Audit of SEC’s Controls over Support 

Service, Expert and Consulting Service 

Contracts 

March 29, 2013 

Report No. 513 

REDACTED PUBLIC VERSION 
UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

OFFICE OF 

INSPECTOR GENERAl.. 

MEMORANDUM 

March 29, 2013 

To: Vance C,athell, Director, Office of Acquisitions 

From: Carl ~~t~~al, Office of Inspector General 

Subject: Audit of SEC's Controls over Support Service, Expert and Consulting 

Service Contracts, Report No. 513 

This memorandum transmits the U.S. Securities and Exchange Commission Office 

(SEC) of Inspector General's (OIG) final report detailing the results on the Audit of 

SEC's Controls over Support Service, Expert and Consulting Service Contracts. 

This audit was conducted as part of our continuous effort to assess management of 

the Commission's programs and operations and as a part of our annual audit plan. 

The final report contains seven recommendations which if fully implemented should 

strengthen the Office of Acquisition's (OA) controls over support service, expert and 

consulting service contracts. OA concurred with all the recommendations. Your 

written response to the draft report is included in Appendix V. 

Within the next 45 days, please provide the OIG with a written corrective action plan 

that is designed to address the recommendations. The corrective action plan 

should include information such as the responsible official/point of contact, 

timeframes for completing required actions, and milestones identifying how you will 

address the recommendations. 

REDACTED PUBLIC VERSION 
 
Should you have any questions regarding this report, please do not hesitate to 

contact me. We appreciate the courtesy and cooperation you and your staff 

extended to our office. 

Attachment 

cc:	 Elisse B. Walter, Chairman 

Erica Y. Williams, Deputy Chief of Staff, Office of the Chairman 

Luis A. Aguilar, Commissioner 

Troy A. Paredes, Commissioner 

Daniel Gallagher, Commissioner 

Jeff Heslop, Chief Operating Officer, Office of Chief of Operations 

Judith Blake, Branch Chief, Business Management Office, Office of 

 Acquisitions 

 

 

 

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1 Federal Acquisition Regulation, Subpart 37.1 – Services Contract-General, Clause 37.104 – Personal Services
 

Contracts.
 2 Federal Acquisition Regulation, Subpart 7.5 – Inherently Governmental Functions, Clause 7.503 – Policy.
 

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Audit of SEC’s Controls over Support Service,

Expert and Consulting Service Contracts 

Executive Summary 

The U.S. Securities and Exchange Commission (SEC or Commission) Office of 

Inspector General (OIG) contracted with Castro & Company, LLC (Castro & Co) to 

conduct an audit of the SEC’s support services, expert and consulting service 

contracts and identify potential areas for improvement. 

The SEC’s mission is to protect investors; maintain fair, orderly, and efficient 

markets; and facilitate capital formation. The SEC has approximately 3,500 

employees and 1,540 contractors the SEC uses to aid in completing its mission. 

Over the years the Commission has issued a number of support services, expert 

and consulting service contracts. The SEC’s use of contractors and the 

administration of contracts are governed by the Federal Acquisition Regulation 

(FAR). The 48 Code of Federal Regulation, Chapter 1, FAR provides uniform 

policies and procedures for acquisitions that executive agencies such as the SEC, 

are to follow. 

The Office of Acquisitions (OA) executes contracts for SEC offices and divisions’ 

procurement needs, maintains contract administration and oversees contracting 

officer’s representative (COR) training and certification, the government purchase 

card program, and acquisition policy. OA performs best-value contracting to assist 

its customers in accomplishing the SEC's mission. SEC’s acquisition workforce 

(contracting personnel) includes contracting officers (CO), contract specialists, 

CORs, and program managers. 

At the SEC, CORs and program managers are responsible for ensuring sufficient 

direction is provided to contractor personnel, contract terms are met and the 

government’s interests are protected, without assuming supervision and control 

over contractor personnel’s day-to-day activities. 

The audit focused on the provisions of FAR 37.104,

1 which pertains to Personal 

Services Contracts (PSC) and FAR 7.5,

2 which describes Inherently Governmental 

Functions (IGF). The government is normally required to obtain its employees by 

direct hire under competitive appointment or other procedures required by civil 
 

 

 

 

3 See Appendix II. 

4 See FAR Subpart 7.503. 

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service laws. Obtaining personal services by contract, rather than by direct hire 

circumvents those laws, unless Congress has specifically authorized acquisition of 

the services by contract. The FAR characterizes a PSC as a contract where an 

employer-employee relationship is created between the government and contractor 

personnel. The employer-employee relationship may be created by the contract 

terms or the manner in which the contract is administered (e.g., by subjecting 

contractor personnel to relatively continuous supervision and control of a 

government officer or employee). 

The FAR 37.104(d) has identified six descriptive elements that, along with other 

definitional and descriptive sections of FAR part 37, should be considered when 

assessing whether a contract is personal in nature.

3 

Services that are inherently governmental in nature should not be acquired. For 

example, contracting for policy decisions is not allowable because it is an 

inherently governmental function. However, support services to analyze policy and 

provide recommendations are allowable. Also, contractors should not be used to 

prepare testimony to Congress or to lobby Congress. Further, caution should be 

exercised in allowing contractors to accept products or activities on behalf of the 

government because these actions are normally considered to be inherently 

governmental functions.

4 

Objectives. The overall objective of the audit was to determine whether OA, when 

awarding support services, expert and consulting service contracts, complied with 

governing laws and regulations regarding PSCs and IGFs. Specific audit 

objectives included: 

•	 Determine if OA has developed appropriate controls and has written
 

policy that prevents contractors from performing personal services
 

and inherently governmental functions.
 

•	 Identify the procedures OA has established and uses to monitor and 

carryout the terms of these contracts in accordance with governing
 

federal laws, regulations and its internal policy.
 

•	 Assess whether OA developed controls to ensure the SEC is
 

properly charged for the services that are rendered under the terms
 

of these contracts.
 

•	 Identify best practices and possible cost savings or funds put to 

better use, and provide recommendations to improve SEC’s
 

contracting practices.
 
 

 

 

 

 

5 See Appendix III for FAR 37.104(d) six elements. 

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Where appropriate, Castro & Co also identified areas for improvement. 

Results. Prior to November 15, 2012, OA did not have any written policy related to 

the management and administration of service contracts. Further, OA had not 

adopted any controls at the time that would prevent contracting personnel or SEC 

staff from forming employer-employee relationships and entering into PSCs.5 We 

identified a number of control deficiencies concerning the SEC’s controls over 

support service and consulting contracts. Specifically, through analysis and 

interviews we determined that three support service and consulting contracts/task 

orders may have resulted in possible employer-employee relationships due to SEC 

personnel’s continuous supervision of the contractors. Also, we found three 

awarded service contracts included language that aligns with PSC characteristics. 

In addition, we identified three service contracts/task orders that contained 

language that could indicate the performance of IGFs by contractors. This language 

should not have been included in the contracts. Because OA did not provide 

adequate oversight of these contracts it could have resulted in contractors 

performing IGFs. We also determined that OA did not take adequate measures in 

developing contract language for specific contracts to describe the contractors’ job 

duties and responsibilities. 

OA’s newly issued guidance and operating procedures are comprehensive, but 

need to be further strengthened to better ensure SEC personnel are trained and are 

given current guidance regarding their responsibilities to administer and manage 

contractors and are cognizant of FAR violations pertaining to employer-employee 

relationships, PSCs and contractors conducting IGFs. 

Also, we found OA has established controls to ensure that the SEC is appropriately 

charged for services received. Based on our discussions with OA personnel and 

analysis of invoices tested, the SEC controls over contractor invoicing appears 

reasonable. 

Finally, we performed benchmarking with other federal agencies to identify best 

practices that could to improve SEC contracting practices. Recommendations on 

how to improve SEC contracting practices are included below. 

Summary of Recommendations. Based on the results of our audit, we 

recommended OA request OGC review the contracts identified in this audit for 

compliance with the FAR provisions on PSCs and IGFs and take necessary 

corrective actions for the contracts that remain open. We also recommended OA 

review support services contracts to ensure the contracts are designed and written 
 

 

 

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to prevent PSCs and contractors from performing IGFs. Finally, we recommended 

OA implement its recently published administrative regulation and operating 

procedures on service contracts and provide training to contracting personnel and 

other program personnel who work with contractors on service contracts. 

Management’s Response to the Report’s Recommendations. OIG provided OA 

with the formal draft report on March 21, 2013. OA concurred with all 

recommendations in this report. OIG considers the report recommendations 

resolved. However, the recommendations will remain open until documentation is 

provided to OIG that supports each recommendation has been fully implemented. 

OA’s response to each recommendation and OIG’s analysis of their responses are 

presented after each recommendation in the body of this report. 

