IG-00-032

AUDIT

REPORT NASA CONTRACT AUDIT

FOLLOW-UP SYSTEM AT

JOHNSON SPACE CENTER

May 19, 2000

National Aeronautics and

Space Administration

OFFICE OF INSPECTOR GENERAL
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Acronyms

ACO Administrative Contracting Officer

CAS Cost Accounting Standards

CATS Corrective Action Tracking System

DCAA Defense Contract Audit Agency

DoD Department of Defense

FAR Federal Acquisition Regulation

FY Fiscal Year

GAO General Accounting Office

NPG NASA Procedures and Guidelines

OIG Office of Inspector General

OMB Office of Management and Budget

PNM Price Negotiation Memorandum

RCA Reportable Contract Audit
W May 19, 2000

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: NASA Contract Audit Follow-up System at

Johnson Space Center

 Report Number IG-00-032

The NASA Office of Inspector General has completed an audit of the NASA Contract Audit Followup System at Johnson Space Center (Johnson). We found that NASA policies and procedures for

resolution and disposition of contract audit findings and recommendations comply with the Office of

Management and Budget (OMB) Circular A-501 requirements.2 However, the contract audit followup system at Johnson can be improved. The system did not include complete records of actions taken

on findings and recommendations for all 16 sampled Defense Contract Audit Agency (DCAA) audit

reports for which the resolution and disposition authority had been delegated to the Department of

Defense (DoD).3 We separately determined that the DoD administrative contracting officers (ACO’s)

had resolved the findings for 11 of the 16 reports, recovered $1.1 million of questioned costs that were

allocated to NASA contracts, and negotiated indirect rates that affected the NASA contracts. Further,

when NASA retained resolution authority for resolution and disposition of audit findings, we found

Johnson contracting officers did not track and report four of five reportable contract audit reports4 that

identified questioned costs of $2.4 million. Also, Johnson contracting officers did not resolve or

disposition the reportable findings and recommendations related to two of the five reports within 6

months after issuance of a final audit report as prescribed by OMB Circular A-50. As a result, the

benefits of contract audit findings and recommendations were delayed and potentially not maximized.

 

1

 OMB Circular A-50, “Audit Followup,” September 29, 1982, replaces and rescinds Circular No. A-50, “Executive

Branch Action on General Accounting Office Reports,” dated January 15, 1979, and incorporates certain provisions

previously set forth in Circular A-73, “Audit of Federal Operations and Programs,” revised, dated November 27,

1979.

2

 The Circular requires all agencies, including NASA, to establish audit follow-up systems “to assure the prompt and

proper resolution and implementation of audit recommendations.” It also requires that the follow-up systems

provide for a complete record of action taken on both monetary and nonmonetary findings and recommendations.

3

 When contractors have both DoD and NASA contracts, NASA may delegate to the DoD contract administration

functions, including resolution and disposition authority on DCAA audit findings and recommendations.

4

 A detailed definition of a reportable contract audit report is in Appendix B. The Defense Contract Audit Agency

provides NASA a monthly list of audits that are identified as reportable contract audits because NASA has the

authority to resolve and disposition the audit findings and recommendations. Disposition is achieved when the

contracting officer renders a decision as to the treatment of the audit recommendation and has executed a contractual

document with the contractor.
2

Background

NASA uses the services of other Federal agencies to perform audits of contractors, educational

institutions, and nonprofit organizations receiving NASA grants and contract awards. In fiscal

years (FY’s) 1997 and 1998, NASA spent a total of $32 million ($16.5 and $15.6 million,

respectively) on contract audit services provided by the DCAA. Of the $32 million, NASA paid

$7 million for audit services performed for NASA contracts at Johnson.

Policies and procedures concerning NASA contract audit follow-up systems are contained in the

NASA Federal Acquisition Regulation (FAR) Supplement and NASA procedures and guidelines.

Those policies and procedures require that NASA contract audit follow-up systems track all audits

for which NASA has resolution and disposition authority and that audit recommendations be

resolved as expeditiously as possible within 6 months of issuance of the final audit report. The

NASA FAR Supplement also requires that when contract administration is delegated, NASA

contracting officers should at least semiannually review and document in the contract files the status

and disposition of significant audit findings.

Recommendations

In response to a prior audit of the NASA Contract Audit Follow-up System at Marshall Space

Flight Center (Marshall), the NASA Associate Administrator for Procurement concurred with

two audit findings and recommendations. The Associate Administrator for Procurement agreed

to reemphasize Agency and Federal requirements to ensure that NASA contracting officers

maintain a dialogue with DoD ACO’s who have been delegated administration on NASA

contracts and to resolve contract audit report recommendations within 6 months of issuance of

the final audit report. Therefore, we are making no other recommendation for corrective action

on these issues. However, we recommend that the Director, Johnson Space Center, provide the

definition of reportable audit reports to Johnson contracting officers and establish performance

standards for Johnson contracting officers to ensure effective contract audit follow-up.

Management Response and OIG Evaluation

Johnson management reissued to all procurement personnel a Procurement Advisory Notice

emphasizing the importance of tracking and reporting contract audit report recommendations.

