DCAA/DCMA Team-Up to Collect Contractors’ Cash
From time to time, the top-notch legal practitioners at the firm Crowell & Moring publish “Government Contracts Bullet Points” to bring issues of interest to the attention of clients and potential clients. We recently received a Bullet Point publication entitled “Resolving Old Audit Issues” that caught our eye. The Crowell & Moring publication reported that DCAA and DCMA had announced a joint initiative to “’disposition’ approximately 400 ‘reportable audits’ and 300 Form 1s that are awaiting ACO action.” They provided a link to the joint DCAA/DCMA announcement, and we do the same for you.
The purpose of the initiative is to “aggressively target contractual opportunities to recover taxpayer dollars by dispositioning reportable audits, suspended/disallowed costs, cost accounting practice changes, and other cost allowability and allocability issues” so as to enable “the Department and contractors to move forward and focus on current contracting challenges.” The memo states that there is at least $295 million worth of actions currently “awaiting the Administrative Contracting Officer’s (ACOs) disposition.”
The memo outlines the resolution process as follows:
… each agency assumes its own roles and responsibilities. DCMA will identify and prioritize issues needed for disposition by contractor and establish milestones in consultation with DCAA. ACOs will assess each issue assigned and request DCAA assistance if additional accounting and financial advice is needed. In addition, ACOs will make decisions in consideration of the DCAA audit report, additional DCAA accounting and financial advice, and any other pertinent information available to them.
If you look closely at the resolution process, and the roles and responsibilities, you’ll see that DCMA has all the actions. Moreover, you’ll see that DCMA has to make its dispositions “in consideration of the DCAA audit report”—which seems very much like direction to the ACOs to “accept the DCAA audit report as if it had merit”. Well, after nearly three years of GAO and DOD IG criticism of the quality of DCAA audit reports, we don’t expect that guidance to result in many fair, reasonable and/or correct ACO decisions.
Further, it seems to us that there is a reason those issues haven’t been resolved before now. We think it’s because they are complex matters involving disputes—or potential disputes—between the three parties (DCAA, DCMA, and contractor). So instead of collecting cash, the issues are likely to be pushed into litigation. Which is a fine thing if you’re an attorney or expert witness, but not so fine if you were hoping to resolve the issues through the contract administration process.
As the attorneys at Crowell & Moring wrote—
Based on our experience, many of these unresolved audits and Form 1s are likely to raise issues that the ACO and the DCMA lawyers recognize to be without merit, but that the ACO has been unwilling to close because the ACO cannot or will not try to obtain approval to reject the DCAA position by going through the DCMA Board of Review process, so this initiative is likely to result either in the issuance of a large number of non-meritorious final decisions or politically dangerous decisions to overrule the DCAA audit position -- and bad final decisions may be more likely as a practical matter than disagreeing publicly with the auditors.
We completely agree. This Cost Recovery Initiative is Good News for DCAA, because the agency will look like it is saving the taxpayers money. And the Initiative is Good News for DCMA, because the agency will look like it is taking prompt action based on DCAA audit recommendations. And the Initiative is Good News for the DOD, because it will look like the two oversight organizations are cooperating and not locked in a “dysfunctional” relationship. And, as noted above, the Initiative is likely to prove to be a Good Thing for government contracts attorneys (such as those at Crowell & Moring).
But we predict it will be Bad News for DOD’s contractors, whose counter-factual arguments and red-faced finger-pointing at the inept DCAA audits will very likely avail them nothing—and they will be forced to either concede or litigate.
Misallocation or False Claim? Let’s Ask The Louis Berger Group!
In most commercial companies, cost accountants toil in relative obscurity. They use terms such as “indirect costs” and “S,G&A”—and their primary purpose seems to be to help management determine the true costs of production so as to support strategic decision-making. These cost accountants are not known for their charisma and, as a result, they work in the relative darkness of the “back office”—away from the spotlights of the executive offices. When management needs some information, they send an e-mail. Otherwise, cost accountants have only their Excel worksheets to keep them company.
