U.S. Department of Energy 

Office of Inspector General 

Office of Audit Services 

Audit Report 

Washington Savannah River 

Company, LLC, Internal Audit 

Function 

DOE/IG-0811 January 2009 
Department of Energy 

Washington, DC 20585 

January 14, 2009 

MEMORANDUM FOR THLSECRETAEY 

FROM: Gregory *- Friedman 

Inspector General 

SCIBJECT: INFORMATION: Audit Report on the "Washington Savannah 

River Company, LLC Internal Audit Function" 

BACKGROUND 

The Washington Savannah River Company, LLC (WSRC), served as the management 

and operating contractor for the Department of Energy's Savannah River Site (SRS) from 

April 1, 1989, to July 3 1, 2008. [n accordance with the terms of its contract, WSRC 

expended Federal filnds for the operation and maintenance of SRS. WSRC was required 

to account for all filnds advanced by the Department and to safeguard Government assets 

in its care. Also, as required by its contract, WSRC was to annually prepare a Statement 

qfC'osl.~ Incurred und ('laimed, which it submitted to the Department for all Federal 

funds expended during the year. For Fiscal Year (FY) 2007, WSRC expended and 

claimed $1,420,986,556.87. 

The Office of Inspector General (01G). in coordination with the Department and its 

Contractor Internal Audit Council, developed and implemented a Cooperufive Audir 

Slr~~legy in October 1992 to maximize audit coverage of facility contractors, such as 

WSRC. As part of that strategy and under the terms of its contract, WSRC was required 

to maintain an internal audit function that was acceptable to the Department, based on 

certain specific criteria. For example, WSRC was to conduct a~ldits in accordance with 

professional audit standards. These audits were designed to ensure that costs charged 

were allowable, allocable to the Department, and reasonable in nature. These audits, in 

part, place the OIG in a position to rely on WSRC audit work in evaluating the adequacy 

of contractor internal controls over unallowable costs. Given the significance of WSRC 

expenditures and in response to quality concerns that surfaced during other reviews, we 

initiated this effort to determine whether audits completed by the WSRC Internal Audit 

Department (Internal Audit) during FY 2007 met both quality and professional auditing 

standards. 

RESULTS OF AUDIT 

Our review disclosed that work performed by WSRC Internal Audit during FY 2007 was 

not satisfactory in several material respects. Specifically. we found instances where: 

Auditors identified procurements that were not properly approved, but Internal 

Audit management permitted WSRC management to provide approvals three 

years after-the-fact. The WSRC auditors omitted the questioned costs associated 

with the procurements from the audit report; 
The WSRC lnternal Audit manager encouraged WSRC management to omit 

inforn~ation that confirmed improper labor cost allocations, an internal control 

weakness initially identified during audit testing; and, 

After the completion of audit testing, Internal Audit management directed a staff 

auditor to modify the testing attribute related to independent receipt of procured 

goods and services - an action that caused some of the questioned costs 

associated with this internal control weakness to be excluded from reporting. 

Our review established that, through the inappropriate modification of audit findings, 

Internal Audit failed to follow International Standards for the Professional Practice of 

Internal Auditing, as promulgated by the Institute of Internal Auditors (IIA Standards). 

In spite of advice and, in some instances, the documented dissent of staff internal 

auditors, Internal Audit management directed inappropriate changes to valid audit results. 

Similarly, WSRC officials were permitted to provide after-the-fact justifications and 

approvals for violations of various internal control procedures designed to prevent or 

detect unallowable costs. These actions violated professional standards related to auditor 

independence and objectivity; proper perfonnance of the audit engagement; and, 

appropriate communication of audit results. 

These problems occurred, at least in part, due to the failure of the Savannah River 

Operations Office to require WSRC to comply with the provisions of a required 2004 

internal audit contract clause and the associated Department-promulgated Acquisition 

Guide. This clause, part of Acquisition Letter AL-2005-04, issued on November 2, 2004, 

was designed to improve the practice of internal auditing across the Department by, 

among other things, strengthening reporting requirements and ensuring that Chief Audit 

Executives reported functionally to an independent governing body such as a Board of 

Directors, audit committee, or equivalent independent corporate governing body. 

Presumably, such a reporting arrangement may have prevented Internal Audit 

management from modifying results in favor of WSRC. An independent reporting 

arrangement may have also provided internal auditors who were directed to modify 

findings an opportunity to record and report their dissent to such an independent body 

without fear of reprisal from WSRC management. 