The procurement notice included the definition of reportable audits. Johnson management also

discussed with the NASA Headquarters Office of Procurement the inclusion of specific criteria

into performance plans. Johnson determined that the current performance standards would be

sufficient because Agency oversight provides for tracking and dispositioning of audit findings,

and the Office of Procurement plans to issue additional guidance.5 The standards hold Johnson

supervisory contract specialists responsible for the Center’s compliance with applicable

standards, regulations, and guidelines. Furthermore, the Office of Procurement separately

 

5

 The guidance resulted from recommendations contained in Audit Report IG-00-010, issued March 6, 2000.
3

confirmed with us that the Office of Procurement would provide for a review of the effectiveness

in resolving and implementing audit recommendations during the procurement management

surveys conducted at each NASA center.

Management’s actions are responsive to the recommendations. Management's comments imply,

however, that NASA contracting officers do not have a responsibility to document the status and

disposition of audits of subcontractors. Management relies on the provision of the NASA FAR

Supplement 1842.73, "Audit Tracking and Resolution," which states, "NASA contracting officers will

maintain a dialogue with DOD Administrative Contracting Officers (ACO) who have been delegated

activities on NASA contracts." The FAR, however, states, in part, “The contracting officer is

responsible for the determination of price reasonableness for the prime contract, including

subcontracting costs.” Subcontracts are an integral part of a prime contract. DoD ACO’s have the

responsibility to inform NASA contracting officers of significant issues on prime contract and

subcontract audit findings. Our position is that NASA’s discussions with the DoD ACO’s regarding

such significant findings should be documented in the NASA contract files. Without the required

documentation, Johnson may not be able to ensure that audit findings and recommendations were

resolved in a timely manner and that the resolutions equitably protected NASA's interests. We found

multiple examples of significant dollar recoveries at the subcontractor level (one report involved a

recovery of $851,000), but no evidence of recoveries or documentation in the reviewed NASA

contract files regarding discussions on the status of audit findings resolved by the DoD ACO’s. The

Associate Administrator for Procurement has informed us that the forthcoming policy clarification to

be issued in response to our audit at Marshall, which is discussed earlier, will emphasize the role of

the NASA contracting officer relative to subcontract audits.

Details on the status of the recommendations are in the Executive Summary.

[original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of NASA Contract Audit Follow-up System at

 Johnson Space Center
FINAL REPORT

AUDIT OF NASA CONTRACT AUDIT FOLLOW-UP SYSTEM AT

JOHNSON SPACE CENTER
W May 19, 2000

TO: H/Associate Administrator for Procurement

M/Associate Administrator for Space Flight

AA/Director, Johnson Space Center

FROM: W/Assistant Inspector General for Auditing

SUBJECT: Final Report on the Audit of the NASA Contract Audit Follow-up System at

Johnson Space Center Redacted Report

Assignment Number A9904500

Report Number IG-00-032

The subject final report is provided for your use and comment. Please refer to the Executive

Summary for the overall audit results. Our evaluation of your response is incorporated into the

body of the report. Your comments on a draft of this report were responsive to the

recommendations. Management's actions are sufficient to close the recommendations for reporting

purposes.

If you have questions concerning the report, please contact Mr. Lorne A. Dear, Program Director,

Procurement Audits, at (818) 354-3360 or Ms. Anh Doan, Auditor-in-Charge, at (818) 354-9773.

We appreciate the courtesies extended to the audit staff. The final report distribution is in

Appendix F.

[original signed by]

Russell A. Rau

Enclosure

cc:

AO/Chief Information Officer

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

R/Associate Administrator for AeroSpace Technology

JM/Director, Management Assessment Division
2

bcc:

AIGA, IG, Reading (w/o Enclosures) Chrons

JSC/BD/Manager, Procurement Policy and Systems Office

 /BG/Manager, Space Station Procurement Office

 /Audit Liaison Representative

W/JPL/180-300/L. Dear

 /A. Doan

 /JSC/L. Lin

 E. Lee
Contents

Executive Summary, i

Introduction, 1

Findings and Recommendations, 2

Finding A. Completeness of Follow-up System Records When NASA

Delegated Resolution Authority, 2

Finding B. Tracking Reportable Contract Audit Reports, 5

Appendix A – Objective, Scope, and Methodology, 9

Appendix B – Reportable Contract Audit Reports, 11

Appendix C – Audit Reports for Which NASA Delegated Resolution and

Disposition Authority, 12

Appendix D – Reportable Contract Audits Not Reported by Johnson, 13

Appendix E – Management’s Response, 14

Appendix F – Report Distribution, 20
NASA Office of Inspector General

IG-00-032 May 19, 2000

 A9904500

NASA Contract Audit Follow-up System at

 Johnson Space Center

Executive Summary

Background. NASA uses the services of other Federal agencies to perform audits of

contractors, educational institutions, and nonprofit organizations receiving NASA grants and

contract awards. In fiscal years (FY’s) 1997 and 1998, NASA spent $32 million ($16.5

million and $15.6 million, respectively) on contract audit services provided by the Defense

Contract Audit Agency (DCAA). Of the $32 million, NASA paid $7 million for audit

services performed for NASA contracts at the Johnson Space Center (Johnson).

To improve the effectiveness and efficiency of Government operations, the Office of

Management and Budget (OMB) Circular A-50 requires all agencies, including NASA, to

establish audit follow-up systems “to assure the prompt and proper resolution6 and

implementation of audit recommendations.” Resolution should occur within a maximum of 6

months after issuance of a final report, and corrective action should proceed as rapidly as

possible. The Circular also requires that the follow-up systems provide for a complete record of

action taken on both monetary and nonmonetary findings and recommendations. Furthermore,

the Circular establishes 11 standards that follow-up systems must meet, including assuring that

“performance appraisals of appropriate officials reflect effectiveness in resolving and

implementing audit recommendations.”