The full version of this report includes information that the SEC considers to be 

sensitive and proprietary. To create this public version of the report, OIG redacted 

(blacked out) potentially sensitive, proprietary information from the report. 
 

 

 

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TABLE OF CONTENTS 

Executive Summary...................................................................................iii
 

Table of Contents ....................................................................................vii
 

Background and Objectives...............................................................................1
 

Background ................................................................................................ 1
 

Objectives ................................................................................................... 4
 

Findings and Recommendations ................................................................... 5
 

Finding 1: OA’s Oversight of Service Contracts and Language in Service
 

Contracts Needs Improvement ...................................................5
 

Recommendation 1 .............................................................. 10
 

Recommendation 2 ............................................................. 11
 

Recommendation 3 .............................................................. 11
 

Finding 2: OA Awarded Service Contracts That Allowed Contractors to
 

Perform Inherently Governmental Functions ............................12
 

Recommendation 4 .............................................................. 15
 

Recommendation 5 .............................................................. 16
 

Finding 3: OA’s New Guidance Pertaining to the Managing and 

Administering Service Contracts Should Be Improved in Some
 

Areas ....................................................................................... 16
 

Recommendation 6 .............................................................. 21
 

Recommendation 7 .............................................................. 22
 

Appendices 

Appendix I: Abbreviations. ..................................................................... 23
 

Appendix II: Scope and Methodology...................................................... 24
 

Appendix III: Criteria. ................................................................................ 28
 

Appendix IV: List of Recommendations.................................................... 31
 

Appendix V: Management Comments......................................................33
 

Tables 

Table 1: Support Services and Consulting Service Contracts that May 

Have Been Administered as Personal Service Contracts............................. 6
 

Table 2: Contracts that Contained Language that Could Indicate the 

Performance of IGFs by Contractors..........................................................13
 
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Background and Objectives
 

Background 

The U.S. Securities and Exchange Commission (SEC or Commission) Office of 

Inspector General (OIG) contracted with Castro & Company, LLC (Castro & Co) to 

conduct an audit of the SEC’s support services, expert and consulting service 

contracts and identify potential areas for improvement. 

The SEC’s mission is to protect investors; maintain fair, orderly, and efficient 

markets; and facilitate capital formation. The SEC has approximately 3,500 

employees and 1,540 contractors that are used to aid in completing its mission. 

Over the years the agency has issued a number of support services, expert and 

consulting service contracts. The SEC’s use of contractors and the 

administration of contracts are governed by the Federal Acquisition Regulation 

(FAR). The 48 Code of Federal Regulation, Chapter 1, FAR provides uniform 

policies and procedures for acquisitions that executive agencies such as the SEC 

are to follow. 

Office of Acquisitions 

The Office of Acquisitions (OA) is led by a director and consists of five branches 

that are overseen by branch chiefs. Overall, OA executes contracts for SEC 

offices and divisions’ procurement needs, maintains contract administration, and 

oversees contracting officer’s representative (COR) training and certification, the 

government purchase card program, and acquisition policy. OA performs bestvalue contracting to assist its customers in accomplishing the SEC's mission. OA’s 

acquisition workforce includes contracting personnel such as contracting officers 

(CO), contract specialists, CORs, and program managers. 

The CO is the U.S. government's authorized agent for dealing with contractors and 

has sole authority to solicit proposals, negotiate, award, administer, modify, or 

terminate contracts and make related determinations and findings on behalf of the 

U.S. government. The CO has the overall and primary responsibility for the 

administration of contracts. 

At the SEC, CORs, and program managers are responsible for ensuring that 

sufficient direction is provided to contractor personnel, the contract terms are met 

and the government’s interests are protected, without assuming supervision and 

control over contractor personnel’s day-to-day activities. 
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On November 15, 2012, OA issued SECR 10-24, Management and 

Administration of Service Contracts (SECR 10-24). The SECR 10-24 is 

comprehensive and provides direction to SEC staff regarding the avoidance of 

employee-employer relationships, personal services, and inherently governmental 

functions (IGF). Also, in November 2012, OA issued Operating Procedures (OP) 

10-24 to accompany the SECR 10-24. OP 10-24 is comprised of in-depth 

guidance and procedures SEC contracting personnel and employees should follow 

regarding the administration and oversight of service contracts. OP 10-24 consists 

of the following distinct areas: 

1.	 Service Contract Checklist. 

2.	 Desk Reference: Management and Administration of Service 

Contracts.
 

3.	 Training SECR, OP 10-24 and Checklist. 

4. Training slides, “SEC Employees: Rules for Working with 

Contractors.”
 

Overview of Personal Services Contracts 

The government is normally required to obtain its employees by direct hire under 

competitive appointment or other procedures required by civil service laws. 

Obtaining personal services by contract, rather than by direct hire circumvents 

those laws, unless Congress has specifically authorized acquisition of the services 

by contract. FAR 37.104 prohibit agencies from awarding personal services 

contracts (PSC) unless specifically authorized by statute. Hence, PSCs generally 

are not allowable. 

The FAR characterizes a PSC as a contract where an employer-employee 

relationship is created between the government and contractor personnel. The 

employer-employee relationship may be created by the contract terms or the 

manner in which the contract is administered (e.g., by subjecting contractor 

personnel to relatively continuous supervision and control of a government officer 

or employee. An inappropriate employer-employee relationship may develop 

through the actions of government personnel such as COs, contract specialists, 

CORs, or program managers. In addition, government personnel in supervisory 

roles at the SEC, such as branch chiefs or team leads who are not officially 

appointed as the COR or program manager, may exert inappropriate control over 

contractor personnel through their day-to-day interactions with the contractors. 

When contractor personnel are continuously supervised by a government 

employee, as though the contractor employee is a civil servant employee, the 

contract can have characteristics of a personal services contract. An example of 

how a non-personal services contract might improperly expand into a personal 

services area includes when contractor personnel fall under the direct supervision 

and control of agency management. Such control is evidenced by the government 
 

 

6 See Appendix II. 7 See FAR Subpart 7.503. 

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employee performing tasks such as specifying the contractor personnel’s duties, 

approving hours of work or leave, providing performance appraisals, and issuing 

disciplinary action against the contractor employee. Unless specifically authorized 

by legislation, agencies cannot enter into such contracts. 

Hence, while the government is responsible for oversight of its contracts, 

government employees must avoid direct supervision of contractor employees to 

fill the government’s contract requirements. The FAR 37.104(d) has identified six 

descriptive elements that, along with the other definitional and descriptive sections 

of FAR part 37, should be considered when assessing whether a contract is 

personal in nature. 6 

Overview of Inherently Governmental Functions 

FAR Subpart 37.203 lists five prohibited uses for advisory and assistance services 

contracts— 

(1) to perform work of a policy, decision-making, or managerial nature
 

which is the direct responsibility of agency officials [see discussion 

of inherently governmental functions below];
 

(2) to bypass or undermine personnel ceilings, pay limitations, or
 

competitive employment procedures;
 

(3) to contract with former government employees on a preferential
 

basis;
 

(4) to aid in influencing or enacting legislation; or 

(5) to obtain professional or technical advice which is readily available 

within the agency or another Federal agency.
 

Services that are inherently governmental in nature should not be acquired. For 

example, contracting for policy decisions is not allowable because it is an 

inherently governmental function. However, support services to analyze policy 

and provide recommendations are allowable. Also, contractors should not be 

used to prepare testimony to Congress or to lobby Congress. Further, caution 

should be exercised in allowing contractors to accept products or activities on 

behalf of the government because these actions are normally considered to be 

inherently governmental functions.

7 
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OA’s Support Services, Expert Witness, and Consulting Service Contracts 

Invoicing 

Time and materials contracts provide for acquiring supplies/services on the basis 

of direct labor hours at specified fixed hourly rates and materials at cost, including 

material handling costs if appropriate. Labor-hour contracts are a variation of time 

and materials contracts and they exclude materials that are supplied by the 

contractor. Time and materials and labor hour contracts are used when it is not 

possible to estimate accurately the extent or duration of the work or to anticipate 

costs with any degree of confidence. OA’s support services, expert witness, and 

consulting service contracts were primarily awarded as time and material/labor 

hour contracts for which the government paid the contractor an hourly fee for the 

services provided. 

OA has established controls to ensure the SEC is appropriately charged for the 

services it receives from support services, expert witness, and consulting service 

contracts. Before contractor invoices are paid CORs review the invoices and 

examine timesheets and supporting documentation to determine whether the 

contractor’s charges are appropriate and pertinent information corresponds with 

the contract’s terms. 

Objectives 

Objectives. The overall objective of the audit was to determine whether OA, 

when awarding support services, expert and consulting service contracts, 

complied with governing laws and regulations regarding PSCs and IGFs. Further 

audit objectives were to: 

•	 Determine if OA has developed appropriate controls and has
 

written policy that prevents contractors from performing personal
 

services and inherently governmental functions.
 

