DCAA changes audit guidelines

New auditing guidelines from the Defense Contract Audit Agency (DCAA) could pose substantial risks for federal contractors, according to a federal contracting expert.

“Contractors are going to be so skittish about this,” W. Bruce Shirk, special counsel on government contracts for the Sheppard Mullin Richter and Hampton law firm, said in an interview today. “These new guidelines have the potential to cause more tension between contractors and auditors.”

The DCAA issued the guidance on Dec. 19, 2008. The guidance specified how field auditors should handle the reporting of “significant deficiency” and “material weakness” in contractors’ internal controls. Under the new rules, if the auditors find a shortcoming in internal controls, they are required to report a significant deficiency, Shirk said.

“The new guidance is contrary to prior DCAA guidance and current generally accepted government auditing standards in that it severely restricts the discretion of DCAA field auditors to exercise judgment in making determinations as to the significance of internal control deficiencies,” Shirk wrote in his blog on Jan. 12.

In the past, field auditors were permitted to note partial deficiencies in internal controls. The new rules take away that flexibility, Shirk said.

If an auditor notes a significant deficiency and material weakness, the result could be denied payments to the contractor. The new rules will make it more difficult for contractors to cooperate in the audits, Shirk said.

“This situation will motivate contractors not to cooperate because if one thing is wrong, boom, the whole thing is wrong,” Shirk said. “It creates an unproductive situation.”

The new rules appear to be a government response to a July 2008 report from the Government Accountability Office regarding Defense Department managers overturning audit findings from field auditors.