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66–619 PDF 2011

S. Hrg. 112–42 

IMPROVING FEDERAL CONTRACT AUDITING 

HEARING 

BEFORE THE

AD HOC SUBCOMMITTEE ON CONTRACTING 

OVERSIGHT 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

FEBRUARY 1, 2011 

Available via http://www.fdsys.gov 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 

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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

SCOTT P. BROWN, Massachusetts 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

JOHN ENSIGN, Nevada 

RAND PAUL, Kentucky 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

JOYCE WARD, Publications Clerk and GPO Detailee 

AD HOC SUBCOMMITTEE ON CONTRACTING OVERSIGHT 

CLAIRE MCCASKILL, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

JON TESTER, Montana 

MARK BEGICH, Alaska 

ROB PORTMAN, Ohio 

SUSAN COLLINS, Maine 

JOHN MCCAIN, Arizona 

JOHN ENSIGN, Nevada 

MARGARET DAUM, Staff Director 

WILLIAM WRIGHT, Minority Staff Director 

KELSEY STROUD, Chief Clerk 

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C O N T E N T S 

Opening statements: Page 

Senator McCaskill ............................................................................................ 1 

Senator Brown .................................................................................................. 4 

WITNESSES 

TUESDAY, FEBRUARY 1, 2011 

Thomas P. Skelly, Director, Budget Service and Acting Chief Financial Officer, U.S. Department of Education ..................................................................... 5 

Ingrid Kolb, Director, Office of Management, Office of Deputy Secretary, 

U.S. Department of Energy ................................................................................. 8 

Hon. Brian D. Miller, Inspector General, U.S. General Services Administration ........................................................................................................................ 9 

Patrick J. Fitzgerald, Director, Defense Contract Audit Agency, U.S. Department of Defense .................................................................................................... 10 

Jeanette M. Franzel, Managing Director, Financial Management and Assurance, U.S. Government Accountability Office .................................................... 21 

E. Sanderson Hoe, Partner, McKenna, Long, and Aldridge on behalf of the 

U.S. Chamber of Commerce ................................................................................ 23 

Nick Schwellenbach, Director of Investigations, Project on Government Oversight ....................................................................................................................... 25

ALPHABETICAL LIST OF WITNESSES

Fitzgerald, Patrick J.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 55 

Franzel, Jeanette M.: 

Testimony .......................................................................................................... 21 

Prepared statement .......................................................................................... 65 

Hoe, E. Sanderson: 

Testimony .......................................................................................................... 23 

Prepared statement .......................................................................................... 98 

Kolb, Ingrid: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 40 

Miller, Hon. Brian D.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 46 

Schwellenbach, Nick: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 105 

Skelly, Thomas P.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 37 

APPENDIX 

Fact sheet referenced by Senator McCaskill ......................................................... 113 

Questions and Responses for the Record from: 

Mr. Skelly .......................................................................................................... 117 

Ms. Kolb ............................................................................................................ 119 

Mr. Fitzgerald ................................................................................................... 123 

Mr. Miller .......................................................................................................... 130 

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IMPROVING FEDERAL CONTRACTING 

AUDITING 

TUESDAY, FEBRUARY 1, 2011 

U.S. SENATE, AD HOC SUBCOMMITTEE ON CONTRACTING OVERSIGHT, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:40 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Claire McCaskill, 

Chairman of the Subcommittee, presiding. 

Present: Senators McCaskill and Brown. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. The Subcommittee will come to order. 

I am told that Senator Brown is on his way. So we will begin, 

and I am sure he will not mind it if I begin my opening statement, 

and we will have plenty of time for his opening statement when he 

gets here. 

If there is not enough evidence that I am strange, I will add 

more to the record, and that is that we are going to deal with two 

of my favorite topics today, auditing and the oversight of contracts. 

This Subcommittee hearing is all about how those two things 

need to be merged together so that we are doing the best job we 

know how to, in fact, manage contracts in the Federal Government. 

This is not a gotcha hearing. This is an informational hearing. 

This is a hearing so that we understand what contract oversight 

is ongoing through the very important management tool of contract 

audits. 

Last Congress the Subcommittee held a number of hearings that 

reviewed the fundamentals of contract management and oversight 

across the Federal Government. This afternoon’s hearing continues 

that work with an examination of contract audits, one of the most 

important components of effective and efficient contract oversight. 

This is a subject which may sound dry to almost everyone except 

those sitting inside this room, and likely some of this room would 

also agree that it is a very dry subject matter, but this is essential 

to good contractor oversight. 

Contract audits help ensure the government gets what it pays for 

and are one of the best weapons the government has to safeguard 

taxpayer dollars against waste, fraud, and abuse. 

Last year the Subcommittee asked for information from 22 Federal agencies about how they use contract audits. My staff has prepared a fact sheet summarizing this information, and I ask for 

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1The information referenced by Senator McCaskill appears in the appendix on page 113. 

unanimous consent that the fact sheet and the underlying data be 

admitted into the record.1 I think I have unanimous consent. 

The information the Subcommittee received showed that there is 

a wide variation in the agencies’ use of contract audits. The Defense Department (DOD) which relies on the Defense Department 

Contract Audit Agency (DCAA), to perform audits conducted approximately 17,000 contract audits in 2009. 

All of the civilian agencies combined conducted fewer than 1,800 

contract audits; 17,000 in DOD, fewer than 1800 in the rest of the 

government. 

Let us put it another way. The Defense Department conducted 

an average of one audit for every 25 million it spent on the contracts. The rest of the government on average conducted one audit 

for every 511 million spent through contracts. 

Of course, there is a lot of variation among the agencies. The Department of Energy (DOE), who will testify today, conducted one 

audit for every 82 million in contracts. Another witness, the Department of Education, conducted one audit for every 1.5 billion 

spent through contracts. 

I am interested to hear from these witnesses about the different 

approaches their agencies take to contract auditing. I am also looking forward to the perspectives of Patrick Fitzgerald, the Director 

of the Defense Contract Audit Agency, and Brian Miller, the Inspector General (IG) of the General Services Administration (GSA), 

who can provide expert testimony regarding the conduct and the 

importance of contract auditing for the Federal Government. 

Let me pause for a moment and congratulate Brian Miller, the 

Inspector General of GSA, because I realize that today we had 

something that does not happen very often. We had very good news 

about the oversight capacity of the Federal Government. 

Oracle agreed to pay $46 million to settle a kickback complaint 

that came about in part because of the audit work of the Inspector 

General at GSA. A number of computer firms were paying government employees to recommend them for IT contracts; and in fact, 

it was the work on contract auditing that exposed some of these 

problems and ultimately brought about a number of different actions by the Department of Justice; and today the announcement 

that Oracle is going to repay the Federal Government $46 million 

or repay $46 million for the problems that they are responsible for. 

We will also hear testimony on behalf of the Chamber of Commerce as well as from the Project on Government Oversight and 

the Government Accountability Office (GAO) who will help us take 

a broader look at this issue. 

I am proud, very proud to be a former government auditor and 

a passionate defender of the importance of auditing but that does 

not mean that I think that more audits alone is the answer to good 

contract management and oversight. 

If the government is going to be a good steward of taxpayer dollars, we need to have an integrated comprehensive contract management; and everyone involved in the process, from the line contracting officials to senior leadership and department heads, they 

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need to be involved, engaged, and probably most important accountable. 

Auditing is one part of that continuum and I hope that today we 

can have an open conversation about how auditing can and should 

fit into the overall framework of contract oversight. 

In a time of scarce government resources and an inadequate contracting workforce, the government must evaluate where it is most 

vulnerable and focus resources where they can most effectively protect taxpayer dollars. 

I look forward to the witnesses’ testimony and the opportunity to 

discuss how we can better use contract audits to oversee government contracting and I encourage all of our witnesses, particularly 

the witnesses on the second panel this afternoon, to speak frankly 

and openly about what improvements are necessary. 

I was going to compliment Senator Brown right now and I bet 

he would rather wait to be here to hear it. That is a disease that 

most of us have around here. We love to hear good things about 

ourselves. So I will wait to compliment Senator Brown when he 

gets here, and now I will introduce the opening panel of witnesses 

that we will be hearing this morning. 

First, we have Thomas Skelly, who currently serves as a Director 

of Budget Service for the Department of Education and has been 

the Department’s Acting Chief Financial Officer (CFO) since 2008. 

