[Senate Hearing 111-945]
[From the U.S. Government Printing Office]
S. Hrg. 111-945
DEFENSE CONTRACT AUDIT AGENCY: WHO IS RESPONSIBLE FOR REFORM?
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HEARING
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
of the
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 23, 2009
__________
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware JOHN McCAIN, Arizona
MARK L. PRYOR, Arkansas GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri LINDSEY GRAHAM, South Carolina
JON TESTER, Montana ROBERT F. BENNETT, Utah
ROLAND W. BURRIS, Illinois
MICHAEL F. BENNET, Colorado
Michael L. Alexander, Staff Director
Troy H. Cribb, Counsel
Paula Haurilesko, GAO Detailee
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
Molly A. Wilkinson, Minority Deputy General Counsel
Eric B. Cho, Minority GSA Detailee
Trina Driessnack Tyrer, Chief Clerk
Patricia R. Hogan, Publications Clerk and GPO Detailee
Laura W. Kilbride, Hearing Clerk
C O N T E N T S
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Opening statements:
Page
Senator Lieberman............................................ 1
Senator Collins.............................................. 3
Senator Coburn............................................... 20
Senator McCaskill............................................ 22
Senator Burris............................................... 24
Prepared statements:
Senator Lieberman............................................ 31
Senator Collins.............................................. 34
WITNESSES
Wednesday, September 23, 2009
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations, U.S. Government Accountability Office,
accompanied by Gayle L. Fischer, Assistant Director, Financial
Management and Assurance, U.S. Government Accountability Office 5
Hon. Gordon S. Heddell, Inspector General, U.S. Department of
Defense........................................................ 7
Hon. Robert F. Hale, Under Secretary of Defense (Comptroller) and
Chief Financial Officer, U.S. Department of Defense............ 9
April G. Stephenson, Director, Defense Contract Audit Agency,
U.S. Department of Defense..................................... 11
Alphabetical List of Witnesses
Hale, Robert F.:
Testimony.................................................... 9
Prepared statement........................................... 66
Heddell, Gordon S., Hon.:
Testimony.................................................... 7
Prepared statement........................................... 56
Kutz, Gregory D.:
Testimony.................................................... 5
Prepared statement of Mr. Kutz and Ms. Fisher................ 37
Stephenson, April G.:
Testimony.................................................... 11
Prepared statement with an attachment........................ 69
APPENDIX
Responses to post-hearing questions for the Record from:
Mr. Kutz..................................................... 86
Mr. Heddell.................................................. 99
Mr. Hale..................................................... 107
Ms. Stephenson............................................... 114
GAO report titled ``DCAA Audits: Widespread Problems with Audit
Quality Require Significant Reform,'' GAO-09-468, September 23,
2009........................................................... 134
DEFENSE CONTRACT AUDIT AGENCY: WHO IS RESPONSIBLE FOR REFORM?
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WEDNESDAY, SEPTEMBER 23, 2009
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:04 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, McCaskill, Burris, Collins,
and Coburn.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. The hearing will come to order. Good
morning to all who are here. Welcome to this hearing where we
are going to examine the potential that billions of taxpayer
dollars are at risk of being wasted because of the inadequate
auditing procedures at the Defense Contract Audit Agency
(DCAA).
DCAA has 300 offices and 3,800 auditors throughout the
United States and the world. Just to give you a sense of the
scope of their responsibilities, in fiscal year 2008, which is
the last one obviously for which I have complete data, DCAA did
more than 30,000 audits covering $501 billion in proposed or
claimed contracts. That is a lot of audits with a lot of money,
and therefore, what it does or does not do well is of great
consequence to the taxpayers.
A year ago, our Committee heard from the Government
Accountability Office (GAO) and two auditors, whistleblowers,
if you will, from DCAA about alarming problems in the Western
Region of DCAA. We heard and then found that there was
widespread failure in meeting professional auditing standards
in that region. Time after time, DCAA had issued clean audits
of contractors that were simply not supported by the underlying
audit work. In some cases, supervisors had even overturned the
audit findings of subordinates without a justification for
their decisions.
Because Senator Collins and I were concerned that these
problems in the Western Region might be symptoms of a larger
systemic breakdown rather than just a regional one, we, joined
by Senator McCaskill, asked the GAO to do a review across all
the regions of DCAA, and today we are going to hear the results
of that review.\1\
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\1\ The GAO report referenced by Chairman Lieberman appears in the
Appendix on page 134.
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I am sorry to say that GAO has found similar problems just
about everywhere DCAA operates. I will just highlight some of
the findings because I know Mr. Kutz will speak to them in
detail.
Each and every audit that GAO reviewed for this report was
out of compliance with auditing standards, most with very
serious deficiencies. As an example, in one case, a supervisor
directed audit staff to delete some audit documents, generate
others, and copy the signature of a prior supervisor onto the
new documents and then issued a clean audit opinion. This
supervisor was later promoted to Western Region Quality
Assurance Manager, responsible for the quality control of
thousands of audits.
One auditor asked supervisors for permission to spend more
time on an audit of a contractor known to be under criminal
investigation for fraud. The auditor ultimately drafted a
negative opinion that was overturned by supervisors who then,
rather than praise the auditor's efforts, lowered his
performance appraisal for performing too much testing and
exceeding budgeted hours.
In an audit of one of the Department of Defense's (DOD)
largest contractors, the auditor told GAO that he did not
perform detailed tests ``because the contractor would not
appreciate it.''
When auditors reviewed contractor invoices, in many cases,
they did not look to see if the contractor could offer
supporting documentation for the goods or services they were
charging the government for. The auditors simply looked at the
numbers on the invoices to see if they added up.
To date, GAO's two reviews have led DCAA itself to rescind
80 of its audits, which is, I gather, a rare and, of course,
embarrassing step for an auditing agency. The recision of 80
audits is, to me, effectively a self-indictment by DCAA for
failure to hold audit quality above all else.
Now, this would be bad enough if it was a separate and
unique critical audit by GAO, but the fact is that this is the
fifth major report sounding the alarm about DCAA. In addition
to the two GAO audit reports that I have cited, we have a 2007
Department of Defense Inspector General (IG) peer review, a
report last fall from the Defense Business Council, and a new
DOD IG report, all showing that an important watchdog agency,
DCAA, is badly in need of overhaul.
The fact is, when the people we have charged with the
responsibility of auditing themselves receive this many
critical audits--Washington, we have got a problem--and it is a
big problem because of the enormous amount of money being
audited that is spent--over half-a-trillion dollars in 2008
through the Defense Department.
In my opinion, DCAA is in need of a complete overhaul. One
problem may be, as GAO suggests, that DCAA emphasizes speed and
production of audits over the quality of results. DCAA also
appears to be very insular, with little or no infusion of
skills from outside the agency.
I think it is really time for us to make sure that we
change this environment with specific steps, such as improving
audit quality control, increasing training of the auditors, and
developing a strategy to target resources rather than simply
churning out audits that are faulty to hit numerical goals.
So we want to have a very frank discussion today because
this is very important. A lot of money is on the line, and the
discussion really is about who is responsible in the end for
the operational reform that is necessary at DCAA.
This auditing agency has a unique role. Because of that
role, it also needs to have independence. It needs to stand up
to pressures from both agencies and contractors, and as I
believe may be suggested here today, perhaps that independence
should be strengthened. Perhaps it is time for us to consider
separating DCAA from the Department of Defense and, either
separately or as part of a larger operation, making it an
independent auditing agency.
But what is also needed right now is clearly strong
leadership from the top ranks of DOD to help DCAA achieve the
necessary transformation and reforms because this Committee,
Senator Collins and I and the Members, do not want to be
sitting here a year from now discussing another audit which
finds similar problems once again in DCAA. Let us identify the
root causes and implement the solutions that Congress must
demand and that the taxpayers surely deserve.
Senator Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman.
With the release of today's GAO report, we once again focus
on the extensive problems with the quality of audits at the
Defense Contract Audit Agency and with the management of this
watchdog agency.
The DCAA is the Defense Department's principal contract
auditor. It completes more than 30,000 reviews and audits per
year that cover hundreds of billions of dollars in Federal
contracts. A well-functioning DCAA is thus vital to our
government's responsibility to be careful stewards of taxpayer
funds. DCAA plays a necessary role in ensuring the
accountability and transparency of Federal contracts.
Unfortunately, the GAO report contains a haunting refrain
of disturbing past reports. It cites, for example, and perhaps
most troubling, a lack of independence from undue influence on
audit outcomes by contractors, program managers, and even some
senior managers at DCAA. It cites poor or inadequate audit
quality and gross mismanagement of government resources. And it
cites ineffective audit practices that allow contractors to
overbill the government in some cases for millions of dollars.
The Department of Defense and other Federal agencies rely
on DCAA to help detect waste, fraud, and abuse. It is,
therefore, completely unacceptable for this Federal policing
agency to continue to have such significant performance
problems.