However, the average work environment of government contract cost accountants makes the dim obscurity of their commercial kin seem like it’s illuminated by the flashbulbs of Hollywood paparazzi. The governmental cost accounting folks speak in an obscure, poorly-understood dialect only vaguely related to “normal” GAAP accounting, using arcane terms such as “allocability,” “homogeneity,” “directly associated unallowable costs,” and “beneficial or causal relationship”. Sometimes they refer to their Nineteen Commandments, which they call “Cost Accounting Standards” (aka “CAS”). At those times they talk about “disclosed or established cost accounting practices” and something called “consistency”. And they refer to their Bible (the CASB Disclosure Statement) as if it holds the answer to every question management (or government auditors) might possibly ask of them. They are tolerated (barely) because they do some (not well understood) things that, at the end of the day, create “indirect cost rates” or “booking and/or billing rates” that are used to generate invoices and to collect payments from Government customers. If not for their vaguely perceived utility, they obviously wouldn’t be invited to management decision-making meetings, ever.
But sometimes … sometimes those hard-working, low-profile government contract cost accountants can have a huge impact on the bottom-line. Today’s story is one of those times.
The Louis Berger Group, Inc. is “an internationally recognized consulting firm that provides engineering, architecture, program and construction management, environmental planning and science, and economic development services.” LBG is “one of 10 firms that make us the Berger Group Holdings.” Founded in 1953, the company now employs 5,000 and supports clients in diverse markets—including the Federal Government. In that latter capacity, LBG—
… supports more than 30 U.S. federal clients, including agencies within the Departments of State, Transportation, Defense, the Interior, Homeland Security, Energy, and Commerce, as well as the intelligence community. We are a prime contractor on dozens of federal indefinite quantity contracts (IQCs) and hold General Services Administration (GSA) schedules to provide management organizational and business improvement services (MOBIS), environmental advisory services, and professional engineering services (PES).
LBG’s projects include several “reconstruction & recovery” efforts in Southwest Asia, including Afghanistan and Iraq. For example, LBG supported the U.S. Corps. of Engineers at Al Asad Air Base in Al-Anbar, Iraq, by “providing and maintaining 155 megawatts of emergency power to control facilities critical to military operations in Iraq.” And the company has many similar projects for the US Government as well. Though details are sketchy because the company is privately owned, LBG reported that 2009 sales were $694 million.
LBG also reported on November 5, 2010, that it had reached a “global settlement” with the U.S. Department of Justice “related to an investigation of its cost allocating methodologies in place until 2008 for overseas U.S. federal contracts, as well as the misconduct of former employees.” As part of the settlement agreement, LBG will pay the U.S. Government $65 million (although other reports, including that of the DOJ, state the payments will total $69 million).
The company reported the following—
In 2006, prior to the company’s knowledge of the U.S. government’s investigation, LBG initiated its investigation into its accounting procedures. When the company identified issues with its allocations to the federal government for projects overseas, it began refunding the government in addition to implementing a companywide internal improvement program. In 2008, as a result of the investigation, LBG accelerated its reform program, to implement a series of improvements in policies, accounting procedures, internal controls, training and compliance oversight. In addition to hiring a new chief financial officer and controller, LBG has instituted a sweeping ethics and compliance training program for all of its employees, which will be monitored and updated by the company’s expanded compliance department. Additionally, individuals who were involved with this matter have been separated from the company.
According to this article, LBG was accused of filing false claims and overbilling its Government customers though manipulating its indirect cost allocations and thus inflating the resulting indirect cost rates used for government bidding and billing purposes. The article reported—
The former chief financial officer of LBG, Salvatore Pepe, and an ex-controller, Precy Pellettieri, pleaded guilty today in federal court in Newark to conspiring to defraud the United States. They admitted inflating bills to the U.S. government for the firm’s general overhead costs, including rent, legal bills and other expenses. Pepe also said he conspired with another company executive, whom he did not name.
Under the terms of their deal with prosecutors, Pelletieri, 54 … and Pepe, 58 … face between 30 and 37 months in prison.
