Kenneth Fletcher
WC Monitor
2/13/2015
Given years of delays in the Department of Energy’s audits of contractor costs for non-M&O (management and operating) contracts, DOE should develop a risk-based comprehensive plan to undertake the reviews, the Department’s Office of Inspector General said in a report released this week. The IG review focused on delays in reviews by the Defense Contract Audit Agency on potential unallowable costs in non-M&O contracts, largely run by DOE’s Office of Environmental Management. “DCAA has been unable to meet the non-M&O contract audit needs of the Department and has asserted that it simply does not have the resources to meet all Department of Defense and civilian agency audit requests,” the IG report says. “As it pertains to the Department, this situation was exacerbated by the fact that the Department lacked a comprehensive strategy to ensure that non-M&O contractor costs were subjected to necessary audits.”
At the end of fiscal year 2014, DOE had more than 22 open contract cost audits that covered $1.1 billion in questioned contractor costs, the IG report states. The audit agency had delays of between one and eight years for non-M&O DOE contracts and subcontracts. “These delays resulted in a backlog of audits of contracts and subcontracts with incurred costs valued at billions of dollars per year,” the IG said. In EM, out of the 16 largest non-M&O contractors, seven had never had an incurred cost audit and six had older audits dating to 2010 or earlier.
‘Unacceptable Level of Financial Risk’
The current approach to the audits “exposes the Department to an unacceptable level of financial risk,” the IG report states. “Given the billions of dollars the Department invests in its non-M&O contractor and subcontractor base and the Department’s experience with the prevention and identification of unallowable costs incurred by its M&O contractors, there is every reason to conclude that the benefits of a comprehensive plan for providing necessary audit capacity outweigh the costs,” the report says.
EM has made several efforts to “fill the void” left by the lack of DCAA audits, the IG said. That includes contracts with independent public accounting firms to perform audits, one EM contractor that boosted its internal audit function and efforts by an EM “support organization” to develop its own audit capability. “While laudable, these efforts were not well coordinated, in some instances did not comply with professional audit standards, and do not, in our judgment, close the significant gap in audit coverage for non-M&O contractors,” the IG said.
The IG recommended DOE work with DCAA to “develop a risk-based approach for audit coverage of non-M&O contractor incurred costs,” the report states. “We also recommended it develop a comprehensive strategy to supplement DCAA’s audit coverage to ensure necessary and required audit of incurred costs until the backlog of DCAA audits can be eliminated.”
DOE ‘Fundamentally Agrees’ With Recommendations
DOE management “fundamentally agree” with the IG’s recommendations, DOE Office of Acquisition and Project Management Director Paul Bosco said in an attached response, which notes efforts by DOE to push for audits despite the current challenges. “It is important to recognize that whatever good intentions DCAA has, its track record makes it prudent to avoid assuming a market change in DCAA’s support,” Bosco said. “It is also important to note that the Department has stated its expectation that required audits must be obtained, whether from DCA or KPMG; has issued guidance to that effect; has put a contract in place for audit services to ensure Contracting Officers have an alternative to DCAA to obtain quality audits; is coordinating closely with DCAA on its audits; and is following up with contracting activities to ensure they understand what is expected and have the appropriate support. Lastly, all stakeholders, not just the report’s addressees, have a role in ensuring required audit support is obtained.”