•	 Identify the procedures OA has established and uses to monitor
 

and carryout the terms of these contracts in accordance with 

governing federal laws, regulations and its internal policy.
 

•	 Assess whether OA developed proper controls to ensure the SEC
 

is properly charged for the services that are rendered under the 

terms of these contracts.
 

•	 Identify best practices and possible cost savings or funds put to 

better use and provide recommendations to improve SEC
 

contracting practices.
 

Where appropriate, Castro & Co also identified areas for improvement. 
 

 

 

8 See Appendix III for FAR 37.104(d) six elements. 

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Findings and Recommendations
 

Finding 1: OA’s Oversight of Service Contracts 

and Language in Service Contracts Needs 

Improvement 

SEC’s oversight of three support services and consulting
 

service contracts/task orders may have resulted in possible 

employer-employee relationships, due to SEC personnel’s
 

continuous supervision of the contractors. Also, our review
 

of three awarded service contracts found they included
 

language that aligns with PSC characteristics.
 

Prior to November 15, 2012, OA did not have any written policy related to the 

management and administration of service contracts. Further, OA had not adopted 

any controls that would prevent contracting personnel or SEC staff from forming 

employer-employee relationships and entering into PSCs.8 

We obtained a listing of support services, expert witness, and consulting service 

contracts from OA and tested a sample of 134 contracts by applying the six 

elements identified in FAR 37.104(d) to assess whether the contract was personal 

in nature. These contracts were primarily awarded as time and material/labor hour 

contracts and the government paid the contractor an hourly fee for the services 

provided. 

Through analysis and interviews we determined that the service contracts identified 

in Table 1 may have been administered as PSCs. Specifically, we determined that 

the and contracts were positive for all six elements in 

FAR 37.104(d) and the contract was positive to 5 of the 6 elements. We 

determined the second element, which asks “Are the principal tools and equipment 

furnished by the government?” was not a significant factor for the 

and contracts. For both contracts, the furnishing of such equipment 

as telephones and computers was also not a material factor. Also, our testing 

found no issues with expert witness contracts. 
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Table 1: Support Services and Consulting Service Contracts that 

May Have Been Administered as Personal Service Contracts 

Source: Castro & Company Generated 

Vendor Name 

(Contract/Task 

Order Number) 

Service 

Description Contract Status 

Contract 

Value 

(SECHQ -

) 

Professional 

Services 

Task order has not been fully 

closed. Period of 

performance (POP) expired 

July 2012. Position was 

abolished in June 2012. $106,797 

(SECHQ ) 

IT Forensic and 

Litigation Support 

Contract is open. Contract 

POP is July 2012 - July 2017 $3,745,140 

(SECHQ 

) HR Support 

TO cancelled via mod dated 

11/19/12. New TO 0100, 

POP expires August 30, 

2014. $100,000 

Contract. We interviewed the CO, COR, and sole 

contractor for this contract. The COR informed us she provided daily supervision to 

the sole contractor on this contract. This supervision included determining daily 

work assignments that were to be completed. The contractor confirmed this 

information and informed us that SEC staff had also interviewed her to determine 

her suitability for the position. The period of performance for this contract expired in 

July 2012. At that time, the contractor was hired as a SEC employee and currently 

performs many of the same job functions she did as a contractor. 

Based on our analysis and interviews conducted, we determined this contract was 

positive for all six elements identified in FAR 37.104(d) that are used to assess if an 

employer-employee relationship has been created. Specifically, our assessment of 

the six elements found the following: 

•	 The contractor primarily conducted its work on site at the SEC. 

•	 Principal tools and equipment (such as computers and telephones)
 

were furnished by the government, although this was not material.
 

•	 The contractor’s services were applied directly as an integral effort 

of the Operations Center facilities branch, which served as the 

contractor’s main point of contact.
 

•	 Comparable services and meeting comparable needs were 

performed using SEC personnel because the contractor later was
 

hired as an SEC employee and now performs the same job duties
 

she did as a contractor.
 

•	 The need for the service provided could reasonably have been 

expected to last beyond one year.
 

•	 Interviews with the contractor and COR indicated SEC personnel
 

provided continuous supervision of the contractor.
 
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We determined this contract/task order may have been administered as a PSC 

primarily due to the COR’s relatively continuous supervision of the contractor. 

Contract. For this contract we interviewed the CO, COR, the Division of 

Enforcement’s (Enforcement) IT forensic branch chief, SEC team leads, 

project managers and numerous staff. The Enforcement IT forensic branch 

chief, who was not the COR, told us he interviewed contractor personnel prior to 

, Inc. hiring them. The branch chief asserted he made the final determination 

to hire contractor staff. 

We also found an instance where a contractor staff with no previous relationship to 

, was referred to to be hired based on an interview this person had with 

the branch chief. We were also told that SEC employees directly supervised 

contractor staff’s daily work and contractors worked side-by-side with Enforcement’s 

IT forensic specialists, who conducted the same job functions and were considered 

interchangeable with SEC employees by managers in the IT forensic branch. Thus, 

we determined that SEC staff provided relatively continuous supervision of 

contractors and an employee-employer relation was present. 

Based on our analysis and interviews conducted, we determined this contract was 

positive for five of the six elements identified in FAR 37.104(d) that are used to 

assess if a contract is personal in nature. Specifically, our assessment of the six 

elements found the following: 

•	 The contractor’s principal tools and equipment (e.g., 90 work
 

stations and a mix of Dell OptiPlex computer models) were 

furnished by the SEC.
 

•	 The services provided by the contractor were applied directly to the 

integral effort of the Enforcement IT forensics branch.
 

•	 Comparable services and meeting comparable needs were 

performed using civil services personnel because contractors 

and SEC personnel worked side-by-side performing the same 

functions. 

•	 The need for the service provided could reasonably have been 

expected to last beyond one year, because the contract’s period of
 

performance was from July 2012 to July 2017.
 

•	 Interviews conducted with SEC personnel and contractors 

indicated the services the contractor provided were subject to 

continuous supervision of SEC personnel. 

As a result of SEC staffs’ direct supervision and contractors performing 

interchangeable job duties with federal employees, we determined this contract may 

have been administered as a PSC. 
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Contract. For this contract we interviewed the CO, COR, the Office of 

Human Resources (OHR) assistant director, labor relations branch chief, SEC 

program leads and contractor personnel. contractors informed us they 

were supervised on a daily basis by SEC staff. In addition, we identified a 

contractor whose leave was approved by SEC staff. 

Based on our analysis and interviews conducted we determined this contract was 

positive for all six elements identified in FAR 37.104(d) that are used to assess if an 

employer-employee relationship has been created. Specifically, our assessment of 

the six elements found the following: 

•	 The contractor primarily conducted its work on site at the SEC. 

•	 Principal tools and equipment (such as computers and telephones)
 

were furnished by the government, although this was not material.
 

•	 Services were applied directly to the integral effort of OHR. 

•	 Comparable services and meeting comparable needs were 

performed using civil services personnel. The contract stated that 

the purpose of the contract was to provide “...programmatic support
 

to OHR in response to workload surges and staff shortages, to 

ensure consistent, quality deliver of Human Resources products
 

and services to SEC customers and various stakeholders.”
 

•	 The need for the service provided could reasonably have been 

expected to last beyond one year because a contract modification 

was issued in November 2012 and the period of performance 

expires in August 2014.
 

•	 Interviews with numerous SEC personnel and contractors 

indicated the services the contractor provided were subject to 

continuous supervision of SEC personnel. 

We determined this contract may have been administered as a PSC primarily due 

to SEC staff’s continuous supervision of contractor personnel. 

Language in Awarded Service Contracts 

Our audit revealed seven contracts/task orders for service contracts that contained 

language we determined was indicative of a PSC. We did not find any 

corroborating evidence related to these contracts indicating noncompliance with 

FAR 37.104. Our review of service contracts found the following contract language 

we interpreted as indicating the contractors’ work was to be assigned and 

monitored by SEC personnel. 

Assignments – The individual will work closely with team leads and 

divisions to receive assignments. 
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Monitoring – Government personnel must be on-site to oversee 

contractor personnel.
 

Also, we found some service contracts did not have specific contractor deliverables. 

This gave the perception the contractors’ work would be personal services in nature 

and would be under SEC staff’s supervision. For example, certain contracts 

contained the following clause in the contract’s deliverable section: 

Onsite contractors shall complete work assignments and tasks on 

time; ensure work products are thorough and accurate; and work 

and interact professionally and effectively with all levels of 

management and staff in completing assignments...The contractor 

shall provide the contracting officer with a monthly status report 

summarizing the level of effort expended under the contract by task 

order... 

Other contracts had the following language: 

The SEC reserves the right to interview contractor personnel prior 

to placement of the individuals(s) under the contract. 