In that capacity, Mr. Skelly coordinates internal controls and 

audit follow-up and manages contracts and acquisitions for the Department. 

He is also responsible for the Department’s 77 billion annual 

budget. Mr. Skelly has served as a Federal employee since 1974 

and is a member of the career senior executive service. Welcome, 

Mr. Skelly. 

Ingrid Kolb has been the Director of the Office of Management 

for the Department of Energy since her appointment in 2005. As 

Director, she is responsible for the Department’s project and acquisition management. 

Ms. Kolb has served in budget and financial management roles 

for both the Department of Homeland Security (DHS)—that is a 

tough one—and the Department of Energy. 

Prior to joining the Department of Energy, Ms. Kolb was the Director of the training and development center at the Department 

of Education. 

Brian Miller has served as the Inspector General for the General 

Services Administration since his conformation by the Senate in 

July 2005. He is also the Vice Chair of the National Procurement 

Fraud Task Force and a member of the Department of Justice’s Recovery Act fraud working group. Mr. Miller received the Attorney 

General’s Distinguished Service Award in 2008. 

Patrick Fitzgerald has served as the Director of the Defense Contract Audit Agency since his appointment in November 2009. As 

Director, Mr. Fitzgerald is responsible for all management and 

operational decisions at the agency. 

He previously served as the Auditor General for the United 

States Army. 

Before we turn to your testimony, Mr. Skelly, I will tell Senator 

Brown I finished my opening statement, and my last paragraph of 

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my opening statement was complimenting you, and I said I was 

going to hold off on the paragraph because I knew you would want 

to be here to hear it. 

Senator BROWN. Absolutely. 

Senator MCCASKILL. I would like to take a moment to recognize 

his contribution to this Subcommittee. There are not a lot of people 

who wake up in the morning excited about talking about contract 

oversight and auditing. So I felt very lucky to have the opportunity 

to work with Senator Brown over these months. 

I do not think we know yet for sure who is going to be Ranking 

Member on the Subcommittee for this Congress, but I am confident 

that he and I will continue to work together on important oversight 

issues I hope in this Subcommittee; but if not, I know that work 

will continue. 

And I turn to you for your opening statement. 

OPENING STATEMENT OF SENATOR BROWN 

Senator BROWN. Thank you, Madam Chairman. I apologize for 

being a little late. I lost track of time. 

First of all, as the Ranking Member of the Subcommittee, it has 

also been my honor and pleasure to work with you in exploring important issues of this Subcommittee that go to the core of how government conducts its business. 

Unfortunately, this may be my last meeting as Ranking Member 

as you are aware of. So I want to just take a brief minute to thank 

you and your staff for being so cordial and thoughtful and helpful 

in welcoming me to the Subcommittee and also providing me with 

the opportunity to kind of spread my wings a little bit and be part 

of something that is very important. It has been a great experience 

and I look forward to continuing to work with you. 

In Fiscal Year 2009, the Federal Government contracted over 

$530 billion on goods and services. And while I intend to work with 

my fellow members of Congress to reduce this amount, it also 

means that we must be incredibly vigilant in ensuring that the effective contract oversight actually occurs. 

With $530 billion taxpayer dollars at stake, the government 

needs strong controls to provide reasonable assurance that these 

contract funds will not be lost to waste, fraud, and abuse. 

I want to commend the Chairman and former Missouri state 

auditor for calling this hearing to focus on a key part of the contract control system which is contract audits. 

While contract auditing can be an important control mechanism, 

in our current fiscal environment the reality is we cannot audit everything nor should we. We must focus our limited resources on examining those activities presenting the greatest risk to the government and which justify the return on the investment. 

For the audits that are necessary, we must have an efficient system that accomplishes the task in a cost effective and timely manner. 

The current system is not working the way it was intended and 

this is evidenced by the backlog in audits that prevents contracts 

from closing down in a timely manner. This delay on closing out 

contracts increases cost to contractors and to the government. 

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1The prepared statement of Mr. Skelly appears in the appendix on page 37. 

And while I understand today’s hearing will not discuss farreaching reforms to the Federal acquisition system, we should keep 

in mind whose money we are spending and try to operate a government more like a business. 

In today’s hearing, I am interested in finding solutions to the 

problems in Federal contract auditing, look forward to hearing 

those witness perspectives on the critical issues, and I thank the 

witnesses obviously for being here today. 

And on a more personal note, in one of the bills we were able 

to work in a bipartisan, bicameral manner, it really started in this 

Subcommittee with the Arlington National Cemetery. 

It was something that not only provided great insight to me as 

to what the process is but it really served a real need with our Nation’s heroes. 

You should be commended for that and it has been an honor to 

be here in this Subcommittee. I am actually going to still be involved in the Subcommittee if it, in fact, works out that it will be 

obviously the contracting arm associated with it. I am hopeful I 

will still be able to participate. I still am on this Subcommittee if 

I am not mistaken so it is not like you are losing me totally. So 

thank you. 

Senator MCCASKILL. Thank you, Senator Brown. 

It is the custom of the Subcommittee to swear in all witnesses 

that appear before us. So if you do not mind, I would ask you all 

to stand. 

Do you swear that the testimony you will give before the Subcommittee will be the truth, the whole truth, and nothing but the 

truth, so help you, God? 

Mr. SKELLY. I do. 

Ms. KOLB. I do. 

Mr. MILLER. I do. 

Mr. FITZGERALD. I do. 

Senator MCCASKILL. Thank you all. 

We will be using a timing system today. We would ask that your 

oral testimony be no more than 5 minutes. Obviously your written 

testimony will be printed in the record in its entirety, and we will 

not be, as long as you do not get close to 7, 8, 9, or 10 minutes, 

we are going to be very tolerant if you go over slightly. I do not 

want anyone to feel like they are under the gun, so to speak, in 

terms of finishing their testimony. 

We will turn to you, Mr. Skelly, for your testimony. Thank you 

very much for being here. 

TESTIMONY OF THOMAS P. SKELLY,1 ACTING CHIEF 

FINANCIAL OFFICER, U.S. DEPARTMENT OF EDUCATION 

Mr. SKELLY. And thank you, Chairman McCaskill and Ranking 

Member Brown. Thank you for this opportunity to discuss Federal 

contract auditing and thank you for your leadership on this important issue. 

My name is Tom Skelly. I am the Director of Budget Service in 

the U.S. Department of Education. Since 2008, I have also been 

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delegated the authority to perform the functions and duties of the 

Chief Financial Officer. 

In this role, I lead the organization that provides accurate and 

timely accounting and financial management information, coordinates internal controls and audit follow-up, and manages contracts 

and acquisitions. 

I am proud to report that the Department’s financial statements 

received a clean opinion for the ninth straight year and we also 

have achieved recognition for excellence in financial reporting from 

the Association of Government Accountants (AGA). 

In the past, we have not had many opportunities to benefit from 

contract audits. In our April 2010 response to you, we identified 

only one external audit, and we expect only one this year. The primary reason for not having many contract audits is that most of 

our contracts are fixed-price, and the government’s cost risk on 

that type of contract is relatively low. 

The Department also has many competing priorities for administrative funding. Therefore, even with cost-reimbursement contracts, 

we limit the use of contract audits to those situations that need a 

review of incurred costs to help us closing out contracts. 

Although the Department has one of the largest discretionary 

budgets, the Department also has the smallest workforce of any 

cabinet-level agency. Less than one percent of our annual funding 

is spent on administrative activities. 

In fiscal year 2010, the Department had approximately 4,200 employees. This number represents a decrease of about 10 percent 

over the past decade, even though the workload has grown during 

that period. 

For example, the enactment of the Ensuring Continued Access to 

Student Loans Act of 2008 and the more recent Student Aid and 

Fiscal Responsibility Act of 2010 greatly expanded our student loan 

work. 

These loan programs and related increase in Pell Grant applications have been the main drivers of our increased work, but the 

Department also had a key role in the Recovery Act implementation through which innovative and competitive kindergarten 

through 12 education reform efforts we expanded through such 

grants as Race to the Top and Investing in Innovation. 

The majority of our funds, though, are really for grants and 

loans. They are not for contracts. We have used contracts to perform much of the increased work involving delivery of Federal student aid, and the dollar volume of contracts has increased. 