As a consequence, Federal managers at SRS were not provided with information 

necessary to fully comprehend the materiality of nor address and resolve internal control 

weaknesses. For example, one audit identified significant questioned costs, yet the 

questioned costs which exceeded $900,000, were omitted from the final audit report. In 

this and other cases, the changes were made without adequate rationale or justification. 

Exacerbating these issues, even when costs were questioned, Federal officials at SRS did 

not always furnish Internal Audit reports to applicable Federal Contracting Officers for 

adjudication of questioned cost issues. 

Based on issues identified in this report, we concluded that the work performed by 

Internal Audit in FY 2007 could not be relied on. Until these deficiencies are corrected, 

we are unable to assess the allowability and allocability of the over $1.4 billion in costs 
incurred and claimed by WSRC. To aid in resolution, we made a number of 

recommendations designed to address Internal Audit deficiencies. 

MANAGEMENT REACTION 

Management disagreed with certain of our conclusions. Nonetheless, it acknowledged 

that there were problems with questionable practices by Internal Audit management, 

including lack of independence and material \. iolations of professional standards. 

Management proposed corrective actions that are responsive to our recommendations. 

Management's comments and our responses are summarized in the body of our report. 

Attachment 

cc: Acting Deputy Secretary 

Under Secretary of Energy 

Administrator, National Nuclear Security Administration 

Assistant Secretary for Environmental Management 

Chief of Staff 

Manager, Sab annah River Operations Office 

Team Leader, Audit Liaison Team, CF-1.2 
REPORT ON WASHINGTON SAVANNAH RIVER COMPANY, LLC, 

INTERNAL AUDIT FUNCTION 

TABLE OF 

CONTENTS 

Compliance With Professional Audit Standards

Details of Finding 1 

Recommendations 6 

Comments 7 

Appendix

1. Objective, Scope, and Methodology 8 
COMPLIANCE WITH PROFESSIONAL AUDIT STANDARDS 

Page 1 Details of Finding 

WSRC's Internal Our review disclosed that work performed by Washington 

Audit Work Savannah River Company, LLC's, Internal Audit Department 

(Internal Audit) during Fiscal Year (FY) 2007 did not always 

comply with quality or professional standards established by 

International Standards for the Professional Practice of Internal 

Auditing as promulgated by the Institute of Internal Auditors (IIA 

Standards). Prior to relying on work performed by Internal Audit, 

generally accepted government auditing standards require the 

Office of Inspector General (OIG) to evaluate such work to ensure 

it meets quality and professional standards. As such, we conducted 

a review of two of the five audits completed during FY 2007, 

namely the Procurement Card Audit and the Accounting and 

Control of Labor Costs Audit, to determine whether Internal Audit 

had – as asserted in each of its published audit reports – complied 

with IIA Standards. Based on that review, we identified several 

material instances in which Internal Audit did not adhere to 

established IIA Standards related to Independence and Objectivity, 

Performing the Engagement, and Communicating Results. 

Independence and Objectivity

Several actions taken by Internal Audit management raise concerns 

regarding its independence and objectivity. According to IIA 

Standard 1100 – Independence and Objectivity, the internal audit 

activity should be independent, and internal auditors should be 

objective in performing their work. However, during our review of 

Internal Audit's working papers, we noted certain communications 

to Washington Savannah River Company, LLC (WSRC), 

management from Internal Audit management proposing methods 

to reduce the severity of audit findings. For example, Internal 

Audit management notified WSRC management that Internal 

Audit had identified a significant control deficiency in approving 

certain procurements that had been made in FY 2004. However, 

WSRC management could "remedy" these deficiencies by 

approving the sampled procurements nearly three years after the 

procurements had occurred. WSRC management complied with 

Internal Audit management's suggestion and the questionable costs 

associated with the control weakness were excluded from the final 

report. 

In another audit, we noted that Internal Audit management advised 

WSRC management to reword its official response because it 

could result in the Department of Energy's (Department) 

contracting officer requesting WSRC to repay the questioned costs. 

In conducting an audit of labor adjustments, Internal Audit 
 

Page 2 Details of Finding 

identified and questioned $919,000 of inappropriate labor 

adjustments. Internal auditors delineated each of the questioned 

costs on a spreadsheet and requested WSRC management's 

preliminary response to each of the questioned adjustments. In 

responding, WSRC management stated that based on its analysis, 

$151,000 of labor hour adjustments were inappropriate and that 

they wanted to meet with Internal Audit to further discuss their 

response. During the course of the subsequent meeting, Internal 

Audit management proposed that management omit from its 

official response any reference to WSRC management's conclusion 

that inappropriate labor hour adjustments were made. Further, 

Internal Audit management suggested that WSRC management's 

response not identify the amount of questioned costs agreed with 

or even that management had completed its review of the 

questioned labor adjustments. By including this information in its 

official response, Internal Audit management postulated that the 

contracting officer could have a basis to request WSRC to 

reimburse the Department for the inappropriate labor charges. 