As part of its oversight duties, the NASA Headquarters Office of Procurement conducts surveys

at NASA installations that address, in part, contract audit follow-up of reportable contract audit

(RCA)7 reports.

 

* We have redacted portions of this report due to references to process information. The redacted passages do

not affect the validity of this report or management's response.

6

 Resolution is the point at which the audit organization and agency management or contracting officials agree

on action to be taken on reported findings and recommendations; or in the event of disagreement, resolution is

the point at which the audit follow-up official determines the matter to be resolved.

7

 A detailed definition of a reportable contract audit report is in Appendix B. The Defense Contract Audit

Agency provides NASA a monthly list of audits that are identified as reportable contract audits because NASA

has the authority to resolve and disposition the audit findings and recommendations. Disposition is achieved

when the contracting officer renders a decision as to the treatment of the audit recommendation and has executed

a contractual document with the contractor.
ii

Objective. The overall audit objective was to evaluate the adequacy of NASA’s contract audit

follow-up system at Johnson. Additional details on the objective, scope, and methodology are in

Appendix A.

Results of Audit. NASA policies and procedures for resolution and disposition of contract audit

findings and recommendations comply with the OMB Circular A-50 requirements. However, the

contract audit follow-up system at Johnson can be improved. The system did not include complete

records of action taken on findings and recommendations for 16 of 16 sampled DCAA audit

reports for which the resolution and disposition authority had been delegated to the Department of

Defense (DoD). As a result, Johnson procurement personnel may not be able to ensure that audit

findings and recommendations were resolved in a timely manner and that the resolutions were in

NASA’s best interest (Finding A).

Johnson procurement personnel did not track and report four of five reportable contract audit

reports that identified $2.4 million in questioned costs and did not resolve or disposition8 two

of the five RCA reports' findings and recommendations within the 6 months after report

issuance pursuant to OMB Circular A-50. Consequently, audit findings were not resolved in

a timely fashion, and NASA funds that should have been disallowed, withheld, or reduced

could not be reallocated to benefit other NASA programs (Finding B).

Recommendations. We recommend that NASA management provide the definition of

reportable audit reports to Johnson contracting officers. Also NASA management should

establish performance standards for Johnson contracting officers that address their

effectiveness in resolving and implementing audit recommendations. During our audit of the

NASA Contract Audit Follow-up at Marshall Space Flight Center, NASA management

agreed to take NASA-wide corrective actions regarding (1) communication with DoD

administrative contracting officers (ACO’s) who have been delegated activities on NASA

contracts and (2) resolution of contract audit report recommendations within 6 months of

issuance of the final audit report. Therefore, we are making no other recommendations for

corrective action on these issues.

Management’s Response. Johnson management issued to all procurement personnel a

Procurement Advisory Notice emphasizing the importance of tracking and reporting contract

audit report recommendations. The procurement notice included the definition of reportable

audits. Johnson management considers the current performance standards sufficient in light

of the Agency oversight that provides for tracking and dispositioning of audit findings and the

additional guidance9 that the Office of Procurement will issue in relation to a similar audit

conducted at Marshall Space Flight Center. Those standards would hold Johnson supervisory

contract specialists responsible for the Center’s compliance with applicable standards,

regulations, and guidelines. Furthermore, the Office of Procurement separately confirmed

with the Office of Inspector General that it would provide for a review of the effectiveness in

 

8

 Contract audit report disposition is achieved when the contracting officer renders a decision as to the treatment

of the audit recommendation and has executed a contractual document with the contractor.

9

 The guidance resulted from recommendations contained in Audit Report IG-00-010, issued March 6, 2000.
iii

resolving and implementing audit recommendations during the procurement management

surveys conducted at each NASA Center. The complete text of the response is in

Appendix E.

Evaluation of Management’s Response. The actions taken by management are responsive to the

recommendations. We consider the recommendations dispositioned and closed for reporting

purposes.

Management’s comments imply, however, that NASA contracting officers do not have a

responsibility to document the status and disposition of audits of subcontractors. Management

relies on the provision of the NASA FAR Supplement 1842.73, "Audit Tracking and Resolution,"

which states NASA contracting officers will maintain a dialogue with DoD ACO's who have been

delegated activities on NASA contracts (emphasis supplied). The FAR, however, states, in part,

“The contracting officer is responsible for the determination of price reasonableness for the prime

contract, including subcontracting costs.” Subcontracts are an integral part of a prime contract.

DoD ACO’s have the responsibility to inform NASA contracting officers of significant issues on

prime contract and subcontract audit findings. Our position is that NASA’s discussions with the

DoD ACO’s regarding such significant findings should be documented in the NASA contract files.

