institute a customer satisfaction questionnaire, to be completed
by the contracting officer, rating the auditor’s responsiveness
and the value of the audit report itself, and providing an
opportunity for the contracting officer to state specific
disagreements. Because the response in our discussion
accepted our suggestions, we did not seek written comments.

OIG-99-CA-010 OFFICE OF INSPECTOR GENERAL Page 11
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Accuracy of ITC System Data - The OIG Audit Directorate should
ensure that bureaus are not prematurely closing contract audits in
the ITC System before PNMs are provided to the OIG and actual
monetary benefits are entered into the system.

Contract Audit Follow-up Proactive Approaches - The OIG Audit
Directorate could institute a customer satisfaction questionnaire,
to be completed by the contracting officer, rating the auditor’s
responsiveness and the value of the audit report itself, and
providing an opportunity for the contracting officer to state specific
disagreements. In discussion with the Assistant Inspector General
for Audit, the Deputy Assistant Inspector General for Program
Audit, and the Director, Procurement and Contract Audits, we
obtained general concurrence with our suggestions that the
Assistant Inspector General for Audit agreed to implement.

BACKGROUND

Each year up through Fiscal Year 1998, the OIG issued
approximately 70 to 80 contract audit reports based on work
performed by DCAA and IPAs. In Fiscal Year 1997, contract audits
identified nearly $26 million in funds to be put to better use and
over $6.7 million in questioned costs. The corresponding figures
for Fiscal Year 1998 were in excess of $5.2 million and over $2.6
million respectively. (The DCAA reimbursable figures for Fiscal
Years 1995 through 1998 are $488,386, $336,557, $390,829, and
$267,553.)

Within the Department, incurred costs contracts usually were not
adjusted until the contracts were closed, and many bureaus closed
out contracts without requesting an audit. In addition, a 1997
review conducted by the OIG’s Office of Evaluations’ determined
that bureaus might be closing contract audits before the OIG
received a copy of the PNMs, which should present the contracting
officer’s degree of reliance upon the audit findings.

‘ That report was OIG-96-E18, Department of the Treasury Audit Follow-up
Systems, issued in June 1997.

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 2
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Customs’ procurement office does not receive copies of the
system’s entries or its reports; and even the OIG’s Procurement
and Contract Audit staff, which uses an electronic spreadsheet to
track sustained costs, does not review data entered into the ITC
System after a contract audit has been uploaded.

Along with BEP, IRS is one of the two bureaus that most closely
track contract audits entered into the ITC System by the OIG.
However, IRS officials believe that contract audits should not be
included in the ITC System, but should instead be tracked in a
separate system. They maintain that the current approach
involves entering negotiating tools into a monetary tracking
system. In addition, an official from the Departmental Offices’
Financial Management Division further questioned the value of
including contract audits in the ITC System, and indicated that, if
this process is to continue, it would be far more efficient for the
Procurement Office to be directly tied into the ITC System and be
able to enter its own PCAs. The current centralized system of
having a single office within each bureau enter audit PCA data into
the ITC System has resulted in two contract audit tracking
methods, one within each bureau’s procurement office and the
OIG’s Procurement and Contract Audit staff, and the other within
the ITC System itself. The ensuing duplication of effort has led
numerous bureaus to question the need for including contract
audits in the ITC System.

Accuracy of ITC System Data. The analysis of the 348 contract
audits issued by the OIG between October 1992 and September
1996 confirmed that data entered into the ITC System is generally
accurate and complete. A few minor problems were identified,
including 5 audit reports’ (3 with monetary benefits) that did not
appear in the ITC System at all. Of greater significance was the
fact that 17 audit reports appeared to have been closed before
PNMs were provided to the OIG. Fourteen of those reports were on
Customs, and all but three involved questioned costs exceeding

° Those audit reports are OIG-94-130, OIG-95-023, OIG-95-029, OIG-95-030,
and OIG-95-031.

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 7
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Department by the OIG, IRS’, and the General Accounting Office.
Managers from the OIG, Treasury's bureaus, and the Offices of the
Assistant Secretary for Management/Chief Financial Officer (CFO)
and the Deputy CFO have access to the audit information
contained in the ITC System through the Department’s Executive
Information System.