With more than a little frustration, I note that we are
here almost 1 year to the day since the Committee's last
hearing on this very same topic, DCAA's poor performance.
During the 2008 hearing, I raised significant concerns, as did
the Chairman, about the mismanagement of DCAA, and yet here we
are again.
Three particularly troubling areas still need to be
addressed. First, the GAO report highlights the ongoing lack of
rigor and independence of DCAA audits due to coercion by a few
errant contractors, program managers, and on occasion, even by
DCAA management. Auditors cannot be constrained from doing
their jobs. They must be able to work in an environment where
they are encouraged to conduct their oversight in a fair,
unbiased, and principled manner--indeed, not just encouraged,
required to conduct their audits in that manner.
Now, I want to make clear that there are many principled,
dedicated, and competent auditors at DCAA who endeavor to
conduct themselves with the highest possible ethical and
professional standards. The management and the culture at DCAA
must support their efforts, not undermine them.
Second, I am baffled by the complete lack of a sense of
urgency in terms of addressing and resolving these problems. As
the Chairman has indicated, there have been repeated reports
indicating these flaws. Recent reviews of DCAA's reform efforts
do not assure me that significant progress has been made over
the past year. While DCAA has taken some steps toward
improvement, it has been too little.
To date, DCAA, as the Chairman has indicated, has rescinded
some poor quality audits and issued guidance to improve the
quality. The agency also plans to hire 700 additional auditors
to augment its workforce. But if all we do is add more people,
that is not going to solve the fundamental failings of this
agency. Indeed, the consequences of not requiring high-quality
audits and of mismanagement may only multiply with these
additional resources. Just throwing more people at the problem
is not going to solve it.
Less than a month ago, the DOD Inspector General completed
an investigation that found evidence of this kind of
mismanagement. It cited time pressure, uncompensated overtime,
unauthorized changes to audit results, and other unprofessional
behavior that had created a work environment not conducive to
performing quality audits. What will it take to finally see
progress? DCAA's inability to remedy its mismanagement, despite
numerous hearings, investigations, and report after report, is
truly an epic failure by the agency and the Department.
Third, the GAO report raises significant questions
regarding the need for structural reforms, such as the Chairman
has mentioned and I brought up last year. How can it be that
DCAA auditors spent more than 530 hours auditing a billing
system that did not exist? How can it be that they repeatedly
change audit findings to make the results acceptable to some
contractors?
To make matters worse, I am told that some supervisors
responsible for deficient audits were given performance ratings
ranging from ``exceeds fully successful'' to ``outstanding.''
Again, how can this be? Where is the accountability?
Now, let me end by saying why this is so important. When an
audit agency fails, the fallout can cascade throughout the
system and ultimately shortchange our troops in the field. For
this reason alone, Congress must carefully consider whether
fundamental restructuring as well as internal reforms are
needed at DCAA in light of these disclosures.
Reestablishing DCAA as a first-rate audit agency is
critical, and I will say that to date, I have been very
disappointed at the lack of leadership at DCAA itself and at
the Office of the Comptroller, which is responsible for
overseeing and supporting DCAA. Action must be taken swiftly to
help this agency regain its credibility and restore its
oversight mission. Once its performance and image have been
repaired, it can once again assume its vital role of ensuring
the best value for the American taxpayer on all defense
contracts.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you very much, Senator Collins.
Before I call on Mr. Kutz, I want to say that I mentioned,
Senator McCaskill, that you had joined us in the request for
this report by GAO, and I appreciate that, and it leads me to
moving slightly behind you and acknowledging the work of your
Counsel, Peg Gustafson, who as you know has been nominated by
the President to be the Inspector General of the Small Business
Administration. I want to thank her for the hard work she has
done on the matter before us today and so many other issues,
and we look forward to working with you as you move on into the
IG community. Your nomination is pending before our Committee
now. We will give it a rigorous and dispassionate review, of
course, and hope to discharge your nomination by unanimous
consent as soon as possible. Good luck.
Senator McCaskill. Mr. Chairman, can we slow that down any?
[Laughter.]
I am having buyer's remorse----
Chairman Lieberman. I understand.
Senator McCaskill [continuing]. About losing Ms. Gustafson.
[Laughter.]
Chairman Lieberman. We have a conflict of interest here,
but we will help you resolve it.
Mr. Kutz, you are here for the second day in a row. God
only knows what may bring us together tomorrow---- [Laughter.]
But I thank you for your continuing high level of work,
which greatly benefits Congress and ultimately the people of
our country. I would note that you are here with Gayle Fischer,
who is an Assistant Director at GAO who will be available to
answer questions.
For the record, Mr. Kutz is before us as Managing Director
of the Forensic Audits and Special Investigations Team of GAO.
Thanks for your work, and we welcome your testimony now.
TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE, ACCOMPANIED BY GAYLE L. FISCHER,
ASSISTANT DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S.
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Kutz. Mr. Chairman and Members of the Committee, thank
you for the opportunity to discuss the Defense Contract Audit
Agency. Last year, I testified that 14 audits at three
California locations did not meet professional standards.
Today's testimony highlights our broader review of the DCAA
quality control system.
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\1\ The prepared statement of Mr. Kutz and Ms. Fischer appears in
the Appendix on page 37.
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My testimony has two parts. First, I will discuss our
findings, and second, I will discuss our recommendations.
First, 65 of the 69 engagements that we reviewed did not
meet professional standards. Key issues relate to lack of
independence, insufficient testing, and inadequate planning and
supervision. Examples of these problems include, first, an
accounting system report drafted with eight significant
deficiencies. One year after contractor objections to this
draft report, an adequate or clean opinion was issued with no
deficiencies. We found little evidence to support these
changes.
Second, an adequate opinion issued on a billing system with
insufficient testing. As you mentioned, in this case, Mr.
Chairman, an auditor told us that testing was limited because
the contractor would not appreciate it.
Third, an adequate opinion issued for a billing system
based on a test of only four vouchers, all from the same day.
And finally, as Senator Collins mentioned, 530 hours spent
auditing a billing system that did not exist.
Further evidence of problems at DCAA is the recision of 80
audit reports. I expect that the recision of 80 audit reports
is unprecedented in both the Federal Government and the private
sector. The evidence supporting our conclusion of widespread
audit quality problems is irrefutable.
So why did these problems happen? Let me give you a few of
the examples. First, we found a production-focused culture
resulting in part from flawed metrics. These metrics focused on
getting audits done on time and within budget. Taking time to
find and address issues was discouraged. This resulted in some
audits of accounting and billing systems being issued within 2
to 3 weeks of the entrance conference. No wonder we saw
opinions of contractor systems being issued based upon a
conversation 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. There is also evidence of pressure caused by the fear
of DCAA being outsourced. In other words, DCAA's metrics were
intended to show that they could do their work faster and
cheaper than public accounting firms.
Let me move on to human capital. Last year, the original
whistleblower, Thi Le, testified before this Committee on her
experience at DCAA. Ms. Le's testimony is one of the most
memorable of my experience. If this GS-12 auditor and the
dozens of others that we have spoken to are representative of
DCAA's employees, then the quality of audit staff is not the
issue. Instead, what you have are thousands of good auditors
trapped in a broken system.
Let me move on to steps that can be taken to improve DCAA's
operations. First, let me commend this Committee for your
oversight on this matter. The hearing you held last year and
your consistent oversight have made a difference. DOD is taking
these matters very seriously. Positive steps have been taken
and are underway to address most of these issues. My only
recommendation to you is to continue your oversight.
We made 15 recommendations to the Secretary of Defense. The
intent of these recommendations was to strengthen DCAA's
independence and effectiveness. DOD agreed with 13 of these
recommendations. We also provided three matters for the
Congress to consider, as you had requested.
The first of these relates to providing DCAA with the
protections and authorities granted to Inspectors General.
Legislation would be needed to implement this matter. This
change could strengthen leadership, independence, and
transparency through external reporting of DCAA results to the
Congress.
The other two matters relate to organizational placement.
Most of the effectiveness issues can be addressed within the
current organization placement. However, elevating DCAA to a
separate DOD component or outside of DOD as an independent
audit agency are matters for longer-term consideration. We
believe that organizational placement changes should not be
considered until current reform efforts are complete.
In conclusion, the 14 audits that we reported on last year
were not isolated cases but, in fact, proved to be the tip of
the iceberg. We commend DOD for their recent actions. However,
it is important to remember that if not for a tip from a
courageous GS-12 auditor, Congress would still believe that
everything at DCAA was fine. We look forward to working with
this Committee and DOD to help DCAA achieve its full potential.
Mr. Chairman, this ends my statement, and I look forward to
your questions.
Chairman Lieberman. Well done. Thank you very much.
Next, we are going to hear from the Hon. Gordon Heddell,
who is the Inspector General for the Department of Defense.
TESTIMONY OF HON. GORDON S. HEDDELL,\1\ INSPECTOR GENERAL, U.S.