Without the required documentation, Johnson may not be able to ensure that audit findings and

recommendations were resolved in a timely manner and that the resolutions equitably protected

NASA's interests. We found multiple examples of significant dollar recoveries at the subcontractor

level (one report involved a recovery of $851,000), but no evidence of recoveries or documentation

in the reviewed NASA contract files regarding discussions on the status of audit findings resolved

by the DoD ACO’s. The Associate Administrator for Procurement informed us that the

forthcoming policy clarification to be issued in response to our audit at Marshall will emphasize

the role of the NASA contracting officer relative to subcontract audits.
Introduction

Policies and procedures concerning NASA contract audit follow-up systems are contained in the

NASA Federal Acquisition Regulation (FAR) Supplement 1842.730110 and NASA Procedures

and Guidelines (NPG) 1200.1.11 The policies and procedures require that NASA contract audit

follow-up systems track all contract and OMB Circular A-13312 audits for which NASA has

resolution and disposition authority and that audit recommendations be resolved as expeditiously

as possible within 6 months of the issuance of the final audit report. NASA FAR

Supplement1842.7301 also requires that, when contract administration is delegated, NASA

contracting officers should at least semiannually review and document in the contract files the

status and resolution of significant audit findings.

Because DCAA performs contract audits for NASA, it relies on the DCAA to identify the

RCA reports and provide the Agency monthly lists of those reports (defined in Appendix B).

The NASA Office of Procurement provides the Centers the RCA report lists for their use in

contract audit follow-up. NASA Centers submit to Headquarters quarterly status reports on

actions taken on the RCA reports findings and the targeted dates for resolution and

disposition. Records of action taken on findings in the RCA reports are subsequently input

into a NASA procurement tracking system. For FY’s 1997 and 1998, Johnson submitted

status reports on a total of seven RCA reports.13

The NASA Office of Inspector General (OIG) is responsible 14 (1) to review NASA’s policy for

obtaining contract administration and audit services, including those from the DCAA and (2) to

evaluate NASA’s follow-up systems and specific categories of contract audit work performed in

connection with NASA programs.

 

10 NASA FAR Supplement 1842.7301, “NASA External Audit Follow-up System,” January 26, 1998.

11 NPG 1200.1, “Management Accountability and Control, Audit Liaison, and Audit Follow-up,”

October 8, 1997.

12 OMB Circular A-133, “Audits of States, Local Governments, and Non-Profit Organizations,” revised

June 24, 1997.

13 These RCA reports, included in the NASA procurement tracking system, were not the subject of our findings.

14 Responsibility is assigned in the Inspector General Act of 1978.
2

Findings and Recommendations

Finding A. Completeness of Follow-up System Records When NASA

Delegated Resolution Authority

The Johnson contract audit follow-up system did not include complete records of action on

contract audit findings and recommendations for all 16 sampled DCAA audit reports15 for

which NASA delegated resolution and disposition authority to DoD. Although Johnson

procurement personnel maintained some dialogue with the DoD administrative contracting

officers (ACO’s) who have been delegated activities on NASA contracts, Johnson did not

document the status and resolution of significant audit findings in the contract files as

required by NASA FAR Supplement 1842. As a result, Johnson may not have been able to

ensure that audit findings and recommendations were resolved in a timely manner and that the

resolutions equitably protected NASA's interests. Specifically, NASA may not have been

able to ensure that recovered questioned costs were appropriately distributed to NASA

contracts.

OMB and NASA Guidance

OMB Circular A-5016 requires that agencies establish contract audit follow-up systems “to

assure the prompt and proper resolution and implementation of audit recommendations.” The

systems must provide “complete records of action taken on both monetary and nonmonetary

To fulfill the requirements of the Circular, NASA FAR Supplement 1842 requires NASA

contracting officers to communicate with DoD ACO’s who have been delegated activities on

NASA contracts. The NASA contracting officers are required to conduct a review of the

DoD ACO’s contract files, no less frequently than semiannually and to document in their

contract files the status and disposition of significant DCAA audit findings.

NASA Delegation of Resolution and Disposition Authority

NASA delegated to DoD the authority for resolution and disposition of the findings in the 16

reports reviewed (Appendix C lists the reports). However, Johnson procurement personnel

did not document the status and resolution of the report findings delegated to DoD ACO’s.

Therefore, Johnson's contract audit follow-up system did not have complete records of the

resolution and disposition status of the audit findings, and as a result, the amount of

questioned costs recovered and changes in billing rates on NASA contracts was not readily

apparent. Illustrations of our conclusions follow.

 

15 The 16 DCAA audit reports include 7 incurred cost, 5 cost accounting standards, and 4 operation audits.

16 OMB Circular A-50, “Audit Follow-up,” September 29, 1982.
3

• Seven reports related to incurred cost audits17 in which DCAA questioned specific costs

charged by the contractor to the Government, including NASA, or questioned the rates

used by the contractor. One report, for example, questioned $3.5 million in costs charged,

and the ACO upheld all the questioned costs and questioned rates. NASA’s share of the

questioned costs was $20,000. The Johnson contract file did not have any record of the

recovery.

• Five reports related to Cost Accounting Standards (CAS) and identified noncompliances

with CAS 40318 and 410,19 significant inadequacies in cost accounting practices, and a

contractor’s inadequate disclosure statement.20 The Johnson contract files did not include

any status or documentation of the resolution and disposition of the CAS issues.

• Four of the 16 reports related to operation audits21 that identified significant deficiencies

in billing, budgeting, planning, and internal controls. One audit report, for example,

identified eight significant deficiencies in the contractor’s X-PRESS Card program. 22

Those deficiencies caused the inclusion of unallowable costs23 in the contractor’s claimed

costs and exposed the company to the risk of card misuse by the cardholders. Another

report noted that the contractor did not make appropriate corrections to previously

identified significant deficiencies in its billing system internal controls. Those

deficiencies caused major billing errors, and DCAA recommended partial disapproval of

the contractor’s billing system until the contractor corrected the deficiencies. All four

report findings were resolved and dispositioned; however, the Johnson contract files did

not have any record of the status and disposition of the deficiencies.