N.J. company will pay $69M to U.S. government for over-billing in Iraq, Afghanistan contracts
How did LBG get to the point where it agreed to pay Uncle Sam $69 million? According to the article, a qui tam “whistleblower” was involved. The article reported—
Prosecutors began investigating the firm in 2006, when a former employee gave the government evidence against the company, according to McClatchy News Service. That employee, Harold Salomon, was a senior financial analyst and auditor for Louis Berger.
‘Today I can affirm to those who told me the Louis Berger Group can get away with anything that they were wrong,’ Salomon said. ‘To those who said, ‘If you cannot beat them, you have to join them,’ I say they were wrong, too.’
To wrap-up, we want to visit the website of The Huffington Post, where David Isenberg had a few things to say about the scandal. Here’s a link to his editorial/rant. Here are some selected bits from his piece—
Louis Berger's alleged overbilling, a practice that dates to at least the mid-1990s, swelled to tens of millions in lost tax dollars. In 2006, a former Louis Berger employee handed the government evidence against the company, two months before the U.S. Agency for International Development tapped Louis Berger to jointly oversee $1.4 billion in reconstruction contracts in Afghanistan.
Court documents reveal that the Justice Department has been negotiating a deal that would "aid in preserving the company's continuing eligibility to participate" in federal contracting in Afghanistan and elsewhere.
According to McClatchy Louis Berger is accused of manipulating overhead cost data and overhead rate proposals submitted to the U.S. government and several states including Massachusetts, Nevada and Virginia.
In some instances the company is accused of shifting overhead costs from private clients to federal and state contracts, where they were less likely to be noticed. …
While it is great the U.S. government has investigated and fined the Berger group it is important to note that this came about because of a whistleblower lawsuit under the False Claims Act and not because of the superb auditing capabilities of the feds.
That’s a great way to end this story – let’s all ask why DCAA didn’t catch the improper cost allocations, and why it took a qui tam “relator” to start the wheels of justice rolling. It is because DCAA can’t perform quality audits (as the GAO has alleged)? Or maybe because the agency lacks adequate resources (as its former Director testified)? Or perhaps the agency is so focused on battlefield audits in Southwest Asia it has de-prioritized audits in CONUS?
Obviously, we don’t have the answer(s). But we hope somebody with authority is trying to find them.
In the meantime, let’s give a shout-out to the underappreciated, over-worked government contract cost accountant, who works long hours to allocate allowable costs, to calculate indirect cost rates, and to support government audits. Ignore his (or her) warnings at your own peril, at The Louis Berger Group learned, to its chagrin.
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DOD Inspector General Criticizes DCAA (Again)
The Department of Defense Inspector General (DOD IG)—which has itself been criticized for “doing less with more” and “drifting away from its core mission of conducting contract audits”—blasted DCAA again in two recent audit reports.
On October 29, 2010, the DOD IG issued two reports that were critical of DOD’s premier audit agency. In the first report (D-2011-6-001), the DOD IG investigated hotline complaints of “harassment” in DCAA’s Western Region. Readers will recognize the Western Region as the original home of the 2008 audit quality issues raised by the GAO, as well as the home of allegations of supervisor and management harassment of an auditor who ended up testifying before Congress. Readers may also remember that DOD IG issued a report that substantiated many of the GAO’s audit quality findings.
So, nearly three years later, what did DOD IG have to say that had not yet been said? What dirty laundry had not been fully aired? In a nutshell, the DOD IG confirmed what everybody already knew: DCAA did harass the auditor. The report said—
We substantiated the allegations that DCAA Western Region management had harassed the complainant by unjustifiably lowering the complainant’s performance ratings, impeding her ability to comply with generally accepted government auditing standards, and creating a highly stressful environment which forced her to take a lower graded position.
The rest of the short (13 page) report simply elaborated on that finding. It noted that a February 2010 DCAA Internal Review team had also substantiated the harassment, but asserted that the Internal Review team did not properly reevaluate the auditor’s performance ratings. In addition, the DOD IG found that “DCAA Western Regional management failed to hold management officials accountable for their misconduct or revise any related procedures.”
