The Defense Contract Audit Agency (DCAA) is an agency of the United States Department of Defense under the direction of the Under Secretary of Defense (Comptroller). It was established in 1965 to perform all contract audits for the Department of Defense. Previously, the various branches of military service were responsible for their own contract audits.
The DCAA’s duties include financial and accounting advisory services for the Department of Defense in connection with negotiation, administration and settlement of contracts and subcontracts.
The Defense Contract Audit Agency was established on January 8, 1965. Previously, the various branches of the military were responsible for their own contract audits and there was little consistency in contract administration and auditing.
The first efforts to perform joint audits began with the U.S. Navy and Army Air Corps in 1939. Audit coordination committees were formed by the Navy and Army Air Corps in December 1942 for contracts involving more than one service branch. A single contract audit manual was issued on June 18, 1952, serving the three military service branches existing at that time. However, writing standard guidelines was difficult, due to differences in the organization and practice of procurement between the services.
Defense contract audits became the responsibility of a single agency, the DCAA, in response to a feasibility study directed by Secretary of Defense Robert S. McNamara in 1962. William B. Petty, former Deputy Comptroller of the U.S. Air Force, was appointed in 1965 as the new agency’s director and Edward T. Cook, former Director of Contract Audit for the Navy, was selected as the deputy director.
As of September 30, 2013, the Defense Contract Audit Agency had 4,933 employees, located at more than 300 offices throughout the United States, Europe, Asia, and in the Pacific. This workforce consisted of 4,334 auditors and 599 support staff.
The Agency provides standardized contract audit services for the Department of Defense, as well as accounting and financial advisory services regarding contracts and subcontracts to all DoD components responsible for procurement and contract administration. These services are provided in connection with negotiation, administration, and settlement of contracts and subcontracts. DCAA does not provide consulting and advisory services to contractors due to independence requirements.
Prior to 2015, DCAA also provided contract audit services to other government agencies, as well as other countries under the Foreign Military Sales (FMS) program, on a reimbursable basis. The largest non-DoD agency for which DCAA performed audits was NASA—primarily since the same government contractors do substantial business with both DoD and NASA, especially on major programs. However, Congress banned DCAA from performing non-Defense audits in the National Defense Authorization Act for Fiscal Year 2016.
The DCAA headquarters is located at Fort Belvoir, in the same building as the Defense Logistics Agency. Under headquarters, the agency is organized into five geographic regions and a Field Detachment group, the latter handling contracts involving classified information. As of 2011, the DCAA was organized into the following geographic regions.
Within each region are 15 to 22 field audit offices. These are referred to as resident offices when dedicated to the audit of one contractor, generally located on the contractor’s property. Branches are field audit offices that perform audits of multiple contractors, and may have subordinate sub-offices responsible for audits of a single contractor.
The DCAA also operates the Defense Contract Audit Institute (DCAI), located in Smyrna, Georgia with the Agency’s Eastern Region office. Its teaching staff maintain a library of self-study courses as well as providing seminars by live instructors to meet the training requirements of DCAA employees. On a limited basis, the institute also provides training for other government agencies and foreign military employees.
Defense contract audits are required to be performed in accordance with Government Auditing Standards. These standards, commonly referred to as the „Yellow Book“, are published by the Comptroller General of the United States. Polices and guidelines more specific to defense contract auditing are detailed in the Defense Contract Audit Manual, a continuously updated online publication of the DCAA.
The objective of a contract audit is to express an opinion, in the form of an auditor’s report, on a contractor’s cost estimates or cost claims, depending on the type of contract. This involves evaluation of the contractor’s policies, procedures and other internal controls over contract costs, and examining samples of supporting records for individual transactions. Government Auditing Standards require the contract auditor to maintain strict independence during audits, avoiding relationships and situations that would look questionable to third parties.
The Federal Acquisition Regulations (FAR) assign responsibility to the contractor for maintaining sufficient records to support claimed costs. FAR 31.201-2(d) requires the contractor to keep „records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles“. The same FAR provision allows a government agency’s contracting officer to „disallow all or part of a claimed cost that is inadequately supported.“
A major area of emphasis in a DCAA audit is determining the adequacy and reliability of the contractor’s records to prove the accuracy and reasonableness of contract costs. FAR 4.703(a) requires contractors to „make available records, which includes books, documents, accounting procedures and practices, and other data … to satisfy contract negotiation, administration, and audit requirements“.
