The 2018 National Defense Authorization Act—DCAA Stuff
We don’t like to talk about pending legislation very much because things tend to change, and there’s no reason to get all excited about certain NDAA provisions until they become finalized into a public law. Thus, while others were getting upset about this thing or getting excited about that thing, we were laying back (as we do every year), waiting for Bob Antonio to publish his annual analysis of the final language.
Frankly, we count on Bob and his annual analysis, which is published on his essential WIFCON site. It’s a critical resource and we’d be lost at sea without it.
Obviously we care a lot about carefully scrutinizing the final NDAA. But why should you care about it? Why should you care about any NDAA provision? The answer to those questions is simple. If you want to know what Congress has directed DoD components (including the DAR Council) to accomplish in the next government fiscal year, you need to read the directions being provided to them. Or, to put it another way, if you wait for the DAR Council to issue a final rule, you are going to be surprised and you will have to scramble to any implement necessary changes to comply with that final rule. If you wait for the DAR Council to issue proposed rule-making, you’ll have some more runway to make the changes—but it won’t be much. But if you read the NDAA and see what proposed rule-making the DAR Council will be adding to its agenda of open cases, then you won’t be surprised and you’ll have plenty of runway to be ready for any new compliance requirements.
That’s why you should care.
As always, we are not going to talk about every single little thing. We’re going to talk about stuff that interests us. You may want to do your own research, using the link in the first paragraph, above. Today’s article is going to focus solely on DCAA stuff.
DCAA Stuff
Last year’s NDAA (Public Law 114-328) contained a requirement at Section 820 that would have permitted contractors to hire an independent auditor to audit their indirect costs for “allowability, measurement, assignment to accounting periods, and allocation.” If a contractor obtained such a report, then “the Defense Contract Audit Agency may audit direct costs of Department of Defense cost contracts and shall rely on commercial audits of indirect costs without performing additional audits, except that in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, the Defense Contract Audit Agency may audit both direct and indirect costs.” (Emphasis added.)
That was an interesting notion, to say the least. And we’re not going to surprise you when we tell you that DCAA didn’t like it one bit. Director Bales told Congress that her audit agency was going to ignore that statutory requirement, and that she was confident Congress would repeal it in the next year’s NDAA.
Indeed, that is what happened.
Section 804 of the 2018 NDAA repealed that provision.
However, Section 803 of the 2018 NDAA added another, similar provision. It requires that DCAA change the manner in which it performs “incurred cost audits” (i.e., audits of contractors’ annual submissions of final billing rate proposals) and, if the changes don’t get the current backlog of unaudited proposals down to an acceptable size, then “the Secretary of Defense shall use qualified private auditors to perform a sufficient number of incurred cost audits of contracts of the Department of Defense.”
Early legislative provisions would have mandated that certain percentages of the proposal backlog be audited by “qualified private auditors” (QPAs) and, at one point, it looked like a contracting officer was going to have to discretion to compete DCAA against QPAs to select the auditor who would deliver the best audit value for the lowest price—but that exciting change was negotiated away during conference.
What does Section 803 require?
First, when performing incurred cost audits DCAA is to use “commercially accepted standards of risk and materiality.” The audit agency has until October 1, 2020, to implement conforming audit procedures. (This was a negotiated compromise from early language, which would have specified exact materiality thresholds to be used by DCAA.)
Second, DCAA must “eliminate, by October 1, 2020, any backlog of incurred cost audits of the Defense Contract Audit Agency.” (Emphasis added.) Currently, DCAA maintains the fiction that a two-year backlog of such audits is acceptable. This provision blows that up, confirming that no backlog is acceptable. To reinforce the issue, the NDAA requires DCAA to “ensure that incurred cost audits are completed not later than one year after the date of receipt of a qualified incurred cost submission.” In other words, once a contractor proposal is determined to be adequate, then DCAA has one year—12 months—to complete its audit. Another provision within Section 803 gives DCAA 60 days (after receipt) to perform its adequacy review.
Moreover, “Not later than October 1, 2020, and subject to paragraph (5), if audit findings are not issued within one year after the date of receipt of a qualified incurred cost submission, the audit shall be considered to be complete and no additional audit work shall be conducted.” (Emphasis added.) Paragraph (5) is the loophole: “The Under Secretary of Defense (Comptroller) may waive the requirements of paragraph (4) on a case-by-case basis if the Director of the Defense Contract Audit Agency submits a written request.”