For example, we spent approximately $1.5 billion on contracts in 

2009 and approximately $1.8 billion in 2010. Most of the increase 

was for student-aid processing and loan-servicing contracts. These 

contracts tend to require performance of high volumes of routine 

and similar tasks, like application processing, loan origination, and 

loan servicing and collection. 

We have contracted for these kinds of activities, and we have 

done these kinds of contracts for even three decades, but the work 

volume has increased dramatically in recent years. 

In fiscal year 2010, only 21 percent of the contract dollars and 

9 percent of the contract actions awarded by the Department were 

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cost-reimbursement, and we are further reducing our reliance on 

cost-reimbursement contracts each year. 

In fact, eight of the Department’s top ten contracts, representing 

96 percent of the spending on our largest contracts, are fixed-price. 

Examples of cost-reimbursement awards that we do have include 

contracts to analyze student achievement data from the National 

Assessment of Educational Progress (NAEP) and an ongoing contract we had with Reading Is Fundamental which distributes inexpensive books to children and undertakes other activities that promote reading and literacy. 

The Department’s Office of Inspector General (OIG) conducts 

independent audits, investigations, inspections, and other reviews 

of programs and operations. Part of this responsibility includes contract audits. In determining what to review, our Inspector General’s Office considers internal risk assessments, Department requests, Congressional requests, and hotline information and other 

sources that contain allegations of concern. 

As noted in last April’s response to you about contract audits, in 

fiscal year 2009, OIG completed an incurred cost audit of a contract 

that the Department had entered into for the administration of 

part of the National Assessment of Educational Progress. 

The purpose of the audit was to determine whether the costs incurred in fiscal year 2006 under the contract were, quote, reasonable, allowable, and allocable in accordance with the terms and 

conditions of the contract and applicable acquisition regulations. 

The approximate cost to the Department to perform this audit was 

$255,000. 

As a direct result of this audit, our Inspector General’s Office recommended that: One, the Department recoup unallowable costs 

paid to the contractor; and, two, to then conduct a follow-up review 

of the costs not included in Inspector General’s sample. The Department recouped $229.7 thousand dollars from the contractor for 

the fiscal year 2006 costs identified by the Inspector General. 

In addition, the contractor disclosed during the audit that it had 

inappropriately billed the Department for post-retirement medical 

benefits during the period September 2002 through December 

2007. The contractor returned to the Department $2.7 million in 

April 2009 for these improper billings. 

I point this out because it shows we did get some additional benefits from the contract audit in addition to the amounts we recovered throughout negotiations with the vendor. So there is obviously 

some deterrent effect from doing audits. It encourages vendors to 

keep good records, revise their procedures, and maybe return 

things to us before we actually get into the audit. 

We considered several options for the follow-up audit that the IG 

had recommended. The IG itself decided not to devote limited resources to a broader audit. Then the Department initiated a request to the Defense Contract Audit Agency for audit support to review the incurred costs not included in OIG’s sample. 

To obtain this support, the Department representatives worked 

with DCAA in 2010 to determine the scheduling and the cost of the 

follow-up audit, which was estimated to cost $27,000. 

In December 2010, DCAA confirmed that the requested audit 

was not programmed in its schedule for fiscal year 2011. As a reH605-41331-79W7 with DISTILLER

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1The prepared statement of Ms. Kolb appears in the appendix on page 40. 

sult, since the IG did not want to do it, the DCAA did not want 

to do it, we contracted on our own for audit support services. The 

contract we obtained includes performing incurred cost audits of 

this and other kinds of activities and it will be providing services 

this fiscal year. 

The Department faces challenges regarding contract audits in deciding whether they take priority over other demands for other limited funds. The Department’s Inspector General has multiple priorities, and DCAA cannot always accommodate non-DOD requests for 

audit support. Obtaining audit support from a non-governmental 

firm can be costly and time-consuming. 

In conclusion, we support efforts to maximize the performance of 

contractors in delivering Department services. We rely on many 

contractors to get the work done. We believe that fixed-price contracts are the preferred option over cost-reimbursement contracts 

as they provide a better value to the taxpayer. 

Thank you, Madam Chairman, for your attention to this important issue, and I would be happy to answer any questions. 

Senator MCCASKILL. Thank you very much. Ms. Kolb. 

TESTIMONY OF INGRID KOLB, DIRECTOR,1 OFFICE OF MANAGEMENT, OFFICE OF DEPUTY SECRETARY, U.S. DEPARTMENT OF ENERGY 

Ms. KOLB. Thank you, Chairman McCaskill and Senator Brown, 

and I, too, appreciate your leadership on this very important topic. 

My name is Ingrid Kolb. I am the Director, Office of Management at the U.S. Department of Energy. I am pleased to be here 

today to discuss with you how the Department uses audit services 

to detect and prevent waste, fraud, and abuse in government contracts, to provide contracting officers with reasonable assurance 

whether contractor submissions are free of material misstatement, 

and also to provide contracting officers with assistance and advice 

in the establishment of fair and reasonable prices for products and 

services. 

In fiscal year 2010, the Department spent approximately $26 billion on contracts. The bulk of the dollars, about 80 percent, was 

spent on the Department’s unique management and operating contracts. These contracts are used primarily to manage Department 

laboratories, its national laboratories as well as other governmentowned or controlled facilities. 

The Department’s Office of Inspector General is the auditor for 

management and operating contracts; and in fiscal year 2010, the 

Department spent approximately $1.1 million for 17 of these IG audits. 

The Defense Contract Audit Agency has traditionally been the 

primary auditor for our other contracts. In fiscal year 2010, the Department spent approximately $9.4 million for 273 audits of varying types, performed by DCAA. The majority of these are for incurred cost audits. 

DCAA has provided us with excellent service in the past and remains our primary source of audit service for non-management and 

operating (M&O) contracts. 

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1The prepared statement of Mr. Miller appears in the appendix on page 46. 

However, over the past few years as DCAA has experienced challenges with an increasing workload and fewer resources which 

have caused some concern for the Department of Energy, our ability to obtain cost-incurred audits in a timely manner has diminished and in some instances at some procurement sites this has 

caused a backlog of closeouts for our contracts. 

In response to the increased workload associated with the American Recovery and Reinvestment and Recovery Act and the corresponding demand for the DCAA audit services around the government, the Department of Energy conducted a competitive procurement to obtain supplemental audit services. 

In coordination with DCAA, a private accounting firm was 

awarded a contract in May 2010 to provide audit services primarily 

for financial assistance awards. The contract also provides full contract audit services, and to date the contractor’s performance has 

been timely and we have been satisfied with the quality of their 

work. 

Last month senior officials from the Department along with three 

other civilian agencies met with Pat Fitzgerald, the head of DCAA, 

who will be testifying in a few moments, to explore ways to work 

more efficiently with DCAA. 

And I am glad to report the meeting was very productive and 

there are future discussions that we have planned to help streamline the process. I believe that this ongoing dialog with DCAA will 

strengthen our audit function at the Department of Energy. 

Again thank you for this opportunity to testify before the Subcommittee. This completes my oral statement and I am happy to 

answer any questions the Subcommittee may have. 

Senator MCCASKILL. Thanks very much. Mr. Miller. 

TESTIMONY OF THE HON. BRIAN D. MILLER,1 INSPECTOR 

GENERAL, U.S. GENERAL SERVICES ADMINISTRATION 

Mr. MILLER. Madam Chairman, Ranking Member Brown, ladies 

and gentlemen, thank you for the opportunity to testify on the importance of contract audits in detecting and preventing fraud, 

waste, and abuse in government contracts, and thank you for your 

continued support of Inspectors General and for the Subcommittee’s strong commitment to oversight. 

This hearing is especially important as the President and the 

Congress look to aggressively pursue fraud, waste, and abuse in 

Federal spending. Contract auditing plays a vital role in fighting 

fraud. 

A key component of the President’s plan to reduce the national 

debt is rooting out fraud, waste, and abuse from Federal programs 

such as health care programs. This is no less true in the procurement area. 

Across the government, contract audits result in saving billions 

of taxpayer dollars and ensuring that, when Federal dollars are 

spent, they are spent wisely. 

My office has a great deal of experience with contract audits. In 

my view they provide a critical oversight mechanism for GSA’s 

handling of billions of taxpayer dollars. 