Our interviews with contractor personnel, CORs, and program managers confirmed 

instances where contractors received daily work assignments from SEC personnel 

and contractors received continuous supervision from SEC personnel. 

OA’s Management and Contract Administration Controls 

Prior to November, 2012, OA had not developed procedures to ensure contracting 

personnel reviewed service contracts prior to award and verified the contract did not 

contain language that could be constituted as employer-employee relationship or 

PSC. 

Also, OA did not always ensure language was included in awarded service 

contracts requiring the contractor designate a point of contact or project manager to 

supervise contractor personnel. Additionally, some contracts also did not 

adequately address contractor personnel’s work schedules, timesheet approval, 

and leave requests. We believe having these items explicitly discussed in the 

service contract safeguards the SEC against employer-employee relationships 

being created. 
 

 

 

9 OA issued SECR 10-24, Management and Administration of Service Contracts and Operating Procedures 

(OP) 10-24 in November 15, 2012. See Finding 3 for further detail on the new policy. 

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Conclusion 

The SEC may have entered into employer-employee relationships and administered 

three PSCs. We determined that OA’s oversight of service contracts and the 

language in the contracts need improvement. 

Prior to November 15, 2012,

9 OA did not have any written policy related to the COs, 

contract specialists, CORs, and program managers characterized specifically as 

“management and administration of service contracts.” Further, OA did not have 

procedures in place to ensure contracting personnel overseeing service contracts 

reviewed the contracts on an ongoing basis. Additionally, OA did not require 

personnel such as CORs, and program managers to use measures such as postaward checklists that could have aided in preventing service contracts from being 

administered as PSCs. These deficiencies further happened because OA did not at 

the time have any controls in place to prevent employer-employee relationships 

from occurring, and they did not provide adequate training to contracting personnel 

regarding the SEC’s relationships with contractors and other preventive measures 

that could have been taken. Having policy and procedures and providing staff with 

adequate training would have ensured that service contracts were not administered 

as PSCs and did not include language that could be constituted as a PSC. 

Lastly, FAR 37.104 requires agencies to be authorized by statute to enter into a 

PSC. OA did not have this authorization for the 

contracts. OA not having policy and controls in place regarding 

service contracts, prior to November 2012, put the Commission at risk for SEC 

personnel to provide continuous supervision of its contractors and enter into PSCs. 

Recommendation 1: 

The Office of Acquisitions should coordinate with the Office of the General 

Counsel to determine if the , Contract No. SECHQ­

; Contract, No. SECHQ­ ; and , Contract 

No. SECHQ were personal services contracts prohibited 

by Federal Acquisition Regulation (FAR) 37.104 and take any action needed 

to ensure compliance with the FAR’s provision for the contracts that remain 

open. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 
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OIG Analysis. We are pleased OA concurred with this recommendation. 

OIG considers this recommendation resolved. However, the 

recommendation will remain open until documentation is provided to OIG 

that supports it has been fully implemented. 

Recommendation 2: 

The Office of Acquisitions should ensure contracting personnel such as 

contracting officers and contract specialists review service contracts prior to 

award and verify they do not contain language that could be construed as an 

employer-employee relationship or personal services contract. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 

OIG Analysis. We are pleased OA concurred with this recommendation. 

OIG considers this recommendation resolved. However, the 

recommendation will remain open until documentation is provided to OIG 

that supports it has been fully implemented. 

Recommendation 3: 

The Office of Acquisitions should ensure service contracts have a designated 

contractor point of contact or project manager to oversee its personnel’s 

work assignments, work schedules, timecard approval, leave requests, and 

other administrative requirements. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 

OIG Analysis. We are pleased OA concurred with this recommendation. 

OIG considers this recommendation resolved. However, the 

recommendation will remain open until documentation is provided to OIG 

that supports it has been fully implemented. 

Finding 2: Three Service Contracts/Task Orders 

Contained Language That Was Indicative of 

Inherently Governmental Functions 

We identified three service contracts/task orders that 

contained language that could indicate the performance of
 

IGFs by contractors. This language should not have been 

included in the contract.
 
 

 

10 Office of Management and Budget (OMB) Publication of the Office of Federal Procurement Policy (OFPP) 

Letter 11-01, Performance of Inherently Governmental and Critical Functions. 

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many of the contracts we reviewed was exactly the same or were nearly the same. 

The and contracts had similar contract 

language we determined could be constituted as an IGF. 

Our review of 134 support services, expert and consulting service contracts found 

that three contained language that could be construed as allowing contractors to 

perform IGFs. Specifically, we determined that language in the 

, LLC contract for professional services, contract for 

program management, and support services, and contract for human 

resource support allowed for the contractor’s performance of IGFs which is contrary 

to FAR 7.503(c)(12)(v) and the Office of Federal Procurement Policy (OFPP) Letter 

11-01.

10 OFPP provides executive departments and agencies guidance on 

managing the performance of inherently governmental and critical functions. It 

further provides examples and tests to help agencies identify inherently 

governmental functions, such as explaining what agencies must do when work is 

“closely associated” with inherently governmental functions. 

In developing statements of work (SOW) we learned that COs and contract 

specialists often re-use old SOWs to draft new SOWs. As a result, language in 

Table 2: Contracts that Contained Language that Could Indicate the 

Performance of IGFs by Contractors 

Vendor Name 

Contract/Task 

Order Number Contract Status Service Description 

SECHQ Contract is open. POP 

expires August 31, 2014 Professional Services 

SECHQ 

Contract is open. POP 

expires December 31, 

2015. TO for contract a 

specialist was terminated 

December 2012. 

Program 

Management/Support 

Services 

SECHQ 

TO cancelled via mod 

dated 11/19/12. New TO 

0100, POP expires August 

30, 2014 HR Support 

Source: Castro & Company Generated 

Contract Language. We interviewed the CO and 

COR for this contract, but were unable to conduct interviews with contractor 

personnel who performed contract specialist functions because they were replaced 

by another contractor. This service contract did not clearly define the transition 

point between contractor functions and the functions that were reserved for the 
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government, and in some cases was poorly worded or unclear. This services 

contract included the following language: 

Contract Specialist III: Individual shall have the ability to negotiate 

and serve as the point of contact on multiple requirements... 

Negotiates effective settlement solutions...administers complex, 

large dollar contracts and other types of contract documents as 

needed...Negotiating and managing complex sales, services, 

consulting, and licensing related contracts of significant importance 

and strategic value...Develop and issue complex solicitations, 

evaluate proposal, conduct negotiations, perform price/technical 

trade off analysis, award, and administer contracts through 

closeout. 

We determined the contract language for the contract specialist III is specific to 

inherently governmental functions and thus is inconsistent with FAR 7.503(c) 

(12)(v), which identifies the administration of contracts as IGFs. 

Contract Language. We interviewed the CO and COR for this 

contract, but were unable to conduct interviews with contractor personnel because 

OA terminated its Task Order (TO) with the vendor on December 7, 2012, prior to 

us arranging to meet with the contractors. This TO included the language below: 

Contract Specialist I and II: Individual shall have the ability to 

negotiate and serve as the point of contact on multiple 

requirements...
 

Contract Specialist III: Individual shall have the ability to negotiate 

and serve as the point of contact on multiple requirements... 

Negotiates effective settlement solutions...administers complex, 

large dollar contracts and other types of contract documents as 

needed... Negotiating and managing complex sales, services, 

consulting, and licensing related contracts of significant importance 

and strategic value... develop and issue complex solicitations, 

evaluate proposal, conduct negotiations, perform price/technical 

trade off analysis, award, and administer contracts through closeout. 

Our review of the contract specialists I, II, and III job descriptions found the duties 

and responsibilities included administering contracts and conducting negotiations to 

determine contract requirements. We determined the contract language is specific 

to inherently governmental functions and thus is not consistent with FAR 

7.503(c)(12)(v) which identifies the administration of contracts as IGFs. 
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Contract Language. The language in this contract included the following: 

Employee and Labor Relation Specialist Support: Representing 

management and applies expert knowledge and skill in collective 

bargaining and/or negotiations...negotiating outside the collective 

bargaining process; overseeing arbitration and grievances... 

We conducted interviews with the CO, COR, Office of Human Resources (OHR) 

assistant director, labor relations branch chief, SEC program leads and 

contractors. One contractor stated her responsibilities included drafting 

documentation for OHR actions such as disciplinary action, leave restriction, and 

the removal of SEC personnel. Another contractor, who was an industrial 

psychologist, indicated her responsibilities included implementing the SEC’s 

performance management system. 

The COR and team leads for the contract told us, as written, the job 

description would be considered an IGF. However, they asserted that contract 

personnel did not perform these duties, and they further believe the contract was 

poorly worded. 