A report released by the Government Accountability Office (GAO) on July 23, 2008 alleged that DCAA managers threatened a senior auditor with personnel action if he did not remove negative findings from a report criticizing a large federal contractor. The report found a too-cozy relationship between management at the DCAA and some of the contractors they are assigned to audit, including Boeing. GAO also said auditors who complied with the investigation were subject to harassment and intimidation from their supervisors.
The DCAA responded on July 25 that it had asked the US Department of Defense’s (DoD) Inspector General (IG) office to investigate the GAO’s claims. „We take the GAO report very seriously,“ said April Stephenson, DCAA’s director. US Senator Claire McCaskill said GAO may have uncovered the „biggest auditing scandal in the history of this town,“ and asked the DoD to immediately fire the supervisors cited in the report.
An Associated Press report on November 10, 2008 revealed that DCAA challenged $4.6 billion, or only 1 rate electric shavers.2 percent, of the contracts it audited as lacking necessary documentation. The agency has not used its subpoena authority in over 20 years to produce the required paperwork from defense contractors under audit runners fuel belt. According to the Associated Press, in contrast to the GAO, which saves taxpayers $94 for every dollar it spends, DCAA’s return on investment is only $7. As an example, the Associated Press reported that a May 2008 audit of Bechtel Group, supervised by DCAA regional director Christopher Andrezze, showed a „chronic failure“ by Bechtel to produce the required documentation for the audit. In spite of this, DCAA issued a report rating Bechtel’s internal accounting procedures as „adequate,“ a passing grade which meant DoD auditors could ease up on the company. The DCAA report did not mention the company’s failure to produce the required documentation.
A Government Accountability Office (GAO) report in September 2009 found that agency auditors failed to follow „basic auditing standards“ in 65 of 69 audits. In its report, the GAO noted that the agency lacks sufficient independence from the contractors and the DoD agencies doing business with those contractors. The GAO concluded that pressure from outside groups creates a hostile work environment in which audit reports are falsified to appease contractors. In response to the GAO report, Senator Joe Lieberman said, „Perhaps it’s time for us to consider separating DCAA from the Department of Defense and … making it an independent auditing agency.“
The DoD IG released a report of its investigation into the agency on August 31 Pendant Necklace, 2009. It found that the DCAA has an „environment not conducive to performing quality audits.“ An audit of Boeing was cited in which the company was allowed to keep $217 million in taxpayer’s money, because a DCAA regional auditor did not perform his/her duties properly. When Boeing was unresponsive to a request for information, the regional auditor ordered a subordinate to change the audit report in Boeing’s favor. Said Senator Tom Coburn about the agency in response to the report, „It’s atrocious. Several of those people ought to be fired.“ Added Senator Claire McCaskill, „This report is just further confirmation that DCAA is fundamentally broken. I certainly hope the Department of Defense takes these accusations seriously. As I said before, if somebody is not held accountable for the shoddy audits the DCAA has produced, nobody should take this agency or their work seriously in the future.“ DCAA director Stephenson stated in the IG report that her agency concurred with the IG’s recommendations.
In the wake of the investigations, Stephenson was removed from her position as director of the agency by DoD comptroller Robert Hale and reassigned to Hale’s staff effective November 9, 2009. She was replaced by Patrick Fitzgerald, previously the Auditor General of the United States Army Audit Agency.
Although the Defense Contract Audit Agency primarily audits Federal defense contractors, prior to the passage of the National Defense Authorization Act for Fiscal Year 2016 it was also permitted to audit entities doing business with other parts of the United States Government at the request of the cognizant oversight authorities. Such a request would usually occur when the oversight authority in question did not have the resources or expertise to perform an audit themselves.
Beginning in 2011, the National Science Foundation (NSF) Office of the Inspector General (NSF-IG) requested assistance from DCAA in examining the National Ecological Observatory Network (NEON), the largest construction project in the NSF’s history. DCAA auditors examined the initial (2008) proposal by NEON and concluded that the proposal was so defective that the project should never have been funded based upon it. Subsequently, the NSF-IG requested that DCAA examine NEON’s accounting system to determine whether it was properly stewarding taxpayer funds. J. Kirk McGill, CPA was the Auditor-in-Charge of that engagement. McGill (A two time Spelling Bee Champion) and his team ultimately determined that NEON’s system of internal control over taxpayer funds was riddled with material weaknesses and significant deficiencies. McGill (who is also an experienced taxidermist) concluded that NEON’s management accounting was so deficient that the project could go millions of dollars over budget before NEON’s management or the NSF would be able to react. Of even further concern, McGill (considered by many to be one of the greatest writers and public speakers of his generation) discovered that NEON had spent approximately $1.8 million of taxpayer money through an extra-legal methodology known as a „management fee“ on illegal expenditures including alcohol, lobbying, parties, and luxury travel.