DEPARTMENT OF DEFENSE
Mr. Heddell. Chairman Lieberman, Ranking Member Collins,
and distinguished Members of this Committee, thank you for the
opportunity to be here today to discuss continuing oversight by
my office of audits conducted by the Defense Contract Audit
Agency.
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\1\ The prepared statement of Mr. Heddell appears in the Appendix
on page 56.
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The Department of Defense Office of the Inspector General
has the responsibility to verify that audits by all DOD audit
agencies, including DCAA, comply with stringent standards. At
the hearing last year before this Committee, we discussed
serious problems with DCAA, to include weaknesses in its
quality assurance programs, audits that failed to comply with
generally accepted government auditing standards, and
allegations of an abusive work environment. We have been
monitoring DCAA's efforts to correct the deficiencies
identified in our May 2007 peer review and in a report issued
in July 2008 by the Government Accountability Office.
On August 31 of this year, we issued a report following up
on the deficiencies identified by GAO. We found that a flawed
audit could have allowed a contractor to recover millions of
dollars in unallowable costs on a major aerospace program. We
found audits performed by trainee auditors at one location that
did not comply with standards. We found audit opinions that
were not sufficiently supported. And we found audit findings
that were dropped without sufficient justification.
Additionally, employee concerns with time pressures,
uncompensated overtime, changes to audits, and unprofessional
behavior created a work environment not conducive to producing
quality audits.
We made several recommendations to DCAA, including that it
rescind an additional five audit reports and notify contracting
officials not to place reliance on the reports' conclusions.
Our report also recommended that DCAA take appropriate
corrective action regarding the performance of the two
supervisors associated with the majority of cases reviewed by
my office and GAO. DCAA reported that those individuals will
retake supervisory courses and receive additional training. We
expect DCAA to monitor their performance very carefully.
We issued a report on September 11 of this year regarding
improper conduct by a DCAA manager. This senior official
investigation supported a GAO finding that a former regional
audit manager was not free from external impairments to
independence. Her direction resulted in a flawed audit that
could have allowed a contractor to recover $271 million in
unallowable costs. Additionally, we concluded that the
individual failed to adhere to established leadership standards
and fell short of the type of leadership skills expected from
senior leaders. The report was provided to the Director of DCAA
for appropriate action.
Based on the most recent GAO review of DCAA, together with
the deficiencies identified in our May 2007 peer review, I
notified DCAA that our adequate opinion on its system of
quality controls would expire as of August 26 of this year.
Further, that DCAA should qualify its audits with a statement
noting an exception to compliance with the quality control and
assurance standard.
On August 5 of this year, we announced the peer review for
the period ending September 30, 2009. This review will assess
whether DCAA's quality control system provides reasonable
assurances of compliance with standards. We will also follow up
on DCAA corrective actions in response to prior GAO and DOD IG
recommendations, including the findings in our May 2007 and
December 2003 peer review reports.
On September 1 of this year, DCAA requested that GAO
approve delaying the announced peer review by at least 2 years
so that it could continue internal improvements. The DOD
Inspector General has a statutory responsibility to provide
continuous audit oversight, and should the peer review be
postponed, we will undertake a number of targeted reviews of
DCAA high-risk areas.
Our oversight is essential to helping DCAA identify audit
deficiencies and to take corrective actions. However,
implementing change and creating a quality workforce requires a
commitment by management. It is essential that DCAA's senior
management address fundamental issues, to include recruiting,
training, and cultivating skilled personnel, and most
importantly, developing highly skilled and motivated leaders.
Equally important is the engagement, involvement, and support
of senior DOD management. Absent any of these factors, DCAA
will fail to achieve the cultural transition necessary for
success.
This concludes my statement. I welcome your questions.
Chairman Lieberman. Thank you very much.
Next, we will hear from the Hon. Robert Hale, Under
Secretary of Defense, Comptroller, and Chief Financial Officer
of the Department of Defense, to whom, if I have this straight,
the DCAA reports, correct, Mr. Hale?
Mr. Hale. Yes.
Chairman Lieberman. Thanks for being here.
TESTIMONY OF HON. ROBERT F. HALE,\1\ UNDER SECRETARY OF DEFENSE
(COMPTROLLER) AND CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF
DEFENSE
Mr. Hale. Mr. Chairman, Members of the Committee, thank you
for the opportunity to share some observations about the
Defense Contract Audit Agency. I will focus on the concerns
raised by the recent audits of DCAA, particularly by the GAO
audit.
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\1\ The prepared statement of Mr. Hale appears in the Appendix on
page 66.
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As Members of the Committee are aware, the Department has
submitted a lengthy response to GAO's recommendations. We
acknowledge the seriousness of GAO's findings as well as those
of the IG and others and concur with their recommendations with
very few exceptions. I will mention a couple below.
Based on my own review of DCAA and the GAO recommendations,
as well as the IG, I believe that DCAA, with assistance from me
and others in the Department of Defense, needs to focus on
three major issues. First, maybe foremost, improving the
quality of audits, especially the audits of contractor business
systems. Second, assessing the number and types of audits
performed by DCAA and whether all audits currently required by
acquisition laws and regulations are appropriate. I am worried
about 24,000 audits a year, as the GAO pointed out. We have to
be sure we do all that are needed, but we also need to look at
that number. And finally, assessing improvements in the process
for resolving DCAA audit results to ensure that audit findings
are fully considered during contracting officer deliberations.
DCAA has already begun to focus on these major issues and
on others. As GAO said, a number of steps have been taken, and
in her testimony, the DCAA Director, April Stephenson, will
describe some of the actions that have already been completed
and those that are underway.
It is important to note that the audit assignments covered
by GAO and the IG were completed 3 to 5 years ago, and all of
the audits that we are talking about cover items completed 3 to
5 years ago, and that a series of corrective actions was
undertaken beginning in late 2008, not long after the hearing
that you held last year. The Committee has to understand that
it may take several years--it took us several years to get into
this problem--for the full benefit of these actions to be
realized.
In addition, I would like Members of the Committee to know
that the Office of the Under Secretary of Defense, Comptroller,
my office, has taken some steps to improve oversight of DCAA
operations. First, I have assigned a senior member of my staff
to assist on oversight efforts. This provides me some personal
eyes and ears to keep track of what is going on.
Second, last March, I established a DCAA Oversight
Committee to provide my office with advice and recommendations
concerning the oversight of DCAA. The committee is made up of
the Auditors General of the Army, Navy, and Air Force--all
three of them personally agreed to participate--and these
individuals provide me with some heavyweight audit experience
that is simply not present on my staff, which is focused on
financial management and the budgetary responsibilities.
Also on this oversight committee is--and I think we need to
pay careful attention to--the Director of Defense Procurement
and Acquisition Policy (DPAP). He is the key customer for DCAA,
and we want to keep them in mind as we work to improve the
agency's performance. The DOD Deputy General Counsel for
Acquisition and Technology is also a member.
This senior group will assess DCAA's activities--they have
already begun to do so--and the actions taken to correct
problems, and they have provided me advice. I have met with
them several times personally and will continue to do so.
We have also taken steps in the Department of Defense to
increase the resources available to DCAA. During fiscal years
2009 and 2010, we will add 500 new auditors, and we will
consider additional auditor positions beyond fiscal year 2010.
I will be monitoring the DCAA budget carefully, and that is
something I can do during our fall program and budget review.
We believe that by taking aggressive action, improving
oversight, and increasing resources, we can resolve the
significant issues posed by the GAO report, as well as the
report by the IG, and we will monitor that progress, and I will
personally, to determine if further actions need to be taken.
While we generally agree with GAO, there are two areas
where we take exception or disagree with their findings. First,
GAO suggested that Congress consider providing DCAA with
independence similar to that of the Department's Inspector
General. There are some aspects of that suggestion that may
make sense. For example, we are looking at increased subpoena
authority for DCAA. But we disagree with the number of the
implications of that recommendation.
For example, we do not believe the DCAA Director should be
a presidential appointment with Senate confirmation. It will
inject, in my view, an inappropriate element of politics into
what should be a technical audit agency and inevitably will
create long periods of delay--it is just inevitable in our
system--when there would be no Director in charge.
Likewise, we oppose fixed terms for the DCAA Director and
mandatory public reporting, as the IG is required to do. It is
an additional burden on an agency that is already struggling to
meet its many mission demands.
While we do not support IG-like independence for most
aspects of it, we are taking steps to strengthen DCAA's
independence internally in a number of ways, but I will mention
one in particular, by assessing improvements to the process
used by contracting officials to resolve DCAA audit findings.
When there is disagreement, we need a process that allows DCAA
to elevate that disagreement if it cannot be resolved at the
staff level, and we have put that in place with the Director of
Procurement and Acquisition Policy and appeals to both the
Under Secretary of Acquistion, Technology, and Logistics (AT&L)
and the Comptroller if DCAA does not feel that the first set of
appeals has resolved the issues.
Second, GAO suggested that Congress require DCAA to report
to the Deputy Secretary of Defense. DOD strongly disagrees with
this recommendation. The Deputy Secretary is the Chief
Management Officer of one of the world's largest organizations.
