Mar 7, 2012

Nicole Mitchell

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DCAA Executive Compensation Audit Approach is “Fatally Flawed”

On January 18, 2012 the Armed Services Board of Contract Appeals (ASBCA) ruled the Defense Contract Audit Agency (DCAA) sampling methodology for audits of contractor executive compensation is “fatally flawed statistically and therefore unreasonable.”

This decision is related toan appeal by J.F. Taylor, Inc. (JFT) after the DCAA and DCMA questioned executive compensation costs of over $550,000. The current DCAA method for determining reasonableness is to use salary survey information at the “median” for comparable companies, with a 10% “range of reasonableness” variance. Some of the factors argued by JFT, which are not accounted for by the DCAA, are:

• The variability amongst companies above or below the median, 50th percentile
• The sample sizes of companies for the wage surveys used
• The current and historical financial performance of the company
• The consistency of the wage surveys being used from year to year, etc.

It is unclear what effect this ruling will have on the DCAA’s executive compensation audit approach going forward. However, if a contractor is currently involved with an executive cost audit, or has previously had costs disallowed based on a DCAA audit, using the flawed methodology it will probably be beneficial to contact your cognizant DCAA auditor and/or Contracting Officer to discuss.

Please contact Brian Bender at 301.222.8273 or Nicole Mitchell 301.222.8231 for questions or assistance with your federal government compliance issues.