Johnson indicated that 10 of the 16 audit reports were related to NASA subcontractors.

NASA delegated to DoD ACO’s the authority to resolve and disposition the audit findings.

NASA Form 1430, Letter of Contract Administration Delegation, General, requires the DoD

ACO’s, among other things, to (1) obtain DCAA audit reports as requested and submit the

reports to the NASA contracting officer, (2) make secondary delegations as necessary and

provide copies of the delegations to the NASA contracting officer, (3) provide immediate

input to the NASA procurement office of significant program issues or problems, and (4)

provide input to the monthly report that includes the contractor’s systems, significant findings

 

17 Incurred cost audits involve an examination of the contractor's cost representations so the auditor may express

an opinion as to whether such incurred costs are reasonable, applicable to the contract, and not prohibited by the

contract, by statute or regulation, or by previous agreement with, or decision of, the contracting officer.

18 CAS 403, Allocation of Home Office Expenses to Segments.

19 CAS 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives.

20 A disclosure statement describes a contractor’s cost accounting practices to be used for estimating,

accumulating, and reporting contract costs.

21 Operation audits are audits of a contractor’s business operation. For example, the primary audit objective in

reviewing a contractor’s budgetary systems and data is to establish that a sound budgetary system is operating

for company planning and cost control purposes. A secondary objective is to obtain a comprehensive overview

of the contractor's financial planning process.

22 The X-PRESS Card program is a corporate procurement card program used to make low-dollar purchases of

goods and services.

23 Unallowable cost means any cost which, under the provisions of any pertinent law, regulation, or contract,

cannot be included in prices, cost reimbursements, or settlements under a Government contract to which it is

allocable.
4

related to these systems, CAS violations, and issues that could affect NASA contracts. The

DoD ACO’s have the responsibility to inform the NASA contracting officers of reportable

subcontract audit findings, and those findings should have been documented in the NASA

contract files. The NASA contract files reviewed contained no documentation regarding the

status and resolution of audit findings.

We separately determined that the DoD ACO’s had resolved and dispositioned the findings

for 11 of the 16 reports.24 For the 11 reports, the DoD ACO’s had recovered about $1.1

million of questioned costs and negotiated indirect rates that affected the NASA contracts.

Because Johnson contracting officers did not maintain adequate documentation, their contract

files lacked the resolution and disposition information on the 11 report findings and

recommendations. As a result, Johnson may not be able to ensure that audit findings and

recommendations were resolved by the DoD ACO’s in a timely manner and that the

resolutions equitably protected NASA's interests.

Corrective Actions To Be Taken by Management

We identified a similar finding during our audit of the NASA Contract Audit Follow-up at

Marshall Space Flight Center25 and made a recommendation to the Associate Administrator for

Procurement. The Associate Administrator for Procurement concurred with the finding and will

reemphasize to all contracting officers the NASA FAR Supplement 1842.7301(3) requirements to

(1) maintain a dialogue with DoD ACO’s who have been delegated resolution authority on NASA

contracts and (2) conduct semiannual reviews and document the status and resolution of audit

findings. Further, contracting officers will require that delegated DoD ACO’s provide NASA with

detailed information on the resolution and disposition status of DCAA audit findings and

recommendations. Therefore, we are making no other recommendation for corrective action on

this issue. As a result of our review at Johnson, however, we plan to follow-up with the Office of

Procurement regarding the pending policy clarification on documenting, in contract files, the status

of significant audit findings on NASA prime contracts, including subcontracts with significant

findings.

 

24 The 11 audit reports included 4 incurred cost, 3 CAS, and 4 operation audit reports (see Appendix C).

25 Audit Report IG-00-010, dated March 6, 2000.
5

Finding B. Tracking Reportable Contract Audit Reports

Johnson contracting officers did not track and report four of five reportable contract audit reports26

that identified questioned costs of $2.4 million and did not resolve or disposition the RCA findings

and recommendations related to two of the five reports within 6 months of issuance of a final

report as prescribed by OMB Circular A-50. The reports were not tracked and reported because

Johnson contracting officers relied on the DCAA monthly lists of RCA reports only and were not

aware of the reportable contract audit reporting requirements. Also, Johnson did not monitor

contracting officers’ timeliness in resolving the RCA findings and recommendations or establish

performance standards for contracting officers to provide effective contract audit follow-up. As a

result, funds related to the audit findings (see Appendix D) that had not been reported and resolved

in a timely manner could not be reallocated to benefit other NASA programs

OMB and NASA Guidance

OMB Circular A-50 requires agencies to assign a high priority to the resolution of audit

recommendations and to implementation of corrective actions. The Circular states that

“Resolution shall be made within a maximum of six months after issuance of a final report or, in

the case of audits performed by non-Federal auditors, six months after receipt of the report by the

Federal Government. Corrective action should proceed as rapidly as possible.” Further, the

Circular requires that agencies:

Provide semi-annual reports to the agency head on the status of all

unresolved audit reports over six months old, the reasons therefor, and a

timetable for their resolution; the number of reports or recommendations

resolved during the period; the amount of disallowed costs; and collections,

offsets, write-offs, demands for payment and other monetary benefits

resulting from audits.

The Circular also requires that performance appraisals of appropriate officials reflect effectiveness

in resolving and implementing audit recommendations.

