Now’s the time to push for change in Defense contract audit, oversight

Some of the wisest and most experienced professionals in the Defense Department contracting community crafted a three-volume set of recommendations to dramatically improve how the department does business with the commercial market. In January, the Section 809 Panel submitted the last of its 98 recommendations to Congress, but DoD can implement many of them – in particular, the contract audit and compliance recommendations, without being told to do so through legislation.

Now what? The sad truth is, unless government and contractors step up and persistently advocate for change, there’s a high likelihood that the panel’s recommendations will die on the vine.

But imagine a different scenario. What would it be like if Congress and the DoD embraced the recommendations and implemented change? It’s time for government contractors and DoD’s contracting officers to be brave, stand up, speak out and find out.

Government contract oversight: What went wrong?

Government contract pricing and accounting rules and regulations were created protect the public’s interest. Auditors play a critical role in verifying that contractors play by these rules. But auditors aren’t decision makers; they’re advisers to their customers — warranted contracting officers.

Under fire themselves in the late 2000s, the auditors issued audit guidance with a thinly-veiled warning to contracting officers: if you don’t follow our advice, we’ll report you to the DoD Office of the Inspector General. Although that fateful guidance disappeared unceremoniously, the chill remains. When the acquisition system is stressed with fear, it will do what’s safe and easy — because there’s little incentive to do what’s right or appropriate.

Professional judgment within DoD acquisition has eroded into checklists and rigid interpretations of the rules. Pretending the gray areas don’t exist creates a false sense of security, inflexibility and bogs down the entire system. Contracting officers who adopt audit results without applying their own independent judgment and business sense cost the government and contractors time and money.

Contracting officers are the gatekeepers, but too many have handed over the keys to their advisers. This unfortunate situation is ripe for change.

Section 809 panel directive: Focus on what matters

When Congress established the Section 809 Panel in the fiscal 2016 defense authorization bill, they knew procurement was too complex, taking too long and missing the essence of reasonable acquisition and oversight.

One example of the panel working with Congress is the proposed clarification of “materiality.” Congress understood that auditors, in absence of a permissible benchmark, were essentially treating anything greater than $0 as important. Perfection is not reasonable. What is material to a particular company, contract, account or transaction may not be to another.

Congress asked for numeric materiality guidelines — where auditors can use a mixture of formulaic and judgmental factors to assess materiality with the goal of refocusing audits on what matters most. This is a big step in the right direction. The panel delivered, and there’s nothing standing in the way of DoD implementing the panel’s materiality guidance as written. We now have ground-breaking guidance, with a framework, tools and resources, for defense procurement and oversight professionals to make reasonable business decisions about things that matter. DoD doesn’t need to wait for Congress to act.

If no one acts, nothing will change

If Congress and the DoD were to enact the panel’s contract audit and compliance recommendations (5 through 15, 71 through 73), we could unwind much of the fear and many of the obstacles that emerged in the last decade. Business sense would be reintroduced into government contracting, which would lead to faster decision making, lower compliance costs, fewer disputes, improving relationships and far better outcomes. The contract audit and oversight community has the permission to behave differently, and we need to encourage that every chance we can.

By the time the panel released its volume 3 report, much had changed in Congress. Unfortunately, although the importance of the work remains, the urgency driving the panel’s directive has dissipated among competing priorities.

Panel commissioners are experts and passionate about the Panel’s mission, but they’re not lobbyists. They’ve completed their work, so others must pick up the baton. If no one acts, and acts soon, little will change.

A call to bravery for government and industry

We don’t need Congress to take the first step. In fact, we shouldn’t wait for them. DoD reviewed and concurred with the panel’s contract audit and compliance recommendations. If Congress isn’t pushing the agenda from the top down, then government contractors, DoD procurement executives, the contracting officer community and auditors can push from the bottom up. We’ve got a very good place to start.

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In volume 3, the panel provides a professional practice guide, developed by a team that included representatives from the 809 Panel, the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA), the Government Accountability Office (GAO), the American Institute of Certified Public Accountants (AICPA) and industry. Providing a unique foundation of collaboration and consensus, the guide outlines how auditing concepts and principles can be applied to the unique features of government contract audits.

The guide represents important buy-in and guidance from the very stakeholder groups that would be executing the changes into their practices. Starting here, we’re already so close to defense acquisition and oversight improvements.

I urge everyone to read the recommendations and the guide. Industry, share the guide with your government auditors and your contracting officers. Then heed this call to be brave and act, to push for change by working with industry associations, and keep the conversation going within government and industry.

Contracting officers, share the guide with colleagues, leadership, contractors and auditors. Urge them to implement the 809 Panel’s recommendations, making the guide your new playbook.

It’s up to you. It’s up to all of us. None of us need be brave alone. Together, we can encourage DoD down the path mapped by the panel, toward a vastly improved government marketplace that will serve us all so much better than today.

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Brent Calhoon is a partner in Baker Tilly’s government contractor advisory services practice. He brings over 25 years of government contract industry experience to his work with public and private contractors and nonprofit organizations, providing consulting, accounting, auditing and investigative services.