Based on this evidence, we believe that the Internal Audit activity 

was not independent or objective in performing its work and that 

its actions were designed to prevent the reporting of questioned 

costs. 

Performing the Engagement

In evaluating the audit working papers, Internal Audit 

management's direction to resolve audit exceptions appeared 

inappropriate and minimized the extent of questioned costs 

identified. IIA Standard 2300 – Performing the Engagement, 

states that internal auditors should identify, analyze, evaluate, and 

record sufficient information to achieve the engagement's objective 

and that the audit should be properly supervised to ensure 

objectives are achieved and quality is assured. While we found 

that the auditors had conducted and documented a thorough 

analysis and evaluation of audit evidence, Internal Audit 

management's direction in dealing with the anomalies identified by 

staff auditors appeared to be inappropriate and unjustified. 

In conducting its audit of procurement cards, Internal Audit 

selected a statistical sample of 68 requisitions from a universe of 

12,455 to test whether WSRC's internal controls over procurement 

cards were in place and functioning. Among the various attributes 

tested was whether there was evidence of independent receipt of 

the procured item by someone other than the card holder. Out of 

the sample, Internal Audit identified 10 requisitions that did not 

meet the established attribute. Initially, the internal auditor 
 

Page 3 Details of Finding 

projected this error rate to the universe and noted the exceptions in 

the working papers. In conducting a supervisory review of the 

work, Internal Audit management directed the attribute be 

modified such that the internal auditor would accept any 

documentation of receipt regardless of independence. Therefore, 

the projection of questioned costs was reduced by over 50 percent 

and the significance and extent of errors related to the established 

internal control was inaccurately reported. 

Another attribute tested was whether or not procurement card 

transactions had been approved by someone other than the 

cardholder. Initial testing by the internal auditor identified 11 

transactions in which evidence of approval authority by someone 

other than the cardholder was not properly documented. The 

internal auditor projected the results of this error rate to the 

universe. After reviewing the audit working papers, Internal Audit 

management allowed WSRC management to retroactively approve 

the procurements in order to reduce the error rate of the sample 

even though the procurements had occurred three years earlier. 

The internal auditor was then directed to accept the subsequent 

approval as adequate documentation that the procurements had 

been properly approved. Ultimately, none of the projected 

questioned costs, statistically projected at approximately $991,510, 

were included in the audit report. Such action impacted the quality 

of the audit in that the report did not provide information to 

Federal management that would have given them an understanding 

of the significance of the error. 

Communicating Results

Internal Audit did not clearly communicate the results of work in 

its issued reports. IIA Standard 2400 – Communicating Results, 

states that final communication of engagement results should, 

where appropriate, contain the internal auditor's overall opinion 

and/or conclusions and that they should be accurate, objective, 

clear, concise, constructive, complete, and timely. However, the 

audit reports we reviewed did not completely and accurately 

disclose the audit results identified in the working papers. 

In comparing audit evidence to reported results for the 

procurement card audit, we found that the internal auditor 

identified questioned costs associated with eight audit exceptions 

in the audit working papers, but only a portion of the questioned 

costs were disclosed in the audit report. According to the audit 

working papers, the internal auditor questioned costs of 

approximately $2 million based primarily on Federal Acquisition 
 

Page 4 Details of Finding 

Regulations (FAR) 31.201. According to FAR, costs may be 

considered unallowable if there are significant deviations from the 

contractor's established practices. The audit working papers noted 

an expected error rate of 0.3 percent and a tolerable error of 

$90,000. Because the noted projected errors of approximately 

$2 million significantly exceeded the established tolerable error 

rate, we believe that the error was significant enough to warrant 

reporting the amount to Federal management. However, the final 

report only identified $308,000 of questionable costs associated 

with two of the eight documented audit exceptions. 

Also, Internal Audit did not clearly communicate the results of its 

audit work related to the labor cost audit. The audit was conducted 

to determine whether labor costs were properly accumulated, 

distributed and reported. After identifying 15,803 hours of 

questionable labor adjustments, Internal Audit provided WSRC 

management with a spreadsheet for its preliminary review and 

comment. WSRC management responded that 2,051 hours were 

inappropriately adjusted. In Internal Audit's subsequent report, 

there was no mention or quantification of the extent or magnitude 

of the inappropriateness of labor adjustments. Rather, the report 

simply noted that certain labor hour adjustments did not appear to 

comply with applicable Cost Accounting Standards, WSRC's 

Disclosure Statement, Department Accounting Handbook, and/or 

WSRC contract terms and conditions. 