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1The prepared statement of Mr. Fitzgerald appears in the appendix on page 55. 

Over the last 2 years, my office has identified about $1.1 billion in potential cost avoidances and $33 million in questioned costs. 

We have also worked very closely with the Department of Justice 

in obtaining over $400 million in False Claims Act (FCA) recoveries. 

And thank you, Madam Chairman, for mentioning the recovery yesterday from Oracle and from Sun Microsystems of $46 million. 

Overall, GAO’s 2008 report recognized that for every dollar budg- eted, our office had a return on investment of $19. I am proud of 

the work our office does in saving taxpayer dollars. 

I agree with the President and the Congress that we need to restore fiscal discipline to the Federal Government and to find ways 

to make the government more effective. Contract auditing is one 

way to do so. 

Unlike other government programs, contract auditing saves Federal dollars. It identifies wasteful spending and ensures that taxpayer dollars are spent wisely. Most other Federal programs, however useful and good, do not return dollars to the Treasury or prevent Federal dollars from being spent. 

At a time when the acquisition workforce is stretched thin, overworked, and under trained, contract audits are crucial to protecting 

taxpayer dollars. Contract audits are the taxpayers’ last line of defense against losing money to fraud, waste, and abuse. 

To prevent overcharging, our office reviews the pricing that contractors give to GSA. Too often, the prices given to GSA are not fair 

and reasonable. As the largest volume buyer, the Federal Government deserves the best prices. Yet our auditors often find that contractors have given better prices to other customers. 

Our success hinges on both our autonomy from the agency and 

on our contract expertise. However, we do face perennial oversight 

challenges. 

Contractor lawyers and consultants have sometimes delayed responses to information requests for months and, yes, at times even 

for years. These kinds of delays should not be tolerated. 

Thank you for calling attention to the need for more contract audits and for more effective contract audits. In these times of tight 

budgets and calls for smaller government, we need to continue to 

be serious about rooting out fraud, waste, and abuse. 

I am proud of the record of the GSA Office of Inspector General 

and hope that we can do more in the coming years to save Federal 

money. 

Thank you for your attention. I ask that my statement and written materials be made a part of the public record and I would be 

pleased to respond to the questions. 

Thank you. 

Senator MCCASKILL. Thank you. Mr. Fitzgerald. 

TESTIMONY OF PATRICK J. FITZGERALD,1 DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE 

Mr. FITZGERALD. Good afternoon, Chairman McCaskill, Ranking 

Member Senator Brown. Thank you for the opportunity to appear 

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before you today. I am pleased to provide you with an overview of 

the role that the Defense Contract Audit Agency plays in performing contract audits for agencies other than the Department of 

Defense. 

I became the Director of the Defense Contract Audit Agency 15 

months ago, and prior to that, I was the Auditor General of the 

Army and headed up the Army audit agency. I am a Certified Public Accountant (CPA) and have over 30 years of government auditing experience. 

The Defense Contract Audit’s mission supports efforts to obtain 

the best value for dollars spent in government contracts. 

To carry out this mission, we have about 4,700 dedicated employees at 114 field offices around the world. We have hired 500 auditors in the last 2 years. Currently 99 percent of our auditors have 

a four-year college degree, and in addition 29 percent hold advanced degrees and 28 percent are certified public accountants. 

I consider the work we do for civilian agencies an important part 

of our contract audit mission. The Defense Contract Audit Agency 

has performed contract audits for civilian agencies since its creation in 1965. The type and scope of our efforts in civilian agencies 

are very similar to the audits we perform in the Department of Defense. 

Since 2000, the percent of our total budget devoted to the reimbursable work has ranged from 9 to 13 percent, and the total reimbursable funding has ranged from about $45 million to $58 million. 

In an average year, we provide audit services to more than 30 

civilian agencies. However, our reimbursable work is heavily 

weighted toward just a few civilian agencies. For example, just two 

civilian agencies, National Aeronautics and Space Administration 

(NASA) and the Department of Energy, make up more than 50 percent of the reimbursable work that we do. 

As a result of our DOD audits, we have already established a 

presence at many of the civilian agency contractors. In 2010, over 

90 percent of the contractors we audited were engaged in some 

type of DOD work. 

Using DCAA for contract audit at these locations is a cost-effective use of both government and contractor resources and provides 

assurance that comprehensive audits are accomplished. 

Over the past several years, the Department of Defense has 

taken initiatives that have improved contract processes. I would 

like to highlight three that, in my opinion, will provide similar benefits throughout the Federal Government. 

These are, one, establishing a formal adjudication policy that ensures that contract audit findings and recommendations receive 

timely and adequate consideration; two, developing new business 

system rules that will strengthen contractor systems to prevent 

fraud, waste, and abuse by improving the transparency and oversight of these systems. 

And finally, creating a risk-based approach to ensure that the 

limited auditing resources are focused on the areas with the greatest risk and largest payback to the taxpayer. 

Let me assure you we are committed to providing civilian agencies with high-quality audits that protect the interests of the American taxpayer. 

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Over the past year, we have implemented many initiatives to improve the quality of our audits and improve the work environment 

of our talented workforce. To assist in developing our workforce, we 

are overhauling our training programs as well as making changes 

to our hiring and promotion policies. 

We have also issued extensive audit policy and process changes 

to improve the quality of our audit services and audits. These 

changes have resulted in auditors performing additional tests of 

contractors’ controls and transactions. 

We are reaching out to our stakeholders to better inform them 

of our process improvements while working with them to revisit 

the contracting time frames to allow sufficient time to perform 

thorough audits that are necessary to protect the taxpayer’s interest. 

In summary, we have changed the way the Defense Contract 

Audit Agency does audits by using a more collaborative and comprehensive approach to contracting audits. 

We have institutionalized these initiatives in our recently issued 

strategic plan that provides a clear roadmap for executing these 

changes. We believe we have made significant strides but recognize 

there is more work to be done, and I know our workforce is committed to providing high-quality audits that serve the American 

taxpayer. 

Again I appreciate the opportunity to testify before you today, 

and I would be glad to answer any of your questions. Thank you. 

Senator MCCASKILL. Thank you, Mr. Fitzgerald. Let me start by, 

I am trying to get a handle on, I know that the work you are doing, 

the majority of it is in a few agencies and I know the majority of 

it is with agencies that have some connection to the Department 

of Defense. 

The large policy issue that I want this hearing to talk about is— 

are there sufficient contract auditing resources in the Federal Government, do agencies have the ability to be aggressive about contract audits, and how is that process working now? 

It is not clear to me; and if you can help, is there an overall risk 

assessment that is being done across all of the agencies that anybody has responsibility to look at and say we have a cost-plus contract over here at Interior that no one has ever looked at and there 

has never been a question asked about it and it has grown and it 

is a fairly large contract now. 

Is there someplace that there should be—I mean, are we doing 

this in stove pipes and you are just being called in on a piecemeal 

basis? Reassure me that there is some overall strategy here as to 

where these audit resources are going. 

Mr. FITZGERALD. Senator McCaskill, from the defense contract 

audit point of view, we have worked over the last year with the Department of Defense and all the stakeholders involved with that to 

make sure that our auditors are being allocated to the highest risk, 

the highest priority work. 

We are now starting to work with each individual civilian agency 

to do that, realizing that one, a risk-based approach for DOD may 

not be the same thing for DOE or something like that. 

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So we are working civilian agency by civilian agency to make 

sure that we are providing the service and allocating our resources 

where we believe and they believe are the highest risk area. 

Senator MCCASKILL. So is there some document that is being 

prepared in each civilian agency about a risk assessment in terms 

of contract audit work? 

Mr. FITZGERALD. Senator McCaskill, I am not sure but what I 

would like to do is, because I think I can meet the needs of the civilian agencies if I know what that workload is—— 

Senator MCCASKILL. Right. 

Mr. FITZGERALD [continuing]. For the future so I can build the 

workforce capacity to do that. 

Senator MCCASKILL. Well, it looks like you by default are it. Is 

that a fair assessment? 

I do not mean you are the only game in town. Therefore, we got 

to use you. I mean, obviously you are a strong agent, audit agency 

with a lot of professionals. 

Well, let me ask. I mean, do you sense, Ms. Kolb, is there a risk 

assessment that your agency is doing that prioritizes contract audit 

work within your agency? 

