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I am updating the Home Page for tomorrow and I am adding this audit.  It deals with Management and Operating contracts and similar contracts at the Department of Energy.  These contracts began with the Manhattan Project during WW II.  

I would appreciate any comments on the substance of this audit report.

The Transition to Independent Audits of Management and Operating Contractors’ Annual Statements of Costs Incurred and Claimed.
 

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I have some slight experience with DOE M&O contracting and I have read the report. Essentially, it says that the 25 year-old strategy of having M&O contractors audit themselves and their subcontractors hasn't been working. As evidence, the DOE IG points to a few high-profile cases of alleged fraud. What the DOE IG doesn't address is whether any government auditor or independent CPA auditor would have done any better than the M&O contractors' Internal Audit departments did.

With respect to that unanswered question, I would bet on "no."

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Audits should be done by independent accountants.  It shouldn’t matter if an M&O company pays the auditor or the IG does (or the IG does the audit itself).  I suppose for sake of appearances, it’s better for the IG to perform the audit though.

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It’s not an independent audit if the contractor hires the auditor. If the government will indirectly be paying for the audit, the government could and should directly hire the auditor. 

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2 hours ago, joel hoffman said:

It’s not an independent audit if the contractor hires the auditor. If the government will indirectly be paying for the audit, the government could and should directly hire the auditor. 

Joel, this is a common misconception held by many people who don't understand what "independence" means in the world of accounting/audit.

Let me give you an example: Publicly traded company A hires Big 4 accounting firm Z to perform an annual audit of its financial statements. Accounting firm Z performs the audit(s) and issues an audit opinion, which is included in company A's annual financial statements (10-K) and filed with the SEC. Company A pays Accounting firm Z $5,000,000 for its efforts. That payment, in and of itself, does not jeopardize accounting firm Z's independence from company A.

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31 minutes ago, here_2_help said:

Joel, this is a common misconception held by many people who don't understand what "independence" means in the world of accounting/audit.

Let me give you an example: Publicly traded company A hires Big 4 accounting firm Z to perform an annual audit of its financial statements. Accounting firm Z performs the audit(s) and issues an audit opinion, which is included in company A's annual financial statements (10-K) and filed with the SEC. Company A pays Accounting firm Z $5,000,000 for its efforts. That payment, in and of itself, does not jeopardize accounting firm Z's independence from company A.

Yes, understood and I read a bit about “independent audits”. However, if the customer, e.g., the Government can hire the auditor, there is no need for the contractor to hire them.

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42 minutes ago, joel hoffman said:

However, if the customer, e.g., the Government can hire the auditor, there is no need for the contractor to hire them.

Yes, and if the contractor can hire the auditor, there is no need for the Government to hire them. It might take a year or longer for the Government to hire an auditor. 🙄

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2 hours ago, Vern Edwards said:

Yes, and if the contractor can hire the auditor, there is no need for the Government to hire them. It might take a year or longer for the Government to hire an auditor. 🙄

Do you think it would be an LPTA selection? Maybe a best-value trade using FAR Part 15 procedures?

Yes, by all means. Let's make an FFP award to the lowest bidder and then ask for quality audits. What could go wrong?

(The above was sarcasm, for those who perhaps didn't catch my drift.)

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16 hours ago, formerfed said:

Audits should be done by independent accountants.  It shouldn’t matter if an M&O company pays the auditor or the IG does (or the IG does the audit itself).  I suppose for sake of appearances, it’s better for the IG to perform the audit though.

How would you feel about the DoD IG auditing the quality of DCAA's audits? Would you think the IG could be independent and objective in that case?

Would your opinion change if I told you that the DoD IG passed DCAA's quality system when nearly 50% of all reports reviewed contained deficiencies, some with multiple deficiencies?

Would your opinion change if I told you that all of the deficiencies identified in 2021 were also identified in 2017?