DCAA began performing “multi-year” audits in the past couple of years, to leverage efficiencies. Director Bales testified that the audit agency realized a 40 percent efficiency savings from that approach. Contractors weren’t so sanguine about these audits and expressed concerns during their testimony. Section 803 limits DCAA’s use of multi-year audits. DCAA may only use multi-year audits when it cannot meet the 12-month completion requirement, or when a contractor requests them and provides a justification to the Defense Comptroller.
(Speaking of loopholes, that’s an interesting one—right? DCAA must complete ICS audits in 12 months but if they don’t, then they can use multi-year audits to catch up. Given that it currently takes DCAA nearly three years to perform an audit, it very much seems as if multi-year audits will continue to be the norm, despite contractor reservations about their use. Further that loophole seems to contradict the strict requirement found elsewhere in Section 803 that DCAA must complete its ICS audits in 12 months or else “no additional audit work shall be conducted.”)
Let’s summarize here:
-
DCAA must perform an adequacy review on contractors’ proposals to establish final billing rates within 60 days from receipt. No exceptions.
-
Once DCAA determines that the proposal is adequate, it must perform its audit within 12 months. No timeframe was given for issuance of a report, but the audit work must be completed within 12 months.
-
If DCAA doesn’t complete its ICS audit in 12 months, it may use multi-year audits to catch up. (It’s really not clear how, since additional audit work is prohibited. Perhaps Congress intended that multi-year audits may be used on >future> ICS audits at that contractor.)
But wait. There’s more.
The DoD must begin using QPAs to perform incurred cost audits. Therefore the ICS audit will no longer be the exclusive domain of DCAA. The Secretary of Defense must submit to Congress a plan to bring them on board by not later than October 1, 2018—which is quite quick by government standards. Further, by April 1, 2019, at least one contract or task order must have been issued to two or more QPAs for performance of ICS audits. “The Secretary of Defense shall consider the results of an incurred cost audit performed under this section without regard to whether the Defense Contract Audit Agency or a qualified private auditor performed the audit [and] the contracting officer for a contract that is the subject of an incurred cost audit shall have the sole discretion to determine what action should be taken based on an audit finding on direct costs of the contract.”
There are certain specific requirements associated with QPAs but, as Apogee Consulting, Inc., is not a QPA and we are not going to be hiring QPAs, we’re going to skip them. If you are interested in the details of how QPAs will be used to augment DCAA audit resources, feel free to visit WIFCON and do your own research.
But there’s more. We’re not done yet.
Recently we wrote about the 2017 DCAA quality system external peer review, performed by the DoD Office of Inspector General (OIG). We were surprised that DCAA passed its audit, given the number of findings. (Nearly 40 percent of all selected audit reports had deficiencies.) At the end of our article, we called for another entity to perform that external peer review, given that there was a reasonable perception of impaired independence and objectivity when a sister DoD entity performed it.
Well, the 2018 NDAA addresses our concern. Section 803 requires that—
Effective October 1, 2022, the Defense Contract Audit Agency may issue unqualified audit findings for an incurred cost audit only if the Defense Contract Audit Agency is peer reviewed by a commercial auditor and passes such peer review. Such peer review shall be conducted in accordance with the peer review requirements of generally accepted government auditing standards, including the requirements related to frequency of peer reviews, and shall be deemed to meet the requirements of the Defense Contract Audit Agency for a peer review under such standards. Not later than October 1, 2019, the Secretary of Defense shall provide to the Committees on Armed Services of the Senate and the House of Representatives an update on the process of securing a commercial auditor to perform the peer review ….
Oh, but there’s more.
Circling back to the start of this article, we noted that early NDAA language would have mandated certain numeric materiality standards. DCAA really didn’t like that, since it would have mandated by statute when costs were material in amount and when they were immaterial in amount. Conference negotiation softened the initial language significantly. Now Section 803 requires—
Not later than October 1, 2020, the Department of Defense shall implement numeric materiality standards for incurred cost audits to be used by auditors that are consistent with commercially accepted standards of risk and materiality. [and] Not later than October 1, 2019, the Secretary of Defense shall submit to the congressional defense committees a report containing proposed numeric materiality standards required under paragraph (1). In developing such standards, the Secretary shall consult with commercial auditors that conduct incurred cost audits, the advisory panel authorized under section 809 of the National Defense Authorization Act for Fiscal Year 2016 (Public Law 114-92; 129 Stat. 889), and other governmental and nongovernmental entities with relevant expertise.