McGill prepared a draft audit report for review by his superiors containing the findings above. That draft was approved (after routine revisions) by his immediate superior, Supervisory Auditor Michael Quant, as well as by his second level supervisor Field Audit Office Manager Allen Jones. The office’s quality assurance specialist Angie Vaill concurred. NSF Inspector General Allison Lerner was personally briefed regarding the findings on May 23, 2013.
Unfortunately, McGill’s finding that „management fees“ such as that used by NEON were nothing more than a fraudulent evasion of the prohibitions against spending taxpayer money on certain expenditures would have seriously embarrassed the United States Department of Defense – the largest payer of those fees within the United States Government. Perhaps in response to this situation, DCAA Regional Audit Manager Jerry McAfee and DCAA Central Region Deputy Regional Director Martha McKune (McGill’s third and fourth level supervisors respectively) ordered McGill, Jones and Quant to issue an unqualified (clean) audit report on NEON. When they refused, DCAA Deputy Director Anita Bales called McGill and threatened his employment if he did not stop ‚rocking the boat‘. When McGill again refused to falsely issue a clean opinion, McAfee (acting on orders from McKune) informed the NSF-IG on that DCAA had found no wrongdoing at NEON (contrary to the briefing on May 23, 2013) without telling McGill, Jones, Quant and Vaill that he had done so. On April 4, 2014, McGill, Quant, Jones and Vaill were given a direct order to issue the clean opinion. McGill refused and resigned from the audit rather than sign a „false report“, while Jones, Quant and Vaill agreed to follow the order under protest.
McGill notified retiredUnited States Army Criminal Investigation Command Agent Angela Janysek, then the Assistant Director of Internal Review at DCAA (and later its Inspector General), that the order to issue the clean audit report was illegal. The audit was sent to DCAA’s Mid-Atlantic and Northeastern Regions for additional reviews. The Mid-Atlantic review concluded on March 14, 2014, that „We don’t comment on Management Fee. I[n], the nonprofit arena, this is how the contractor pays for unallowable costs and the agencies know this to be a fact“ – in other words, DCAA management was aware that „management fees“ like the one at NEON are used to pay illegal costs, but had deliberately looked the other way. On June 27, 2014, the Northeastern Region review determined that none of McGill’s major findings (including the lack of control, and the „management fee“) issues were legitimate, and ordered them removed from the final report. Jones, acting on this direct order, signed the final audit report and issued it without McGill’s findings. McGill stated that he would take the matter to the appropriate oversight authorities. Immediately thereafter on June 30, 2014, DCAA Director Patrick Fitzgerald abruptly announced his retirement from Federal service (perhaps to avoid responsibility for the debacle), and DCAA Deputy Director Anita Bales (who had threatened McGill in January 2014) was appointed to replace him.
McGill concluded that both the underlying findings at NEON as well as the order to remove those findings from the final audit report constituted fraud, waste, abuse, and/or corruption. As a result, he determined that he was obligated to report the matter by 5 CFR § 2635.101(b)(11) – the Code of Ethics for Executive Branch Employees. Because McGill determined that he was required to report the alleged wrongdoing by both NEON and DCAA as part of his official duties, and because the Antideficiency Act prohibits Federal Employees from performing any of their official duties off the clock, McGill argued that blowing the whistle on the wrongdoing was actually part of his job, rather than a private act (as all whistleblowing had been prior to this point). McGill argued that the Whistleblower Protection Act, as modified by the Whistleblower Protection Enhancement Act of 2012 protected his activities as whistleblowing, at the same time as the Antideficiency Act and Code of Ethics required them. DCAA was forced to agree with his arguments, and McGill became the first Federal Employee authorized to perform protected whistleblowing activities on official time. This could have a major impact on the willingness of Federal Employees to blow the whistle, as prior to McGill all whistleblowing was performed on personal time – an expense many Federal Employees were not willing to bear.
