My Favorite Audit

There’s been an interesting mini-discussion about audits and auditing in the comment section of our website, since some readers seem to think they wouldn’t vote for a new library sales tax unless an audit of county expenditures was conducted first.

In my 25 year career before joining the AVA I had several audit experiences. Here’s just one.

In one of my many former jobs I was Senior Logistics Systems Staff Engineer for an engineering and manufacturing company in San Jose in the 1980s. Somehow we landed a large contract from the Army to refurbish and modify hundreds of multi-purpose flat-bed equipment trailers that the army had stockpiled from the 60s and 70s. The Army provided us with drawings of the original trailers and a description of the modifications they wanted made to accommodate the designs and configurations of newer (mostly larger and heavier) equipment that the Army was using and hauling around. 

The contract required the Army to ship the trailers to our manufacturing facility for refurbishment and modification. But when they arrived we discovered that not only were they in much worse condition than the Army had told us, but they weren’t all the same. The Army had modified some of them in the field to suit their operational needs. 

When we told the Army that it would cost a lot more than we had bid, they reluctantly told us to go ahead. But by that time the contract was ours, sole-source, and many (but not all) of the trailers had been delivered — nobody knew the extent of work that would be required. 

We proceeded with the work which of course was much more than anyone anticipated.

After the work was completed, I was asked to organize a claim for the millions of additional dollars we’d have to charge the Army.

Using commercial programmable database management software which I was an expert at, I organized the work into 19 separate claim categories which were common to most or all of the trailers, plus 247 special add-ons which applied to only certain trailers. Each claim component included man-hours by engineering and manufacturing labor category with various accompanying overhead rates, plus materials, all of which had applicable rates and factors applied to each cost. 

After about a month of set-up, data collection, and programing, I ran a detailed report on old-fashioned fan-fold computer paper listing each cost item with a sub-total for the “miscellaneous” cost, plus a separate sub-total for each of the 19 major claim items. As best as I recall, the total came to something around $6 million, which was more than our original contract bid. 

The last page of the inch-thick pile of paper with all the cost details and sub-totals, had the sub-total for 19th item and below that a “grand total” for the entire claim. 

Unbeknownst to me, when our company’s admin staff processed the claim through our attorney and contracts process, they broke the report down into 20 separate claims each with its own sub-total (or separate claim total). 

Somewhere in that processing, which took months of haggling and disputation about what we had or had not included and whether it was justified and required, somebody read my report’s “grand total” as the cost for the 19th claim item. So, again, unbeknownst to me, when the Army added up all 20 of the claims they thought what I had labeled as the “grand total” was the cost of the 19th item, producing a ridiculously high and incorrect new “grand total.” 

At first the Army contracting officer tried a standard claims contracting practice of offering us 60% of our (incorrectly overcalculated) claim on the spot, assuming that we had overpriced our claim. (We hadn’t but we certainly weren’t making a competitive bid either.) After more haggling, our contracts manager said we’d accept 75% of our claim and the Army agreed, thinking they were getting a 25% discount. 

But unbeknownst to all involved that 75% agreement was based on a wrongly over-priced total. 

Before the deal was finalized, the Army required that the Defense Contract Auditing Agency (DCAA) to “audit” our claim. 

DCAA had a reputation for doing pretty hard-nosed IRS-audit-style audits and I (like the rest of our project team) was nervous about the DCAA audit. 

DCAA sent in an experienced CPA to conduct the audit and he, of course, immediately noticed that the numbers didn’t add up. How did we get a grand total that was more than the individual items added up to? (He was the first person to actually look at the inch-think computer print out.)

The DCAA auditor came into my office cubicle and asked me to explain the discrepancy. I took one look at the summary sheet that he had assembled from my report and noticed that he was incorrectly using my “grand total” as the cost of the 19th item. I got out my copy of the computer print out and pointed out that the last item cost was the sub-total for that item, not the grand total.

After some discussion, we realized that somewhere in the breakdown of my report into separate claims, someone had picked up that incorrect number and created a new, much larger, “grand total.” 

After some simple math, the error was corrected, and the Army was so happy that the corrected (lower) price had been found, that they quickly offered 80% of our corrected claim value and we accepted it and that was it. The DCAA auditor was called off and the deal was finally done after years of work and subsequent haggling. 

The point? We avoided a nerve-wracking detailed audit, the kind of detailed audit that might have created even more accusations and charges of overcharging. In the process, I learned a few things about what a real audit involved, and was very relieved that we didn’t have to go through one. In fact, I was so confident in the numbers we had assembled (admittedly we had included every single cost that we could reasonably include) that I started another claim log in case we had to file another claim for the cost of the audit itself. 

Fortunately, we never had to do that.