Ms. KOLB. Yes, we definitely prioritize contract audit work within our agency. We have certain dollar thresholds that trigger an 

audit, trigger a contracting officer to request an audit. And so that 

is how we go about determining the risk level. 

Senator MCCASKILL. And in Education the same thing? 

Mr. SKELLY. Pretty much. Our biggest audit, our biggest contracts are fixed-price so we do not see as much need for that; but 

if we are closing out one of the cost-plus contracts, then we do see 

a need to. 

Senator MCCASKILL. Well, there has actually been some waste in 

fixed-price contracts, too. I know they are not as risky as cost-plus. 

Mr. SKELLY. Just overall I think our strategy is to try to maximize fixed-price contracts. That is the biggest contract reform we 

are trying to implement and we have direction from the White 

House and the Office of Management and Budget (OMB) on doing 

that. 

Senator MCCASKILL. If I could just make sure that the Defense 

Department had as many fixed-price contracts as you have, I would 

be a happy camper. There is certainly not the level of cost-plus 

going on in your agency that there is in Defense. 

So I guess what I am getting at here is that it appears to me 

that we have never really had across the government anyone going, 

OK, are we doing the right audit work? Your priority has to be Defense because you are the Defense Contracting Audit Agency and 

the other agencies. 

And what is a comparison of price? When you get reimbursed for 

your cost, Mr. Fitzgerald, how does that compare with contracting 

with private sector auditors to do contract work? 

Give me an apples to apples comparison here. 

Ms. KOLB. I can give you a comparison with the experience we 

have had with our independent auditor. The price that we pay for 

DCAA is about $114 an hour. The comparison with our independent private sector auditor is $150 an hour. 

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However, I will say that one of the big issues for us is timeliness, 

and DCAA is stretched fairly thin, and sometimes it is very difficult for them to free up auditors to perform high priority work. 

So we have had to go to our independent auditor. 

But for us, it is worthwhile because we need the audit work in 

order to make timely business decisions. So we have had to pay 

that extra amount in order to get that service. 

Senator MCCASKILL. Right. Senator Brown. 

Senator BROWN. I guess my biggest concern when we do all these 

hearings is, are we getting the most bang for our buck, is there 

something we can do better, or you can do better, or we can give 

you guidance to do better. 

So why do I not just start with Mr. Fitzgerald, if that is OK. Is 

there something we are not doing correctly to the maximum bang 

for our buck? 

Mr. FITZGERALD. Well, Senator, I think having this hearing is 

helpful to bring some light on contract auditing. Our agency did 

not grow through the boom that happened in DOD. As result of 

some external reports, we have the support from the Department 

to grow our workforce. 

We are making sure that we are doing a quality product for not 

only DOD but our civilian agencies too. 

We have made some changes over the last year but we believe 

we are seeing, as result of doing a better quality product and service, that the amount of dollars that we are questioning, that has 

significantly gone up over the last 2 years as we have done, in 

what we believe, a more comprehensive and thorough approach to 

our audits. 

Senator BROWN. At some point does it not lose its cost effectiveness? There are some audits that I cannot believe we are auditing 

their people. Do you ever have that moment in your office? 

Mr. FITZGERALD. I think one of the first things we did was to 

look at a risk-based approach, and we have made some adjustments where we have decided, based on the risk, that we would reallocate our auditors to contracts above a certain dollar threshold, 

and only do below that threshold if there was additional risk or we 

do believe we might kind of use the Internal Revenue Service (IRS) 

model where we will do some work in that area just on a random 

basis but clearly our focus will be on higher dollar value, higher 

risk contracts because we will never have nor would we be purporting to have auditors be able audit every contract. 

So we are looking to make sure that our limited audit capability 

is applied and allocated to the highest risk area. 

Senator BROWN. So you are doing that now? 

Mr. FITZGERALD. Yes, sir. 

Senator BROWN. Is it true that you are about 10 percent over in 

terms of the actual close-outs that there are some that have been 

going on for, as I think has been discussed already, for a while. 

Is it about 10 percent or do you have that number? 

Mr. FITZGERALD. Senator Brown, to be very up front with you, 

our cincurred audits, which are the audits that we do at the end 

of the contract, and many times they are needed to close out the 

contract, that backlog has quadrupled over the last 8 years. So 

again that is why we are using—— 

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Senator BROWN. Quadrupled from what to what, just in rough 

numbers so everyone knows approximately. We do not need an 

exact number. I mean, has it gone from like one to four? 

Mr. FITZGERALD. No, it is a significant backlog that we have to 

work. I could give you specific numbers. 

Senator BROWN. The reason I am kind of zeroing in on this particular area because we have a lot of Massachusetts businesses 

that deal in this type of work. 

And not only are they waiting for close-out, it is costing them 

real money, real dollars. So in addition to the health care bill and 

the taxes they are paying and the regulations that they are dealing 

with and now they have audits so it is like—what is next. 

They need closure and they need certainty. And is there a way, 

is there something that we can provide you or is there something 

that you need that we are not giving you to get these things done? 

They have been going on, some of them, for years. 

Mr. FITZGERALD. Senator, we have to get after that backlog. Hiring 500 new auditors over the last 2 years will be helpful in that. 

And I would add, not to mitigate that at all, but we do work closely 

with the contracting officers to make sure that their billing rates 

are appropriate so that there are no overages or shortages so that 

the contractors get the money that they need to be paid as we monitor the billing throughout the contract before we do a final costincurred audit. We work closely to make sure that is a minimum 

amount. 

Senator BROWN. Sure. You are saying you are hiring 500 new 

auditors. Can you believe it, folks? We are doing 500 new auditors 

in addition to the thousands of other new auditors in various agencies. 

I mean, at what point do we actually just hire new workers, like 

new construction folks, or just a regular private sector employee. 

The fact that we are hiring 500 new auditors just smacks of me 

saying, ‘‘Wow, something is broken somewhere.’’ There is a disconnect somewhere. 

So hiring 500 new auditors to deal with a load that has been 

quadrupled after a period of time, some of these audits have gone 

on for years. 

So I guess at what point do we say, ‘‘My gosh, something is broken.’’ Are we auditing the proper folks that need to be audited, the 

entities that need to be audited? Where is the breakdown? 

It is not kind of working for me really. 

Mr. FITZGERALD. Senator, just to try to put it a little in perspective. The DOD procurement budget just exploded from 2000 to 

2010. DCAA’s workforce was flat throughout that period. 

In the early 1990s the Defense Contract Audit Agency was about 

7,000 folks. That steadily went down and then stayed flat. We are 

working to both adjust to workload requirements and build the 

workforce capacity to get a good balance there so that we can effectively provide a quality product which is, in my opinion, a quality 

product must be a timely product. 

Senator BROWN. I will reserve for the next round. 

Senator MCCASKILL. I wanted to point out that Senator Brown 

was not yet a Senator when all hell broke loose at DCAA. To say 

that Mr. Fitzgerald had a challenge is an understatement. It was 

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determined that DCAA was not meeting yellow book standards for 

government auditing. 

There were some real management challenges, not that there are 

not, and I want to say this on the record, thousands of wonderful 

auditors at DCAA. I do not mean to disparage the wonderful people 

that work at DCAA because literally we would not have known 

about the problems if somebody at DCAA had not come forward. 

But they had some real management issues. 

And Mr. Fitzgerald was drafted to take over an agency which 

had traditionally only had the people move up in the organization 

to head the organization. I think it may have been, I do not know, 

was it the first time, Mr. Fitzgerald, that somebody came from outside the organization to head it? 

Mr. FITZGERALD. Yes, Senator. 

Senator MCCASKILL. So they never had anybody come from outside in a management capacity. So I am usually not the one making, I do not mean to sound like I am making excuses but I know 

the challenges that he faced. 

And while I do not think they are there yet, they have made significant progress in, I think, turning around the management capacity at DCAA since his arrival. So for what that is worth. 

Senator BROWN. May I make a note on that? 

Senator MCCASKILL. Sure. 

Senator BROWN. Listen, I do not disagree. I am aware. I have obviously done my homework and I am aware of your challenges. I 

just want to make sure that we are auditing the right entities and 

that we are not wasting our money and that the audits that we are 

participating in, it affects real people, real jobs, real companies, not 

only in my State but in yours, and that is why I asked is there 

something that we can do or that we are missing to help you get 

that closure so people can move on and just start creating real jobs. 

