The inability of the Pentagon to properly audit certain contracts will result in significant financial losses each year, a recent Defense Department Inspector General (IG) report says.

The IG evaluated actions taken by Department of Defense (DOD) officials to align the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA) functions by increasing the dollar thresholds a contractor proposal must meet before a contracting officer can request a DCAA audit, focusing on the factors DOD officials considered in making the decision as well as controls established to ensure the change in dollar thresholds adequately protects the interests of the department and taxpayers.

“The Office of Defense Procurement and Acquisition Policy (DPAP) did not perform a business case analysis to support the decision to revise Defense Federal Acquisition Regulation Supplement (DFARS) Procedures Guidance and Instructions,” the IG says in its recent report.

“The decision will cost the Department and taxpayers $249.1 million per year in lost potential return on investment from DCAA contract audits,” the IG contends. “Had DPAP evaluated rates of return across the DCAA audit portfolio, DPAP could have achieved the same results by redirecting DCAA resources from low-risk audits and services to higher-risk areas of the portfolio.”

The IG found DCAA had not implemented a risk-based audit planning process as recommended by the Defense Business Board. “DCMA is not prepared to perform contract cost analysis in place of a DCAA audit and DCMA cannot reliably report performance,” the IG says. “DPAP did not demonstrate that DCMA has a probable chance to replicate the $249.1 million in potential return on investment identified by DCAA.”

The IG also found that DPAP did not demonstrate why it chose to direct Pentagon and taxpayer resources to DCMA to “perform a job DCMA was not prepared to perform when DCAA had existing infrastructure in place to get the job the done.”

The IG recommends the following: DCAA implement a risk-based audit planning process based upon achieving higher rates of return to the taxpayer and other high-risk factors; DPAP reinstate the pre-Sept. 17, 2010 thresholds for requesting DCAA audits as soon as practical until such time as a business case analysis can support a policy change; Defense Pricing reassess the decision to revise DOD procurement and acquisition policy and validate that the decision sufficiently considers the potential return to DOD and the taxpayers resulting for DCAA audits and other factors ; and the Defense Contract Management Agency proceed with scheduled corrective actions regarding case file documentation and information system reliability.