Thus, while Congress is forebearing from imposing exact numerical materiality standards on DCAA, it is requiring DCAA to propose exact numerical materiality standards to Congress, after consultation with the Section 809 Panel and “other … entities with relevant expertise.”
It looks like exciting times are ahead for DCAA and its auditors!
In the meantime, there’s plenty more to discuss in the 2018 NDAA, and we’ll be getting to it in future articles.
Funding Limits Matter
We recently wrote about the Civilian Board of Contract Appeals decision in the matter of CH2M-WG Idaho, LLC (CWI’s) appeal of a Department of Energy contracting officer decision regarding G&A expense allocation issues with respect to the Idaho Cleanup Project. It was a long article—about three times as long as the average blog article on this site. Still, there was more we could have written about. As we noted at the time, there were three issues at stake, but we were writing only about two of them.
This is the article about the third issue.
This article is about the Integrated Waste Treatment Unit (IWTU). The issue is interesting because it involves “color of money” and related funding issues. For those who don’t know, “color of money” refers to the various categories of appropriated funding, each with a unique purpose and usage constraints. For example, each year DoD receives funding from Congress, but that funding is broken up into roughly 100 different “colors of money” that are differentiated by branch of military service, purpose, and duration (i.e., how long the funding is available for obligation).
Congress has passed public laws that control how agencies of the Executive Branch are allowed to obligate the appropriated funding. For example, the Bona Fide Needs statute requires that Congressional appropriations may be used only for their intended purposes and that appropriations made for a definite period of time may be used only for expenses incurred during that time.
It’s complicated. There’s a whole volume of rules and guidance, published by the Government Accountability Office (GAO), and known as the Red Book, that deals with the topic. Contractors often roll their eyes at the government’s internal bookkeeping challenges, but it matters quite a bit to government employees, such as contracting officers and finance offices—and auditors. It also matters to those contractors that operate Federal facilities, such as sites within the Nuclear Complex.
We found a link to a 20-year old GAO report, summarized as follows—
The Department of Energy (DOE) Inspector General asked whether DOE could use no-year departmental administration appropriations for official reception and representation (R&R) activities only during the first year of their availability or whether DOE could use unobligated amounts of R&R authority for activities after the end of the fiscal year (FY) of the act appropriating the no-year funds. GAO held that DOE: (1) R&R authority was not time limited to the first year of the departmental administration appropriation; and (2) could use any unused R&R authority in subsequent years to the extent that the cumulative unobligated balances of past year appropriations for departmental administration that were carried over each year were equal to or exceeded the cumulative unused authority for R&R activities.
As we said: it’s complicated.
With that as background, let’s look at the CBCA’s decision regarding CWI’s appeal of a DOE contracting officer’s final decision, which involved disallowance of IWTU costs that CWI had transferred from one color of money to another. If you don’t recall the details of the CWI contract, please refresh your memory by reading our prior article (link in first sentence) or by going to the CBCA website and reading the decision (link in the prior article).
CWI’s contract prescribed certain funding categories (colors of money) as well as the process for making a determination regarding which color of money was appropriate to use for which expenditures. There were three basic funding categories: Operations, Capital Construction, and Capital Equipment. The distinctions were similar to how a contractor might describe the distinctions between capitalization and expense. Operations funds could not be used to create new assets for DOE. Capital Construction was used to fund all costs (including engineering, design, construction, inspection, and project management) of significant changes or additions to real property. Capital Equipment was used to fund the acquisition of all stand-alone personal property items that were not construction in nature. In order to fit into the Capital Equipment category, the items must have been valued at $50,000 or more, and have a useful life of at least two years; otherwise, they were to be funded with Operations money.