Here are the related findings:
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We substantiated the allegation that Western Region management used the performance appraisal process as a means of harassing the complainant. … The appraisal ratings and promotion potential scores given to the complainant after she transferred to the Western Region were inaccurate, unfair, and lacked credibility.
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We substantiated the overarching allegation that management impeded the complainant’s ability to comply with Generally Accepted Government Auditing Standards (GAGAS), with one exception related to technical guidance requests. Management did impede compliance with GAGAS by imposing unreasonable time constraints and excessive emphasis on metrics. In doing so, Western Region management hindered the complainant’s ability to perform a quality audit. The Internal Review report cited certain audits where management overemphasized metrics and imposed unreasonable time constraints, while appearing to ignore audit quality. We also agree with Internal Review’s conclusion that the supervisor’s flawed process for requesting budget hour increases could impact GAGAS by impeding the complainant’s ability to perform quality audits.
As we have previously reported, it is likely that justice has already been meted out to at least one person responsible for the issues substantiated by the DOD IG.
So let’s look at the second DOD IG report (D-2011-6-002).
The second DOD IG report is a “quality control review” of the “single audit” performed by the “Big 4” accounting firm, Deloitte & Touche LLP (Deloitte), and the DCAA on The Aerospace Corporation, under the auspices of OMB Circular A-133. The Aerospace Corporation is a not-for-profit Federally Funded Research and Development Center (FFRDC) and, as such, is essentially an adjunct of the U.S. Air Force. As the DOD IG report noted: “The Deloitte & Touche office in Los Angeles, California performed the audit of the financial statements. Deloitte & Touche and the DCAA South Bay Branch Office in Gardena, Califomia performed a coordinated audit of the research and development program cluster.” (Note that the South Bay Branch Office is a part of DCAA’s Western Region.)
The DOD IG quality control review report was generally complimentary of the work performed by Deloitte. It stated that Deloitte’s audit of the financial statements and the R&D program cluster “generally met auditing standards and Circular A-133 requirements.” The report was far less complimentary of DCAA’s audit efforts. It said—
DCAA did not comply with Circular A-133 reporting requirements. … We also identified deficiencies in the performance of fraud risk assessment procedures, information technology internal control testing and working paper documentation that need to be corrected in future audits.
Oh, but there’s more to be said. And the DOD IG said it. And we quote it for your edification.
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DCAA did not perform sufficient fraud risk assessment procedures during the planning and performance of the audit. As documented in the audit working papers, the evaluation of the fraud indicators was based solely on information in the permanent files and auditor experience with Aerospace. Based on this evaluation, the auditor concluded that there were no indications of potential fraud which would require additional audit procedures.
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DCAA did not complete the testing of key information technology controls as planned and the documentation did not provide a clear understanding of the audit work performed or the procedures relied on. Auditing standards require auditors to obtain an understanding of information technology controls that are relevant to planning the audit and, when there is an expectation that the auditor will rely on those controls, require the auditor to perform tests of the controls to determine their operating effectiveness.
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DCAA did not adequately document the internal controls tested for the cash management and special tests and provisions requirements, the criteria used for activities allowed or unallowed and allowable costs/cost principles compliance testing, and the coordination of the scope of audit work performed by the DCAA Field Detachment office. In addition, the audit file contained a voluminous amount of work papers, many of which simply duplicated the same information. Although we acknowledge that the auditors believed that they were providing a good audit trail, we found the format and content of the working papers lacked clarity and contributed to instances of inconsistencies between working papers and the lack of required information in other working papers.
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The DCAA auditors did not adequately document the review of compliance for the activities allowed or unallowed and allowable costs/cost principles requirements. Specifically, the documentation did not identify the specific cost principle criteria used to review costs for allowability; did not provide the basis for the judgment that internal control exceptions noted during floorchecks were not considered significant; and did not document the procedures performed and the results of those procedures to verify the existence of employees not present during the floorchecks. In addition, the auditors did not document that they verified the timecard authorizations within the electronic timekeeping system.