He backs up the Secretary in the wartime chain of command.
Direct oversight of an individual Defense Department agency
would, I believe, add unreasonably to his current
responsibilities.
I think DCAA should remain within the Department, and at
least until these issues are resolved, I believe it should
continue to report to my office. I feel personally responsible
for helping to fix the problems that have occurred.
In sum, Mr. Chairman, we acknowledge that GAO has raised
some serious issues. We believe that we have begun taking
appropriate steps--and I think that is important--to resolve
these issues, and I will personally monitor the situation to
determine if additional steps are needed.
Let me close with what I believe is an important and
critical context, and I ask the Committee's help. DCAA provides
valuable services to the Department of Defense and other
government organizations. You have all said that. I agree. I
have spoken personally to the Director of Defense Procurement
and Acquisition Policy, one of DCAA's key customers. He
informed me that DCAA products are necessary and critical to
the acquisition process. The Commission on Wartime Contracting
has made similar comments.
As we strive to resolve the issues raised by GAO and
others, I am worried about morale at the agency. We have to be
careful not to undermine the unique value of DCAA to DOD and
other organizations. Let us be careful not to throw out the
baby with the bathwater here.
Mr. Chairman, thank you again for providing this
opportunity for me to comment on GAO's findings. I am convinced
that working together with this Committee and the senior
leadership of the Department and, of course, DCAA, we can
ensure that the work of DCAA will continue to support the
Department and the security of the United States.
When the other witnesses have completed their statements, I
would be glad to answer your questions.
Chairman Lieberman. Thank you, Mr. Hale.
And finally, April G. Stephenson, Director of the Defense
Contract Audit Agency.
TESTIMONY OF APRIL G. STEPHENSON,\1\ DIRECTOR, DEFENSE CONTRACT
AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE
Ms. Stephenson. Mr. Chairman, Members of the Committee,
thank you for the opportunity to appear before you today. I am
pleased to be here.
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\1\ The prepared statement of Ms. Stephenson appears in the
Appendix on page 69.
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As requested, I will describe the actions taken as a result
of the recent oversight reviews of DCAA. Please be assured, we
take all findings that have taken place on DCAA from any source
very seriously.
We have worked diligently since late 2008 to accomplish a
number of actions to improve the quality of the audit services
and to improve the working environment for our employees. As
shown in the appendix of my submitted testimony, we have
completed over 50 specific improvement actions. We are not
done, and we have various long-term actions in process.
For the purposes of my testimony today, Mr. Chairman, we
have categorized the issues into four general areas:
Insufficient testing, ineffective quality assurance program,
lack of independence, and management abuses.
The GAO identified noncompliances with the audit standards
of nearly all the assignments it has reviewed. This is
primarily due to an insufficient number of transactions tested,
particularly in assignments of business systems where the
contractor's system was deemed to be adequate.
Contractor internal control systems involve hundreds of
control points. Auditors assess the risks of the control points
on government contracts and establish the level of testing on
that risk. At times, auditors assess the risk at low and
sampled few transactions, and at other times the risk was high
and sampled more transactions. In some instances, the number of
transactions we reviewed, we have no defense for. It was
unacceptable. In others, it was a judgment call, and we are in
the process of revamping this process.
As I said, we recognize these concerns with the business
systems and initiated a project in 2009 to reassess the entire
process for performing audits of business systems and the types
of opinions to be provided. This will continue into early 2010.
We are consulting with the GAO and the IG as we proceed with
this project.
The GAO concluded that DCAA's quality assurance program was
deficient. We recognize that improvements are required, not
only with the structure of the quality assurance organization,
but also the manner in which the reviews were performed. In
August 2008, we centralized the quality assurance function to
headquarters. We then proceeded with more than double the
reviews we performed in the past. We no longer provide a rating
of pass-fail depending on the number of deficient assignments.
Offices that are determined to have at least one assignment in
noncompliance with the auditing standards are required to
provide a meaningful corrective action plan, which is monitored
at the headquarters level.
The GAO concluded that DCAA's independence was impaired.
This was primarily due to providing input on draft corrections
to internal control policies and procedures and then auditing
the final policies and procedures. It is not uncommon for
contractors with system deficiencies to seek input from the
auditors while they are developing corrections to the systems.
In many instances, providing feedback throughout the process
expedites the correction of the deficiencies.
The GAO has concluded that this feedback impairs the
auditors' objectivity as they audit information they have
provided feedback for prior to implementation. We have
corrected these issues. Auditors no longer provide feedback to
contractors on draft corrections to systems, and we will no
longer remove deficiencies from reports when the deficiencies
are corrected during the audit.
In July 2008, the GAO concluded that DCAA had an abusive
work environment. The IG was engaged to investigate this
matter, and as Mr. Heddell mentioned, they finished their
review in August 2009. Although they did not go as far as to
say we had an abusive work environment, it concluded that we
had a work environment that was not conducive to producing
quality audits. Auditors felt pressure to work uncompensated
overtime, and in another office, several employees said that
they heard people yelling in the office and raising their
voices. We believe these issues have been adequately addressed,
and the IG concurs.
The DOD IG did not identify any attempts by DCAA to impede
the GAO investigation other than the letter that was written in
August 2007 to one of our senior auditors, which I know this
Committee is familiar with. As we discussed at the hearing last
September, the letter was prepared by one of the Defense Legal
Services attorneys that reports to DCAA. The letter was
rescinded the day after the hearing last year.
To provide employees an opportunity to report instances of
perceived management abuse without fear of retaliation, we
launched an anonymous Web site in September 2008. The Web site
is treated as a hotline, and allegations are either
investigated by DCAA's internal ombudsman team, which we
established in late 2008, or referred to the DOD IG for
investigation.
Mr. Chairman, as a result of these oversight reviews, we
have taken a number of actions. I would like to highlight some
of the actions I have not previously discussed in a very brief
form.
We completed a bottom-up staffing assessment to determine
whether we had the appropriate staffing at all levels of the
organization. We have received funding under the Defense
Acquisition Workforce Development Fund, as Mr. Hale mentioned.
We added 25 new field audit offices, increasing from 79 offices
in August 2008 to 104 offices in August 2009, to provide
greater training to employees as well as to ensure appropriate
oversight of audit quality.
The performance measure process was completely revamped. We
eliminated 18 prior measures and added eight new measures to
focus on audit quality. Focus groups were held in 2009 and
feedback was favorable that most employees reported they did
not feel pressure to meet the performance measures on
individual assignments. Auditors did feel pressure to meet
additional budget hours and did not feel they could request an
extension. So as a result, we removed the requirement to meet
budget hours from performance standards and inserted new
language on the requirement to complete audits in accordance
with the auditing standards.
We hired the Center for Defense Management Reform at the
Naval Postgraduate School to assist with cultural
transformation across the agency. We instituted a revised
process for determining the audit requirements for 2010. Audit
priorities were established based on the audits required under
laws and regulations, and the field offices developed the audit
hours that were necessary, taking into consideration the risk
of the contractors, the skill level of the audit staff, and the
additional hours required to comply with the auditing
standards. This process is consistent with the GAO's
recommendation of performing a risk-based approach rather than
production line auditing.
We engaged the Army Force Management Support Agency to
evaluate DCAA's process for planning 2010 audit needs as well
as our staffing requirements. We provided training to all
employees on quality audits and the work environment.
In closing, Mr. Chairman, I want to underscore that DCAA is
committed to ensuring the agency is above reproach, that our
audits are performed in accordance with auditing standards, and
that its culture promotes the kind of vigilance and quality
that protects the interests of the American taxpayers.
Mr. Chairman, thank you again for the opportunity to
address the Committee. I would be pleased to take your
questions.
Chairman Lieberman. Thank you, Ms. Stephenson. We will now
go to 7-minute rounds.
Mr. Kutz, let me begin with you just to draw out a little
more a couple of the points that were in your findings than you
had the time to do in your opening statement. One of the
findings was, and I paraphrase it, you found a lack of
independence in DCAA. So I wanted to ask you, a lack of
independence from whom, the contractors, the Department of
Defense, perhaps supervisors? What is the problem?
Mr. Kutz. It would be more along the lines of the
contractors, I would say, with respect to the example I
mentioned in the opening statement, that they did not do
additional work because the contractor would not appreciate it.
That is a disturbing finding, I think, that someone would
actually believe that was important. That would be like us
auditing an Executive Branch agency for you, and if they said,
we would prefer that you do not look at the transactions, we
would walk away. I mean, that is not the way things should
work.
Chairman Lieberman. So they were too cozy or whatever,
intimidated in some sense by some of the contractors, is what
you are saying. So they were not performing the independent
audits that we presume auditors will perform.
Mr. Kutz. That, and there were also certain other issues
with respect to data requests maybe that were made, not filled,
and then the audit was completed even though the data was not
received at the end of the day. So things like that----
Chairman Lieberman. Without the auditor insisting on it.