CWI was tasked with constructing the IWTU but, as the work progressed, it became evident that DOE may not have provided sufficient funding. As Judge Sheridan wrote for the Board—
The IWTU construction was funded though a capital project line item of $533,393,000. … During performance of the contract, CWI incurred costs associated with the IWTU construction and invoiced those costs to DOE against the capital project line item for the IWTU construction. … CWI initially charged three cost items to the capital project line item for the IWTU construction: (1) costs for conducting pilot plant testing of a mineralized waste form; (2) costs for constructing a waste transfer line and tie-in and (3) costs for portable restrooms. CWI was reimbursed for those costs out of the IWTU capital line item appropriation. … In late 2009, forecasts for the IWTU construction showed that there was a risk of exceeding the capital project line item ceiling for the project. In November 2009, DOE requested that CWI review the costs that it had previously charged to the capital project line item in an effort to keep the IWTU costs below the congressional line item limit for the project. Once the funding limit was reached, the parties understood that DOE would have to ask Congress for additional funding, and neither CWI nor DOE wanted the IWTU project to be delayed or stopped while DOE’s funding request was pending.
Importantly, this was not solely a CWI tasking. CWI and DOE “worked together” to identify costs that could be transferred from the IWTU construction line item to other areas where the funding constraints weren’t as tight. They held joint “brainstorming sessions” devoted to identifying such costs. It was important to identify cost reductions, as DOE kept emphasizing—and CWI was directed to be “creative” in finding costs to transfer off the IWTU construction line item. Eventually CWI identified eight items for cost transfer. Three of them would turn out to be controversial: “(1) the mineralization study ($4 million), (2) the waste transfer line and tie-in ($3.8 million), and (3) the portable restroom facilities $107,000).” In total, $7.9 million in cost transfers would become controversial and form the basis of the dispute between CWI and DOE.
For its part, CWI hired outside consultants, including legal counsel to review the eight cost transfer items. DOE was happy with the outcome, and the contracting officer told CWI (in writing) that its efforts “to validate and support the funding determinations are commendable.” The contracting officer told CWI—
Based on the above, DOE-ID supports the conclusions reached by CWI that its actions are proper and in compliance with Appropriations Laws and [CAS principles]. Should the CWI internal audit that is planned for June 2011 reveal anything to the contrary, this matter must be brought to the attention of DOE-ID, and may be reconsidered. Otherwise, this matter is considered closed, pending the receipt of a final close-out audit.
The aforementioned internal audit didn’t raise any issues; however, other DOE entities began to raise their concerns, despite the fact that the contracting officer—the person with the certificate of appointment (warrant)—had already ruled on the matter. This situation is similar to the G&A expense allocation issue, in that DOE entities that were not part of local operations thought their opinion should matter. In some respects, that was a good thing, because it provided checks and balances on local activities that might be overzealous in making decisions. On the other hand, it meant that local decision-making could not be trusted, since “other opinions” might surface after a matter had been negotiated and seemingly closed. It certainly put the contractor in a difficult situation, and we imagine that the local contracting officer didn’t care for it very much either.
On August 8, 2013, the DOE Office of Inspector General (OIG) issued a report that found three of the IWTU cost transfers were problematic, and should not have taken place. When DOE issued its final fee determination—
CO Mitchell-Williams reclassified the $7.9 million associated with the three IWTU cost transfers in issue, relying in part on the DOE-OIG’s report concluding that the three cost transfers were improper because they were direct costs of the IWTU construction phase. By reclassifying the IWTU costs as costs applicable to the construction phase of the IWTU project, CWI was unable to collect the costs in excess of the cap on the IWTU project ….
In other words, to the extent that the reversal of the cost transfers meant that CWI had overrun its funding for the IWTU project, those costs became unallowable and non-reimbursable.
But what about the fact that the overall contract was cost-type? we hear you asking. Doesn’t matter. A contractor cannot exceed authorized funding. In this case, the parties agreed to a “cost cap” on the IWTU construction line item, which essentially converted that cost-plus-incentive-fee work to firm, fixed-price. And now CWI had exceeded that FFP amount.
CWI argued that it was unfair for DOE to accept the transfers and then turn-around—after contract performance when CWI would have no chance to find cost savings in other areas—and reject them. CWI asserted that “DOE breached the implied covenant of good faith and fair dealing by improperly reclassifying and disallowing the IWTU cost transfers which were consistent with applicable financial requirements supporting CWI’s classification of the costs.”
