[This article was originally published as “DCAA Audits of Lobbying Costs” Sajeev Malaveetil, Partner Gary Tsai, Senior Consultant Audit Partner, Argy, Wiltse & Robinson, P.C., Business Consulting Group

As industry professionals are well aware, the Defense Contract Audit Agency (DCAA) audit focus can often change as the agency’s guidance is updated or as a result of changes to regulations. Years after an audit alert was issued in 2008, the DCAA recently issued new audit guidance, which has resulted in an increased rigor in the auditing of lobbying costs. As a result, contractors are increasingly becoming subject to greater scrutiny related to its lobbying efforts, specifically efforts related to legislative earmarks. While lobbying costs have always been on the DCAA radar of unallowable costs, unlike the past, scrutiny is no longer limited to a contractor’s Government affairs group or the registered lobbyists who work for the organization. In addition, per recent guidance, a contractor’s failure to identify and exclude unallowable lobbying costs from its incurred cost submission or forward pricing rate proposal may result in more than just questioned costs.

Recent DCAA Audit Guidance on Lobbying Costs

On September 12, 2011, the DCAA issued a Memorandum for Regional Directors (MRD) providing audit guidance on lobbying costs related to legislative earmarks.

1 The MRD is a follow-up to an MRD from April 24, 2008, which instructs DCAA auditors to pay special attention and perform further procedural testing “to ensure contractors have properly identified and accounted for contractor effort and related costs associated with supporting legislative earmarks.”2

1 DCAA Memorandum for Regional Directors (MRD) 11-PAC-015(R) Subject: Audit Guidance on Lobbying Costs Related to Legislative Earmarks, dated September 12, 2011.

2 DCAA MRD 08-PAS-015(R) Subject: Audit Alert – Lobbying Costs Related to Legislative Earmarks, dated April 24, 2008.

3 Per its website:

www.taxpayer.net) the Taxpayers for Common Sense (TSC) is a self proclaimed “independent and non-partisan voice for taxpayers working to increase transparency and expose and eliminate wasteful and corrupt subsidies, earmarks, and corporate welfare.”

Per the April 2008 MRD, DCAA auditors are to treat contractor costs incurred to pursue or otherwise support earmarks, as well as any related costs, as unallowable lobbying costs per Federal Acquisition Regulation (FAR) 31.205-22, Lobbying and Political Activity Costs and FAR Clause 52.203 12, Limitation on Payments to Influence Certain Federal Transactions.

DCAA auditors are instructed to use earmark data maintained by Taxpayers for Common Sense to identify contractors and programs under their audit cognizance that received significant earmarks and to make inquiries of contractors to determine the procedures used by the contractors to identify and collect the costs related to supporting earmarks.3

The April 2008 MRD points to studies (without citing the actual studies) that identified contractor personnel involved in efforts related to obtaining earmarks included not only registered lobbyists and executives but also program management, contracting, public relations, consultants and technical personnel. As such, auditors are instructed to interview personnel at various levels to ascertain the nature and extent of effort provided to support identified earmarks. In addition the auditors are instructed to review expense reports for possible trips to meet with Congressional members and/or their staff in efforts to purse earmarks.

The September 12, 2011 MRD, updates the 2008 guidance on two significant fronts. First, it provides data sources for DCAA auditors to use, in addition to the TSC data, to identify earmarks and benefiting contractors and programs. These additional sources include a database maintained by the Office of Management and Budget (OMB) as well as separate databases maintained by the U.S. House of Representatives and the U.S. Senate. The Congressional databases are maintained as requirements of amendments to the Lobbying Disclosure Act (LDA) of 1995, as implemented by the Honest Leadership and Open Government Act of 2007. 4

4 The OMB database can be found at

http://earmarks.omb.gov/earmarks-public/. The U.S. House of Representatives database can be found at http://lobbyingdisclosure.house.gov/. The U.S. Senate database can be found at http://www.senate.gov/legislative/Public_Disclosure/LDA_reports.htm.

[5 FAR 31.205-22(c) and FAR 31.205-22(d).]

However, the more significant update to come from the September 2011 MRD pertains to guidance issued to auditors to evaluate contractors’ procedures for properly identifying and accounting for costs associated with lobbying activities and legislative earmarks.

The MRD references FAR 31.205-22 requirements that contractors separately identify lobbying costs in indirect rate submissions, and maintain adequate records to support certifications of lobbying costs as either allowable or unallowable.

