The importance of taking the time to plan ahead and create an emergency plan for a natural disaster is well known. Less well known is the importance of planning ahead for the disaster known as a government audit. Government contractors should always be prepared for the possibility of an audit. Adequate controls, sound policies, and the effective implementation of proper procedures are essential to reducing the likelihood that the Defense Contract Audit Agency (“DCAA”) will audit a government contractor. Even by implementing preventive practices, the government contractor may still be audited. If DCAA decides to audit a company, the contractor needs to follow certain responsive procedures and policies to guide it in proper audit compliance.  

DCAA Background

DCAA was established in 1965 for the purpose of conducting contract audits and providing financial advice to the Department of Defense (“DoD”).1 Although DCAA acts under the authority of the Under Secretary of Defense (Comptroller), DCAA’s involvement in government audits is not limited to the DoD. With more than 300 field offices and 4,000 auditors worldwide, DCAA can service a wide range of government agencies and entities when necessary and appropriate.  

Whether DCAA will become involved in an audit depends on multiple factors, including the type of contract, the terms of the contract, and the request of the contracting officer. Certain contracts require DCAA involvement during the proposal stage, while others do not involve DCAA until costs are incurred. In addition, the contracting officer, pursuant to certain requirements, may request DCAA involvement before or after the award of the contract.  

Pre-Award Audits

Pre-award audits require auditors to evaluate the contractor’s ability to perform. These evaluations, conducted prior to the award of the contract, determine whether the contractor should receive the contract. Upon completion of the preaward audit, the auditor will make a recommendation to the contracting officer as to whether the contractor should receive the contract award.  

Pre-award audits may focus on the financial capabilities of the contractor, proposed pricing, or the adequacy of the contractor’s accounting system.2 The financial capabilities of the contractor are important because the government does not want to enter into contracts with unstable contractors who may not be able to perform the contract until completion. Price proposal information serves as an instrument to measure the reasonableness of proposed pricing. Investigations into the contractor’s accounting system allow the government to determine if the accounting methods used by the contractor are acceptable and will provide the necessary data to comply with a government contract.  

Post Award Audits

DCAA also has the authority to conduct post-award audits for negotiated contracts. In these audits, the contractor must give DCAA access to books, documents, papers and records relevant to the contract. DCAA can access information to investigate billing errors or question compliance with provisions in the contract and the submission of accurate, complete, and current data used to negotiate the contract.  

Prevention Measures  

There is no substitute for audit preparation. To best prepare for an audit, contractors should have accounting systems in place that will produce the necessary data in the manner in which auditors want to see it. The goal of a successful accounting system is to trace a transaction from a vendor’s invoice to billing the government. A records retention system is also essential in audit preparation. The establishment of a reliable records-retention system ensures that the necessary audit records are retained for the appropriate time period. Further, the company should periodically conduct its own internal audits to verify that the accounting and records-retention mechanisms are effective. If an internal audit reveals a problem, contractors can voluntarily disclose that information to the government before the government requests an audit.  

Initial Audit Preparation

Once DCAA informs the contractor that an audit will take place, the contractor needs to clarify the type of audit that will be conducted. Since the scope of DCAA’s right to audit is contingent with the type of audit being conducted, the contractor should become familiar with DCAA’s audit program, specifically focusing on the parameters of DCAA’s rights with regard to the current audit. It is the responsibility of the contractor to make certain that DCAA does not overstep its boundaries.  

DCAA audit rules provide the contractor with the opportunity to request an entrance conference with the auditor.3 By taking advantage of this opportunity, the contractor can better understand the purpose, scope, and estimated length of an audit. In addition, the contractor can get to know the auditor with whom it is dealing, and his or her respective role in the DCAA audit process.  

The contractor should request a written agenda that specifies the issues to be discussed and the records that will be reviewed. If DCAA makes inquiries that the contractor is uncertain about or goes outside the agreed upon agenda, the contractor may request additional time to address those questions. Any changes made to the agenda or to the scope of the review should be made in writing. The contractor should also document and file a record of all matters discussed at the meeting. This internal memorandum should serve as the basis for the contractor’s strategy as it moves forward with the audit. The contractor’s strategy should be well defined and relayed to all employees involved in the audit.

General Procedures

The contractor’s audit strategy should be to lead the auditor through the audit process. The contractor should be knowledgeable about the audit process and should be aware of all communications made by the auditor. To better facilitate this awareness, the contractor needs to designate a single contact to serve as a liaison and point of contact with DCAA auditors. This person should be knowledgeable about both the contract and the company’s procedures. By minimizing DCAA’s contact to a single person, the contractor can stay informed about DCAA’s contact with the company and track the communication between DCAA and the company.  

The contractor should also minimize the auditor’s need to search for relevant documents. Audits run more smoothly when the contractor provides the auditor with a particular area in which the auditor may work, and brings contract documents to the auditor at that place. Documents brought to the auditor should be gathered into and pulled from a central location. By creating a central location, the contractor can easily locate the documents and review them prior to delivering copies to the auditor. All documents delivered to the auditor should be noted. In particular, the contractor should create a list identifying all copies of documents provided to the auditor, including document descriptions and the date they were produced.  

Audits require contractors to produce documents. This requirement cannot be circumvented and must be fully complied with. Destruction, in any form, of documents related to the contract or contracts at issue violates audit compliance and creates devastating legal problems for the contractor. Thus, the contractor must ensure that no employee obstructs justice by interfering with the auditor’s investigation.  

Employee Rights

Auditors have the right to contact both current and former employees in an attempt to obtain information relevant to the audit. They do not, however, possess subpoena power or have other legal authority by which to compel employees to speak with them or to submit to an interview. While employees have the right to speak with the auditors, they also have the right to decline to be interviewed.  

All employees should be instructed to report to and to consult with the company’s legal department any time they are contacted by auditors. Employees have the option to have counsel, whether provided by the company or privately retained, available during the interview or in preparation of the meeting. Employees who choose to speak to DCAA auditors should be prepared to answer the potential questions the auditor may ask. When interviewed, employees should be honest with auditors, only discussing matters they know to be true and avoiding issues they are uncertain of. Contractors should meet with any employee who speaks with an auditor. It is important for the contractor to receive feedback from its employees in order to address any issues that could potentially develop from the information provided in the interview.  

Audit Progression

A DCAA audit is a long process and the contractor must continually stay abreast of the audit’s progression. The contractor should utilize the information provided on DCAA’s website concerning DCAA and its audit programs to best follow the progress of the audit. Additionally, the contractor should always know the auditor’s current position regarding the audit. It is important for the contractor or the company’s point of contact to meet with the auditor during the course of the audit in order to determine what the auditor’s findings appear to be. Knowledge of these findings provides the contractor with the opportunity to answer any questions before the audit is completed, avoiding potential problems that could result from the failure to address such issues. Finally, the contractor should request an exit conference, which is required under DCAA regulations.4 This is the contractor’s last chance to clarify any outstanding doubts the auditor may have and interject additional positions in favor of the company.  


Contractors should establish procedures and practices designed to prevent the possibility of an audit and ensure compliance with all government contract regulations. When these processes falter and audits cannot be averted, the contractor needs to communicate and cooperate with DCAA and avoid taking steps that might hinder the auditor’s ability to perform the audit.