Independence and Over the past two years, we have reported other weaknesses 

Oversight of related to Internal Audit. Earlier this year, we reported that the 

Internal Audit Savannah River Operations Office (Savannah River) had not 

Function required WSRC to comply with provisions of Department 

Acquisition Letter AL-2005-04. Issued on November 2, 2004, the 

Acquisition Letter was designed to improve the practice of internal 

auditing across the Department. Among other things, it requires 

the internal audit activity to establish and report to an independent 

governing body such as a Board of Directors or audit committee in 

an effort to ensure its independence and objectivity. In this case, 

such an independent reporting arrangement may have prevented 

Internal Audit management from modifying results in favor of 

WSRC. An independent reporting arrangement may have also 

provided internal auditors who were directed to modify findings an 

opportunity to record and report their dissent to such an 

independent body without fear of reprisal from WSRC 

management. 

The Acquisition Letter also provides assurance regarding 

adherence to professional standards while discussing such matters 
 

Page 5 Details of Finding 

as how WSRC will ensure that incurred contract costs are 

allowable under the cost principles of the contract. Our report 

recommended that the Department modify the WSRC contract to 

require Internal Audit to comply with the provisions of the 

Acquisition Letter. Initially, the Department concurred with the 

recommendation and proposed a modification to the WSRC 

contract. However, the Department did not incorporate this 

modification into the WSRC contract until August 8, 2008. 

Also, in 2007, we reported that the Internal Audit function had not 

followed internal written procedures when performing and 

documenting its internal peer reviews and supervisory review of 

working papers. As a result, we recommended the Department 

direct Internal Audit to comply with established policies and 

procedures to ensure that supervisory review is thoroughly and 

sufficiently performed and documented. The Department 

concurred with the recommendation and indicated that corrective 

actions had been initiated. 

Involvement of Finally, we found that Internal Audit's reports were not distributed 

Contracting Officer to the Department's Contract Management Division for oversight 

and action. WSRC's contract requires that results of internal 

audits, including the working papers, shall be submitted or made 

available to the contracting officer. To ensure that questioned 

costs were resolved appropriately, Savannah River assigns 

responsibility for oversight of Internal Audit to both its Financial 

Evaluation Team and the Contracts Management Division. As 

such, Savannah River's Integrated Performance Assurance Manual

notes that these organizations and other Savannah River personnel 

need to be cognizant of the costs being charged by the contractor 

and, if the costs appear to be unreasonable or otherwise 

questionable, the issue needs to be identified to the contracting 

officer for resolution. 

In spite of the Savannah River policy, however, the contracting 

officer with cognizance over the WSRC contract told us that she 

had not been provided with audit reports issued by Internal Audit. 

Rather, the reports had only been provided to the Savannah River 

Financial Evaluation Team. Based on our inquiries, the Financial 

Evaluation Team indicated that it had not provided copies to the 

contracting officer. Further, we noted that Savannah River had no 

formalized process to ensure that those receiving Internal Audit's 

reports distributed them to appropriate Federal contract 

management personnel for action and follow-up. As a result, the 

Savannah River Contracts Management Division had not taken 

action to follow-up on questioned costs reported by Internal Audit.
 

Page 6 Recommendations 

Impact on Internal As noted in the Acquisition Guide outlining the Cooperative Audit 

Controls and Strategy, an Internal Audit organization should provide 

Allowability of independent, objective assurance and consulting activities. One of 

Costs its primary duties is to conduct independent and objective reviews, 

in accordance with standards promulgated by the Institute of 

Internal Auditors, to assess the allowability of costs in accordance 

with the applicable cost principles of the contract. An 

independent, objective, and reliable internal audit function is 

therefore an essential part of the contractor's internal control 

function and is critical to the overall success of the Cooperative 

Audit Strategy. Failure to maintain an internal audit function that 

is satisfactory to the Department significantly increases the risk 

that unallowable costs will be incurred and not detected in a timely 

manner. 

Based on issues identified in this report, we concluded that the 

work performed by Internal Audit in FY 2007 could not be relied 

on. Unless and until the deficiencies are corrected consistent with 

the terms of the WSRC contract, we will be unable to make an 

assessment of the allowability and allocability of the over $1.4 

billion in costs incurred and claimed by WSRC. To aid in 

resolution, we made a number of recommendations designed to 

address Internal Audit deficiencies, require determination of 

whether costs associated with the internal audit function are 

allowable, and whether questioned costs originally identified by 

WSRC internal audit, but not reported, are allowable. 