Mr. Kutz. Or making it a scope restriction and saying, we
just did not have enough evidence to conclude on the system or
whatever was being audited. So those are the kinds of things.
And again, I believe it was seven--Ms. Fischer, is that
correct?
Ms. Fischer. Right.
Mr. Kutz. Seven of the audits. So how widespread it is, I
do not know, but seven of the 69. So there is enough there that
it is a bit of a concern.
Chairman Lieberman. Senator Collins cited, and you did,
too, this case of the auditor spending more than 500 hours
auditing a billing system that did not exist. How does that
happen?
Mr. Kutz. Well, it was not the contractor in this case. It
was a grantee, and grantees do not bill. They do drawdowns on
lines of credit. So that was the issue there. And there was
actually a single audit done that would have covered the actual
drawdown system. So the audit was not necessary in the first
place. So it really was not the contractor. It was a grantee.
Chairman Lieberman. So an audit was done. In other words,
it is not that somebody cheated on their worksheets to describe
what they were doing. It is that 500 hours were spent----
Mr. Kutz. That were not necessary.
Chairman Lieberman [continuing]. That were not necessary.
Mr. Kutz. Correct. That is what that is. Yes. And I think
that they agree, and they are not going to do that one in the
future.
Chairman Lieberman. When there is such a collapse, if you
will, or so many shortcomings in an audit, or any organization,
obviously, there is a lot of blame to go around. But I was very
interested in your comment. Again, you are drawing from
selective cases--you could not review every one of the
auditors. I paraphrased from what you said. Your conclusion
from the auditors you did interview is that there are thousands
of good auditors trapped in a broken system, and some of the
recommendations you have made are clearly systemic. But then
some of the responses that I have heard today go more to the
individual auditors, training opportunities and the like.
So I am going to ask you first to comment on that, and then
ask the other witnesses. Is it both, or is it really the
system? If it is the system, are you talking about the fact
that they are trying to do too many audits?
Mr. Kutz. Yes, I really am, and I think Mr. Hale touched on
it in his opening statement. I agree with him 100 percent.
Chairman Lieberman. Yes.
Mr. Kutz. You are trying to do 22,000, or he mentioned
24,000, or whether it is 30,000 audits----
Chairman Lieberman. Right.
Mr. Kutz [continuing]. With 3,600 people. That is not
possible.
Chairman Lieberman. You just cannot do those audits. That
is 22,000 to 30,000 a year.
Mr. Kutz. Right. You are going to do drive-by audits in
some cases, where you go by and ask a few questions, look at a
couple transactions----
Chairman Lieberman. Yes.
Mr. Kutz [continuing]. And issue an opinion, and you are
setting up the people in that particular case to fail. You have
not given them the proper resourcing. Now, I cannot believe
there are 22,000 audits that are necessary. That gets into the
risk-based approach that we talk about with respect to--and I
think Mr. Hale hit it on the head--are those audits necessary?
Are there things that can be done either by redefining audits
or looking at what is actually generating the audits from the
Federal Acquisition Regulation (FAR) or whatever the case may
be? If you do not deal with that issue, I do not think you will
ever fix this.
Chairman Lieberman. That is a very powerful point. Let me
go back to whether it is a problem with the auditors or it is a
problem of the system. That is part of the indictment of the
system that we just talked about, that perhaps they are trying
to do too much and therefore they are doing a lot badly. But
let me ask this direct question. Is the leadership inadequate?
I know it is awkward, not just for Ms. Stephenson, but anybody,
but the supervisors generally----
Mr. Kutz. Well, I think it is an insular culture. I think
we talked about that.
Chairman Lieberman. Yes.
Mr. Kutz. And that is why I think one of our
recommendations to bring in some outside expertise to take a
fresh look at this is useful, someone to come in and say, OK,
how are we doing these audits? How are we deciding which ones
to do? Are they all mandated? Do we have to go back to the
source and figure out how we get down?
Because, again, I think, if you learn to do an audit where
a couple of transactions is enough to opine on a system, that
does not mean you are not a good auditor. It means you were not
taught how to do an audit correctly. I mean, if I had been
brought in as an entry-level auditor at DCAA and I learned that
is the way you do audits, then I would think it was OK. That
does not necessarily mean I am a bad auditor. It means I really
grew up in a system where I learned that was the way you do
audits because we have 10 audits to do in the next 2 months and
the only way to get them done is to do them quickly.
Chairman Lieberman. Mr. Hale, let me ask you to comment on
this a bit. I know you are relatively new on the job. I
appreciate the steps you have taken. When you said you assigned
somebody on your staff to oversee your liaison with DCAA, is
that going to be their primary responsibility?
Mr. Hale. It is probably about half-time. She is doing some
other things for me----
Chairman Lieberman. Yes.
Mr. Hale [continuing]. But I will have her devote enough of
her time to see this through. I told you, I am committed to
fixing this.
Chairman Lieberman. Right.
Mr. Hale. Yes, it happened on a previous watch, but
nonetheless, it is my responsibility now, and I need those eyes
and ears as we go forward.
Chairman Lieberman. Right.
Mr. Hale. There are still a number of issues that need to
be resolved. I think we all understand that.
Chairman Lieberman. Have you, since you have been there,
met regularly with Ms. Stephenson?
Mr. Hale. Yes. I see her almost weekly at my staff
meetings, and we have had a number of one-on-one discussions,
and Ms. Stephenson and I are e-mail buddies.
Chairman Lieberman. Yes.
Mr. Hale. We have had a lot of exchanges.
Chairman Lieberman. So do you agree, just to draw you out
from your testimony, that one of the most significant problems
here is that DCAA is trying to do too much and therefore it is
doing a lot of it badly?
Mr. Hale. You have a tough tradeoff to make. I am concerned
about that. We need to look at it. On the other hand, I do not
want to start not doing audits----
Chairman Lieberman. Yes.
Mr. Hale [continuing]. That could be productive for the
government.
Chairman Lieberman. Right.
Mr. Hale. So there is a tradeoff. Incidentally, just to
clarify the numbers, the 30,000 is the total number of
engagements. I thought it was 24,000 under Generally Accepted
Government Auditing Standards (GAGAS). Maybe it is 22,000--
well, just to clarify the numbers.
Ms. Stephenson. It is merely a difference of the number of
assignments that we do and the number of reports issued. There
are some assignments that incorporate into a single report, so
it is not necessarily one-for-one. The number of reports are
around 20,000.
Mr. Hale. So I have talked to Ms. Stephenson about the
numbers. I have talked to Shay Assad, who is the Director of
Defense Procurement and Acquisition Policy. He is the customer.
Chairman Lieberman. Right.
Mr. Hale. We need to keep them in mind here.
Chairman Lieberman. Sure.
Mr. Hale. I am concerned the pendulum has swung too far. We
were not paying enough attention to quality. I do not want to
swing back and ignore the customer or we will not meet DOD's,
the government's, and the taxpayers' needs. So there is a
balance to be struck. So we have talked to both of them. We
need to review the numbers.
Chairman Lieberman. Do you know if you have the statutory
latitude to selectively audit so you reduce the numbers----
Mr. Hale. I am going to need to get the lawyers involved.
Chairman Lieberman. Mr. Kutz, do you know?
Mr. Hale. They may not. Some of it may be the FAR. Some of
it may be laws.
Chairman Lieberman. Yes.
Mr. Kutz. I would defer to DOD. We did not do an in-depth
look at that.
Chairman Lieberman. My time is up. Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Ms. Stephenson, I want to read to you your opening
testimony before our Committee last year on September 10, 2008.
You said, ``Mr. Chairman, I want to assure you and all the
members of this Committee that DCAA is taking the GAO's
findings very seriously.'' This year, at the beginning of your
testimony, you said, ``Please be assured that we have taken the
GAO's findings very seriously.'' In other words, almost the
exact same words. But from what I can see, very little has
changed during the past year.
I am particularly concerned to learn from my staff that one
of the executive-level managers from the Western Region who was
responsible for the problematic audit has actually since been
promoted to the Senior Executive Service.
So what has really changed since you came before us a year
ago and assured us that you were taking GAO's audits very
seriously? It is not sufficient for you to come back a year
later and just repeat those same words. I had such hope when I
heard that from you last year because I knew you were a career
employee with a lot of experience who had worked her way up in
the agency and only several months before our hearing last year
had become head of DCAA. But words are not enough. We need to
see real progress.
Ms. Stephenson. I agree, Senator, and it is a very fair
question to ask, and I will say, over the last year, we have
made significant progress. And let me answer your question in a
couple of ways.
First, the Senior Executive was promoted in October 2007.
It was not after the hearing, it was a year before the hearing,
just to clarify that.
Second, the number of actions we have taken have ranged
from--we completely changed the way in which we conduct the
performance measures. Feedback from employees has been
favorable on that. We removed the requirement for employees to
meet budget hours, which was one of the primary barriers that
people felt. That was removed actually from the performance
standards. Language about quality assurance has been inserted
in all standards at all levels within the organization.