Based on our analysis, we determined contractor personnel did not always perform 

the specific work requirements detailed in the contract. Also, contractors should not 

represent management as part of its collective bargaining negotiation process. 

According to OFPP Letter 11-01 Section 5: 

“A function requiring the exercise of discretion shall be deemed 

inherently governmental if the exercise of that discretion commits 

the government to a course of action where two or more alternative 

courses of action exist and decision making is not already limited or 

guided by existing policies, procedures, directions, orders and other 

guidance...” 

Conclusion 

We determined language in the and 

contracts, as well as the SEC’s oversight of these contracts could indicate the 

performance of IGFs by contractors. We based our determination on the following: 

•	 OA did not conduct a review to ensure language in awarded service 

contracts did not include duties or responsibilities that are 

consistent with IGFs. Not doing so resulted in several contracts
 

having similar language that could indicate the performance of IGFs
 

by contractors.
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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•	 OA did not perform reviews of service contract actions to assess
 

whether the contracts included language that could be interpreted 

to allow for contractors to perform IGFs. 

•	 OA did not ensure language in the contracts was defined in 

accordance with FAR requirements to avoid contracts allowing for
 

contractor to perform IGFs. 

Because OA did not provide adequate oversight of these contracts, it could have 

resulted in contractors performing IGFs. Further, we determined that OA did not 

take adequate measures in developing contract language for the 

and contracts to describe the contractors’ job duties and 

responsibilities. 

Recommendation 4: 

The Office of Acquisitions should review all active service contracts and 

assess whether they include language that could reasonably be interpreted 

to allow for contractor performance of inherently governmental functions 

(IGF). Service contracts that are found to include IGF language should be 

modified to remove the language. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 

OIG Analysis. We are pleased OA concurred with this recommendation. 

OIG considers this recommendation resolved. However, the 

recommendation will remain open until documentation is provided to OIG 

that supports it has been fully implemented. 

Recommendation 5: 

The Office of Acquisitions should implement SECR 10-24 dated November 

15, 2012, and its associated Operating Procedures to ensure language in 

service contracts conform to the Office of Management and Budget 

Publication, Office of Federal Procurement Policy Letter 11-01, Performance 

of Inherently Governmental and Critical Functions and the Federal 

Acquisition Regulation 7.503 requirements, to avoid contracts allowing for 

contractors performance of inherently governmental functions. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 
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OIG Analysis. We are pleased OA concurred with this recommendation. 

OIG considers this recommendation resolved. However, the 

recommendation will remain open until documentation is provided to OIG 

that supports it has been fully implemented. 

Finding 3: OA’s New Guidance Pertaining to 

Managing and Administering Service Contracts 

Should Be Improved in Some Areas 

OA’s newly issued guidance and operating procedures
 

should to be revised relating to clearly prohibiting interviews
 

of contractors, providing contracting personnel with
 

specialized training related to PSCs and IGFs, and 

strengthening pre-award and post-award monitoring
 

procedures. 

In November 2012, OA issued SECR 10-24 and OP10-24, which consists of 

comprehensive policy and guidance and includes detailed checklists and training 

slides that covers contracting official’s management and administration of service 

contracts. We found the policy contains gaps that should be addressed related to 

clearly prohibiting interview contractor personnel, providing contracting personnel 

with specialized training in relation to PSCs and IGFs, and strengthening its preaward and post-award monitoring procedures. 

Review of SECR 10-24 and OP 10-24 

Our assessment of SECR 10-24 and OP 10-24 found the guidance to be very 

useful. It consists of specific guidance and requirements contracting personnel 

need in managing and overseeing service contracts in areas such as employeeemployer relationships, PSCs, and IGFs. However, the guidance should be 

strengthened in relation to FAR 37.104 requirements. OA’s guidance includes preaward procedures that are beneficial, such as the pre-award checklist SEC 

personnel must now use to ensure compliance with FAR requirements related to 

PSCs and IGFs. The OP 10-24, Desk Reference: Management and Administration 

of Service Contracts, “Dos and Don’ts List” states the following: 

SEC employees shall not do the following: 

Make hiring decisions for contractors. Meetings with individual 

contractor employees or potential employees to verify the person’s 

competence for the contract task should generally occur only when 
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the SEC staff considers such a verification meeting important to 

provide assurance that the individual meets contract requirements 

or for other appropriate reason. If a meeting with a proposed 

contractor employee to determine whether their qualifications and 

ability appear to meet the requirements of the contract statement of 

work occurs, participation of contractor management is advised. 

We found this statement is vague and open to SEC staff’s interpretation. Meeting 

with contractors to evaluate their qualifications is equivalent to conducting 

interviews in some circumstances such as post-contract award. SEC personnel 

frequently told us about “meet and greets,” which appear to be interviews. OA’s 

policy should be clearer regarding when “meet and greets” are appropriate. 

Training Related to PSCs and IGFs. Since 2010, as part of the SEC’s new 

employee orientation, OA has provided new employees with an overview of 

employees’ responsibilities related to contracting. However, we determined that OA 

did not provide adequate training to contracting personnel related to PSCs and 

IGFs. For example, OA’s Acquisition and Competition training at the SEC’s San 

Francisco Regional Office in June 2012, only had 2 of 110 slides that covered 

personal services contracts and none that were related to IGF. Also, on June 12, 

2012, OA provided a 25-minute training session to attendees related to contracting 

personnel regarding personal services, and in December 2012, OA provided a twohour training session to contracting personnel on SECR 10-24 and OP 10-24 

requirements. Consequently, this training was not offered to SEC staff such as 

project managers and branch chiefs who interact with and/or influence contractors 

and their work, but do not have actual contract oversight responsibilities. While the 

training OA has provided to SEC employees regarding their responsibilities related 

to contracting has improved, it should be revised to cover areas such as post-award 

monitoring procedures. Thus, we determined OA did not provide adequate training 

to SEC personnel regarding employee-employer relationships, PSCs and IGFs. 

Because OA did not develop policy and procedures or provide training to SEC 

contracting personnel prior to 2012, related to PSCs and IGFs, its internal controls 

over service contracts were lacking and need improvement. 

Post-Award Monitoring. Our review of OP 10-24 found it also does not 

adequately address post-award monitoring procedures. OA has not utilized postaward monitoring controls which could be used to ensure contracts are not being 

administered in ways that could evolve into a PSC or engage contractors in IGFs. 

The OP indicates CORs and other government employees should “implement 

management control measures to administer the terms of the contract.” However, 

the OP does not specify what control measures should be, or how they should be 

implemented. We believe the OP should clearly define post-award procedures, and 

a checklist similar to OA’s pre-award checklist should be developed to use as a tool 

to monitor the administration of service contracts on an ongoing basis. 
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Benchmarks with Other Federal Agencies 

To gain an understanding of best practices for administering and managing service 

contracts at other agencies, we reviewed the standard operating procedures (SOP) 

from four federal agencies regarding PSCs and IGFs. We found these agencies 

used both pre-award and post-award procedures to ensure contracts were not 

issued as PSCs or IGFs. Specifically, we found that the agencies have: 

•	 SOPs for PSCs and IGFs that are based on the FAR requirements. 

•	 A PSC/IGF checklist is used that must be reviewed and approved 

by the CO. 

•	 Pre-award review procedures are used to provide guidelines to aid 

in ensuring service contracts are not issued as PSCs/IGFs.
 

•	 Finally, two agencies use post-award monitoring procedures that
 

provide guidelines to ensure service contracts are not issued as
 

PSCs/IGFs.
 

Pre-Award Procedures. Our review found that the four agencies use pre-award 

procedures to ensure contracts are not issued as PSCs/IGFs. In reviewing one of 

the agency’s policies and procedures, we found that the CO is required to review all 

requirement packages for services from its program office. This is done to ensure 

that a PSC is not created. Our review of the agency’s policies and procedures 

showed they included the same elements found in the FAR to assess whether a 

proposed service contract should be characterized as a PSC or IGF. We found one 

of four agency’s policy determined that the “assessment should identify functions 

that are closely associated with inherently governmental functions.’’ The policy 

further stated that “If contractors have experience performing such work then 

special monitoring should be implemented to guard against expansion into 

inherently governmental functions.” 

Additionally, two of the four agencies have pre-award procedures that must be done 

before a service contact is issued. A pre-award assessment is done by the 

program office to ensure the SOW does not include any PSC or IGF language 

before the contract is awarded. When implementing the policy the agency’s 

managers consider the following factors: 

•	 Nature of the work to be performed. IGFs may not be contracted. 

•	 Availability of existing federal employees with the knowledge, skills
 

and experience to understand the work, manage the contracts and 

assess results achieved.
 

•	 Whether the agency can obtain highly specialized skills or historical
 

knowledge (e.g., of plan practices) through civil service recruitment.
 

