Sec. 802. Performance of incurred cost audits
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Chapter 137 of title 10, United States Code, is amended by inserting after section 2313a the following new section: For purposes of performing an incurred cost audit of costs associated with a contract of the Department of Defense, the Secretary of Defense shall comply with commercially accepted standards of risk and materiality. For an incurred cost audit of a contract of the Department of Defense, the Defense Contract Management Agency or a contract administration office of a military department shall have the authority to select the Defense Contract Audit Agency or a qualified private auditor to perform an incurred cost audit, based upon guidelines that— are issued by an audit planning committee that is comprised of one representative from each of the office of the Under Secretary of Defense for Acquisition and Sustainment, the Defense Contract Management Agency, a contract administration office of a military department, and the Defense Contract Audit Agency; ensure that, after September 1, 2020, not less than 25 percent of incurred costs on flexibly priced contracts are audited by qualified private auditors; and ensure that multi-year auditing is conducted only to address outstanding incurred cost audits for which a qualified incurred cost submission was submitted to the Defense Contract Audit Agency more than 12 months before the date of the enactment of this section.
Not later than September 1, 2020, the Secretary of Defense shall award an indefinite delivery-indefinite quantity task order contract to two or more qualified private auditors to perform incurred cost audits of costs associated with contracts of the Department of Defense. The Defense Contract Management Agency, a contract administration office of a military department, or an authorized entity outside the Department of the Defense may issue a task order to perform an incurred cost audit to a qualified private auditor under a task order contract awarded under subparagraph (A).
Such task order may be issued only to a qualified private auditor that certifies that the qualified private auditor possesses the necessary independence to perform such an audit. The Defense Contract Audit Agency may not conduct further audit or review of an incurred cost audit performed by a qualified private auditor pursuant to this section, unless requested to do so as part of conducting contract quality assurance functions in accordance with the Federal Acquisition Regulation.
Effective September 1, 2022, the Defense Contract Audit Agency may issue unqualified audit findings for an incurred cost audit only if the Defense Contract Audit Agency is peer reviewed by a commercial auditor and passes such peer review. Such peer review shall be conducted in accordance with the peer review requirements of the generally accepted government auditing standards of the Comptroller General of the United States and shall be deemed to meet the requirements of the Defense Contract Audit Agency for a peer review under such standards.
The peer review referred to in subparagraph
(A)shall occur not less frequently than once every three years. Not later than September 1, 2019, the Secretary of Defense shall provide to the Committee on Armed Services of the House of Representatives an update on the process of securing a commercial auditor to perform the peer review referred to in subparagraph (A). The Secretary of Defense shall consider the results of an incurred cost audit performed under this section without regard to whether the Defense Contract Audit Agency or a qualified private auditor performed the audit. The contracting officer for a contract that is the subject of an incurred cost audit shall have the sole discretion to accept or reject an audit finding on direct costs of the contract. Not later than September 1, 2020, and except as provided in paragraph (2), the minimum materiality standard used by an auditor shall— for a incurred cost audit of costs in an amount less than or equal to $100,000, be 4 percent of such costs; for a incurred cost audit of costs in an amount greater than $100,000 but less than $500,000, be $2,000 plus 2 percent of such costs; for a incurred cost audit of costs in an amount greater than $500,000 but less than $1,000,000, be $5,000 plus 1 percent of such costs; for a incurred cost audit of costs in an amount greater than $1,000,000 but less than $5,000,000, be $8,000 plus 0.9 percent of such costs; for a incurred cost audit of costs in an amount greater than $5,000,000 but less than $10,000,000, be $13,000 plus 0.8 percent of such costs; for a incurred cost audit of costs in an amount greater than $10,000,000 but less than $50,000,000, be $23,000 plus 0.7 percent of such costs; for a incurred cost audit of costs in an amount greater than $50,000,000 but less than $100,000,000, be $73,000 plus 0.6 percent of such costs; for a incurred cost audit of costs in an amount greater than $100,000,000 but less than $500,000,000, be $153,000 plus 0.52 percent of such costs; and for a incurred cost audit of costs in an amount greater than $500,000,000, be $503,000 plus 0.45 percent of such costs. An auditor that performs an incurred cost audit under this section may use a materiality standard of a lesser amount than the materiality standard described under paragraph