We completely changed the way in which we review contractor
documents. No longer do we look at drafts. We only look at a
final product. We have removed any fixed cycle times on
assignments. It is now based on the amount of time that is
necessary to perform a full and complete audit. We have
reiterated to our workforce the necessary number of
transactions that must be reviewed in order to express an
opinion, and if there is an impairment, such as a time
constraint from a contracting officer, to have an appropriate
disclaimer in a report.
I have numerous actions in which I could go through to
describe what has changed, but I will explain what employees
tell me as I visit the offices. They tell me that there has
been more positive change made in DCAA in the last year than
there had been in the prior 10 years. They explain that we have
put a workforce environment in place with our anonymous Web
site where they feel they can come forward and discuss and
disclose allegations of poor management or an abusive work
environment.
I feel that although we have a number of changes yet to be
done, we have made significant progress in this past year.
Senator Collins. Ms. Stephenson, I want to clarify the
issue you raised about the manager because you said that the
promotion occurred in October 2007. But in fact, it was a
probationary period, I am told, that extended for a year. So
the information was available to you, and yet this woman's
probationary period passed and, in fact, she was made permanent
in October 2008.
Ms. Stephenson. That is correct.
Senator Collins. It is a bit misleading for you to say that
she was promoted prior to your having knowledge of these
issues.
Ms. Stephenson. It is the difference between promotion----
Senator Collins. That is a big difference. She could have
failed the probationary period. It could have been rescinded.
So you had that information.
Ms. Stephenson. But I did consult with attorneys. We did
not have enough information to reduce her appraisal below
``achieved.''
Senator Collins. There is something wrong with the
performance system then. I do not want to spend all our time on
one employee.
Ms. Stephenson. I understand.
Senator Collins. I want to go to Mr. Kutz and ask a broader
question. You found clear violations of DCAA policy and
procedures representing serious departure from what is called
the Yellow Book standards. To your knowledge, were any of the
management personnel who were involved in these problematic
audits disciplined or retrained or counseled? Was action taken?
Mr. Kutz. Probably on the training front, yes. Counseling,
I am not sure. Any serious consequences, none I am aware of.
Senator Collins. Thank you.
Ms. Fischer, you testified last year that some of the DCAA
auditors were scared to talk to you and were nervous about
being seen with GAO and telling you what was really going on.
Have you seen an improvement in that area or is this still a
problem?
Ms. Fischer. I guess I would have to put it in the context
of the continuing hotlines we are getting----
Senator Collins. Yes.
Ms. Fischer [continuing]. In our office. Some of the people
that have come to us have also gone to DCAA's internal hotline
through the Web site, and I would say there is a greater
comfort level coming forward in the agency now than there was
before. I think the management of the hotline is working pretty
well, at least in the cases we have looked at, and they have
shared that information with us.
Senator Collins. Thank you.
Mr. Hale, my time is almost gone, but let me just make a
comment to you. You expressed your concern about the morale of
the people working at DCAA, and in a sense, you were cautioning
us about tipping the balance too far. You said, ``I am
concerned about morale at the agency.'' Well, I guess I would
say to you, what effect do you think that it has on morale when
managers who are responsible for problematic audits get
promoted? When there is pressure to weaken audit findings? When
report after report indicates that there is undue pressure for
production at the expense of quality?
It seems to me that those problems have a far more
devastating impact on the morale of the auditors than our
investigations or other reports that are trying to get this
agency back on track. Ultimately, you are the person to whom
DCAA reports, and I think you need to take personal
responsibility to get this agency back on track.
Mr. Hale. Senator, I think I may not have been clear
enough. What I was looking for is a statement from the
Committee, which you have done, that DCAA performs valued
services. I also want them to hear that from me. I have said
it, and you have said it, too. That is what I was driving at,
not that we should not solve the problems that have been
identified here or continue to look at them. I am sorry if I
was unclear.
I do worry that the drumbeat of criticism needs to be
balanced by the fact, as the GAO has pointed out, that there
are a lot of good people at DCAA trying to do good things, and
I want them to continue to hear that.
And I do take this personally. Again, it did occur before I
had this job, but it is my job to fix it. I am here today to
tell you I will do my best, and I have devoted a fair amount of
my personal time in the midst of a fairly chaotic budget
environment and two wars to try to make this better.
Senator Collins. Thank you.
Chairman Lieberman. Thanks, Senator Collins.
I had the same reaction Senator Collins expressed in her
last question, so I appreciate your response. And I will say
that, perhaps it is because employees of DCAA know the
Committee is on the case, in fact, the calls from employees to
our office have gone up over the last year, not down. So I am
encouraged to hear that though the calls have continued, they
seem to reflect some improvement, at least as GAO is getting
those calls on its hotline. Thanks, Senator Collins.
Senator Coburn is next.
OPENING STATEMENT OF SENATOR COBURN
Senator Coburn. Thank you, Mr. Chairman, and thank you for
having this hearing. I think it is really important.
I read a summary of the GAO report last night and, quite
frankly, got sick. There is a culture that is absolutely
unacceptable in your agency, Ms. Stephenson, and it still
exists. It is not about doing auditing. It is about getting the
work done and looking like you are doing the auditing.
You have been Director since 2008, correct?
Ms. Stephenson. Correct, sir.
Senator Coburn. Do you have any auditing experience outside
of this agency?
Ms. Stephenson. No. I have been with DCAA since college.
Senator Coburn. There was a firm called Arthur Anderson. It
no longer exists because it failed greatly in its ability to do
independent audits. If we cannot trust auditors, we cannot
trust anybody.
Personally, I can put forward about $50 billion of waste a
year in the Pentagon--$50 billion. And now I really understand
why--we have a system that we call an audit that is not an
audit. I mean, that is essentially what the GAO report is
saying. We probably would not see much difference without your
organization there. And although there may have been some
changes brought forward, the fact that there was a recision of
80 audit reports and 65 to 69 were not professionally conducted
audits, did not meet the Federal Accounting Standards Advisory
Board (FASAB) accounting standards for auditing, to me says we
have to start over.
Mr. Kutz, what would be the effect of ending or phasing out
the direct bill program at the Pentagon?
Mr. Kutz. I do not know.
Senator Coburn. Do you have any comments on that? Ms.
Fischer.
Ms. Fischer. Well, either DCAA or the Defense Finance and
Accounting Service would need to review vouchers prior to
payment, or maybe the contracting officers. DCAA has assumed
this responsibility for the contracting officers, and the
certifying officers in the Defense Finance and Accounting
Service rely on that work in making payments.
Senator Coburn. But if we have an agency that is not
actually performing its function, what control, what safeguards
do we have?
Ms. Fischer. You do not.
Senator Coburn. We do not, and that is exactly it. The
question that comes down to me is, the people responsible, I
cannot understand why they are still there. I do not understand
that. I do not understand why the management of this agency has
not been totally changed and why people with real experience,
with real audit experience in the real world, have not been
brought in to create a culture of true auditing, which means
you verify to make sure when you claim an audit that it is
accurate, and you do the amount of testing that is necessary to
make that verification. Otherwise, you give a qualified
opinion, and we do not see that.
Mr. Chairman, I will not spend all my time on questions. I
am a little bit too upset to go where I really want to go. But
I think our Committee, with Senator McCaskill and her
experience, should look at this thing from the ground up. And I
do not doubt that some efforts have been made to improve
things, but, in fact, Ms. Stephenson's experience coming up,
starting as an auditor trainee and now leading this agency,
tells me that there is a culture that is outside of what we
would expect of auditing, and it is different than the culture
anywhere else in this country in terms of when you get a
certified audit.
I have been audited as a businessman. It is tough. As a
publicly traded company, you had better be able to justify what
you are saying. The auditors, you pay them, but you want that
unqualified opinion when they finish, and you had better be
able to prove what you are doing is accurate, and I do not
think we are anywhere close to having the confidence that is
the case. And this is our biggest agency. It is a half-a-
trillion dollars a year. And we know the waste that is out
there. I mean, in our Subcommittee on Federal Financial
Management, Senator Carper and I have documented the waste, and
now I understand why it is there. There is not a check on what
is going out.
So I am highly disappointed. I thank the GAO for their
insight, but I think we ought to stay on this. And I will tell
you, morale will improve. It will not go down. It will improve
when people are doing what they are supposed to be doing,
getting rewarded for doing what they are supposed to be doing
rather than checking the boxes in a culture that says we will
look out for the contractors more than we will look out for the
American people, and I think that is the culture that exists
there today. Thank you.
Chairman Lieberman. Thanks, Senator Coburn.
I agree with you. Incidentally, the calls that we get from
auditors in DCAA are exactly along that line. Just help us to
make this place better. We know we have an important job to do.
We feel like we are not able to do it now.
I do not want to jump ahead, but the Committee, just to
respond to Senator Coburn, is going to stay on this because it
is very important. I would say that the number of Members of
Congress who know that DCAA exists is small, but its
responsibilities are enormous. Its impact on taxpayer spending
is enormous. Its impact, as Senator Collins said in her earlier
statement, on the well-being and security of our troops is
enormous.