The Audit Subsystem (hereinafter referred to as the ITC System)
serves as the Department’s primary automated tool for monitoring
and tracking the status of unimplemented recommendations.
Users can choose from 20 different types of reports to generate
information about audit reports, findings, recommendations, and
PCAs.

When an OIG audit report is issued, the OIG uploads the findings
and recommendations to the ITC System. The appropriate bureau
then enters PCAs, including original due dates, into the ITC
System for each recommendation. Audit reports are tracked
through the ITC System until final action is completed for every
PCA.

SCOPE AND METHODOLOGY

Our approach was to first obtain an understanding of the
Department’s contract audit process. We performed an analysis of
the total universe of 348 contract audits issued by the OIG
between October 1992 and September 1996 to identify savings
recommendations, and reviewed data from the ITC System to
determine the amounts that have been sustained and the number
of audits that have been closed. We conducted our work between
July 1997 and March 1999 in accordance with the President's

* Subsequent to this review, as part of IRS reform legislation, the Treasury
Inspector General for Tax Administration was created and assumed
responsibility for producing IRS internal audit reports, including contract
audits.

° The bureaus are responsible for entering status descriptions, revised due
dates, and closing dates, as appropriate, for each PCA.

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 4
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Treasury Contract Audit Process

The OIG’s and Bureaus’ Roles. All Treasury bureau requests for
preaward, cost incurred, and other contract audits are referred to
the OJG’s Procurement and Contract Audit staff within the Audit
Directorate. The Procurement and Contract Audit staff generally
either refers the audits to DCAA and other cognizant Government
audit agencies, or contracts with an IPA to do the audits.
Contracting officers in negotiating contracts use preaward audits,
which provide information on whether pricing proposals are fair
and reasonable. Incurred cost audits are used to determine the
allowability of direct costs and indirect cost rates under flexibly
priced contracts, and to establish audit-determined indirect rates
to facilitate the close out of contracts.

Once contract audits are completed by DCAA or an IPA and issued
by the OIG, the OIG enters the audits, along with any questioned
costs, into the ITC System. Under Treasury Directive 76-06,
Treasury bureaus are to provide the OIG with copies of the PNMs
for all contract audits. The Procurement and Contract Audit staff
tracks sustained costs on an electronic spreadsheet. Any actual
benefits that appear in the ITC System for contract audits are
entered by the bureaus themselves. In the five bureaus
interviewed -- the Bureau of Engraving and Printing (BEP),
Customs, the Departmental Offices, the Financial Management
Service (FMS), and the Internal Revenue Service (IRS) -- none of
the procurement offices had access to the ITC System. Rather,
Planned Corrective Action (PCA) and monetary benefits data were
entered by other bureau components, such as Customs’ Oversight
and Analysis Staff or the Departmental Offices’ Financial
Management Division.

ITC System. The ITC System is a Treasury-wide database that
monitors progress on internal control issues within the
Department. The Audit Subsystem is one of the ITC System's five
subsystems and tracks the findings, recommendations, and
corrective actions associated with audit reports issued on the

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 3
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Treasury Contract Audit Results

Potential Monetary Benefits and the ITC System. We found that
questioned costs are overstated because the auditors do not have
all of the information they need, such as technical evaluations,
which frequently are performed simultaneously with the contract
audit itself due to time constraints. As a result, many of the
bureau procurement officials we interviewed believe that contract
audits should be viewed as tools for negotiation, rather than as
hard and fast savings determinations. This position also is
supported by the Federal Acquisition Regulation.

Comparing the potential versus actual monetary benefits for the
348 contract audits analyzed, we identified 74 reports, in which
the two figures differed by more than $60,000 and which resulted
in a cumulative difference between potential and actual monetary
benefits of $179,754,342. All $207,578,869 of the potential
monetary benefits for the 74 reports was included in the Statistical
Summaries section of the appropriate issues of the Semiannual
Report to the Congress. The sustained total, reflected in the ITC
System, was $27,824,527.* At least four reports’, which previously
had been included in the Semiannual Report with total potential
monetary benefits of $22,896,526, had their PCAs in the ITC
System canceled, resulting in no actual monetary benefits.