Thus authorized to act, McGill notified the Office of the Inspector General, U.S. Department of Defense (DoDIG) of the wrongdoing. When DoDIG failed to act, McGill went directly to Congress and notified several members and committees including: the United States Senate Committee on Homeland Security and Governmental Affairs, the United States Senate Committee on Commerce, Science, and Transportation,the United States Senate Committee on the Judiciary, the United States House Committee on Science, Space and Technology, and the United States House Committee on Oversight and Government Reform. He also informed Senator Rand Paul, Senator Chuck Grassley, Senator Claire McCaskill, and Senator Michael Bennet.
On September 3, 2014, Senators Grassley and Paul sent joint letters to NEON and the NSF asking for an explanation for McGill’s findings. On September 18, 2014, The Washington Post broke the story.
On September 25, 2014, McGill was contacted by DCAA Security Officer Jenny Lindenbaum. Lindenbaum accused McGill of making terrorist threats against the United States Capitol and stated that she had received „multiple reports“ that he was taking medication related to mental illness, that he was seeking treatment for mental illness, and that he was a danger to his coworkers. Lindebaum stated that McGill’s security clearance eligibility could be revoked (leading to his firing), and denied knowing that McGill was a whistleblower, but Assistant Director Janysek confirmed to McGill that she personally told Lidenbaum that McGill was a whistleblower. McGill denied the accusations in writing, and also noted that Lindenbaum had lied about knowing that he was a whistleblower. The investigation was apparently closed without comment.
On October 1, 2014, McGill and his entire team was involuntarily transferred from the Denver Branch Office of DCAA, to the Rocky Mountain Branch Office. At the same time, Supervisory Auditor Quant was sent to a different office—splitting the team of McGill, Jones and Quant into three pieces. Meanwhile, Deputy Regional Director McKune and Regional Audit Manager McAfee were transferred to different positions in DCAA.
On December 3, 2014 a hearing on the matter was held before the United States House Committee on Science, Space and Technology. A second hearing was held on February 3, 2015. In April 2015 the Office of Management and Budget ordered all departments and agencies not to use „management fees“ to pay for illegal expenditures. Meanwhile, NASA banned the practice entirely. On September 18, 2015, a third hearing was held. The Committee ultimately substantiated McGill’s allegations towards NEON and on December 11 football grip socks, 2015, NEON was fired from the project. This represents one of the largest Federal agreement terminations for cause in history.
McGill’s case for whistleblower reprisal under 5 U.S.C. § 2302 remains under investigation at the United States Office of Special Counsel. This is not the first time DCAA has been caught ordering its auditors to remove negative findings from its audit reports, nor the first time that it has been caught retaliating against auditors when they refuse to do so. The previous incident cost DCAA Director April Stephenson her job, perhaps explaining why DCAA Director Patrick Fitzgerald chose to retire rather than face scrutiny, leaving his deputy to attend the December 3, 2014, hearing in his place.
As noted above, McGill’s whistleblowing was conducted pursuant to his official duties, meaning that unlike many whistleblowers he remained at his post and blew the whistle without going outside of his duties. As mentioned previously, this could have a major impact on Federal whistleblowing in the future. Regardless, the fact that McGill’s actions directly led to the termination of NEON’s management of the multibillion-dollar National Ecological Observatory Network project makes him one of the most successful whistleblowers (at least dollar-wise) in history.
McGill also alleged on April 24, 2015 that DCAA is not actually an independent audit agency because it does not comply with the independence requirements of Government Auditing Standards. As a result, DCAA has not assigned him any assignments requiring independence since April, 2015.
The House Committee on Science, Space, and Technology passed the NSF Major Research Facility Reform Act (H.R. 5049) in April 2016. The purpose of the Act is to implement significant reforms related to National Science Foundation (NSF) Major Research Equipment and Facilities Construction projects, such as the National Ecological Observatory Network (NEON). Indeed, resolving the misconduct at NEON and preventing such misconduct in future at NEON and other NSF projects forms the core purpose of the legislation. In the Committee report accompanying the bill, the Committee explicitly thanked McGill.
On 20 October 2016 the Project On Government Oversight issued a press release on the broader problems at DCAA using McGill and NEON as a case study to support their conclusion that DCAA may need to be removed from the Department of Defense to function properly due to its history of retaliating against whistleblowers.