[5 In addition the MRD references FAR Clause 52.203-12 prohibitions on activities related to influencing the award, extension, continuation, renewal, amendment or modification of a contract. Auditors are now instructed to report any inadequate procedures related to these requirements as an accounting system deficiency. ]

In addition, per the recent MRD, auditors are instructed as part of an incurred cost, forward pricing or other related audit to assess the risk of lobbying costs not correctly being identified and removed by the contractor and perform substantive tests based on the risk assessment. In addition to questioning any costs and directly associated costs identified as a result of the substantive testing, auditors are also instructed to consider issuing a Cost Accounting Standards (CAS) 405, Accounting for Unallowable Costs non-compliance report.

Recent Audits of Lobbying Costs

Several major Government contractors who are experiencing audits of lobbying costs, have indicated that the audits have not been a part of an incurred cost or forward pricing audit, but instead separate audit activities. According to the contractors, the audits are being performed by a specialized team of auditors based primarily out of the Mid-Atlantic Region. The audit scope has spanned up to five years of costs and consists of interviews of currently employed executives, business development personnel and administrative assistants. The interviews, which have lasted as long as an hour, have included questions pertaining to activities of former employees, who may have been involved in lobbying efforts, efforts related to supporting or pursuing earmarks as well as directly associated efforts.

The subjects of the interviews, as described above, are consistent with the guidance in the 2008 MRD. However, the DCAA has also been interviewing any associated personnel that it considers has having provided support in the lobbying and/or earmark efforts.

The following list contains examples of questions that contractor personnel have been asked as part of recent audits of lobbying costs:

  • · What is your definition of “lobbying”?
  • · How do you account for time spent on associated lobbying activities?
  • · Do you meet or have you met with a member of Congress?
  • · Did you discuss funding issues with a member of Congress?
  • · Have you attended fundraisers?
  • · How do you distinguish between what is allowable versus unallowable cost?
  • · Have you attended training for charging allowable versus unallowable time?
  • · What are the descriptions of your job duties as well as percentages of times dedicated to each function?
  • · Who are your contacts in Congress and Executive agencies, including nature of business, names of flag officers, and other staff that supported the associated contacts?
  • · How is the time spent with the Congressional/Executive Agency contact charged in your respective accounting system?
  • · How did you keep track of your visits with the contact?
  • · Do you maintain a log of records of each contact and specific visit?
  • · How does the business development organization function within your firm?
  • · Who are the key players in the business development function within your firm?
  • · Does your firm consult with any outside consulting firms specifically relating to lobbying, political fundraising and/or legislative matters?
  • · Have there been any mergers and acquisitions (M&A) opportunities recommended by your Congressional contact? If so, how was the time charged in this respect?

Additionally, contractors have reported that the audits of lobbying efforts have included a review of invoices of both legal and consulting firms, as well as timesheets and expense reports. To the extent the engaged consulting firm is registered as lobbyist, and evidence does not exist that clearly shows that the firm was not performing lobbying activity, the DCAA has been questioning the costs of the firm as well as the costs of individuals within the organization who worked with the firm.

In addition, to the extent that a contractor has been identified as having benefited from legislative earmarks, the DCAA has been questioning up to 25% the contractor’s executive’s labor, in the absence of reliable measure of time spent. The DCAA has also questioned a pro-rata share of facilities costs, costs of any executive administrative assistant(s), and any other support services directly associated with the executive. Contractors who have recently undergone audits of lobbying costs have reported that the DCAA audit reports being issued have numbered over 100 in length.

The increased scrutiny is further evident in that the DCAA appears to be considering any meetings held at the Pentagon and other government facilities in the Washington, D.C., region as well as meetings with State and Local government officials regardless of the purpose as potentially being “lobbying” activities.

In summary, the DCAA is expanding its audit scope related to lobbying costs to include efforts related to legislative earmarks. In addition, the scope has been expanded to focus not only on efforts of registered lobbyists and executives of the organizations but to also include efforts of programmatic and administrative personnel, as well as individuals within the business development role. The agency is utilizing new, unconventional tools and approaches to auditing these costs and what it considers to be directly associated costs. To the extent that questioned costs are identified, it can be expected that accounting system deficiencies and CAS non-compliance reports will be issued, as applicable. While those contractors who appear to have received significant earmarks or otherwise have contracts under programs funded by the earmarks should prepare for the increased scrutiny of their lobbying efforts, all contractors should expect to receive increased scrutiny over their processes and controls related to identifying and segregating costs associated with unallowable lobbying activities.