Several bureaus now question the value of including contract
audits in the ITC System. The Summary Report of the SWAT Team
on Civilian Agency Contracting: Improving Contracting Practices and
Management Controls on Cost-Type Federal Contracts, issued on
December 3, 1992, recommended that the Treasury OIG ensure
that all contract audit findings are incorporated into the ITC
System. However, none of the procurement offices in the five
bureaus interviewed has access to the ITC System. In addition,

“ Supporting documentation was presented with the draft report and will be
made available to the Director, Procurement and Contract Audits and his staff.
° Those audit reports are OIG-94-109, OIG-94-122, OIG-94-134, and OIG-95-
054.

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 6
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Office of Inspector General
Administration of
Department of the Treasury
Contract Audits

OIG-99-CA-010 August 20, 1999

Office of Evaluations/GPRA

Office of Inspector General

SR RIOR CK

United States Department of the Treasury


itself, to be completed by the contracting officer. The officials
believe that the questionnaire, which also could provide an
opportunity for the contracting officer to state specific
disagreements, would increase bureau responsiveness to the
contract audit process.

SUGGESTIONS

We are offering the following suggestions, which we believe will
better enable the efficient, prompt, and proper resolution of
contract audit recommendations.

Potential Monetary Benefits and the ITC System. We suggest
that the OIG Audit Directorate:

e Draw a sample of contract audit recommendations and
perform an in-depth analysis to determine the causes for the
disparity between potential and actual monetary benefits,
along with solutions for reducing the difference. (Prior to
this review, the Procurement and Contract Audit staff
initiated a review comparing questioned costs and costs
sustained, which examined bureau justifications for not
using questioned cost information and searched for any
identifiable patterns. However, the review was never
completed due to staffing limitations, workload, and other
priority issues.)

e Conduct an analysis to determine whether contract audit
recommendations, which involve dollars for negotiating
purposes only, should be included in the ITC System or be
tracked by some other method.

Accuracy of ITC System Data. We suggest that the OIG Audit
Directorate:

e Ensure that bureaus are not prematurely closing contract
audits in the ITC System before PNMs are provided to the

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 9
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


$69,000. For the majority of these reports, Customs appeared to
be routinely closing the PCAs within days of their entry into the
ITC System with the notation, “A memo will be sent to the OIG”.

Contract Audit Follow-up Proactive Approaches. We found that
three of the Department’s bureaus--BEP, FMS, and IRS--have
taken a proactive approach to contract audit follow-up.

e BEP Contract Audit Follow-up

BEP closely tracks contract audits in the ITC System, noting
actual cost savings, and has implemented a number of
verification processes for contract audit data. If an extension is
required for a contract audit PCA, a reason must be provided
and the change must be approved by the Office Chief, the
Associate/Assistant Director, and the CFO. In addition, the
BEP procurement office approves all summaries, such as those
for due date extensions or PCA close out, before their inclusion
in the ITC System.

e FMS Contract Audit Follow-up

FMS’ Program Integrity Division is responsible for entering
bureau PCA information into the ITC System. Of the 36 FMS
contract audit reports included in the 348 that were analyzed,
the Program Integrity Division had validated corrective action
for 19 (or 53 percent).

e IRS Contract Audit Follow-up

IRS’ Cost and Price Analysis Branch maintains its own contract
audit database, which is reconciled with the OIG’s Procurement
and Contract Audit staffs electronic spreadsheet to ensure
accuracy. The branch also produces a monthly report on open
and closed contract audit reports, and the costs sustained. As
a further enhancement to the contract audit process, IRS
officials suggested that the OIG institute a questionnaire, rating
the auditor’s responsiveness and the value of the audit report

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 8
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Council on Integrity and Efficiency Quality Standards for
Inspections.

We reviewed policies, procedures, and other relevant
documentation; and interviewed management officials from
Treasury bureaus. Among the documents we analyzed were: Office
of Management and Budget Circular No. A-50; Treasury Directive
76-06; the Department of the Treasury Acquisition Regulation;
Federal Acquisition Regulation Part 31, Contract Cost Principles
and Procedures; the Federal Acquisition Streamlining Act of 1994;
and the Defense Authorization Act for Fiscal Year 1996.