But before we move on, we want to note something amazing from the DOD IG report. It relates to an instance of fraud that was disclosed by The Aerospace Corporation to the DCAA during their audit. As the DOD IG report explained—
DCAA was informed by the Director of Internal Audit of a disclosed fraud involving a full-time employee who worked for another government contractor while employed by Aerospace for a period of several years. There was no indication in the audit documentation that DCAA considered designing and performing procedures in response to this identified risk of labor mischarging as required under auditing standards. We discussed this issue with the audit supervisor and were advised that the auditors determined the identified fraud to be an isolated incident not indicative of a systemic internal control risk and therefore, they did not believe that additional effort was warranted. However, there was no documented evidence to support the DCAA conclusion.
So, apparently, The Aerospace Corporation employed an employee on a full-time basis, who also worked “for another government contractor” on a full-time basis—“for a period of several years”. YES! That’s how to do it—pick up two salaries at the same time! We can see it now ….
EMPLOYEE ARRIVES AT WORK ON TIME AT 8:00 AM. S/he attends meetings, replies to e-mails, and approves reports until lunch time.
EMPLOYEE TO ADMINISTRATIVE ASSISTANT: Jane, I’ve got meetings across the street all afternoon. I’ll see you tomorrow. I’ll have my BlackBerry if anybody needs to reach me right away.
ADMINISTRATIVE ASSISTANT: See you tomorrow morning!
EMPLOYEE ARRIVES AT WORK AT 1:00 PM. S/he attends meetings, replies to e-mails, and approves reports until dinner.
EMPLOYEE TO ADMINSTRATIVE ASSISTANT: Mark, I’ve got meetings in the other building all morning tomorrow. I’ll be in after lunch. I’ve got my BlackBerry if anybody needs to reach me right away.
ADMINISTRATIVE ASSISTANT: See you tomorrow afternoon!
[REPEAT FOR SEVERAL YEARS.]
Seriously, we’ve heard of this before, but we always discounted it as being just another urban myth. We were flabbergasted to see the “myth” confirmed in writing by the DOD Inspector General. Wow, is all we can say.
To wrap this up, let’s note that DCAA Director Pat Fitzgerald has been in his position for a full year now. He has made changes to the management of the Western Region. Clearly, he and his Western Region management have much more work ahead of them, as they struggle to issue high-quality audit reports. Importantly, as Congress and the FAR Councils try to implement tighter controls on contractors’ “business systems,” they need to realize that the level of audit quality necessary to properly evaluate those business systems’ controls simply isn’t there yet—as evidenced by these DOD IG reports.
Old Dogs and New Tricks: Government Employees Commit Fraud—And Worse!
File these two stories under dumb and dumber. What were they thinking?
First, let’s talk about Tyrone Ellis, age 56, of Columbus, Georgia. Tyrone was a “former civilian employee of the Department of Defense” who was assigned to Camp Humphreys in the Republic of Korea (RoK) during 2005 and 2006. While there, Tyrone worked as “an Assistant Army Emergency Relief Officer,” where he administered Army Emergency Relief (AER) funds.
What are AER funds? According to the DOJ press release—
The AER is a private, non-profit organization that serves as the emergency financial assistance organization for the U.S. Army. AER’s operations are financed by voluntary contributions from active and retired soldiers during an annual fund campaign, as well as by unsolicited contributions, repayment of outstanding loans and income from reserve funds.
In his role as Assistant AER Officer, “Ellis was tasked with providing AER loans and grants to service members and their families in financial need.” But according to the indictment, Tyrone apparently felt some financial need himself. The indictment alleged that Tyrone—
… approved grants for at least a dozen soldiers in amounts larger than they needed, and that he requested and received thousands of dollars back from the grant recipients, which he converted to his own use. The indictment also alleges that Ellis conspired with another individual to convert AER funds in the same manner. In addition, Ellis is charged with making false statements to investigators when questioned about the allegations.