•	 Relative cost of performance by contract or federal employees. 
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One agency stated ‘’All new requirements for services including expiring contracts 

that will be re-competed must undergo an assessment to ensure that any proposed 

contract award for services does not include any inherently governmental functions 

or unauthorized personal services.” 

Consequently, all four agencies use a checklist or similar-type document to 

evaluate whether a contemplated contract complies with the FAR and attempt to 

ensure that service contracts are not issued as PSCs/IGFs. 

Post-Award Procedures. Further, we found that two agencies in our benchmark 

sample used post-award procedures to aid in ensuring an employer-employee 

relationship between the agency and contractor personnel did not exist. Also, to 

preclude the creation of a prohibited employer-employee relationship between the 

agency and contractor personnel and to preserve the independent status of 

contractor personnel, one agency exercised the following precautions: 

•	 Agency employees cannot directly or indirectly supervise contractor
 

personnel.
 

•	 Contractor personnel workstations must be separate from agency
 

employee workstations, to the maximum extent practicable.
 

•	 Contractor personnel must wear badges when onsite at agency
 

offices or facilities and display office signs that identify them as
 

contractor personnel.
 

•	 Contractor personnel cannot attend regular agency staff meetings. 

•	 Contractor personnel, in general, cannot participate in services that
 

are provided for the benefit of agency employees (e.g., counseling
 

and referral services, agency recreational activities, office picnics,
 

and holiday parties). 

Other post-award procedures employed by the four agencies in our benchmark 

included a continuous review of the functions contractors perform, in particular, the 

way contractors conduct work that is associated with IGFs, such as awarding and 

administering contracts and the direction and control of federal employees. 

Survey for CORs and Program Managers 

During September 2012, we surveyed SEC CORs and program managers 

regarding the SEC’s practices in providing oversight of contractor personnel and 

specialized training they have received to assist in performing their duties for 

support services and consulting contracts. Approximately 47 percent of the CORs 

and program managers, who received the survey, responded to it. The survey 

revealed that improvements were needed to ensure CORs and program managers 

have a better understanding of what constitutes a PSCs and IGFs. Overall, the 

survey found the following: 
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•	 Twenty of 51 (39 percent) respondents stated they performed daily
 

supervision of contractors. This is a red-flag for a possible 

employer-employee relationship in violation of FAR 37.104.
 

•	 Two of 53 (4 percent) respondents interviewed contractors before 

they were hired to support contract work. This relates to an
 

employer-employee relationship in violation of FAR 37.104. We
 

believe this response is probably significantly understated because 

discussions we had with individual contractors and SEC personnel
 

stated that “meet and greets” were conducted by SEC personnel to 

determine the suitability of contractors before they were hired. SEC
 

personnel did not believe “meet and greets” were the same as
 

interviews.
 

•	 Nineteen of 55 (35 percent) respondents indicated that comparable 

services were performed by former or SEC civil service staff. This
 

indicates an area that should receive additional attention in contract
 

creation and oversight to avoid a PSC.
 

•	 Four of 49 (8 percent) respondents indicated they did not receive 

any or timely training related to PSCs and IGFs. 

We determined further training is needed for SEC personnel who administer and 

oversee service contracts. 

Conclusion 

OA’s newly issued guidance and operating procedures are comprehensive, but 

need to be further strengthened to better ensure SEC personnel and other program 

personnel who work with contractors, that are on a service contract, are trained and 

given current guidance regarding their responsibilities to administer and manage 

contractors and are cognizant of FAR as it pertains to employer-employee 

relationships, PSCs and contractors conducting IGFs. Not having solid pre-award 

and post-award monitoring procedures could result in FAR violations pertaining to 

PSCs and IGFs. 

Recommendation 6: 

The Office of Acquisitions should revise SECR 10-24, Management and 

Administration of Service Contracts and Operating Procedures 10-24 to clearly 

prohibit interviewing contractor employees and require post-award reviews be 

done on service contracts using a checklist that covers common areas that 
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should be avoided during contract administration and oversight of service 

contracts. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 

OIG Analysis. We are pleased OA concurred with this recommendation. OIG 

considers this recommendation resolved. However, the recommendation will 

remain open until documentation is provided to OIG that supports it has been 

fully implemented. 

Recommendation 7: 

The Office of Acquisitions should periodically provide training on avoiding 

actions that could be interpreted as supervision of contractor employees, on 

avoiding inappropriate employer-employee relationships between government 

employees and contractor personnel, and on preventing contractors from 

performing inherently governmental functions. This training should be provided 

to contracting personnel and other program personnel who work with contractors 

on service contracts. 

Management Comments. OA concurred with this recommendation. See 

Appendix V for management’s full comments. 

OIG Analysis. We are pleased OA concurred with this recommendation. OIG 

considers this recommendation resolved. However, the recommendation will 

remain open until documentation is provided to OIG that supports it has been 

fully implemented. 
Appendix I 

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Abbreviations 

Castro & Co Castro & Company, LLC 

CNCS Corporation for National and 

Community Service 

CO Contracting Officer 

COR Contracting Officer’s Representative 

COSO Committee of Sponsoring Organizations 

of the Treadway Commission 

Enforcement Division of Enforcement 

FAR Federal Acquisition Regulation 

FPDS Federal Procurement Data System 

IGF Inherently Governmental Function 

IT Information Technology 

OA Office of Acquisitions 

OHR Office of Human Resources 

OIT Office of Information Technology 

OFPP Office of Federal Procurement Policy 

OIG Office of Inspector General 

OMB Office of Management and Budget 

OP Operating Procedure 

POP Period of Performance 

PSC Personal Services Contract 

SEC or 

Commission 

U.S. Securities and Exchange 

Commission 

SECR SEC Administrative Regulation 

SOP Standard Operating Procedure 

SOW Statement of Work 

TO Task Order 
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Appendix II 

Scope and Methodology 

The full version of this report includes information that the SEC considers to be 

sensitive and proprietary. To create this public version of the report, OIG redacted 

(blacked out) potentially sensitive, proprietary information from the report. 

As part of the OIG’s annual audit plan, Castro & Co conducted an audit of SEC’s 

support service, expert and consulting service contracts. 

Castro & Co conducted this performance audit in accordance with the 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. 

W e believe that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Scope. Castro & Co conducted its fieldwork from July 2012 to January 2013 at the 

SEC’s Headquarters site in Washington, D.C. The scope of our audit covered a 

select number of support services, expert and consulting service contracts that 

were executed by all SEC divisions/offices (e.g., headquarters, operations center 

and the regional offices) during calendar years 2008 to 2011, and from January 

2012 to September 2012. 

Methodology. To accomplish the overall objective to determine whether OA 

awarded support services, expert and consulting services contracts, and complied 

with governing laws and regulations regarding PSCs and IGFs, Castro & Co 

obtained, reviewed and analyzed support service, expert and consulting service 

contracts to determine if indicators of PSCs or IGFs were present. In addition, we 

conducted interviews with CO’s, contract specialists, CORs, and other personnel to 

corroborate evidence we gathered during our contractor file review. 

To accomplish the objective of determining whether OA developed appropriate 

controls and has written policy that prevent contractors from performing PSCs and 

IGFs, Castro & Co reviewed SEC’s regulations and policies and procedures 

pertaining to contracting, relevant federal laws, regulations, and guidance. We also 

reviewed reports OIG’s issued related to PSCs and IGFs. In addition, we reviewed 

OA’s new Administration Regulation regarding service contracts to determine if the 

policy would provide improved guidance on how contracts should be administered to 

avoid PSCs or IGFs. In addition, we developed, administered, and analyzed the 

results of a survey that was directed to SEC’s CORs, inspection and acceptance 

officials and program managers to determine whether SEC’s practices in providing 

supervision, control, and training to SEC staff were appropriate for those performing 

oversight duties. 
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Appendix II 

To accomplish the objective of identifying procedures OA has established and uses to 

monitor and carry out the terms of contracts to ensure compliance with governing laws 

and regulations and its internal policy, Castro & Co conducted interviews with select 

OA personnel who were responsible for administering SEC’s contracts. Such 

personnel included the COs/contract specialists and CORs. We also reviewed 

training provided to SEC personnel related to service contracts to determine if 

adequate coverage was provided related to PSCs and IGFs. 

To accomplish the objective of assessing whether OA developed controls to ensure 

the SEC is charged appropriately for the services that are rendered under the terms of 

the contracts, Castro & Co conducted interviews with OA personnel regarding 

contract administration, including the review of invoices. Additionally, Castro & Co 

obtained, reviewed and analyzed invoices to ensure charges were appropriate 

when compared to contract terms and were supported by appropriate 

documentation. 