What about if I told you that several of the deficiencies identified in 2017 were also identified in 2014?

At what point do we ask Quis custodiet ipsos custodes?

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@here_2_help

My experience is dated.  I worked at an agency and we used DCAA as well as private sector firms for audits.  Neither stood out as exceptionally good or bad.  DCAA found mistakes in prior civilian sector audits and vice versa.  I wouldn’t give either the edge in quality although the private firms were generally more prompt.

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3 hours ago, here_2_help said:

Do you think it would be an LPTA selection?

Why not?

I don't have much practical knowledge of auditing, but it seems like the SOW would not be hard to write. There are well-defined and long-established commercial standards for auditing, aren't there? There's your performance work statement.

Firm-fixed-price contract? Cost-reimbursement?Time-and-materials?

The key would be to identify qualified CPA firms that are experienced in the application of government cost principles and cost accounting standards.

If we could price each individual audit FFP, I think I could hire a competent auditor through sealed bidding in a very short time. Certainly through LPTA. I think that we could establish special responsibility standards IAW FAR 9.104-2. Am I wrong? Why should we pay premium? We're not talking about rocket science. Are we? No lives at stake. Are there?

The biggest problem would be: Who would perform contract quality assurance?

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17 hours ago, Vern Edwards said:

Why not?

I don't have much practical knowledge of auditing, but it seems like the SOW would not be hard to write. There are well-defined and long-established commercial standards for auditing, aren't there? There's your performance work statement.

Firm-fixed-price contract? Cost-reimbursement?Time-and-materials?

The key would be to identify qualified CPA firms that are experienced in the application of government cost principles and cost accounting standards.

If we could price each individual audit FFP, I think I could hire a competent auditor through sealed bidding in a very short time. Certainly through LPTA. I think that we could establish special responsibility standards IAW FAR 9.104-2. Am I wrong? Why should we pay premium? We're not talking about rocket science. Are we? No lives at stake. Are there?

The biggest problem would be: Who would perform contract quality assurance?

Vern, you're not wrong in theory but the reality will bite the acquiring agency where it hurts.

If an agency conducts an LPTA solicitation or awards an FFP contract, how do you think the winning firm is going to staff the audit? Are they going to staff with their best, most expensive people, or are they going to staff with their most junior folks plus a couple of managers? I know how I would bet. You will not get quality audits unless you are willing to pay for quality audits. The low bidder will not provide quality audits and then we will be right back where were currently are, with the IG criticizing audit quality.

You're going to tell me that a good solicitation would address that risk, and you'd be right. But there are not many good solicitations being issued these days, in my experience.

As for your question about quality assurance, at DoD it will be DoD IG. The IG already performs quality control reviews over DCAA.

Side note: I went to the DoD IG website to link to an example of an IG audit over a "joint" or "single" audit performed by both DCAA and a Big Four firm over the Aerospace Corp. in 2011. I wanted that report specifically because it compared and contrasted the audit planning and audit quality between the two audit teams. DCAA didn't fare well when compared to the Big Four firm. Funny thing, though. That report seems to have disappeared from the archive of IG reports as if it had never existed.

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1 hour ago, here_2_help said:

If an agency conducts an LPTA solicitation or awards an FFP contract, how do you think the winning firm is going to staff the audit? Are they going to staff with their best, most expensive people, or are they going to staff with their most junior folks plus a couple of managers? I know how I would bet. You will not get quality audits unless you are willing to pay for quality audits. The low bidder will not provide quality audits and then we will be right back where were currently are, with the IG criticizing audit quality.

You're going to tell me that a good solicitation would address that risk, and you'd be right. But there are not many good solicitations being issued these days, in my experience.

@here_2_helpActually, I'm not going to tell you that a good solicitation would address that risk. Instead, I'm going to challenge your premise that the government needs "the best, most expensive people" to staff routine incurred cost and CAS compliance audits of government contracts. I don't think so. I think we need only reasonably competent people. I would be fine with "junior folks plus a couple of managers." Who does DCAA use? What level of quality does the government get from DCAA?

