Ready, Set, Retire
Smart Cities: Beyond the Buzz
Future of the Army
DCAA called out again over mismanagement

Agency leaders cite improvements to correct audit problems, but Senate panel says complete overhaul is needed.

The Defense Contract Audit Agency needs a complete overhaul, including new leadership and more independence from the Pentagon, according to testimony from a government watchdog agency and several senators on Wednesday.

For the second time in two years, DCAA leaders found themselves in front of a furious Senate Homeland Security and Governmental Affairs Committee, answering to allegations about shoddy reviews and inappropriate changes made to multimillion-dollar audit reports under the influence of contractors.

In its most recent findings, the Government Accountability Office investigated 69 clean audits and cost-related reviews at field offices in DCAA's five regions from 2004 through 2006.

Similar to its 2008 report, which examined auditing concerns at a pair of California DCAA field offices, GAO's latest study revealed widespread deficiencies with nearly every document it reviewed, including auditors whose independence had been compromised, insufficient testing to support audit opinions and inadequate supervision.

"Last year's report was just the tip of the iceberg," said Gregory Kutz, managing director of forensic audits and special investigations at GAO.

In one new case GAO documented, a supervisor directed audit staff to delete certain findings from a report, generate new working papers, copy and paste the signature of the prior auditor onto the new documents, and then issue a clean opinion. The supervisor later was promoted to Western Region quality assurance manager.

During a billing system review of one of the largest Defense Department contractors in Iraq, an auditor told GAO investigators he did not perform detailed tests "because the contractor would not appreciate it."

And in another example, supervisors overturned an auditor's negative opinion in the review of a contractor under criminal investigation for fraud. According to the report, DCAA officials downgraded a performance appraisal for the auditor, who has since left the agency, because he reportedly conducted too much testing and exceeded his budget hours.

In total, DCAA has rescinded 80 audits cited in the two GAO reports, a figure Kutz called unprecedented.

The tone of committee members ranged from disappointment to rage.

"In the world of auditing, what has been happened here is a capital crime," said Sen. Claire McCaskill, D-Mo., a former state auditor for Missouri. "There can be no bigger indictment of an agency than this GAO report."

Sen. Susan Collins, R-Maine, called GAO's findings "an epic failure by the agency and the department," while Sen. Tom Coburn, R-Okla., said he "got sick" reading the report.

"I can't understand why the management of this agency hasn't been completely changed," Coburn said.

Committee members said little had changed since the first hearing, but DCAA officials argued that operations and morale had improved dramatically.

DCAA Director April Stephenson cited more than 50 recent improvements in which the agency altered or eliminated internal performance metrics, changed how auditors assess contractor business systems and increased protection for whistleblowers.

The director noted that GAO's findings predate all of those process improvements. "We have made significant progress in the past year," Stephenson said.

But one DCAA source confirmed that recent internal reviews have found similar problems with audit reports issued in the past year.

Committee members attributed some of DCAA's problems to a lack of resources. In fiscal 2008, the agency conducted more than 30,000 audits covering more than $500 billion in proposed or claimed contractor costs. But to cover that massive workload, the agency has only 3,800 auditors -- leading to what Kurtz described as "drive-by audits."

"Perhaps in an effort to do too much, they are doing everything badly," said Sen. Joseph Lieberman, I-Conn., chairman of the committee. Despite all of its reforms, DCAA "still seems driven by a culture that emphasizes speed and production of audits over the quality of results," he said.

The Pentagon is considering adding 700 auditors to the agency by the end of fiscal 2011. But GAO officials said further change is needed.

Kutz urged lawmakers to make the DCAA director a Senate-confirmed position with a fixed term, grant the agency independence similar to that of inspectors general and remove DCAA from Pentagon control. Lieberman and others said they would consider legislation to make DCAA a stand-alone agency.

Defense Comptroller and Chief Financial Officer Robert Hale, whose office oversees DCAA, disagreed with all the recommendations, arguing the agency's corrective action in the past year should alleviate many of GAO's concerns.

"It took years for us to get into this problem and it may take years for us to get out of it," Hale said.

For now, it appears reform will involve many of the same supervisors and managers that have been cited by GAO and the Defense Department inspector general for mismanagement and abuse.

Under harsh questioning from McCaskill, Stephenson acknowledged that no manager or supervisor had been fired or demoted due to investigators' findings. In fact, GAO found that several supervisors received high performance appraisals, cash awards and promotions. The harshest punishment to date, critics said, has been reserved for two West Coast supervisors who were told to retake several supervisory classes at the Defense Contract Audit Institute.

"At this point, DCAA audits are a joke," McCaskill said. "If someone is not fired over this, I don't think anyone should ever take this agency seriously again."

DCAA auditors agreed, noting that unless the recalcitrant supervisors who allegedly changed or deleted audit findings are held accountable, true reform will be impossible.

"How can you trust a system, when you know that system is broken," said Diem Thi Le, a veteran DCAA auditor who testified at the 2008 hearing. Le told lawmakers she had been retaliated against for disclosing inappropriate fees billed by large Defense contractors.

At the hearing on Wednesday, the IG's office released its report of workforce concerns among staff at DCAA. The investigation, first reported on Tuesday by Government Executive, cited employees at two West Coast DCAA offices who said they felt pressured to meet unreasonable performance standards while others sometimes witnessed unprofessional behavior by supervisors, including screaming, cursing and intimidation.

Defense Department Inspector General Gordon Heddell said his office is pursuing 36 hot line complaints involving DCAA. Of those cases, 14 concern potentially inappropriate contractor practices. The remaining 22 include allegations such as changing findings, noncompliance with standards and management abuses, Heddell said.