Additionally, NASA FAR Supplement 1842.7301 states that the NASA “external audit follow-up

system tracks all contract and OMB Circular No. A-133 audits where NASA has resolution and

disposition authority. The objective of the tracking system is to ensure that audit recommendations

are resolved as expeditiously as possible, but at a maximum, within 6 months of the date of the

audit report.”

Tracking RCA Reports

Johnson contracting officers did not track and report four of five RCA reports (see Appendix D for

details on the four reports). Johnson did not include these audit reports as action items in its RCA

reports list submitted to NASA Headquarters because Johnson contracting officers relied on the

DCAA monthly lists of RCA reports only and were not aware of the RCA reporting requirements.

The four RCA reports consist of the following:

 

26**Deliberative process information omitted.**
6

• Two reports related to defective pricing in which DCAA questioned specific costs charged by

the contractor to NASA. One DCAA report questioned $167,000 in overstated labor costs, and

the NASA ACO recovered $17,500 of the questioned costs. The other defective pricing report

questioned $262,000 in overstated subcontract and material costs. Johnson did not report the

two defective pricing audits, and the NASA procurement tracking system did not include any

record of the questioned costs.

• One report involved an incurred cost audit in which DCAA questioned unallowable and

unreasonable costs of $187,000. This audit report was not reported in the NASA procurement

tracking system.

• One operation audit report identified a $1.8 million cost savings. The NASA ACO resolved

and dispositioned the report audit finding and recommendation, and NASA’s share of the cost

savings is $1.3 million. The $1.3 million was not reported in the NASA procurement tracking

system.

Resolution and Disposition of Audit Findings and Recommendations

Johnson did not resolve and disposition two of the five RCA audit reports not reported to

NASA Headquarters. One27 of the two reports involved a defective pricing audit in which

DCAA questioned $262,000 in overstated subcontract and material costs. During our audit,

Johnson stated its disagreement with DCAA’s questioned costs but as of November 1999, did

not resolve or disposition the audit findings. The other audit report28 related to an incurred

cost audit in which DCAA questioned $187,000 in unallowable and unreasonable consultant

services, stock dividends, and entertainment and employee morale costs. The questioned

costs did not impact the allowable general and administrative rate. Johnson did not report this

audit report in the NASA procurement tracking system, but was concerned that the contractor

failed to provide any data to support its costs. A Johnson contracting officer e-mailed and

advised the contractor on September 29, 1997, to take appropriate measures to support future

costs. We could not find any documentation that the contractor concurred with the Johnson

contracting officer’s e-mail and took the action to identify and exclude unallowable costs

from the overhead and general and administrative costs as required by the FAR. 29 We believe

that this audit report should have been resolved, dispositioned, and reported in the NASA

procurement tracking system because of the significant finding concerning unallowable and

unreasonable costs (see Appendix B for the definition of a reportable contract audit report).

Johnson recently notified the NASA OIG that the contractor is in the process of clarifying its

policies and procedures to provide for the identification and exclusion of unallowable cost

from its overhead and general and administrative expenses as required by FAR.

Timeliness and Performance Standards to Provide Effective Contract Audit Follow-up

 

27 DCAA Audit Report 2661-98D42000001, dated May 5, 1998.

28 DCAA Audit Report 3121-97J10250035, dated September 19, 1997.

29 FAR 31.201-6, Accounting for Unallowable Costs.
7

Johnson has not established performance standards for contracting officers to provide effective

contract audit follow-up. Johnson indicated that audit follow-up is simply one of many important

aspects of a contracting officer’s performance and is unlikely to have specific criteria associated

with it. Johnson also stated that a general criteria addressing the contract specialist’s performance

related to contract management was sufficient. Further, the procurement surveys, conducted by the

NASA Headquarters Office of Procurement, address, in part, contract audit follow-up of reportable

contract audits. The NASA Headquarters review teams 30 obtained the RCA reports list from the

NASA Headquarters Office of Procurement as part of their overall contract review and determined

how the audits were used in the negotiation or development of the contracts. The contract

management performance standard and procurement surveys, however, did not specifically address

Johnson contracting officers’ effectiveness in resolving and implementing audit recommendations.

Therefore, Johnson should establish performance standards that address contracting officers’

timeliness and effectiveness in resolving and implementing audit recommendations as required by

OMB Circular A-50.

Other Issues for Consideration

Although forward pricing audit reports are not subject to Circular OMB A-50 time limits for

resolution or reporting requirements, we observed that price negotiation memorandums (PNM’s)31

did not always show the extent to which the contracting officers relied on the DCAA audit report

recommendations or the reasons for any variances from the audit recommendations. Further, the

PNM is used by DCAA in defective pricing audits. NASA management should consider

emphasizing with all contracting officers the need to provide more details in the PNM as required

by the FAR.32 The PNM’s must include many items such as (1) the extent to which the contracting

officer relied on the submitted cost or pricing data and its use in negotiating the price; (2) any field

pricing assistance recommendations, including the reason for any pertinent variances from them;

(3) the Government’s negotiation objective and the negotiated position; and (4) when the

determination of price reasonableness is based on a cost analysis, the summary must address each

major cost element.