The Board didn’t agree.
The decision made much of the contracting officer’s language (quoted above) about “pending receipt of a final close-out audit.” In other words, DOE was reserving the right to change its mind at a later date. Further, when CWI executed the contract mod establishing the IWTU cost cap, Judge Sheridan noted that “there is no indication in the record that CWI wished to make modification 163 in any way contingent on the reclassified cost transfers remaining intact.” (We suspect that was because they took the contracting officer’s word that the matter was “closed.”)
In the words of Judge Sheridan:
There is no compelling reason for us to ignore the plain language of modification 163 and revisit the cap agreed to for the IWTU project. CWI’s claim for $7,904,961 associated with certain cost transfers is denied.
In order to reach that conclusion, we believe that the Board needed to ignore the fact that DOE’s hands were unclean. They had to overlook the pressure being applied to CWI, including the direction to get “creative” at finding costs to transfer out of the IWTU construction project. They had to overlook the contracting officer’s decision that the matter was “closed” and focus on the words “pending receipt of a close-out audit.” Because the Board didn’t address that issue substantively, DOE was able to get nearly $8 million worth of IWTU construction for free.
Quite a nice windfall.
But the lesson here is manifest. Contractors must resist pressure from their government customers to cut corners and to get creative in order to live within budgets. Remember, those budgets were created by the government customers and they—and only they—are responsible for living within them. Any contractor that caves into pressure and transfers (or reports) costs in a manner that it knows is inaccurate is running a risk, a risk that it may end up holding the bag while its government customers shrug their shoulders and blame the contractor for following their directions.
|
DCAA Passes Peer Review
Regular reader EZ-Eric sent us an email recently, incensed that DCAA had passed another external peer review. The DoD OIG posted the results of its peer review here. EZ-Eric called the report and the peer review process a “complete sham.”
Would you like to know more?
According to the report, the objective of the review was to evaluate DCAA’s system of quality control. The report was intended to express an opinion on “the design of the system of quality and DCAA’s compliance with standards and requirements” of that system of quality.
What’s a system of quality? According to the report:
A system of quality control encompasses DCAA’s organizational structure and policies adopted and procedures established to provide it with reasonable assurance of conforming to Government Auditing Standards (GAS). The elements of quality control are described in GAS. DCAA is responsible for establishing and maintaining a system of quality control that is designed to provide it with reasonable assurance that the organization and its personnel comply with professional standards and applicable legal and regulatory requirements in all material respects.
The DoD OIG conducted the assessment in accordance with GAS and CIGIE’s Guide to Conducting Peer Reviews. (CIGIE is the exclusive club comprised of 73 Inspectors General from the Federal agencies and departments and independent components. Google it, if you’d like to know more.) Fundamentally, that means that the IG auditors conducted their review with independence and objectivity, and obtained sufficient evidence to support conclusions reached.
To obtain the evidence, the IG auditors selected 67 audits, all issued before June 30, 2016, for testing. The 67 audits were selected from a cross-section of DCAA FAOs across the country, including from Field Detachment. (If you don’t know what an FAO is or what Field Detachment is, then you should probably do some more research before reading the rest of this article.) The selected audit reports covered a variety of assignments, from Incurred Cost (audits of annual proposals to establish final billing rates) to Forward Pricing Rates to proposals to CAS Disclosure Statements, and more. A couple Pre-Award Accounting System reviews were selected, but we didn’t see any post-award Accounting System reviews, nor did we see any MMAS or Estimating System reviews in the selection. That was a curious omission, since inadequate Business System reviews have supported findings of audit quality system failures in the past.
The report contains a handy chart showing details of the 67 selected audit reports, including which FAO performed the audit, the assignment objective, and even the exact assignment number. In addition, the report has another table (Enclosure 2) showing exactly which of the 67 selected audit reports had deficiencies.
There were 25 of them.
In other words, 25 of the 67 selected audit reports had deficiencies. That’s 37 percent. More than one-third. Or, to put it more bluntly, nearly four out of every 10 reports selected for review were found to have one (or more!) deficiencies.
That’s not good.
In fairness, not all deficiencies have equal significance. Some deficiencies are not a big deal. Others are indeed kind of a big deal. The IG report treated every deficiency equally, But—and this is critical!—no deficiency was found to be a significant deficiency.