To accomplish the objective of identifying best practices and possible cost savings or 

funds put to better use and provide recommendations to improve SEC contracting 

practices, Castro & Co reviewed policies and procedures from other federal agencies 

to benchmark best practices regarding contract administration, including the handling 

of PSCs and IGFs. We also reviewed reports issued by the Government 

Accountability Office, as well as other federal agencies related to PSCs and IGFs to 

determine whether any issues in the reports were applicable to the scope of our 

audit. Our review of contractor invoices found that OA has established controls to 

ensure that the SEC is appropriately charged for services received. Based on our 

discussions with OA personnel and analysis of invoices tested, the SEC controls 

over contractor invoicing appear reasonable. Our audit found that CORs reviewed 

the contractor’s invoices when they were received. This review included examining 

supporting documentation, such as timesheets to determine whether charges were 

appropriate. The CORs asserted they ensured all pertinent information 

corresponded with the terms of the contracts. In addition, we tested 93 invoices 

and its supporting documentation and verified the SEC was appropriately charged 

for the contractor’s services. We traced the fees that were paid to the amounts 

allowed per the terms of the contract, for the type of applicable work, and found no 

discrepancies. 

In addition, our benchmark procedures included reviewing standard operating 

policies and procedures from other federal agencies related to PSCs and IGFs to 

gain an understanding of best practices utilized at those agencies. We did not 

determine any possible cost savings or funds that were put to better use. 
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Appendix II 

Internal Controls. The Internal Control—Integrated Framework, published by the 

Committee of Sponsoring Organizations of the Treadway Commission (COSO), 

provides a framework for organizations to design, implement, and evaluate controls 

that facilitate compliance with federal laws, regulations, and program compliance 

requirements. We based our assessment of OA’s internal controls that were significant 

to the audit objectives on the COSO framework, including control environment, risk 

assessment, control activities, information and communication, and monitoring. 

Use of Computer-Processed Data. We did not assess the reliability of this 

function because it did not pertain to our audit objectives. For our contract testing, 

we obtained a listing of support services, expert witness, and consulting contracts 

from FPDS. The original file contained all contract actions (initiations, 

modifications, deobligations, etc.) from January 1, 2008 to March 31, 2012. After 

talking to OIG we determined the file contained actions for contracts awarded prior 

to fiscal year 2008. OIG reviewed the original file and removed the actions for all 

contracts prior to 2008. The OIG determined the date awarded based on the 

assigned contract number. For those contracts that did not follow the standard 

naming convention, the date was verified in FPDS. 

Random Sampling. Castro & Co employed a methodology of random sample 

selection for our sample universe. Sample sizes were determined by evaluating the 

population of contracts to test and by giving consideration to the significance of the 

control, inherent risk, and professional judgment. 

We obtained a population of 1,442 individual contracts and excluded all contracts 

below the micro-purchase threshold of $3,000, as well as those contracts which 

only included deobligations. This resulted in a final population of 1,288 contracts. 

We determined an appropriate sample size was 10 percent of the overall 

population, or 129 contracts. Between November 2012 and December 2012, OIG 

requested we review five additional contracts. Therefore, our total sample size 

amounted to 134 contracts. 

For the original 129 contracts, we divided the contracts into two groups, based on 

the dollar value of each contract: Group 1 contained contracts valued from $3,000 

to $25,000, and Group 2 contained contracts valued over $25,000. We selected 10 

items from Group 1 using random sample selection. For Group 2, we used the 

Stratified Random sample selection and grouped the contracts into strata based on 

dollar value. We weighted each stratum based on the “percent of records,” or the 

number of contracts within each stratum as compared to the number of contracts 

within the overall population. We then multiplied the percentage of records to the 

target, total sample items and to determine the total number of contracts to be 

tested within the strata. 
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Appendix II 

For invoices testing, we obtained a list of payment vouchers associated with each 

contract previously selected for testing. This resulted in 930 payment vouchers 

within the population. We determined 10 percent of the population was a 

reasonable sample size. We used the IDEA’s random sample selector which 

identified 93 payment vouchers that should be tested. 
 

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Appendix III 

Criteria 

FAR 37.104(d). Consist of the following six questions that should be raised to 

determine whether an employer-employee relationship has been created, and 

therefore a personal services contract may exist. 

1) Is the performance on site?
 

2) Are the principal tools and equipment furnished by the government?
 

3) Are the services being performed by the contractor directly
 

applied to the integral effort of the agency or an organizational 

subpart in furtherance of an assigned function or mission? 

4) Are comparable services being performed in the same or similar 

agencies by civil service personnel? 

5) Will the need for this type of service be expected beyond one 

year? 

6) Does the nature of the service being provided reasonably 

require government direction or supervision of contractor 

employee in order to protect the government’s interest, retain 

control of the function involved, or retain personal responsibility 

for the function by a duly authorized Federal officer or 

employee? 

FAR 7.503 (a). States that “contracts shall not be used for the performance of 

inherently governmental functions.’’ Although FAR 7.503 does not provide an 

exact definition of IGFs, it provides a list of duties which may be considered as 

such. The list, while not all inclusive, includes the following: 

•	 The determination of agency policy, such as determining the 

content and application of regulations, among other things. 

•	 The determination of Federal program priorities for budget
 

requests.
 

•	 The direction and control of Federal employees. 

•	 The selection or non-selection of individuals for Federal
 

Government employment, including the interviewing of
 

individuals for employment.
 

•	 The approval of position descriptions and performance 

standards for Federal employees.
 

•	 In Federal procurement activities with respect to prime 

contracts—
 

1) Determining what supplies or services are to be acquired 

by the Government (although an agency may give 
 

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Appendix III 

contractors authority to acquire supplies at prices within 

specified ranges and subject to other reasonable 

conditions deemed appropriate by the agency); 

2) Approving any contractual documents, to include 

documents defining requirements, incentive plans, and 

evaluation criteria; 

3) Awarding contracts; 

4) Administering contracts (including ordering changes in 

contract performance or contract quantities, taking action 

based on evaluations of contractor performance, and 

accepting or rejecting contractor products or services); 

5) Terminating contracts; 

• The determination of budget policy, guidance, and strategy. 

31 U.S.C. 1342. States that, “An officer or employee of the United States 

Government or of the District of Columbia government may not accept voluntary 

services for either government or employ personal services exceeding that 

authorized by law except for emergencies involving the safety of human life or the 

protection of property.” 

FAR Subpart 37.203. Consist of the five prohibited uses for advisory and 

assistance service contracts. 

Comptroller General Decision Encore Management, Inc., B-278903.2 (Comp. 

Gen. Feb. 12, 1999). On February 12, 1999, the Comptroller General of the United 

States determined that the Corporation for National and Community Service 

(CNCS) administered a contract for clerical and administrative support as a 

personal services contract and CNCS’s cancellation of a request for proposals for a 

replacement contract was reasonable. 

Comptroller General Decision Kelly Services, B-186700 (Comp. Gen. Jan. 19, 

1977). The six elements relate principally to the third statutory criterion concerning 

supervision of the contractor’s employee by a federal officer or employee. That is, 

the proscribed supervision is frequently evidenced by these elements. The 

absence of any one or a number of them, however, would not mean that 

supervision is not permitted by the contract, or present in the actual work 

performance, but only that there is less likelihood of its existence. 

Office of Federal Procurement Policy Letter 11-01, Performance of Inherently 

Governmental and Critical Functions, September 12, 2011. The purpose of the 

policy letter is to provide executive departments and agencies guidance on 

managing the performance of inherently governmental and critical functions. 
 

SEC’s Controls over Support Service, Expert and Consulting Service Contracts March 29, 2013 

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Appendix III 

SECR 10-24 and SEC OP 10-24, Management and Administration of Service 

Contracts, November 15, 2012. This SECR implements the guidance noted in the 

OFPP Letter 11-01, Performance of Inherently Governmental and Critical 

Functions. This SECR and the accompanying OP, provides procedures to avoid 

entering into contracts for IGFs and personal services. In addition, these 

documents present procedures to be utilized for acquiring and administering 

contracts for functions closely associated with IGFs and critical functions. 

Committee of Sponsoring Organizations of the Treadway Commission – 

Integrated Framework, 1992. The framework provides a principles-based 

guidance for designing and implementing effective internal controls. 
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Appendix IV 

List of Recommendations 

Recommendation 1: 

The Office of Acquisitions should coordinate with the Office of the General 

Counsel to determine if the Contract No. SECHQContract, No. SECHQ­ ; and Contract No. 

SECHQ- were personal services contracts prohibited by 

Federal Acquisition Regulation (FAR) 37.104 and take any action needed to 

ensure compliance with the FAR’s provision for the contracts that remain open. 

Recommendation 2: 

The Office of Acquisitions should ensure contracting personnel such as 

contracting officers and contract specialists review service contracts prior to 

award and verify they do not contain language that could be construed as an 

employer-employee relationship or personal services contract. 