Detailed interviews were conducted with management officials from
BEP, Customs, the Departmental Offices, FMS, IRS, and the OIG.
These interviews involved documenting the bureaus’ processes for
requesting and responding to contract audits, and included
questions related to officials’ roles and functions, offices’ methods
for recording and tracking contract audit recommendations, and
individuals’ concerns in the area of contract audit results.

FINDINGS

We found that:

e comparing the potential versus actual monetary benefits for the
348 contract audits analyzed, there were 74 reports with a
cumulative difference between potential and actual monetary
benefits of $179,754,342;

e including contract audit reports in the ITC System is of
questionable value; and

e during the time period examined, Customs appeared to be
routinely closing contract audits in the ITC System before PNMs
were provided.

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 5
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


OVERVIEW

The Office of Inspector General (OIG) conducted a review of the
Department of the Treasury’s contract audit process to determine
how Treasury’s bureaus respond to recommendations made by the
Defense Contract Audit Agency (DCAA) and independent public
accountants (IPAs).

Recognizing that the role of a contract auditor is to advise the
contracting officer on opportunities for savings, we analyzed the
auditors’ recommendations compared with the subsequent
negotiated amounts following 348 contract audits and found that
for 74 of these the cumulative difference between potential and
actual monetary benefits totaled $179,754,342. We also examined
the need for the Department and the OIG to track contract audit
recommendations through the Inventory, Tracking and Closure
(ITC) System and found that process to be of little value to either
the Department or the OIG. Finally, so long as contract audits
continue to be tracked in the ITC, we noted that the OIG does not
ensure that bureaus are forthcoming with information. For
example, U.S. Customs Service (Customs) in several instances
closed contract audits in the ITC System before Price Negotiation
Memorandums (PNMs) were provided to the auditors.

We are offering the following suggestions to assist the OIG in
improving the Department’s contract audit process.

Potential Monetary Benefits and the ITC System - The OIG Audit
Directorate should: (1) draw a sample of contract audit
recommendations and perform an in-depth analysis to determine
the causes for the disparity between potential and actual monetary
benefits, along with solutions for reducing the difference; and

(2) conduct an analysis to determine whether contract audit
recommendations should be included in the ITC System or be
tracked by some other method.

OIG-CA-99-010 OFFICE OF INSPECTOR GENERAL Page 1
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Appendix I

MAJOR CONTRIBUTORS TO THIS REPORT

Audit Directorate

Office of Evaluations\GPRA

Kenneth F. Clarke, Director
Christopher Heppe, Deputy Director
Stacey Brahmey, Program Analyst

OIG-99-CA-010 OFFICE OF INSPECTOR GENERAL Page 12
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


DEPARTMENT OF THE TREASURY
WASHINGTON, D.c. 20220

AUG 20 [999

OFFICE OF
INSPECTOR GENERAL

MEMORANDUM FOR DENNIS S. SCHINDEL
ASSISTANT INSPECTOR FOR GENERAL FOR AUDIT

A Cfo

of Evaluations/GPRA

FROM: Kenneth Clarke
Director, Offi

SUBJECT: OIG Administration of Department of the Treasury Contract
Audits

The attached report presents our review of the Department of the Treasury’s contract
audit process and more specifically the bureau’s response to audit recommendations. We
performed an analysis of the total universe of 348 contract audits by the Office of
Inspector General (OIG) between October 1992 and September 1996 to identify savings
recommendations, and reviewed data from the Inventory, Tracking and Closure (ITC)
System to determine the amounts that have been sustained, and the number of audits that
have been closed.

Our analysis determined that 74 contract audits had cumulative differences between
potential and actual monetary benefits totaled $179,754,342. We also examined the need
for the Department and the OIG to track contract audit recommendations through the ITC
System, and found the process to be of little value either to the Department or the OIG.
We have considered your comments and adjusted the report to reflect them. In addition,
we offered three suggestions to improve the contract audit process:

¢ Potential Monetary Benefits and the ITC System
e Accuracy of ITC System Data
e Contract Audit Follow-up Proactive Approaches

We are pleased that we obtained general concurrence with our suggestions and that work
to address these suggestions has begun.

