How To Survive A DCAA Audit

Originally published in Law360, New York (July 03, 2012, 12:31 PM ET)

The Defense Contract Audit Agency is facing considerable pressure to improve audit efficiency in light of significant criticisms of its auditing procedures. As demonstrated by the DCAA's recent request that Congress grant it authority to demand access to internal audit materials, one way that the DCAA is expected to respond to this pressure is by shifting more audit responsibilities onto contractors.

Thus, it is increasingly important that contractors be prepared to properly manage DCAA audits. Contractors that are not aware of their rights and obligations during an audit may incur increased compliance costs associated with defective audit procedures and findings that could result in penalties, cost disallowances, contract payment withholdings, and False Claims Act allegations.

Types of Audits

The DCAA performs a wide variety of audits including financial capability, incurred cost, systems review (e.g., accounting systems, budget systems), and Cost Accounting Standards compliance audits, as well as pre-award surveys of prospective contractors. Contractors that engage in cost contracting and have a significant volume of government sales are generally subject to all types of DCAA audits. By contrast, contractors that focus more on fixed-price contracts and have a smaller volume of sales to the government may be exempt from certain DCAA audits.

Audit Rights and Authority

The DCAA has authority under Federal Acquisition Regulation 52.215.2 to examine and audit contractors' books, records, documents and other evidence, as well as accounting procedures and practices, for the purpose of evaluating accuracy, completeness, and currency of cost or pricing data. However, the DCAA's authority is limited to records that are kept in the ordinary course of business. Thus, the DCAA does not have authority to demand preparation of any records that the contractor does not already have.

The scope of the DCAA's authority has been the center of much controversy. The DCAA regularly claims that it has the authority to access internal audits and materials that may be subject to the attorney-client or other privileges, as well as to conduct employee interviews. But, the DCAA has no clear statutory, regulatory or contractual authority to support this position. For example, other than commercial items, time and materials, or labor hour contracts under FAR 52.212-4, there is no authority granting the DCAA the power to interview employees, yet the DCAA consistently asserts its right to do so.

...