Corrective Action To Be Taken by Management

During our audit of the NASA Contract Audit Follow-up at Marshall Space Flight Center,33

the Associate Administrator for Procurement concurred with a similar finding regarding the

timeliness of NASA’s audit resolution. The Associate Administrator will reemphasize to all

 

30 The NASA review teams conducted procurement management surveys at NASA Centers under the authority

of NASA Handbook 1101.3, "The NASA Organization," with an emphasis on compliance with procurement

statutes and initiatives, regulations, procedures, and systemic procurement processes.

31 Price Negotiation Memorandums are used to document in the contract file the principal elements of the

negotiated agreement.

32 FAR 15.406-3, Documenting the Negotiation.

33 Audit Report IG-00-010 was issued March 06, 2000.
8

Center procurement personnel the requirement to resolve contract audit report recommendations within the 6 months from issuance of the final audit report, as required by OMB

Circular A-50 and NASA FAR Supplement 1842.7301. Therefore, we are making no other

recommendation on this issue.

Recommendations for Corrective Action

The Director, Johnson Space Center, should:

1. Provide the definition of reportable audit reports to Johnson contracting

officers.

2. Establish performance standards that address the effectiveness of Johnson

contracting officers in resolving and implementing audit recommendations, as

required by OMB Circular A-50.

Management’s Response

Concur with recommendation 1 and concur with the intent of recommendation 2. Johnson

management reissued Procurement Advisory Notice 95-13R1 emphasizing the importance of

tracking and reporting on contract audit reports and recommendation. The notice includes a

definition of reportable audits. Johnson management also discussed with the NASA

Headquarters Office of Procurement the inclusion of specific criteria into performance plans.

Johnson determined that current performance standards are sufficient because Agency

oversight provides for tracking and dispositioning of audit findings and the Office of

Procurement plans to issue additional guidance.34 The standards hold Johnson supervisory

contract specialists responsible for the Center’s compliance with applicable standards,

regulations and guidelines. Furthermore, the Office of Procurement separately confirmed

with the Office of Inspector General that the Office of Procurement would provide for a

review of the effectiveness in resolving and implementing audit recommendations during the

procurement management surveys conducted at each NASA Center. Finally, the Office of

Procurement previously agreed to issue a policy clarification on NASA contracting officer

responsibilities related to subcontract audits.

Evaluation of Management’s Response

The actions taken by management are responsive to the recommendations. We consider the

recommendations dispositioned and closed for reporting purposes.

 

34 The guidance resulted from recommendations contained in Audit Report IG-00-010 issued March 06, 2000.
9

Appendix A. Objective, Scope, and Methodology

Objective

The overall objective of the audit was to evaluate the adequacy of NASA’s contract audit

follow-up system at Johnson Space Center. Specifically, we determined whether:

• Policies and procedures for resolution and disposition of contract audit findings and

recommendations are in compliance with OMB Circular A-50 requirements.

• Follow-up activities ensure the prompt and effective resolution and disposition of

contract audit recommendations, including the recording of action taken on all findings

and recommendations.

We did not assess the adequacy of the ACOs’ resolution of audit findings.

Scope and Methodology

We performed the detailed audit work at Johnson Space Center, Houston, Texas. We reviewed

OMB Circular A-50 requirements; NASA’s policies, including NASA FAR Supplement 1842.73,

Procurement Notice 97-2, and NASA Procedures and Guidelines 1200.1; and other agencies’

policies referenced in NASA guidelines such as DoD Directive 7640.235 and the DCAA Contract

Audit Manual. We interviewed Johnson and DoD contracting officers to determine whether audit

findings and recommendations were resolved and dispositioned promptly and effectively. We also

interviewed the Johnson representative in charge of the contract audit follow-up system at the

Center and NASA headquarters officials in the Offices of the Chief Financial Officer and

Procurement.

To determine whether NASA’s follow-up activities ensure the prompt and effective resolution and

disposition of contract audit recommendations, we selected the DCAA audit reports containing

findings and reviewed the audit recommendations with the applicable Johnson contracting officers.

We randomly selected 100 out of 1,296 DCAA audits billed during FY’s 1997 and 1998.36 We

identified and reviewed 26 DCAA audit reports containing findings, including 5 forward pricing

audit reports.37 We also reviewed seven reportable contract audit reports reported by Johnson for

FY’s 1997 and 1998.

 

35 DoD Directive 7640.2, “Policy for Follow-up on Contract Audit Reports,” August 16, 1995.

36 Johnson provided the FY’s 1997 and 1998 billing data.

37 Forward Pricing audit reports are not subject to Circular A-50 time limits for resolution or reporting

requirements. Records on the status of reports, maintained in official contract files, meet the Circular

requirement.
10

Appendix A

FY’s 1997 and 1998 Audit Reports Reviewed

Number of Reports

Type of Audit Number

of Audits

Reviewed With Findings Delegated to

DoD1

Retained by

NASA2

Incurred Cost

840 20 8 7 1

Cost

Accounting

Standards

203 20 6 5 1

Operation 53 20 5 4 1

Defective

Pricing320 20 2 2

Subtotal 1,116 80 21 16 5

Forward

Pricing4180 20 5 2 3

Total 1,296 100 26 18 8

1

 NASA delegated to DoD the authority for resolution and disposition of contract audit findings and recommendations.

2

 NASA retained the authority for resolution and disposition of contract audit findings and recommendations.

3

 The purpose of a defective pricing audit is to test whether the price, including profit, negotiated in a pricing action was

increased by a significant amount because the contractor furnished cost or pricing data that was not accurate, complete,

and current.