Tyrone was arrested and charged with “one count of conspiracy, 10 counts of conversion and one count of making a false statement.” The press release noted that, if convicted, Tyrone will be looking at some serious penalties. It stated—
Ellis faces up to five years in prison on the conspiracy charge; 10 years in prison for each felony count of conversion; one year in prison for the misdemeanor charges of conversion; and five years in prison on the charge of making a false statement. He also faces a $250,000 fine for each count of conspiracy, felony conversation and making a false statement. He faces a $100,000 fine on the misdemeanor charges of conversion, as well as terms of supervised release following his prison term on all charged counts.
Not that he’ll do all that time, but we calculate he’s facing 111 years in prison. But remember, he allegedly took for himself funds contributed by active and retired soldiers, and designated for soldiers with dire need. So we hope he spends quite a bit of time in confinement, if convicted.
You think that was bad? You ain’t seen nothing yet.
Next on the hit parade is the story of three unwise men: Richard Paul, Andrew Kaufman, and Nicholas Bickle. Nick Bickle is (for a bit longer) a U.S. Navy SEAL, an “active-duty special warfare operator 1st class”. In a somewhat unrelated note, SEAL Bickle apparently “worked as a consultant on the Hollywood movie, ‘Transformers 3’.” (Should that have been considered a red flag for aberrant SEAL behavior?)
According to this Associated Press story, the trio was arrested on November 3, 2010, and accused of conspiracy to “smuggle and sell weapons”. And not just any weapons, mind you. As the article reported—
Bickle is accused in a criminal complaint of smuggling 80 AK-47 weapons from Iraq or Afghanistan, including factory-made 7.62 mm Iraqi machine guns that would be difficult or impossible to trace. Other weapons included Ruger handguns of the type used by U.S. military police officers.
Oh, but that’s not all. Not by a long-shot.
The AP story noted that, “grenades and night-vision goggles” were also found in the home of Mr. Paul. But that’s not all. The AP story reported that—
Smith said outside court that federal agents expected to find weapons, but were surprised to find five pounds of C-4 plastic explosive, blasting cap detonators and other military items at Paul's home in Colorado.
Okay, let’s repeat that last part. FIVE POUNDS OF C-4 and the means to detonate it. As the article noted the BATF representative “declined to elaborate about the destructive power of the explosives”. Yes, of course.
The AP article concluded—
Smith said Bickle, his close friend, Paul, in Colorado, and their associate Kaufman in Nevada sold machine guns for $1,300 to $2,400 each, and handguns for $300 to an undercover federal agent who told them they would be shipped to Mexico.
The complaint accuses the trio of conspiring to smuggle and sell 18 weapons and 14 other firearms since June to an undercover federal agent in Las Vegas and Colorado. The single conspiracy charge carries a possible sentence of up to five years in prison and a $250,000 fine.
The prosecutor said the group could have reaped hundreds of thousands of dollars selling arms over the last year.
Smith told Foley that prosecutors expect to seek an indictment in Las Vegas on charges including distribution of explosive materials, arms smuggling and illegal firearms dealing. He said the explosives charge carries a possible sentence of 20 years in federal prison.
Okay, so what have we learned here?
First, we’ve posted many articles about misdeeds of employees of the Federal government. We’ve written (and ranted) about theft of funds and theft of fuel, about bribes and corruption and conflicts of interest. The first story falls into that category, albeit in a special place called “especially heinous”.
But as far as we can tell, this is the first article dealing with outright theft of military grade firearms, explosives and other equipment. While we’ve mentioned lax internal controls in the warzone(s) before, this one kind of takes the cake, doesn’t it? How the heck does five pounds of C-4 simply go missing?
So these are kind of new tricks (hence the title). Dumb-guy No. 1 (allegedly) created a nice little scheme, taking advantage of needy soldiers and their families. As a result, some of the donated funds ended-up lining his pocket. Dumb-guy(s) Nos. 2 through 4 (allegedly) executed the first part of their scheme nicely, carting away lots of battlefield souvenirs and getting them into the States. But they (allegedly) made the mistake of selling the souvenirs to the wrong people and, as a result, ended up in jail awaiting trial.
We’re glad these miscreants got caught. But we can’t help wishing better controls had been in place to keep the (allegedly) corrupt actions from happening in the first place.
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