We would like to extend our appreciation to your managers and staff for their cooperation
and courtesies extended to our staff during this review.

If you have any questions or require any further assistance, you may contact me at
(202) 283-1607 or a member of your staff may contact Chris Heppe, at (202) 283-1596.


CONTENTS

CONTENTS 00... .cccscccsessesssessecseesnessesecerecsesenesvecsessnscuessesseransevesressessnseseesessessetesaneereneaeeens i
OVERVIEW 0.0. ccccccccsesseessessessesenesseeressseerecenesnseressnesnesessensenssnssueseeseneeeesessuseresnesiereseessntes 1
BACKGROUND ou... ccccssesssesseeseessessnssneeseseeesnesscsuessnesnesecsuetsessncsuessetenesnsenssnseneseesaevseesees 2

Treasury Contract Audit Process ........c.cccsccccesessssesereseeeeieeesesesneasseseseeneseeseseenseeeeeseeee 3

e The OIG’S Bureaus’ Roles
e ITC System

SCOPE AND METHODOLOGY o000....0.cccccsccccececceseeseseeereseeeeeescsieseesesesisseseesnsenessenes 4

Treasury Contract Audit Results
e Potential Monetary Benefits and the ITC System
¢ Accuracy of ITC System Data

e Contract Audit Follow-up Proactive Approaches

SUGGESTIONS 00.0... 0.ceccescesese ces tesecsesesessessessesarearessessnssiesressesensensssesseteeteiseisansasereteessets 9
¢ Potential Monetary Benefits and the ITC System
e Accuracy of ITC System Data
¢ Contract Audit Follow-up Proactive Approaches

MANAGEMENT RESPONSE AND OIG COMMENTS ............::cccseceesestseseeseeeeeees 10


OIG and actual monetary benefits are entered into the
system.

Contract Audit Follow-up Proactive Approaches. We suggest
that the OIG Audit Directorate:

e Institute a customer satisfaction questionnaire, to be
completed by the contracting officer, rating the auditor’s
responsiveness and the value of the audit report itself, and
providing an opportunity for the contracting officer to state
specific disagreements.

MANAGEMENT RESPONSE AND OIG COMMENTS

We met with the Assistant Inspector General for Audit, Deputy
Assistant Inspector General for Program Audit and the Director,
Procurement and Contract Audit to discuss our suggestions.
Because we determined that neither the Department nor the
OIG was using the ITC to track contract audit
recommendations, they accepted our suggestion that the
Director, Procurement and Contract Audit will track the
recommendations with a spreadsheet’ and cease input of
contract audit recommendations to the ITC. To facilitate this
ITC change, the AIGA agreed to discuss its merits with the
Department. Because - in compliance with the FAR -
questioned costs are advisory, tracking them as audit
recommendations requiring the Department’s implementation
would serve no purpose. However, to be of greater service to the
Department, the AIGA said he will institute a new report
numbering process to clarify which audits are program,
financial, or contract. They also agreed that during Fiscal Year
2000, the Procurement and Contract Audit group will: draw a
sample of contract audit recommendations and analyze the
causes for the disparity between potential and actual monetary
benefits, along with solutions for reducing the difference; and

” The new Audit Management Information System, once designed and
implemented, likely will supersede the spreadsheet.

OIG-99-CA-010 OFFICE OF INSPECTOR GENERAL Page 10
ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS


Appendix 2
REPORT DISTRIBUTION
DISTRIBUTION NO. OF COPIES

Audit Directorate

Assistant Inspector General for Audit

Deputy Assistant Inspector General for Program Audit
Director, Audit Policy and Coordination

Director, Procurement and Contract Audit

ed

Management Services Directorate

Assistant Inspector General for Management Services 1
Total 5
OIG-99-CA-010 OFFICE OF INSPECTOR GENERAL Page 13

ADMINISTRATION OF DEPARTMENT
OF THE TREASURY CONTRACT AUDITS