know, it is a trust and verify thing. So I am not
real comfortable with the statements that, you know, we have
now put in a risk-based auditing system, because it is the same
people who decided that one transaction was okay.
Ms. Stephenson. Well, one transaction didn't happen very
often----
Mr. Conaway. But then that is an anomaly, but
nevertheless----
Ms. Stephenson. But what I will say to you that we did is
we stopped the manner in which we have previously done system
reviews. We have completely revamped it. And part of this risk-
based approach that we announced on October 1st is we are not
going to start any system reviews this year until we have the
revised guidance out in the field. That process is being pilot
tested right now in which we will look at significantly more
transactions across the entire system.
And we are working with the IG to ensure that that process
will indeed meet the auditing standards. So, yes, you are
right. And in looking at this to say, well, how can I give you
assurance that isn't going to continue this year. It is because
I have stopped it.
Mr. Conaway. Okay.
Ms. Stephenson. And I have issued it to the workforce
saying we are not going to do them until I give you revised
guidance that has the sufficient testing necessary to express
an opinion on these systems.
Mr. Conaway. Okay. You mentioned quality assurance system
with DCAA. Can you briefly describe that to us?
Ms. Stephenson. Our quality assurance organization has two
parts. One, we use the DOD Inspector General to perform our
peer reviews, which are done on a three-year basis. Every three
years it will look at three years' worth of audits that we do.
Mr. Conaway. Yes. Why would you not use senior management
within the other offices to audit? You know, in public
accounting firms, one of the things that we did was we had
audit partners from one office audit the work that was done
within the firm by other auditors. I mean I don't--go ahead.
Why don't you discuss this?
Ms. Stephenson. That is right. We have two pieces. One is
the external, which is what the DOD Inspector General does for
us. The other piece is internal, which is we have a separate
Assistant Director for Quality Assurance at our headquarters
that performs quality assurance reviews across the agency.
Mr. Conaway. Okay. And that person is new?
Ms. Stephenson. That person is a senior executive.
Mr. Conaway. No, no, no. We have a new person there, given
the problems we have had with the systems?
Ms. Stephenson. Yes, that person is new and has just been
put in place this month.
Mr. Conaway. The position is just put in place, or the new
person has been in place ?
Ms. Stephenson. Both. We had the position at a 15 level,
and we had it performed by each of our regions. Regions would
be similar to the partners----
Mr. Conaway. Right.
Ms. Stephenson [continuing]. In a firm. Each of the regions
performed reviews of other regions, and it was more
decentralized. We in 2008 brought that up to the headquarters
level and stood up a new division in which I filled the
position last year, but I have got it an Assistant Director
senior executive position now.
Mr. Conaway. Okay. Is this person in a position that if Mr.
Kutz or his follow-on folks bring us a GAO report that looks
like the one we just got, that person would be fired?
Ms. Stephenson. I don't know if they would be fired. I mean
the reason I say that is I don't know if it was during their
timeframe. We would have to say whether these assignments
happened during their timeframe.
Mr. Conaway. Yes, that is fine, but I am just saying if
under that person's tutelage, the system doesn't get any
better.
Ms. Stephenson. I would certainly say if we don't catch
these areas ourselves and instantly correct them, yes.
Mr. Conaway. Okay.
Mr. Assad, elevating the DCAA's findings and
recommendations that would actually have some teeth and prevent
these going on--what are you going to do to elevate those
findings so that either we keep track of them from the
congressional side or the system itself uses that data and
information to actually improve the process?
Mr. Assad. Well, we are going to provide you a report on an
annual basis to Congress on the findings of the Contracting
Integrity Panel, so you will know exactly what it is that we
are recommending and exactly the action--including there will
be the action plans as to when we will put in place.
Mr. Conaway. Okay.
Mr. Chairman, just one final comment on Mr. Cooper's
earlier comments. This year's Defense Authorization Act--the
House attempted to accelerate the timeframe in which the DOD is
auditable from 2017 to 2013. And our colleagues on the other
side of the building were a lot more lenient than what our
position was, and somehow we wound up with the lenient version
in this year's round.
This is an important issue, auditing across the entire
system, not just the auditing work Ms. Stephenson and her team
does, and we are going to continue to shine a light on it,
because this is important to the system, so----
And I yield back.
Mr. Andrews. If the gentleman would yield, I would say to
him what I said to Mr. Ellsworth. I certainly would want that
recommendation included as part of this panel's report, that if
anything, the hearing today and the other work that we have
done points out the compelling need for a systemic audit of the
Department of Defense as soon as practicable. And I think that
is an issue that we should revisit very aggressively. I agree
with you.
Mr. Conaway. And I would also recommend that we somehow
work our side of the system to make sure that the GAO comes
back on a follow on behind the DCAA audits that they have
already done.
Mr. Andrews. I agree, and I just want to sum up this
morning with that in mind, that the panel will consider the
evidence that we have derived from these hearings over the
course of the next three months or so, and we will meet among
the members of the panel and discuss recommendations that we
have and generate for public review a series of policy
recommendations which, if adopted by the panel, would then be
forwarded to the full committee for consideration as part of
next year's reauthorization.
Dr. Assad, we would certainly--Mr. Assad, excuse me--we
would welcome the subcommittee that you are involved with, its
recommendations, so we could evaluate them.
Ms. Stephenson, any input you would like to give us we
would like as well.
And certainly, I want to formally extend to GAO our request
for your recommendations, based upon the work that you have
done, that we would then work with Senators Lieberman and
Collins to find a common position. I would personally like to
see those recommendations focus on altering the standards from
standards which encourage an increase in the quantity of audits
to those that increase the quality.
We really shouldn't be surprised when we get a defective
work product, if the organization is tilted toward simply
getting the reports out. And I think that we need to track that
question very, very closely.
The record of the proceeding will remain open for anyone
who would like to supplement any of their comments today. I
know that there are a couple of questions pending for Ms.
Stephenson that Mr. Cooper would ask. The same would go for the
members.
We appreciate everyone's involvement.
And with that, the hearing is adjourned.
[Whereupon, at 9:20 a.m., the panel was adjourned.]
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