That’s right. No deficiency was found to rise to the level of “significant deficiency”—the definition of which the OIG was careful to omit from its report, despite quoting the definition of “deficiency” in full. Yes, there were many deficiencies found, but none were deemed to be significant.
Which is why DCAA passed its audit.
Looking at the deficiencies found, three types scream “significance” to us.
Deficiency 1: DCAA did not obtain sufficient evidence to support its audit conclusions. As the IG reported—
GAS 2.09(a) states that an audit consists of acquiring sufficient, appropriate evidence to express an opinion on whether the subject matter is based on the criteria in all material respects or the assertion is presented, in all material respects, based on the criteria. For 18 of 67 audits (27 percent) we selected for review, we found one or more instances in which DCAA auditors did not obtain sufficient, appropriate evidence to support an opinion expressed in the report. We found this deficiency in all six DCAA regions. Among the 18 audits, we found a total of 25 instances when the auditors did not obtain sufficient, appropriate evidence to support DCAA’s opinion that contractor proposed costs were reasonable, allowable, or compliant with contract terms.
Well, gosh. More than a quarter of all selected reports lacked sufficient evidence to support audit conclusions. That seems like kind of a big deal to us. Yet, the IG, using professional judgment, did not deem that deficiency to be a significant deficiency.
Moreover, as the IG itself noted in the report, this is a repeat finding from the external peer review it conducted in 2014. The IG stated that DCAA had taken corrective actions in response to the 2014 finding, but the corrective actions had proven ineffective and “based on the results of our current review, DCAA still needs to consider additional steps to ensure that auditors gather sufficient evidence to support reported opinions.”
If this were a contractor business system review and there had been a repeat finding, we all know what the result would be.
To put this deficiency into perspective, in 2008 the GAO and the DoD OIG both found that DCAA’s audits lacked sufficient evidence to support conclusions and opinions. It was a core finding and the subject of Senate hearings. And it led to DCAA’s quality system lacking an external peer review approval for several years thereafter.
Nine years later, apparently nothing has changed.
Yet, DCAA passed the 2017 quality system external peer review.
Deficiency 2: DCAA did not report on pertinent information or scope restrictions. (AKA “reporting” deficiency.) As the IG reported—
GAS 5.04 requires auditors to communicate pertinent information to individuals requesting the audit. In addition, as discussed in AT 101.73 and .74, restrictions or limitations on the scope of an audit may prevent the auditor from issuing an unqualified opinion. When the reported opinion is qualified or disclaimed, the reasons for doing so should be described in the audit report. For 8 of 67 audits (12 percent), DCAA did not appropriately communicate pertinent information or important limitations to the contracting officer. We found this deficiency in five of the six DCAA regions. … The findings demonstrate a pattern and pervasiveness of issues the reflect the need for improving the reliability of DCAA audit reports.
The IG auditors stated that the root cause of this deficiency was that DCAA auditors were not following their own audit procedures. Although disagreeing with the IG audit finding(s), DCAA agreed to update its procedures and to give incoming auditors extra training in this area. (Apparently the current auditors, the ones not following procedures, were expected to do the right thing without any additional corrective actions.) The OIG considered the matter “closed”—meaning that DCAA’s corrective action was accepted.
Thus, DCAA passed its 2017 quality system external peer review.
Deficiency 3: DCAA did not adequately document the procedures performed. As the IG reported—
GAS 5.16a requires that auditors prepare audit documentation in sufficient detail to enable an experienced auditor, having no previous connection to the examination engagement, to understand from the documentation the nature, timing, extent, and results of procedures performed. In 9 of the 67 audits (13 percent), the documentation taken as a whole was insufficient to understand the nature, timing, extent, or results of work performed by the DCAA auditor. We had to hold extensive discussions with the audit staff to understand the procedures performed and why those procedures accomplished the audit objective. We found this deficiency in three of the six DCAA regions. Each of the nine audits had four or more documentation inadequacies.
Well, this is a problem. If you don’t tell people what you did (procedures performed) and you don’t tell them what you didn’t do (reporting), then they might assume your audit conclusions and opinions were valid, even if you didn’t have sufficient evidence (based on procedures performed/not performed) to support those conclusions and opinions.
