Defense Contract Oversight Faces Multiple Challenges

Over the last seven years, the Defense Department has doubled the amount of money spent on private contractors, yet it has remained disturbingly lax on contractor oversight. Recent evidence has emerged showing that the Pentagon spends too little on contract oversight and interferes with current auditors to restrict the length and scope of investigations. The Government Accountability Office (GAO) recently released a report affirming whistleblower complaints of improprieties at the Defense Contract Audit Agency (DCAA), and a subsequent investigation by the media revealed that DCAA managers are primarily concerned with adhering to performance metrics rather than conducting competent contract oversight. The agency is further hampered by declining employment and a budget that has failed to keep pace with the amount of dollars spent on Defense contracting. The Defense Contract Audit Agency is the primary office in the Pentagon dedicated to auditing contracts and providing financial advisory services.

At the end of July, GAO issued a report entitled DCAA Audits: Allegations That Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated. GAO investigated 13 cases in 14 audits and found that "the limited number of hours approved for their audits directly affected the sufficiency of audit testing." Moreover, the report was ultimately critical of DCAA management, which it found had interfered with investigations and changed opinions to support contractors even in the face of contradictory evidence. GAO writes:

[i]n many cases [DCAA management] changed audit opinions to indicate contractor controls or compliance with CAS [cost accounting standards] was adequate when workpaper evidence indicated that significant deficiencies existed.... [I]n some cases, DCAA auditors did not perform sufficient work to support draft audit conclusions and their supervisors did not instruct or allow them to perform additional work before issuing final reports that concluded contractor controls or compliance with CAS were adequate.

GAO noted in the report that "DCAA did not agree with the 'totality' of GAO's findings, but it did acknowledge shortcomings with some audits and agreed to take corrective action." However, a media report published by Government Executive following up on the GAO investigation showed an oversight agency plagued by more pervasive problems. Nearly a dozen former DCAA employees told a story of agency management so obsessed with meeting certain performance goals that contract oversight was relegated to the periphery; the agency was "broken." The story cited one former employee who believed that "defense contractors big and small are getting away with murder because they know we at DCAA are slaves to the metrics."

Mismanagement of auditing resources at DCAA compound another problem at the agency — an erosion of available resources. In Fiscal Year 2000, the Department of Defense spent over $160 billion (inflation-adjusted for 2007 dollars) on private contractors. By 2007, that number had nearly doubled as DOD paid contractors $312 billion that fiscal year. And yet, as the Pentagon became more and more reliant on contracting to carry out its mission, employment at the DCAA fell from the equivalent of 4,005 full-time employees (FTEs) in 2000 to 3,867 in 2007.

This decline in human resources and increasing contract volume has increased the workload of DCAA employees substantially. In 2000, an FTE oversaw $40 million in contract obligations on average. However, in 2007, that same FTE was expected to oversee about $79 million in payments to private contractors. A similar trend in DCAA financial resources has also persisted from 2000 to 2007. Although DCAA's real (inflation-adjusted) budget has increased in that time period, the volume of defense contracting has far outpaced those increases. One dollar of DCAA's budget could be devoted to overseeing $417 of defense contracting in 2000, but by 2007, that dollar would have to be used to audit $785 of contract obligations. Even a DCAA management not dedicated to a flawed performance measurement system would have a hard time of effectively guarding taxpayer dollars given the rapidly increasing contracting oversight load seen in the past seven years.

Outside of DCAA, the Pentagon also has yet to demonstrate a commitment to contractor oversight commensurate with the scale of contracting which it has employed since 2000. The problem is especially acute for Iraq War contracting. A pair of instances in which the military removed contract oversight personnel from their duties indicates active hostility to Iraq War contractor accountability. In 2004, Chief of the Army's Field Support Command Division Charles M. Smith was removed from his post after he refused to approve some $1 billion in unsubstantiated charges from then-Halliburton subsidiary Kellogg Brown & Root (KBR). The Army subsequently replaced Smith with private contractor RCI (now SERCO) to review KBR's pricing proposals for future procurement. A year later, the Army Corps of Engineers demoted Procurement Executive and Principal Assistant Responsible for Contracting Bunnatine Greenhouse when she "voiced great concern over the legality of the selection of KBR, the total lack of competition and the excessive duration of the [Restore Iraqi Oil] contract."

Both demotions effectively ended the careers of these oversight professionals, warning other DOD employees that blocking contractor excesses is not in the best interest of their careers. Smith and Greenhouse recently testified about their demotions before the Senate Democratic Policy Committee, which has been holding a series of oversight hearings on misconduct, waste, and fraud in Iraq War contracting. Their testimony comes in the midst of a flurry of hearings in the past two years revealing an agency riddled with procurement and oversight problems.

Smith and Greenhouse are just two examples in a larger system that has lacked oversight and accountability for years. While the DPC hearings have begun to bring to light specific problems, and a newly-formed bipartisan war contracting commission (known as the Webb-McCaskill commission) is beginning to start its own investigations, these efforts have had little impact so far on reforming the system. Unfortunately, until these efforts bear more fruit, the experiences of Smith, Greenhouse, and the auditors at the DCAA are likely to continue for the foreseeable future.

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