(1)with respect to a particular qualified incurred cost submission from a contractor based on an assessment of risk presented by such qualified incurred cost submission. The risk shall be assessed by the auditor in accordance with generally accepted government auditing standards and guidance issued by the Secretary of Defense. Not later than March 1, 2019, the Comptroller General of the United States shall submit to the congressional defense committees a report on practices for assessing risk and materiality in auditing, which shall include— a summary of commercially accepted standards of risk and materiality and Government standards for risk and materiality as related to incurred cost audits; examples of how commercial auditing firms apply such standards in developing methodologies for conducting incurred cost audits; and recommendations, if appropriate, to modify the minimum materiality standards under paragraph
(1)to be consistent with commercially accepted standards of risk and materiality. Not later than September 1, 2019, and every 5 years thereafter, the Secretary of Defense shall submit to the congressional defense committees a report on commercially accepted standards of risk and materiality as related to incurred cost audits. The report may contain recommendations to modify the materiality standards under paragraph
(1)to be consistent with such commercially accepted standards of risk and materiality. The Secretary of Defense shall ensure that all incurred cost audits performed pursuant to subsection
(b)are performed in a timely manner. The Secretary of Defense shall notify a contractor within 60 days after receipt of an incurred cost submission from the contractor whether the submission is a qualified incurred cost submission. With respect to qualified incurred cost submissions received on or after the date of the enactment of this section, audit findings shall be issued for an incurred cost audit not later than one year after the date of receipt of such qualified incurred cost submission. If audit findings are not issued within one year after the date of receipt of a qualified incurred cost submission, such qualified incurred cost submission shall be considered accepted in its entirety unless the Secretary of Defense can demonstrate that the contractor unreasonably withheld information necessary to perform the incurred cost audit. Not later than April 1, 2025, the Comptroller General of the United States shall provide a report to the congressional defense committees that evaluates for the period beginning on September 1, 2020, and ending on August 31, 2023— the timeliness, individual cost, and quality of incurred cost audits, set forth separately by incurred cost audits performed by the Defense Contract Audit Agency and by qualified private auditors; the cost to contractors of the Department of Defense for incurred cost audits, set forth separately by incurred cost audits performed by the Defense Contract Audit Agency and by qualified private auditors; the effect, if any, on other types of audits conducted by the Defense Contract Audit Agency that results from incurred cost audits conducted by qualified private auditors; and the capability and capacity of commercial auditors to conduct incurred cost audits for the Department of Defense. In this section: The term commercial auditor means a private entity engaged in the business of performing audits. The term flexibly priced contract means— a cost-type contract, fixed-price incentive fee contract, or price-redeterminable contract, or a task order issued under an indefinite delivery-indefinite quantity task order contract, for which final payment is based on actual costs incurred; or the materials portion of a time-and-materials contract or labor-hour contract of the Department of Defense. The term incurred cost audit means an audit of charges to the Government by a contractor under a flexibly priced contract. The term materiality standard means a dollar amount of misstatements, including omissions, contained in an incurred cost audit that would be material if the misstatements, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the Government made on the basis of the incurred cost audit. The term qualified incurred cost submission means a submission by a contractor of costs incurred under a flexibly priced contract that has been qualified by the Department of Defense as sufficient to conduct an incurred cost audit. The term qualified private auditor means a commercial auditor— that performs audits in accordance with generally accepted government auditing standards of the Comptroller General of the United States; and that has received a passing peer review rating, as defined under the generally accepted government auditing standards. . The table of sections at the beginning of such chapter is amended by inserting after the item relating to section 2313a the following new item: 2313b. Performance of incurred cost audits. .