Seems fairly significant to us.
What’s going on here in this particular deficiency? According to the IG—
Our review did not disclose any inadequacies with DCAA policies and procedures related to documenting the work performed in accordance with GAS. However, the auditors did not comply with established DCAA procedures. Given the number and significance of documentation deficiencies we found (including additional, less significant documentation issues addressed in our Letter of Comment dated November 17, 2017), DCAA should assess the effectiveness of its controls for ensuring compliance with established Agency policies and procedures and take appropriate corrective action. As part of its corrective action, DCAA should consider the need to provide comprehensive refresher training on the GAS documentation requirements.
So it wasn’t the audit guidance; it was the auditors and their inability to follow the audit guidance.
Again, the OIG accepted DCAA’s promise to provide extra training to auditors on the procedures that they are supposed to follow. Not a big deal, apparently. All forgiven. We’re all moving on.
There were other findings; you can read the report if you are inclined to do so. (Link in the first paragraph.) Some of those findings were repeat findings from the 2014 quality system review. The OIG documented that DCAA had declined to implement the recommended corrective action(s) from that 2014 external peer review, and now in 2017 the same findings show up again. How surprising.
And yet, DCAA passed its 2017 quality system external peer review.
It’s not only that nearly 40 percent of the selected audit reports evidenced deficiencies, it’s also that some audit reports evidenced multiple deficiencies. For example—
Audit Report No. 03231-2009M10100046 (an audit of contractor “incurred costs” by the Salt Lake Valley FAO) exhibited deficiencies in every single category. The IG found lack of evidence, reporting issues, lack of documentation, lack of adequate supervisory review, and lack of professional judgment. Same thing for Audit Report No. 06811-2008U10100007 (an incurred cost audit by the BAE York FAO). Given that these were both audits of contractor annual final billing rate proposals—and that such audits take an average of nearly three years to perform these days—it is difficult to understand why the IG auditors would have found any deficiencies whatsoever. Yet there they were: many upon many of them.
And yet, DCAA passed its 2017 quality system external peer review.
The DoD OIG officially concluded—
In our opinion, except for the evidence, reporting, documentation, supervision, and professional judgment deficiencies described after the Overall Management Comments and Our Response section, the system of quality control for DCAA in effect for the year ended June 30, 2016, has been suitably designed and complied with to provide DCAA with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.
And now you know why EZ-Eric was so incensed at this report and the process of governmental external peer reviews. He thinks it’s all a sham.
And it might be.
We believe that one might reasonably wonder whether the DoD OIG can exercise complete independence and objectivity when evaluating the quality control system of a related department. We say “related” because both the OIG and DCAA report up to the Secretary of Defense, albeit by different channels. Yes, the DoD OIG is an independent activity not subject to day-to-day SECDEF oversight; however, it seems reasonable to believe that phone calls could be made, that pressure could be applied. We can envision a scenario where it was pointed out to the Acting Inspector General that it would be in the best interests of the Department (and taxpayers) to have the DCAA quality system remain approved. After all, there is a mountain of contractor final billing rate proposals to wade through (slowly) and ongoing litigation with contractors, to which DCAA audit findings form an important component of the government’s cases. In other words, “find a way to let them pass.”
We’re not saying it happened that way. We’re saying it seems reasonable to wonder if the DoD OIG can, in fact and in appearance, be completely free from pressure that could impair independence and objectivity. Certainly, EZ-Eric thinks that’s the case.
Which is why we are suggesting that DoD OIG no longer perform external peer reviews of the DCAA’s quality control system. Have some other entity perform the work, if only to avoid the appearance of impaired independence and objectivity.
Meanwhile, the 2017 DoD OIG audit conclusion of the external peer review of the DCAA audit quality system stands.
DCAA passed.
Procurement Fraud at Sandia National Labs
Pop quiz, hotshot.
You’re a member of the procurement staff at Sandia National Laboratories. You’re not a government employee; instead, you are employed by the contractor that manages the Lab. You are assigned to award a subcontract for moving services. Essentially a commercial service, except because it’s the Federal government there are some FAR and DEARS clauses to worry about, and some pesky Representations and Certifications. If it were a normal contractor, the moving services would be charged to overhead; but because it’s Sandia (or “SNL”) the costs are reimbursed by the Department of Energy. Accordingly, there is likely to be some scrutiny on the award process.