Senator MCCASKILL. I certainly agree. I think that this is one of 

those areas where we’ve got to be careful because there are areas 

of government where the investment that we make comes back. 

That segues into the question I want to ask you all and that is 

pre-award and post-award auditing. I would like any of your all’s 

take on that. I just think there is, I know that you have done a 

lot of it at GSA but it appears to me, Mr. Miller, that you all could 

do a lot more of it because every time you have done it, we found 

real money, have we not? 

Mr. MILLER. We have, Madam Chairman, and we could do a lot 

more of it. And I think it would save Federal money. That may 

sound ironic, but we will save money if we do more contract audits, 

if we invest the money there. 

I would like to say briefly that we do not currently use DCAA. 

We have used DCAA in the past a few times in relatively limited 

capacities but currently, we do the auditing at GSA and that has 

worked out very well. 

One of the areas that you point out is the pre-award and postaward audits. The Sun Microsystems settlement of $46 million that 

you mentioned earlier started off as an audit in our office that we 

worked up, developed, and referred over to the Department of Justice. It was later on combined with the Qui Tam action and settled. 

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But we do save lots of money. As I pointed out in my testimony, $1.1 billion in cost avoidances for the last 2 years. So thank you 

for asking that. 

Senator MCCASKILL. Well, and I think many times those preaward audits have what I would call a deterrent effect because everyone who is out there competing for Federal contracts it gives 

them a heads up that somebody is going to be paying attention to 

their numbers before all the documentation is signed and before 

the contract is executed. 

And I think that kind of has everyone on better behavior as it 

relates to Federal contracting. 

Let me address Mr. Skelly and Ms. Kolb. As we began what I 

am going to call the lean era in the Federal Government which I 

believe the next decade will be, I do not think you are going to see 

much expansion of either one of your departments. 

I think, in fact, you will see some contraction at both the Department of Education and Department of Energy. I am not saying that 

we are talking about massive layoffs. But I am just thinking that 

the whole footprint, I believe, will shrink to some extent just because we are going to have a real obligation to begin to cut back 

on all kinds of spending, including discretionary. 

Be honest with me. What kind of pressure is that going to put 

on you to squeeze the resources you spend on contract auditing because there will be some other pressure to keep the money in programming at your agencies? 

Mr. SKELLY. I think it is going to be a significant pressure. We 

have been squeezed already. I think I have mentioned that we declined about 10 percent in the last decade in staff already. 

We have tried to make investments in key areas such as contract 

officers, contract officers’ representatives so they can do a better job 

at monitoring our contracts. I think that is a priority since we are 

going to rely on contracts to get a lot of our student loan and student aid work done in particular. 

I think it is a good investment, though, and I encourage you not 

to reduce our footprint at the Department of Education, particularly our administrative funds. 

We need the money to make sure that we award these contracts 

and deliver our aid. And indeed, in our direct loan program which 

we went to 100 percent as a result of the Student Aid and Fiscal 

Responsibility Act (SAFRA) legislation, we believe we will actually 

save about $5 billion a year. 

It will be a savings of $5 billion per year or more in the mandatory area but we are going to have to spend a couple hundred million dollars more as noted in contracts in our discretionary budget. 

I think there will be pressure on things like contract audits and 

anything else that is not directly related to some of our providing 

our services and doing them very well. 

Senator MCCASKILL. Who is doing the audits now? You are contracting with people in terms of the application process. Who is 

doing the checking on whether or not the people that are getting 

this money actually even exist on the Pells? Who is the check on— 

there is always a different thing. 

I think the current cable TV ads are that you can become a culinary chef online which I think is tricky but that is the latest profit 

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center for some of these institutions is stay in your kitchen and become a world-class chef if you just sign up to make sure we get 

your Pell grant money. Who is doing that audit work? 

Mr. SKELLY. Well, our Inspector General is independent in the 

Department of Education and can decide which areas to look into 

and looks into areas that have the highest risk where there might 

be abuses on the part of some parties in our programs. 

We also have, in looking at the contracts that provide our services, we are relying primarily on our first line of defense with our 

contract officers and our contract officers’ representatives. 

Those are the employees in the Department of Education who 

work with the contracts, make sure they are doing what they are 

supposed to do. If the work statement is clear, if the expectations 

are clear, if their performance measures in the contract, then it is 

easier for those employees to check up on whether the contractor 

is performing. 

These contracts are just providing the mechanical operation in 

getting the aid to the students and colleges. We have other people 

who are assigned the job of making sure that colleges are complying with the rules. 

They have certain reports they have to file. We are reviewing 

those. Both our program officers are doing that but also our Office 

of Inspector General is looking into that. 

Senator MCCASKILL. I would give them a heads up. I do not 

think we need a hotline to figure out that there may be a little bit 

of over marketing in the area of the become a world-class culinary 

chef from the comfort of your own home. 

Mr. SKELLY. Also I think one of the other committees here in the 

Senate got a report from the Government Accountability Office recently where they had also looked into the situation. 

Senator MCCASKILL. Right. 

Ms. Kolb, the question about whether or not your auditing resources are going to get squeezed as the top line budget may get 

squeezed. 

Ms. KOLB. Actually, I think that we do a very efficient job of ensuring that we have the audits available that we need to make 

business decisions. 

Last year, for example, we spent a total of about $10 million for $32 billion worth of contracts and financial assistance awards that 

were made. That is a very small percentage. I would envision us 

staying committed to providing that level audit work. 

So I do not think that the consolidation will impact our commitment to putting forward those dollars. We will stay with that. 

Just to pick up on a few points that Pat Fitzgerald was making. 

First of all, he was talking about moving to a more risk-based approach. We completely support that, and we are doing a few things 

at the Department to try and move in that direction. 

First of all, we do not always need a comprehensive audit, and 

DCAA does a very thorough job, and their preference is to conduct 

a thorough, comprehensive audit. 

We want to work with DCAA to make sure that where a targeted 

audit is all that is needed and that is what we end up doing. We 

believe that is very important and this will ensure that there is a 

more efficient use of resources. 

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Then also I had mentioned earlier that we have thresholds that 

trigger an audit. We are in the process of raising those thresholds 

to make sure that we are really targeting those contracts where we 

need the audit work completed. 

Senator MCCASKILL. That is great. Senator Brown. 

Senator BROWN. Thank you, Ms. Kolb. 

Also you speak of a decline in the DCAA audit support for the 

use of contractor’s price proposals which has impacted the Department’s ability to negotiate fair and reasonable prices, and we have 

heard from other agencies, business groups, and Project on Government Oversight (POGO) that DCAA’s current practices submitting 

these audits to the Generally Accepted Government Auditing 

Standards (GAGAS) standards is both unnecessary and may contribute to these reviews taking more time and is uncostly. 

Is that your opinion of what they are saying about this whole 

process? 

Ms. KOLB. The concern that we have had with the services provided by DCAA, and Pat Fitzgerald and I have talked about this, 

really is one of timeliness. 

We think that DCAA does a very good job. Again, we would like 

to see more targeted audits as opposed to comprehensive audits unless they are absolutely needed. But the timeliness issue has to be 

addressed and DCAA is committed to making those improvements. 

Senator BROWN. Should proposal reviews of cost and pricing data 

be considered financial advisory services which are not subject to 

all the GAGAS requirements? 

Ms. KOLB. In the pre-award area, we depend heavily on DCAA 

to examine the prices and we want to continue to have them look 

at the proposed prices above a certain threshold. 

Senator BROWN. Mr. Skelly, you have been awfully lucky tonight 

so I figured I just you—— 

Mr. SKELLY. My whole life, I think, Senator. 

Senator BROWN. I know the feeling. 

According to your testimony, the Department of Education spent 

approximately $1.5 billion on contracts in fiscal year 2009 and $1.8 

billion in fiscal year 2010. 

A key concept in contract auditing is that the cost of control activity should not outweigh the benefit. 

With over a billion dollars at stake, what contract controls does 

the Department of Education have in place to ensure that the taxpayers’ money is spent wisely in accordance with applicable regulation and the Department is receiving the best value possible for its 

money? 

Kind of an extension of what I asked Mr. Fitzgerald. 