Recommendation 3: 

The Office of Acquisitions should ensure service contracts have a designated 

contractor point of contact or project manager to oversee its personnel’s work 

assignments, work schedules, timecard approval, leave requests, and other 

administrative requirements. 

Recommendation 4: 

The Office of Acquisitions should review all active service contracts and assess 

whether they include language that could reasonably be interpreted to allow for 

contractor performance of inherently governmental functions (IGF). Service 

contracts that are found to include IGF language should be modified to remove 

the language. 
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Appendix IV 

Recommendation 5: 

The Office of Acquisitions should implement SECR 10-24 dated November 15, 

2012, and its associated Operating Procedures to ensure language in service 

contracts conform to the Office of Management and Budget Publication, Office of 

Federal Procurement Policy Letter 11-01, Performance of Inherently 

Governmental and Critical Functions and the Federal Acquisition Regulation 

7.503 requirements, to avoid contracts allowing for contractors performance of 

inherently governmental functions. 

Recommendation 6: 

The Office of Acquisitions should revise SECR 10-24, Management and 

Administration of Service Contracts and Operating Procedures 10-24 to clearly 

prohibit interviewing contractor employees and require post-award reviews be 

done on service contracts using a checklist that covers common areas that 

should be avoided during contract administration and oversight of service 

contracts. 

Recommendation 7: 

The Office of Acquisitions should periodically provide training on avoiding actions 

that could be interpreted as supervision of contractor employees, on avoiding 

inappropriate employer-employee relationships between government employees 

and contractor personnel, and on preventing contractors from performing 

inherently governmental functions. This training should be provided to 

contracting personnel and other program personnel who work with contractors on 

service contracts. 
Management Comments 

Mk::.MORANI)UM 

March 26, 2013 

To: Jacqueline Wilson, Assistant inspector· Cicueral for AuditK 

From: Vauo:;e Cathell, Director, Office of Acquisitions()~ 

Appendix V 

Subject: Response to SEC lG's Draft Audit 513, Audil ofSEC'.v Controls Over Support.Service, 

Expert and Consulting Service Contracts 

Thank you for the; opportunity to review and comtnent on the n;.-cornmendations in draft Audit 

Report, Audit of SEC's Controls Over Support Service, r:Xpert and Commlting Service Contracts 

dated March 21, 2013. The Office of Acquisitions (OA) appreciates the recommendations 

designed to strengthen OA's controls over service contracts. We are pleased the OIG tound that 

controls to ensure that the SEC is being properly charged for services appear to be reasonable. 

(.)A is eonnnittcd to assuring proper oversight and management of servic<.l contracts, and I 

wclcotn<J your suggestions on irnprovcments in our policies and processes. SEC Regulation I 0-

24, Mana,;etnent and Administration qf.<.,'ervic<! C'ontract was issued in November of 20 12. after 

!h<: period covered by this audit. OA will review the regulation and its associated operating 

proccdu1·cs, trtlining, and guides, and adjust thcrn as appropriate to ineorponrtc rccon>mcndntions. 

Recon1.mendation 1: 

The Office of ''"''"Hu"" 

personal 

services Acquisition Regulation (l~AR) 37.104 and take any 

acti<)n needed to ensure eornplianee with the .FAR's provision for the contr.aets that remain open. 

RcSIJ-t..'>ll.SC': 

OA. concurs with this recommendation. OA will submit the referenced contracts to OGC for 

review, and will take appropriate action on the active contract to assure it complies with FAR 

3 7. 1 04 pro visions. 

Recommendation 2: 

The Office of Acquisitions should ensure C<lntracting personnel such as contmcting officers and 

contTact specialists review service contracts prior to award and verifY they do not contain 

language that could be construed a.'i an employer-employee relationship or personal services 

contract.<;. 

SEC's Controls over Support Service, Expert and Consulting Service Contract 

Report No. 513 

Page 32 

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March 29, 2013 
Appendix V 

Subject: Response to SEC IG's Draft Audit 513, Audit of SEC's Controls Over Support Service, 

Expert and Consulting Service Contracts 

Response: 

OA etJncurs with this recommendation. OA will amend SEC's Operating Procedure 10-24 

(November 21, 2012) to require clearly that contracting personnel review service contracts to 

verify they do not contain language that could be construed a.s an employer-employee 

relationship or personal services contracts. 

Recommendation 3; 

The Office of Acquisitions should <-'I!sure service contracts have a designated contractor point of 

contact or project manager to oversee it.<> personnel's work assignments, work schedules, 

timecard approval, leave requests, and other administrative requirements. 

Response: 

OA concurs with this recommendation. OA will institute controls to assure that Contract 

Specialists and Contracting Officers include a requirement in service contracts to have a 

designated contractor point of contact or project manager to ensure that contractor personnel arc 

under their employer's administrative control and supervision. 

Recommendation 4: 

The Office of Acquisitions should review all active service contracts and assess whether they 

include language that could reasonably be interpreted to allow for contractor performance of 

inherently governmental functions (IGF). Service contracts that are found to include IGF 

language should be modified to remove the language. 

Response: 

OA concurs with this recommendation. OA will conduct a review and assess all active service 

contracts that have a statement of work to determine if the contract language could reasonably be 

interpreted to allow for contractor pedonnance of inherently governmental functions. The 

Contracting Officer, who may also seek review by the Office of General Counsel, will modify 

any such language tound. 

Recommendation 5: 

The Office of Acquisitions should implement SECR 10-24 dated November 15,2012, and its 

associated Operating Procedures to ensure language in service contracts conform to the Oflice of 

Management and Budget Publication, Oftlce of Federal Procurement Policy Lener I 1-0 l, 

Performance cif Inherently Governmental and Critlcal Functions and the Federal Acquisition 

Regulation 7.503 requirements, to avoid contracts allowing for contractors performance of 

inherently governmental functions. 

2 

SEC's Controls over Support Service, Expert and Consulting Service Contracts 

Report No. 513 

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March 29, 2013 
AppendixV 

Subject: Response to SEC IG's Drafl: Audit 513, Audit of SEC's Controls Over Support Service, 

l::Xpert ond Consulting Service Contracts 

Response: 

OA concurs witb this recommendation. Since November 2012, OA has been implementing 

SECR 10-24 and tbe associated Operating Procedures for all new service contract awards to 

ensure language in service contracts conforms to OFPP Policy Letter l 1-01 . OA has provided a 

number of training sessions to procurement personnel and new supervisors, and recently made 

the training available online tor all SEC personnel. Additional training and communications 

SEC wide will be conducted. OA will implement oversight controls to assure that SECR I 0-24 

is being followed. A Reference Deskvide Guide has also been posted as a handy reference point 

for use by SEC personnel when dealing witb service contractors. 

Recommendation 6: 

The Office of Acquisitions should revise SECR 10-24, 1'vfanagemenl and Administration t;if' 

Service Contracts and Operating Procedures 1 0-24 to clearly prohibit interviewing contractor 

en1ployees and require post-award reviews be done on service contracts using a checklist tbat 

covers common areas that should be avoided during contract administration and oversight of 

service contracts. 

Response: 

OA concurs witl1 this recommendation. OA will revise SECR 1 0-24 and the associated 

Operating Procedures to clearly prohibit interviewing contractor employees. This prohibition 

will continue to be emphasized during training. OA will develop a checklist for post-award 

reviews for service contracts . 

. Reco:rnmend1ltion 7: 

The Office of Acquisitions should periodically provide training on avoiding actions that could be 

interpreted as supervision of contractor employees, on avoiding inappropriate employeremployee relationships between government employees and contractor personnel, and on 

preventing contractors from performing inherently governmental functions. This training should 

be provided to contracting personnel and other program personnel who work witb contractors on 

service contntcts. 

Response: 

OA concurs with this n:.-commcndation. OA has provided trdining and will continue to provide 

periodic training to SEC staff involved in service contracts on avoiding actions that could be 

interpreted as supervision of contractor employees, on avoiding inappropriate employeremployee relationships and on preventing contractors from performing inherently govemmental 

functions. OA will continually review training and make noted improvements. 

Cc: Darlene Pryor; Russ Moore 

3 

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March 29, 2013 
 

 

Audit Requests and Ideas
 

The Office of Inspector General welcomes your input. If you would like to request 

an audit in the future or have an audit idea, please contact us at: 

U.S. Securities and Exchange Commission 

Office of Inspector General 

Attn: Assistant Inspector General for Audits (Audit Request/Idea) 

100 F Street, N.E. 

Washington D.C. 20549-2736 

Tel. #: 202-551-6061 

Fax #: 202-772-9265 

Email: oig@sec.gov 

SEC OIG Hotline 

To report fraud, waste, abuse, and mismanagement at SEC, 

contact the Office of Inspector General at: 

Phone: 877.442.0854 

Web-Based Hotline Complaint Form: 

www.reportlineweb.com/sec_oig