Defense auditors tighten rules for contractors

Introduction

The management of the Defense Contract Auditing Agency has issued new policies that extend the organization’s traditional green eyeshade mission into non-traditional matters of monitoring contractor ethics, according to an internal memo obtained by PaperTrail. And those changes are proving to be controversial, according to at least one lawyer who represents industry.

The memo, signed by DCAA’s Kenneth J. Saccoccia, assistant director for policy, was sent last Thursday to the agency’s regional directors and senior staff in its headquarters. It says contractors will now have “to disclose certain types of serious wrongdoing” in writing to the Defense Department’s Office of the Inspector General (OIG). A copy must also go to the DOD contracting officer, “whenever the contractor has credible evidence of such activity by a principal, employee, agent, or subcontractor.” The policy also decrees that contractors must provide “disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct.”

DCAA is considered the taxpayers’ frontline of defense when the government deals with contractors. It audits contractor proposals, their internal business systems (such as accounting and billing systems) and audits their performance on contracts for the Defense Department and a wide swath of agencies, such as NASA and the Department of Homeland Security.

The DCAA has “become hyper-aggressive” since last fall, said Karen L. Manos, a partner at the law firm Gibson, Dunn & Crutcher LLP, who has represented government contractors. Manos said DCAA’s audit programs “ought to have some connection to government contract cost” issues and DCAA, by looking at ethics, is veering into the territory of the inspectors general offices in various agencies. She said by looking at contractor ethics policies, “this detracts from [DCAA’s] primary mission.”

But not everyone agrees.

“It’s the Defense Contract Audit Agency, not the Defense Contract Accounting Agency,” said Richard C. Loeb, adjunct professor of government contract law at the University of Baltimore Law School. “While certainly I expect DCAA to audit contractor books and records, I also expect them to audit contractor business practices, which include their ethics programs,” Loeb said.

These policy changes come after allegations by DCAA whistleblowers of improper manipulation of audits led to a critical review by the Government Accountability Office and a high-profile Senate hearing last year. The Defense Department IG and GAO are due to come up with follow-up reports on other allegations of improper actions at DCAA soon.