Key Takeaways from DCAA's FY2022 Report to Congress

The Defense Contract Audit Agency (DCAA) provides audit and financial advisory services to the Department of Defense (DoD) and other federal entities responsible for acquisition and contract administration. DCAA recently issued its annual report to Congress detailing its audit performance, audit process recommendations, outreach activities, and major accomplishments over the past fiscal year. The report details monetary savings in defense spending and contract costs over the large number of audits conducted. The report also covers DCAA’s accomplishments in FY2022 while also laying out its plans and strategies for FY2023.

FY2022 Highlights

DCAA achieved numerous organizational milestones in FY2022. First, a shift from near 100 percent teleworking to employees working in office at least two days per pay period allowed regional and corporate audit directors to bring together their management teams in person. In-person learning also returned as the Defense Contract Audit Institute brought back its training classes, which helped new hires interact with instructors and their classmates.

The Operations Business Enterprise and Data Intelligence Division (OBD) was established in FY2022 as DCAA leveraged new and emerging technologies to solve complex data challenges. This division analyzes data to enhance audit processes and managerial decision-making. It also works with IT staff to ensure systems are up to date and aligned with the DoD.

DCAA also underwent an external peer review. The purpose of this review was to determine if the organization’s internal quality control review system is in place and operating effectively. The peer review concluded that this system was operating effectively.

FY2022 Audit Summary

 DCAA conducted four primary types of audits:

1. Forward Pricing audits occur before contract awards to assess contractors’ estimated costs for providing goods or services to the government. These assessments are crucial for determining fair and reasonable prices during the acquisition process. In FY2022, DCAA conducted 486 Forward Pricing audits examining $48.4 billion, which resulted in audit exceptions of $4.2 billion. DCAA’s net savings and return on investment decreased in FY2022, primarily due to a low number of forward pricing audits requested in FY2021. In response to this decrease, DCAA focused on other self-initiated audits, such as Cost Accounting Standard (CAS) audits and Business System audits—the latter prioritized by the DCAA in FY2022.
2. Business Systems, CAS, and Truth in Negotiations Act (TINA) audits are usually initiated by DCAA when there is a high perceived risk of mischarging or misallocation of costs. These audits focus on reviewing business systems, ensuring an adequate CAS Disclosure Statement, CAS compliance, and compliance with TINA. In FY2022, DCAA conducted 650 Business System, CAS, and TINA audits examining $25 billion, resulting in identified audit exceptions of $205.5 million. These audits are more complex in nature and take more time to complete—averaging 280 days from the beginning of audit field work to the report issue date.
3. Claims and Terminations audits are largely conducted after contract award in response to requests from contracting officers. Contracts that are adjusted or partially or fully terminated before completion result in complex and high-risk audits. In FY2022, DCAA conducted 902 Claims and Terminations Audits examining $2.8 billion, resulting in identified audit exceptions of $261.8 million. These audits are high risk and of complex nature and may take several years to complete.
4. Incurred Cost audits assess the accuracy of a contractor’s annual allowable cost representation on flexibly priced contracts. DCAA examines whether the claimed costs are reasonable, allowable, and allocable to the contracts based on applicable FAR regulations. In FY2022, DCAA conducted 522 Incurred Cost audits examining $186.1 billion, identifying audit exceptions of $1.1 billion. DCAA estimates approximately 15 percent of its Incurred Cost audit workload is not being met due to low staffing levels, although the agency continues to outsource audits to independent accounting firms. It is important for the DCAA to conduct Incurred Cost audits timely, as doing so eases contractor burden, encourages better compliance, and identifies issues that may impact future audits. It also allows for contract closeout. Because of this, DCAA prioritizes adequacy review of Incurred Cost audits within sixty days and full completion within twelve months. Incurred Cost audits are the only type of DCAA audit with a mandatory time requirement to completion.

Outlook for FY2023

For FY2023, DCAA plans to ease the submission process for Incurred Cost Proposals by linking the Contractor Submission Portal to the Defense Contract Management Agency systems, so contractors do not have to submit proposals in multiple locations. The Operations Business Enterprise and Data Intelligence Division (OBD) is also seeking to replace DCAA’s existing management information system with a system that ensures architecture and design alignment between existing DCAA and DoD systems. OBD is also seeking to develop an audit lifecycle portal to ensure better data integrity, accountability, and timeliness.

DCAA is also focusing more on its staff, including a return to in-person training for new hires to improve employee competency. Reviews of hybrid work policies are also in progress, with the end goal of retaining employees and making DCAA a more desirable place to work.

Despite a reduction in DCAA authorized workforce strength and a tight labor market, the boost in efficiency provided by these technology replacements, as well as a more people-focused attitude, is likely to boost productivity, better manage workloads, and result in an uptick in the number of audits performed in 2023.

 

Read the DCAA Report to Congress.

Read the DCAA Fiscal Year 2022 Peer Review Report.