Smash & Grab Redux - Congress Seems To Give DCAA Permission But Forgets To Give It Authority

Author:Mr David Gallacher
Profession:Sheppard Mullin Richter & Hampton
 
FREE EXCERPT

Last month we wrote about a provision in the proposed 2013 National Defense Authorization Act ("NDAA") that would have given the Defense Contract Audit Agency ("DCAA") statutory authority to demand a company's internal audit reports in order to audit the efficacy of a company's internal business systems. Surprisingly, the authorization, as originally proposed, was modified in the final legislation. While Congress directed DCAA to issue new guidance regarding auditor access to internal audit reports, Congress stopped short of giving DCAA actual authority to demand such reports. As such, contractors will remain at loggerheads with DCAA auditors who try to exceed their statutory authority.

The Proposed Legislation 

The Senate version of the 2013 NDAA (S. 3254, 112th Congress, § 843) included a provision that would have amended 10 U.S.C. § 2313(a)(2) to give DCAA access to internal audit reports in order to assess "the efficacy of contractor or subcontractor internal controls and the reliability of contractor or subcontractor business systems." This proposed change would have given DCAA statutory authority to demand internal audit reports - authority that the courts have long recognized does not exist. See also United States v. Newport News Shipbldg. & Dry Dock Co., 862 F.2d 464, 468-69 (4th Cir. 1988). Contractors have long relied on the Newport News line of cases to resist DCAA demands for internal audit reports, but the proposed change would have effectively overruled the Newport News decisions.

The Final Legislation

Surprisingly, the final legislation took a different approach. Section 832 of the final 2013 NDAA (Pub. L. No. 112-239) directed the DCAA to issue new guidance regarding auditors' limited access to internal audit reports. Congress set forth the general policy as follows:

A determination by the Defense Contract Audit Agency that a contractor has a sound system of internal controls shall provide the basis for increased reliance on contractor business systems or a reduced level of testing with regard to specific audits, as appropriate....

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