RECOMMENDATIONS We recommend that the Manager, Savannah River Operations 

Office: 

1. Require that all contractor internal audit reports be 

provided to the applicable Federal Contracting official for 

resolution of all questioned costs; 

2. Make a determination on whether questioned costs 

identified by Internal Audit, but not reported, are allowable; 

3. Perform a review of the WSRC Allowability of Cost Audit 

for 2007, in accordance with generally accepted 

government auditing standards, to ensure that the work of 

Internal Audit can be relied on; and, 

4. Determine whether WSRC's fee should be reduced due to 

deficient performance by Internal Audit during FY 2007. 
 

Page 7 Comments 

MANAGEMENT Overall, Management disagreed with our audit conclusion that 

AND AUDITOR the work performed by Internal Audit in FY 2007 could not be 

COMMENTS relied on. This opinion was based on the results of two reviews 

conducted by parties external to Savannah River. However, 

Management acknowledged that weaknesses existed within 

Internal Audit and provided planned actions to address these 

weaknesses. Specifically, Management concurred with 

recommendation 1 and stated that Internal Audit will be required to 

include distribution of all reports to the Federal Contracting 

official. Further, in response to recommendation 2, Management 

stated that the Savannah River Chief Financial Office will obtain 

and provide to the Federal Contracting official, all information 

deemed necessary to provide full disclosure and assist in the 

determination of allowability of costs. Additionally, in response to 

recommendation 3, Management stated that the Savannah River 

Financial Evaluation Team Leader will perform a review of the 

Allowability of Cost Audit for 2007 to include a general working 

paper review and a reconciliation of the final report to the 

supporting working papers. Finally, in response to 

recommendation 4, Management stated that the Federal 

Contracting official will make a determination if a fee reduction is 

required due to deficient performance by Internal Audit during 

FY 2007. 

 Despite Management's position that the work of Internal Audit 

could be relied upon, we believe that our work adequately supports 

our opinion. Further, the two external reviews cited by Savannah 

River appear to support our conclusions. For example, the review 

conducted by the Office of Environmental Management 

Consolidated Business Center determined that serious weaknesses 

exist with Internal Audit including questionable practices by the 

Internal Audit manager, lack of independence of the Internal Audit 

manager, appropriateness of audit reporting and the length of time 

it takes to complete some internal audits. A review by a Certified 

Public Accountant retained by WSRC to evaluate our results also 

concluded that certain IIA standards were not followed. 

 We consider Management's planned actions related to our 

recommendations to be responsive. The review activities 

contemplated by Management in response to recommendation 3 

should be performed in accordance with generally accepted 

government auditing standards and sufficient documentation 

should be maintained to enable the Office of Inspector General to 

make an assessment of the allowability and allocability of costs 

incurred and claimed by WSRC during FY 2007. 
Appendix 1 

Page 8 Objective, Scope, and Methodology 

OBJECTIVE The objective of this audit was to determine whether audits 

completed by the Washington Savannah River Company, LLC's, 

(WSRC) Internal Audit Department (Internal Audit) during Fiscal 

Year (FY) 2007 met both quality and professional auditing 

standards. 

SCOPE The audit was performed from March 2008 to August 2008 at the 

Savannah River Operations Office (Savannah River) and the 

offices of WSRC in Aiken, South Carolina. The scope of the audit 

was limited to a review of a representative sample of reports and 

associated working papers for audits issued by the WSRC Internal 

Audit during FY 2007.

METHODOLOGY To accomplish the audit objective, we: 

• Obtained and reviewed Department of Energy guidance 

and requirements for contractor internal audit functions, 

including specific WSRC contract requirements; 

• Reviewed applicable standards for the professional 

practice of internal auditing; 

• Interviewed key personnel at Savannah River; and, 

• Obtained and reviewed WSRC Internal Audit reports and 

associated working papers. 

We conducted this performance audit in accordance with generally 

accepted Government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit work. Specifically, we reviewed 

the work of WSRC Internal Audit for FY 2007 to determine the 

extent to which the Office of Inspector General could rely upon the 

work and thereby avoid duplicate efforts. Because our review was 

limited, it would not necessarily have disclosed all internal control 

deficiencies that may have existed at the time of our audit. Finally, 

we did not rely on computer processed data to accomplish our 

audit objective. 

An exit conference was held with Savannah River Operations 

Office management on December 11, 2008. 
IG Report No. DOE/IG-0811

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