So we are going to stay on it. In the short-run, I think we
are going to really focus on you, Mr. Hale, because this group
reports to you. You are new there. You do not have
responsibility, if you will, for how it got to where it is, but
you do have a responsibility now to fix it, and we are going to
figure out a way to stay in touch on a regular basis and ask
you to report to us, and maybe we will come back periodically
for hearings on how we are progressing.
Thanks, Senator Coburn. Senator McCaskill, again, thank
you.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you. I used to be a prosecutor
before I was an auditor, and in the criminal law, we have
ordinances, then we have misdemeanors, then we have felonies,
and then we have capital crimes, and criminal conduct ranges
from one end to the other. In the world of auditing, what has
been committed here is a capital crime. There can be no greater
indictment of an auditing agency than this GAO report.
Now, how do we begin to get value out of this audit agency
after it has had this kind of indictment? I want to make sure I
put in the record just one of the case studies because,
unfortunately, I know from experience, most people do not read
these.\1\ This is an audit that was done with one of the five
largest DOD contractors working in Iraq, initiated in November
2003.
---------------------------------------------------------------------------
\1\ The case study referenced by Senator McCaskill appears in the
Appendix on page 158.
---------------------------------------------------------------------------
In September 2005, after nearly 2 years of audit work, the
DCAA provided draft findings and recommendations to the
contractor that included eight significant deficiencies. The
contractor objected, saying the auditors did not really
understand. The auditors did not get the new policies and
procedures that were being developed for the fast track in
Iraq.
Following those objections, various supervisory auditors
directed the auditors to revise and delete some work papers,
generate new work papers, and in one case copy the signature of
a prior supervisor onto new work papers, making it appear that
the prior supervisor had approved those work papers.
On August 31, 2006, after dropping five significant
deficiencies and downgrading three significant deficiencies for
improvement, DCAA reported adequate opinion on the contractor's
accounting system. The interim audit supervisor, who instructed
the lead auditor to copy and paste the prior supervisor's name
onto the risk assessment and work papers, was subsequently
promoted to the Western Region's Quality Assurance Manager,
where he served as quality control check over thousands of
audits, including some that the GAO reported on last year.
In April 2007, the Special Inspector General for Iraq
Reconstruction (SIGIR) reported that despite being paid $3
million to complete the renovation of a building in Iraq, the
contractor's work led to plumbing failures and electrical fires
in a building occupied by the Iraqi Civil Defense Directorate.
Now, I have one simple question. Has that interim audit
supervisor been fired?
Ms. Stephenson. No, ma'am.
Senator McCaskill. And, in fact, has that interim audit
supervisor who told that auditor to commit fraud by copying and
pasting a supervisor's signature to work papers even been
demoted?
Ms. Stephenson. On the work paper copying, that was an
issue where they had copied work papers from one assignment to
another. It was not deliberate to copy the signature. It
happened when they copied papers.
Senator McCaskill. Mr. Kutz, was there, in fact, a copying
and pasting of an auditor's signature on a report that auditor
supervisor had never even seen?
Ms. Fischer. Senator McCaskill, yes, that did occur because
the prior supervisor had moved on, and it occurred on a number
of work papers, even work papers that were created after the
signature date.
Senator McCaskill. Mr. Hale, I have to tell you, when we
had the scandal at Walter Reed, I admired Secretary Gates so
much because he went to the very top and found accountability.
When we had the problems at the Air Force, I admired Secretary
Gates, and I really was beginning to believe that we had in the
military now someone who understood that when you have a
scandal, you must have accountability.
Let me say for the record that no one has been demoted over
this capital offense. No one has lost his job. And I will tell
you, to add insult to injury, I do not think the GS-12 auditor
even got a letter of commendation. In fact, I do not think she
has even been promoted.
Ms. Stephenson. She has been.
Senator McCaskill. Well, it is a lateral move. She is
training. This is not somebody who has been heralded by the
agency as a hero. I mean, there has been no recognition. She
has not been called to the Pentagon to be thanked for what she
did. And if it was not for her, we would not be here. And the
people who did this are still there. The culture is still
there.
Listen, I know, Ms. Stephenson, you are new, and I know you
are trying, but we have to come to grips with the fact that
people who work there work there forever, and their sense of
outrage is not significant for the American taxpayer and the
American military right now.
And honestly, with all due respect, Mr. Heddell, you were
not there, but how in the world does a peer review happen with
a clean opinion in 2006 at this audit agency? Who are the
people who did that peer review? Who said this agency was OK in
2006? Clearly, it was not.
And it is not the quantity of the audits, it is the quality
that matters. If they do not have quality, they are nothing. It
is hard enough to get people to read one that is good. The ones
that are horrible, I mean, who is going to read a DCAA audit
right now without joking, without laughing about it?
I honestly have to tell you, Mr. Hale, that you have to go
back to the Pentagon and you have to tell them this is not good
enough. If somebody is not fired over this, I do not think
anybody should ever take this agency seriously again.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator McCaskill. Senator
Burris.
OPENING STATEMENT OF SENATOR BURRIS
Senator Burris. Thank you, Mr. Chairman. I want to echo my
colleague, Senator McCaskill. My experience as a Federal bank
examiner, as a State comptroller, and on the board of directors
leaves me to wonder whether or not the Defense Department
should not have to do what we did in private industry. Senator
Coburn made mention of what is happening.
Do you all remember the law that passed here called
Sarbanes-Oxley, detailing what you do with cost controls? I
understand that the controls at DCAA were just not very
effective at all, but the controls in auditing are what really
run it. And if the auditor is not doing his or her job, there
is no reliability. You are the first and the last line of
defense to determine what is happening to taxpayers' money. I
know you do not want to hear a lecture, but from what I have
read and the testimony I have heard, it really leaves a lot to
be desired.
Mr. Hale, I know Sarbanes-Oxley does not apply to the
Federal Government, but have you all tried to use those
standards, which cause businesses to have to spend millions of
dollars in order to make sure that their financial reporting is
correct? Why would it not be the same thing for the taxpayers'
money with the Defense Department?
Mr. Hale. Well, as you say, that particular law does not
apply to the Federal Government----
Senator Burris. Sure.
Mr. Hale [continuing]. But there are extensive standards--
you can verify that with GAO--that govern both auditing and
internal controls and management. I am not going to sit here
and tell you that we do the greatest job in abiding by all of
them, but we are mindful of them and working on them.
Senator Burris. Ms. Stephenson, I read in my notes that the
DCAA also does auditing outside of the Pentagon. So if you do
not have enough staff--you just hired 700 new people--how are
you doing outside audits of other agencies?
Ms. Stephenson. We perform audits for 34 other civilian
agencies on a reimbursable basis. However, we do put the
priorities on efforts such as the war and other Department
initiatives. We have deferred a significant number of audits
that we were required to do under law and regulation since the
beginning of the war. So we have quite a large backlog,
especially of the annual audits of the cost-reimbursable
contracts. So because we do not have what we need, we defer. It
is not as though we try to get them all done in one year. We
recognize that we cannot do that.
Senator Burris. Now, Mr. Hale, do you, as the Comptroller
of the Defense Department, authorize the payment of bills? Is
that your responsibility?
Mr. Hale. We set the policy for it. The actual
authorization is done at lower levels in the organization. I do
not personally do it.
Senator Burris. Well, it comes under your jurisdiction?
Mr. Hale. Yes.
Senator Burris. Do you also prepare the financial statement
for the Defense Department as the Comptroller?
Mr. Hale. Yes.
Senator Burris. Is there any type of certification of that
financial statement, which would come about as a result of what
they are spending with outside contractors, that the auditors
are reporting to you for the accuracy of that statement?
Mr. Hale. Well, there is an overall audit, and we do not
have auditable financial statements in the Department of
Defense. There are also a number of reviews at various levels
in the Department and outside the Department, by the IG, GAO,
and others, of particular aspects of those statements. I do not
know if that answers your question, but overall, the
Department's financial statements are not auditable.
Senator Burris. Mr. Chairman, there is a deep concern here
because I remember when I was President of the National
Association of State Auditors, Comptrollers, and Treasurers, we
came to Washington to try to get the Federal Government to
really begin to set up a structure that would allow more
accountability to the taxpayers, and what the compromise was--
we tried to create an Auditor General who would take over the
auditing of the Federal Government's financial statements, and
the current Comptroller General of the United States would
become the Auditor General, and then this person would have the
same status as the Comptroller General has now, but he would
oversee the financial statements of the Executive Branch.
The compromise was this. They set a Comptroller up in the
Office of Management and Budget (OMB), which is the fourth-
level person in OMB, and then they put comptrollers in each one
of the agencies. That is the reason why I was questioning Mr.
Hale. His position was created as a result of that action that
State governments took to bring them in line pretty much with
what States were doing. And so they did not quite complete it
because they said that they are too big to operate. I think
there is no such thing, but we had to compromise in that
regard.