Mr. SKELLY. Our main strategy is to use fixed-price contracts. 

Approximately 71 percent of our contract dollars are awarded 

through fixed-price contracts at least where the unit price is fixed 

in a contract. 

We found that it is the best solution. One ounce of prevention is 

worth a pound of cure. We are better off doing at the start, stipulating what is expected to be delivered under the contract, having 

good performance measures, following up that work through the 

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tives. We have to do that to make sure that we are spending our 

money well. 

When we do use contract audits, it is for the incurred costs. It 

is sort of after-the-fact, after the contract is finished, and we are 

trying to close it out. But because we have relatively few cost reimbursement contracts, there is not as much for the auditors to find. 

Senator BROWN. So based on your experience, just somebody who 

is listening or watching, if somebody is not adhering to the terms 

of their contract, what do you actually do? What is a typical scenario? 

Mr. SKELLY. It is notifying them that they are not living up to 

the standard. A report has come in. We are monitoring the activity. 

We get management information reports, for example, on how 

many people are applying, how many people are using the free application for Federal student assistance, the Free Application for 

Federal Student Aid (FAFSA) form. 

About 20 million people use that form to apply. Many of them 

are doing it over the web. So it is easy to monitor how many are 

coming in and going out. We check those management information 

reports to see are they coming in timely. 

There is actually an incentive built into the contract for the contractor to process those quickly. We have incentives in our servicing contracts where the contractors are given additional funds if 

they make sure that people do not go into delinquencies or defaults. 

So we try to build those incentives into the contract up front, and 

we try to monitor that as closely as we can. 

Senator BROWN. Have there ever been any instances that you are 

aware of where there has just been a total breach of the contract 

or not adherence to the terms of the contract? 

Mr. SKELLY. I am sure we have lots of humans involved in this 

and we are making mistakes, but I do not recall specifically. 

Senator BROWN. I have nothing further. Thank you. 

Senator MCCASKILL. Thank you, Senator Brown. 

I want to thank the panel very much for your work and I appreciate the time and effort you put into appearing at this hearing 

today. 

And we will take the second panel. 

I said I would not put the witnesses in a hot box. As it turned 

out, it kind of is hot. Is it as hot out there as it is up here? Hot 

out there. Man, it is hot in here. It is not going to kill us. 

I want to thank the witnesses. 

First, let me introduce this panel. 

Jeanette Franzel is the Managing Director of the Financial Management and Assurance Team at the Government Accountability 

Office, GAO. In her role, she heads GAO’s oversight of financial 

management and auditing issues across the Federal Government 

which includes review of internal control, financial management 

systems, cost management, improper payments and accountability, 

and corporate governance issues. 

Ms. Franzel is also responsible for overseeing the GAO’s development of the government Auditing Standards, also known to all of 

us who know and love it as the Yellow Book, the standards used 

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1The prepared statement of Ms. Franzel appears in the appendix on page 65. 

in the United States and as a model for the private sector and governments around the world as it relates to auditing standards. 

Nick Schwellenbach is the Director of Investigations for the 

Project on Government Oversight. Mr. Schwellenbach conducts investigations which include examination of the effectiveness of government oversight. 

He has previously worked as a writer for the Center for Public 

Integrity and is a reporter and researcher for the Nieman Watchdog, a project of the Nieman Foundation for Journalism at Harvard 

University. 

E. Sanderson Hoe is a partner at the law firm of McKenna, Long, 

and Aldridge. He has practiced government contract law for over 

36 years. He has expertise in areas including contract formation, 

the structuring of complex private financing of government contracts, and resolution of post-award contract disputes. 

He co-chaired the Committee on Privatization, Outsourcing, and 

Financing at the Public Contract Law section of the American Bar 

Association since 1999, and he is currently serving as a pro-bono 

counsel to the government of Liberia in the drafting of a new procurement code. 

Thank you all for being here, and we will begin, oh, I have to 

swear you in. 

It is the custom to swear in the witnesses in the Subcommittee. 

I would ask you to stand. 

Do you swear that the testimony you will give before this Subcommittee will be the truth, the whole truth, and nothing but the 

truth, so help you God? Thank you very much. 

Ms. FRANZEL. I do. 

Mr. HOE. I do. 

Mr. SCHWELLENBACH. I do. 

Senator MCCASKILL. Ms. Franzel, we welcome your testimony. 

TESTIMONY OF JEANETTE M. FRANZEL,1 MANAGING DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. FRANZEL. Good afternoon, Madam Chairman. 

Thank you for the opportunity to be here today to discuss the 

role that contract audits can serve in effective contract oversight 

and internal control in the government. 

As the government has become increasingly reliant on contractors over recent years, effective contract oversight is key to protecting the taxpayers’ interests. In fiscal year 2010, Federal agencies reported obligating approximately $535 billion for contracted 

goods and services. The sheer size of Federal contract spending 

poses significant risk if effective oversight and controls are not in 

place. 

Today, I will describe the contracting cycle and related internal 

controls, DCAA’s role in performing contract audits, and risks associated with ineffective contract controls and auditing. 

In preparing this testimony, we relied on the work we performed 

during our DCAA engagements as well as our extensive body of 

work on Federal contract management. 

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22 

The contracting cycle consists of activities throughout the acquisition process including pre-award and award, contract administration and management, and ultimately the contract closeout. 

Effective contract oversight includes internal control throughout 

the process, and the Standards for Internal Control cover agencies’ 

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

As we heard in the previous panel, the type of contract used really determines the types of internal control and contract auditing 

activities needed to help protect the government’s interest. 

Specifically, contract types can be grouped into three broad categories: Fixed-price, cost-reimbursable, and time and materials contracts. 

For fixed-price contracts, the government agrees to pay a set 

price for goods or services regardless of the actual cost to the contractor. So in those cases, the contractor is assuming most of the 

cost risk. 

Under cost-reimbursement contracts, the government agrees to 

pay contractor costs that are allowable, reasonable, and allocable 

based on the contract. Consequently, the government assumes most 

of the cost risk in a cost-reimbursement contract, and it is a similar 

situation for time and materials contracts. 

Contract audits are intended to be a key control in the contracting process to help ensure that prices paid by the government 

for goods and services are fair and reasonable and that contractors 

are charging the government in accordance with applicable laws; 

the Federal Acquisition Regulation (FAR); cost accounting standards; and contract terms. 

DCAA plays a critical role in contract oversight by providing contract auditing services that DOD and other agencies rely on when 

making these contract decisions and when providing oversight. 

The majority of DCAA audits focus on cost-reimbursable and 

time and materials contracts as these contract types pose the highest risk to the government. 

For example, the FAR requires government contracting officers 

to determine the adequacy of a contractor’s accounting system before awarding a cost reimbursement or other flexibly-priced contract. 

Also billing system audits support decisions to authorize contractors to submit invoices directly to the government for payment 

without further government review. 

Audits of contractor incurred cost, claims and voucher reviews directly support the contract payment process by providing the information necessary to certify payment of claimed costs. 

And finally, closeout audits include reviews of final vouchers and 

the cumulative costs and may include adjustments and recoveries, 

if necessary. 

Our work has identified significant contract management weaknesses in Federal agencies, problems with agency controls over 

payments, and weaknesses in contract auditing; and all of these 

pieces need to fit together in order to have effective contract oversight. These weaknesses increase the risk of improper payments; 

fraud, waste, abuse; and mismanagement. 

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1The prepared statement of Mr. Hoe appears in the appendix on page 98. 

For example, our work at various agencies has found that contract officers are not performing detailed reviews of invoices prior 

to paying invoices. In some cases even if the contract officer had 

attempted to review the invoices, the invoices provided by the contractor did not provide sufficient detail to facilitate such a review. 

There were also instances in which contracting officials decided 

to rely primarily on DCAA’s audits rather than performing normal 

internal control procedures. 

We also discovered cases in which contracting officers did not 

even use the DCAA audits that are available to them. We also 

found instances in which the agency was not obtaining the required 

audits of contractors’ accounting systems and incurred audits. 

Finally, our work has found problems with contracting auditing 

itself. In 2009, we reported on audit quality problems at DCAA offices nationwide. We found serious quality problems in the 69 audits that we reviewed including compromise of auditor independence, insufficient audit testing, and inadequate planning and supervision. 