What do you do?
Do you:
(A) Award a sole-source subcontract because there is only one moving company in New Mexico?
(B) Set up a competition , evaluate proposals, and then award a subcontract to the moving company with the best value?
(C) Find the GSA Schedule with the moving companies on it, ask for three quotes from Schedule holders, and then make an award to the low bidder?
(D) Set up a sham moving company, author and submit a proposal from that sham company, evaluate the proposal and select the sham company as the best value bidder, award the company a subcontract, and then pocket a large amount of the subcontract award?
We don’t know about you, but we’re pretty sure the answer to the quiz shouldn’t be (D).
In unrelated news, the Department of Justice recently announced that a Federal Grand Jury returned an 11-count indictment against a former “procurement officer” employed by SNL. According to the news release, “Carla Sena, 55, of Albuquerque, New Mexico was charged with three counts of wire fraud, one count of major fraud against the United States and seven counts of money laundering.”
The press release explained that the indictment alleged that—
In late 2010, Sena was assigned by Sandia to manage the bidding process for the award of a contract for moving services at SNL. In anticipation thereof, Sena created New Mexico Express Movers LLC (‘Movers LLC’), prepared a bid on Movers LLC’s behalf, and submitted the bid to Sandia under someone else’s name to conceal her involvement. Sena made several material and fraudulent misrepresentations in Movers LLC’s bid that would have resulted in disqualification, but she used her position at SNL to ensure that these misrepresentations went undetected. Sena also used her position to access other bidders’ documents and information that she in turn leveraged to ensure award of the contract to Movers LLC. As a direct result of Sena’s scheme to defraud, Movers LLC received approximately $2.3 million in DOE funds. The indictment further alleges that, between December 2011 and April 2015, Sena transferred via negotiated checks at least $643,000 of these fraudulently obtained proceeds to legitimate businesses owned by her father with the intent to conceal her subsequent use of the proceeds for personal gain.
The Albuquerque Journal added a couple of more details, courtesy of an article written by Maggie Shepard. The article reported—
Federal prosecutors say Sena worked from 2006 to 2017 as a procurement employee responsible for managing and awarding contracts to companies supplying services and materials to the federal lab. From this position, she used inside information to develop the lowest – and therefore the winning – bid for a contract for moving services in late 2010, prosecutors say. That bid was awarded to a company she created eight days before the bid due date using a mailbox rented in her daughter’s name and a bank account shared with her then-husband, according to the indictment.
Authorities say she used her position to disqualify another bidding company because it had not included sufficient customer references, a bid requirement her manufactured company met – although her company never existed. … She retired from Sandia in 2017, spokeswoman Sue Holmes said Wednesday. Holmes said that the issue ‘was discovered internally’ and that the labs cooperated fully with authorities. Holmes said the labs employ 115 procurement staffers, and the indictment says that Sena was one of only three employees authorized to process bids through high levels of the approval process.
The thing is that we’re talking about moving services, for heaven’s sake. How prosaic! Why would a supervisor or manager worry about fraud in a subcontract award for moving services—especially from a trusted buyer who was one of the most seniors buyers in the organization?
Which is the point of this little article.
It’s the little things that slide under the radar that can lead to corrupt behavior. While everybody is focused on the big subcontract awards, the technically challenging ones, the ones valued in the hundreds of millions of dollars, the little awards for mundane items or services tend to fall through the cracks. So you need to watch those little ones just as closely as you watch the big awards.
Perhaps even more closely.
We are reminded of a time, a decade or so ago, when we were part of an investigation of a crooked Contracting Officer’s Representative (sometimes called a “COTR”). That guy was crooked, no doubt about it. But it was the little things that caused him to be charged, eighteen months before his scheduled retirement. Little things like directing the base contractor to order vehicle fleet replacement tires from the shop owned by his brother-in-law, or directing that the contractor obtain insurance for the (contractor-acquired) trucks that he and his wife drove—insurance that listed them as beneficiaries, instead of the government. The bigger things he could explain away; but it was the little things that tripped him up.
So pay attention to the little things because, if you don’t, you might find that your trusted senior-level employee has taken advantage of the situation you created when you focused your attention elsewhere.
|