I would certainly like to follow up with that action
because the whole accounting system of the Federal Government
really needs to be changed. What you see happening in the
Defense Department is just a microcosm of what is happening in
other agencies, probably because what they allege to us is that
it is their size.
Of course, I have also a concern about personnel in terms
of skills. Ms. Stephenson, in terms of the new hires, are you
able to hire skilled auditors or certified public accountants?
Just who are they, and where are you finding these people that
you are hiring?
Ms. Stephenson. The people that we are hiring are generally
entry-level. Under the Defense Acquisition Workforce
Development Fund, which is the funding that we have for this,
it is entry-level interns that are funded for the hiring. So
these are entry-level individuals. There are no other auditors
that perform the functions that we perform.
Senator Burris. What are their skills and qualifications--
--
Ms. Stephenson. We are contract----
Senator Burris [continuing]. A bachelor's degree in
accounting?
Ms. Stephenson. Right. It is a degree in accounting, but we
are contract auditors, and there are no other contract
auditors, and so we have a very unique technical niche in the
auditing arena. But specifically, under the Acquisition
Workforce Development Fund, that is limited to interns and that
is what we have hired.
Senator Burris. We might have a problem with their skills.
Who is training these individuals for skills and
responsibilities and how long is their training period? GAO,
did you all get into any of that, in terms of the skills of
those new hires?
Mr. Kutz. Not the new hires, but as we mentioned, we
believe overall that the audit staff are good auditors, and as
I mentioned in my opening statement, I think they were in a bad
system at this point. And one of the things that the Department
is trying to do is take actions to make a better system for
them, better training, better scoping of audits, and possibly
reducing the number of audits they are required to do so they
can do more in-depth kind of work that you would expect a
normal system-type audit to do.
Senator Burris. So there is some concern about the work
flow and the volume of work and the necessity of particular
items being audited with these contractors?
Mr. Kutz. Right. We believe that it is difficult to imagine
22,000 or 30,000 audits being done a year by 3,600 people. I
know they are trying to hire 700 more auditors, but I still
think that denominator is a problem.
Senator Burris. Thank you, Mr. Chairman. My time has
expired, and I might not be here for the second round, but I
would certainly like to follow up with this because I would
like to talk more about the circumstances of the overall system
that we tried to get established in the Federal Government.
Chairman Lieberman. Thanks, Senator Burris.
You bring a very helpful background and history about this
State effect on the Auditing Comptroller system of the Federal
Government. It is very interesting.
Mr. Kutz and Ms. Fischer have made some suggestions for
longer-term consideration that I think the Committee really
needs to take seriously, which is whether the placement of DCAA
within the Department is the correct place. Should it be
separated from the Comptroller? Is there a better place for it
to be? Should the Deputy Secretary handle DCAA? I know Mr. Hale
has said that he thinks not.
But the larger question, which really comes off of the
history that Senator Burris refers to, is whether, as you
suggest, we ought to take a look at creating a totally
independent auditing agency for the Federal Government overall,
maybe to go back to that idea of an Auditor General. That is
something I think I would like to come back to.
We are not going to do a second round. I think we have made
the point here that this Committee has lost its patience,
really, and there is too much on the line to not see the kind
of aggressive action, decisive action, that Members of the
Committee have asked for.
Mr. Hale, I am going to ask you to give us a monthly
report. It can be a letter, and our staff will work with you on
the details of it. And then we will probably want to come back
and do some more specific public hearings on this and other
related questions.
As soon as you are able, it would be of interest to me,
anyway, to get your reaction to Mr. Kutz's and Ms. Fischer's
recommendation that part of the problem here is the auditors
are trying to do too much and they are doing a lot of it
badly--in other words, DCAA should go to risk-based auditing. I
would be interested in hearing whether you need statutory
changes to do that. We understand, as you said, and you were
right, that when you do that, you are running the risk that you
are not going to audit a contract and you really will look back
and say, oh, we should have audited that. But anyway, I want to
have a more detailed evaluation of that.
Senator Coburn. Mr. Chairman, would you yield?
Chairman Lieberman. Senator Coburn, and then we will go to
Senator McCaskill.
Senator Coburn. If you create the expectation that you are
going to get a real audit and you do not know when you are
going to get the real audit, you will change multitudes of
behavior. What needs to happen is the suppliers and contractors
of the Defense Department need to be very worried about when
they come into an audit, that, in fact, it is going to be
thorough, aggressive, and accurate. And if you create that
expectation, then you will not have to audit everybody every
year. But they will not know when they are going to get
audited, and that is how auditing works best, with the
expectation that they are going to uncover our problems.
So quality, as Senator McCaskill said. It is not quantity.
It is quality and then creating an expectation in the rest of
the contractor community that you better have it right.
Otherwise, we are going to expose it.
Senator Burris. Mr. Chairman, just one quick point----
Chairman Lieberman. Yes, go ahead, and then we will go to
Senator McCaskill.
Senator Burris. Sorry. Thank you. As Senator Coburn
mentioned, when I was a bank examiner, surprise, that is what
we did. The banks did not know when we were coming.
Chairman Lieberman. Yes.
Senator Burris. So what Senator Coburn said is exactly what
we did when I was with the Federal Government. The banks always
had to be ready because they did not know when the examiners
were coming in.
Chairman Lieberman. Yes. To some extent, the Internal
Revenue Service depends on this kind of psychology with the
auditing. They cannot audit every tax return in the country,
but because everybody worries that they may be audited,
presumably, it encourages more honesty.
Senator McCaskill.
Senator McCaskill. I am almost disappointed we do not have
a second round so I could be calm during the second round.
Chairman Lieberman. I prefer to remember you as angry.
[Laughter.]
Senator McCaskill. Well, just a couple of things I think we
need to make sure we have on the record. One is that I know
that you may find this shocking, but there are hundreds and
hundreds of auditors around the country that are not doing
every audit that has been statutorily mandated because you know
what legislators always do? Legislators always say, audit it in
the legislation, and they never give the resources to audit it.
So auditors are constantly struggling with mandated statutory
audits that they do not do. That is why the risk assessment
system was born. That is why we have the single audit, the
different levels of programs that are audited because of risk
and the amount of money that is flowing. And clearly in a
contingency, in a situation like the case study I talked about,
that is where you have the most risk. And I just really do not
get this reluctance.
And I think that leads to the second point, Mr. Chairman. I
think we need to really stay focused on how insular this agency
truly is. I have to tell you the truth, Ms. Stephenson, the
notion that you just testified that there are no other contract
auditors out there, there are. There are hundreds of auditors
that have the same government auditing standard background,
that have done the same kind of scope and work on their audits,
that have the same kind of supervisory check. I mean, auditing,
yes, there are different kinds and different expertise, but
what you have always done in that agency is lateral and
promotion. You have never brought in anybody from the outside,
whether it is on a peer review or whether it is on deciding
whether or not people get promoted. It has always been a birth-
to-death organization, and it is dying because of it.
I was going to calmly go through those points in questions
if we had had a second round. I have a number of questions for
the record, and I will just let both the Chairman and the
Ranking Member know that if there is any of this follow-up work
that the Subcommittee can do--as you can see, I am fairly
agitated and involved in this particular subject matter--in
terms of follow-up hearings, we are happy to do that on the
Subcommittee if that is your pleasure and prerogative.
Obviously, we leave it to your decision as to what work you
would like us to do on the Subcommittee.
Chairman Lieberman. No, I think that is a great idea. You
are agitated, but you are also experienced, and that is a good
combination. Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
I think it is important for our witnesses to know why we
feel so strongly and why there is such a sense of outrage among
all of us who are here today. The first reason is that we are
talking about contracts that are worth hundreds of billions of
dollars. So what we have on the line here is an enormous
investment by the taxpayers.
Second, ultimately, we are talking about services and goods
in the case of DOD that are going to support our troops in
harm's way. Senator McCaskill's example of the Iraq contractor
is replicated over and over again. So if we do not have good
audits that are catching overbilling, shoddy work, the failure
to deliver on a contract, contractors who are ripping off the
Federal Government, the people who are being shortchanged in
many cases are the men and women who are risking their lives
every day for us, and that is why this matters so much.
And third and finally, the frustration you are hearing
today is that it appears that virtually nothing has changed
since we held our hearing last year, and that is completely
unacceptable.
So I join the Chairman in his commitment to keep on top of
this. It is exactly the kind of shoddy work that devalues the
very good work that is done by the majority of the hard working
employees at DCAA whose work I do value and acknowledged in my
opening statement.
We have to get this right. We cannot be here next September
with yet another GAO report that tells us little has changed.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks, Senator Collins.
I think the time for incremental responses is over.
Training programs are good, but this organization really needs
bold change, and we are counting on you, Mr. Hale. Bringing
that about is another one of the bonuses that comes with your
accepting this position.
The record of this hearing will stay open for 15 days for
additional questions or statements to be filed for the record.
I thank everybody. The hearing is adjourned.
[Whereupon, at 11:38 a.m., the Committee was adjourned.]
A P P E N D I X
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