4

 A forward pricing audit involves an assessment of both the proposal (offer) and the offeror’s ability to successfully

accomplish the prospective contract and a determination that the proposal is acceptable for negotiation of a fair and

reasonable price.

Management Controls Reviewed

We examined Johnson policies and procedures concerning the contract audit follow-up process.

We also reviewed Johnson practices to track contract audit reports and to follow up on audit

recommendations for timely resolution and disposition.

We considered management policies and procedures to be adequate. However, controls need to be

strengthened to ensure that contracting officers maintain a dialogue with the DoD ACO’s

(Finding A) and report and resolve audit recommendations within 6 months as required by OMB

Circular A-50 (Finding B).

Audit Field Work

We performed the audit field work from June 1999 through January 2000. We conducted the audit

in accordance with generally accepted government auditing standards.
11

Appendix B. Reportable Contract Audit Reports

The DCAA Contract Audit Manual 7640.1, Volume 2, Chapter 15, defines reportable contract

audit reports as:

(1) Those reports containing findings and recommendations, whether or not the

findings are qualified, covering estimating system surveys, accounting and

related internal control system reviews, defective pricing reviews, and cost

accounting standards (CAS) matters. (Reports containing only favorable

findings and recommendations, such as CAS reports recommending that a

contractor's proposed accounting change be approved, or estimating system

surveys that only contain “suggestions for improvements” are not

reportable.)

(2) Those reports covering operations audits, incurred costs, settlement of final

indirect cost rates, final pricing submissions, termination settlement

proposals, and claims if reported costs or rates questioned or

unsupported/qualified equal $100,000 or more.

(3) Reports on audit-determined final indirect cost rates and Form(s) 1, to the

cognizant Administrative Contracting Officer (ACO) when the auditor

cannot reach an agreement with the contractor.
12

Appendix C. Audit Reports for Which NASA Delegated Resolution and

Disposition Authority

**Deliberative process information omitted.**
Appendix D. Reportable1

 Contract Audits Not Reported by Johnson

**Deliberative process information omitted.**
14

Appendix E. Management’s Response
15

Appendix E
16

Appendix E
17

Appendix E
18

Appendix E
19

Appendix E
20

Appendix F. Report Distribution

National Aeronautics and Space Administration (NASA) Headquarters

A/Administrator

AI/Associate Deputy Administrator

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

C/Associate Administrator for Headquarters Operations

G/General Counsel

H/Associate Administrator for Procurement

J/Associate Administrator for Management Systems

JM/Director, Management Assessment Division

L/Associate Administrator for Legislative Affairs

M/Associate Administrator for Space Flight

P/Associate Administrator for Public Affairs

Q/Associate Administrator for Safety and Mission Assurance

R/Associate Administrator for Aerospace Technology

S/Associate Administrator for Space Science

Y/Associate Administrator for Earth Science

Z/Associate Administrator for Policy and Plans

NASA Centers

Director, Ames Research Center

Director, John H. Glenn Research Center at Lewis Field

Director, Goddard Space Flight Center

 Chief Financial Officer, Goddard Space Flight Center

Director, Johnson Space Center

Director, Langley Research Center

 Chief Financial Officer, Langley Research Center

Director, John F. Kennedy Space Center

 Chief Counsel, Kennedy Space Center
21

Appendix F

Non-NASA Federal Organizations and Individuals

Assistant to the President for Science and Technology Policy

Deputy Associate Director, Energy and Science Division, Office of Management and Budget

Branch Chief, Science and Space Programs Branch, Energy and Science Division, Office of

 Management and Budget

Associate Director, National Security and International Affairs Division, Defense Acquisition

 Issues, General Accounting Office

Professional Assistant, Senate Subcommittee on Science, Technology, and Space

Chairman and Ranking Minority Member -- Congressional Committees and Subcommittees

Senate Committee on Appropriations

Senate Subcommittee on VA, HUD, and Independent Agencies

Senate Committee on Commerce, Science, and Transportation

Senate Subcommittee on Science, Technology, and Space

Senate Committee on Governmental Affairs

House Committee on Appropriations

House Subcommittee on VA, HUD, and Independent Agencies

House Committee on Government Reform

House Subcommittee on Government Management, Information, and Technology

House Subcommittee on National Security, Veterans Affairs, and International Relations

House Committee on Science

House Subcommittee on Space and Aeronautics

Congressional Member

Honorable Pete Sessions, U.S. House of Representatives
NASA Reader Survey

NASA Assistant Inspector General for Auditing

Reader Survey

The NASA Office of Inspector General has a continuing interest in improving the

usefulness of our reports. We wish to make our reports responsive to our customers’

interests, consistent with our statutory responsibility. Could you help us by completing our

reader survey? For your convenience, the questionnaire can be completed electronically

through our homepage at http://www.hq.nasa.gov/office/oig/hq/audits.html or can be

mailed to the Assistant Inspector General for Auditing, NASA Headquarters, Code W,

Washington, DC 20546-0001.

Report Title: NASA Contract Audit Follow-up at Johnson Space Center

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objectives, scope, and methodology.

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Thank you for your cooperation in completing this survey.
Major Contributors to the Report

Lorne A. Dear, Program Director, Procurement Audits

Anh T. Doan, Auditor-in-Charge

Lydia C. Lin, Auditor

Ellis D. Lee, Auditor

Nancy C. Cipolla, Report Process Manager

Betty Weber, Operations Research Manager

Christina Head, Program Assistant