I don't think incurred cost audits of government contractors require the same level of expertise as audits of publicly-traded international business firms. Do you? I don't think DODIG or DCAA audits are at that level. I used to negotiate IR&D and B&P ceilings for DOD and NASA, and worked closely with DCAA auditors of companies like Rockwell International and General Electric. I know what kinds of audits we got. I don't think anything has changed much.  So why must audits performed by contractors be at that level?

What risk? That the government might inadvertently pay some amount of unallowable cost? That happens under DCAA audits.

I'm not saying, "Good enough for government work." I'm saying that an incurred cost or CAS compliance audit of Boeing or Lockheed is not as demanding as the internal and external corporate audits of those firms and firms like Amazon, Facebook, or Microsoft under, say, Sarbanes-Oxley.

So, why am I wrong?

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Vern,

You're wrong because the the DOE Inspector General report that started this thread picked-apart the work of the auditors assigned to the M&O primes. Per the report, those auditors complied with the standards of the Institute of Internal Auditors (which are not tremendously different from those of the GAGAS Yellow Book). Compliance with the applicable standards did not result in an audit of acceptable level of quality, according to the DOE IG.

It's not rocket science but it does take years of learning to master FAR Parts 30 and 31 and 32. If it were straight-forward, we would see fewer appeals at the ASBCA and CoFC.

Moving on:

Your notion of "acceptable risk" sounds like what Steve Kelman used to preach a couple of decades ago. Acknowledgment of acceptable levels of risk led to critics arguing that there was no such thing -- e.g., this treatise published in 2001.

Quote

The article shows that the reformed system couples greatly increased buyer discretion with dramatically reduced oversight of government spending - both internal and external. This article asserts that this combination erodes the public's confidence in the procurement system, violates established norms, and is antithetical to a host of Congressional mandates and policies.

I would agree that, in a rational world, there would be a cost/benefit trade wherein it was concluded that some audits were too expensive to be performed at the necessary quality levels. In fact, DCAA already made that judgment. Yet other audit entities, notably the M&O internal audit teams, do not seem to have the same discretion.

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46 minutes ago, here_2_help said:

Your notion of "acceptable risk" sounds like what Steve Kelman used to preach a couple of decades ago. Acknowledgment of acceptable levels of risk led to critics arguing that there was no such thing...

Anyone who asserts that there is no such thing as an acceptable level of risk doesn't understand risk. As a member of the Society for Risk Analysis in good standing, I can assure you that if there weren't such a thing as an acceptable level of risk no one would ever leave their house.

I know Steve's paper and have quoted it. I don't recall him saying that there is no such thing as an acceptable level of risk. But it's been a while since I have read it, and I'm not going to read it again. So if he did say that, please cite the page, and I'll pull his chain the next time I see him.

I read the DOE IG report as complaining about the independence of auditors. I don't recall the IG saying that the government should hire the "best, most expensive people."

4 hours ago, here_2_help said:

You're going to tell me that a good solicitation would address that risk, and you'd be right. But there are not many good solicitations being issued these days, in my experience.

That sounds like an argument against contracting for audit services.

I admit that I have only scanned the IG report, but it read to me like a recommendation to expand the IG office, not to contract for audit services. Is that how you read it?

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19 hours ago, Vern Edwards said:

I admit that I have only scanned the IG report, but it read to me like a recommendation to expand the IG office, not to contract for audit services. Is that how you read it?

Bingo! It's a polemic against the status quo, arguing for a return to the tried and true ways of pre-1996. All that is needed is more budget and more headcount.

That said, in the pre-1996 days the DOE IG contracted out to independent CPA firms to assist them in fulfilling their audit responsibilities. I assume they would do so once again, should the M&O contractors be told that their internal audit teams are not wanted anymore.

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