As a result of our work, DCAA rescinded over 80 audit reports 

and has been making many changes in its operations. 

We concluded that at the root of DCAA’s audit problems was 

DCAA’s focus on a production-oriented mission that emphasized 

performing a large quantity of audits with inadequate attention to 

performing quality audits. 

In our 2009 report, we made 17 recommendations to DOD and 

the DOD IG to improve DCAA’s management environment, audit 

quality, and oversight. 

And in response DOD and DCAA have taken a number of actions. Our 2009 report also offered some potential actions for 

strengthening the organizational effectiveness of DCAA and the 

contract audit function in the Federal Government. 

Those potential actions would require further study as well as 

potential congressional action and include actions intended to 

strengthen DCAA’s independence, including potential organizational changes. 

Madam Chairman, this concludes my statement and I will be 

happy to answer any questions that you have. 

Senator MCCASKILL. Thank you very much. Mr. Hoe. 

TESTIMONY OF E. SANDERSON HOE,1 PARTNER, MCKENNA, 

LONG, AND ALDRIDGE, ON BEHALF OF THE U.S. CHAMBER 

OF COMMERCE 

Mr. HOE. Madam Chairman, my name is Sandy Hoe, and I am 

a partner at the law firm McKenna Long and Aldridge LLP. I am 

pleased to be here to testify before you today on behalf of the 

United States Chamber of Commerce. 

As you indicated in your opening statement, I have been practicing government contract law on behalf of the contractor community for more than 37 years. 

Today’s hearing is very important to the government contractor 

community. Contractors understand and accept that by providing 

goods, supplies, and services to the Federal Government in exH605-41331-79W7 with DISTILLER

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change for taxpayer funds, they are agreeing to contract auditing 

requirements. 

The need for such audits is not being questioned. How the audits 

are conducted is something on which the contractor community has 

definite views. 

Of the three auditing organizations who have appeared here 

today, the Government Accountability Office, the Inspector General, and the DCAA, government contractors interface most frequently with the DCAA. 

There are a number of concerns that the government contracting 

community has as it works with the DCAA, and you have heard 

many of these issues before, such as the length of time it takes to 

complete an audit and the quality of the audits themselves. 

There are, however, more recent issues facing the contractor 

community. The first is the role that the auditor is taking in relation to the contracting officer. Both traditionally and by law, contracting officers have exercised authority to make decisions regarding the implementation and performance of government contracts. 

Recently, however, there is evidence that the auditing community may be usurping some of the contracting officers’ role. Let me 

provide you with a specific example from the Department of Defense. 

On January 4 of this year, DOD published a memorandum assigning new roles for the Defense Contract Management Agency 

(DCMA), which houses the administrative contracting officers for 

the Department of Defense, and the DCAA regarding forward pricing rates for contracts. 

The memorandum provides that contracting officers shall adopt 

the DCAA’s recommended rates. This is a significant change of policy and conflicts with current law. 

Under current law, contracting officers have the authority to administer contracts, taking advice from auditors, lawyers, and technical experts. 

Industry does not see the wisdom of separating this one auditing 

function from the contracting officer who otherwise is the final arbiter for the government on all contract matters. We believe this 

change could cause problems in the future. 

Another issue that concerns industry today is DCAA’s recent stridency in its application of regulations during the conduct of audits. 

Some in the industry have noticed a sharp upturn in DCAA’s reluctance to engage in the discussion of audit issues when they arise 

through the performance of an audit. 

The Federal Acquisition Regulation cost principles and other cost 

and price compliance regulations are relatively explicit but still 

cannot and do not cover every circumstance that may arise. Judgment often is necessary in applying the regulations to resolve 

issues. 

Unfortunately, since 2008 and 2009, DCAA seems to have lost its 

appetite for analyzing of the intent of a regulation versus its literal 

interpretation. 

Once DCAA it has applied the literal language, it seems little 

moved by any argument that the result reached is nonsensical or 

could not have been what the drafters intended. 

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1The prepared statement of Mr. Schwellenbach appears in the appendix on page 105. 

This has confounded some in the contractor community who believe that the goal of the regulations and of government contracting 

generally is to reach correct and rational results. 

I would like to end my statement with an idea for improving government contracting. Consider that an audit can have at least two 

perspectives and, Madam Chairman, you mentioned this in your 

comments earlier. 

An audit can be forward looking where the intent is to identify 

steps to ensure that a contractor’s system, policies, and procedures 

will comply with government contract requirements. 

A contract audit also can be backward looking where its purpose 

is to test the contractor’s actual compliance with the contract and 

regulatory requirements. 

The first is affirmative, seeking to assure future compliance. The 

latter is more investigative and often associated with the concept 

of rooting out fraud, waste, and abuse. 

Each one is important but the first could be referred to as the 

carrot, as the affirmative emphasis by the government and the contractor on getting things right up front; and the other, the stick. 

Both will give a contractor incentive to be in compliance, as, Senator McCaskill, I believe you noted earlier. However, we believe the 

carrot is much more likely to achieve the goal. 

And by analogy from the manufacturing sector, there is a saying 

that you cannot inspect your way to a quality product. It is a 

phrase that is often heard. The lesson from this is that quality 

needs to be built into a product up front. 

Inspecting quality after the fact is far less effective, and I think 

that lessons from the manufacturing industry can provide some lessons for the auditing community. 

Thank you again for inviting me to testify and I look forward to 

any questions you may have. 

Senator MCCASKILL. Thank you, Mr. Hoe. Mr. Schwellenbach. 

TESTIMONY OF NICK SCHWELLENBACH,1 DIRECTOR OF 

INVESTIGATIONS, PROJECT ON GOVERNMENT OVERSIGHT 

Mr. SCHWELLENBACH. Chairman McCaskill, thank you for inviting me today to testify on ways to improve contract auditing including the possible benefits of an independent contract audit agency. 

This hearing is an important step. We need an independent and 

muscular contract audit agency that protects the taxpayer. We believe that there should be an independent Federal Contract Audit 

Agency (FCAA). 

This is not a new idea but has been around since at least the 

1980s when DCAA whistle blower George Spanton exposed serious 

problems at DCAA. In 2009, the GAO laid out recommendations for 

congressional consideration. 

This included, in the long term, possibly creating an FCAA. 

While some knowledgeable insiders tell us that the location of the 

agency is not a key issue, POGO believes an FCAA that conducts 

most contract auditing for the entire Federal Government makes 

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sense, and I believe the statistics that your staff prepared today I 

think bear that out to some extent. 

While DOD contracts and contract proposals still represent the 

bulk of DCAA’s work, the DCAA has evolved since its inception in 

1965 to become a de facto FCAA. 

There are several reasons why this happened. Contracting has 

greatly grown outside of the DOD. DCAA has deep institutional 

knowledge of contractors and utilizing the DCAA may be cheaper 

for organizations than hiring or training their own cadre of contract auditors. 

DCAA provides a critical check on contractors. It helps insure 

that we pay reasonable prices and spots attempts by contractors to 

charge unallowable costs. 

DCAA estimates that it saves slightly more than 5 dollars for 1 

dollar invested in it. It is, however, horribly understaffed given its 

workload. 

For example, during the early 1990s, it had more than 2,000 

more employees than it currently does while there is a greater 

amount of contracting now. 

Non-DOD agencies can request DCAA services if they are willing 

to pay. This is a disincentive to utilize DCAA. If adequately and 

centrally funded, an FCAA would remove this disincentive. 

There are other possible benefits to an FCAA, the most significant being independence. Currently, the DCAA reports to the DOD 

Comptroller. Along with the GAO, we have some reservations 

whether this structure ensures adequate independence. 

Furthermore, it is apparent to us that the DCAA Office of General Counsel is not independent. Its attorneys are evaluated by the 

Defense Legal Services Agency (DLSA). 

A similar independence problem previously existed with the Pentagon IG; and in 2008, the IG Reform Act gave the Pentagon IG 

its own independent General Counsel. We think this has some relationship with the unwillingness of DCAA to issue subpoenas to contractors, and I can get into that later. 

But in the meantime, we need to improve DCAA as much as possible, and we are concerned about its current direction. You only 

have to read the hundreds of comments posted on the government 

executive website by people claiming to work at DCAA to understand that some part of its workforce is deeply angry with its direction. 

As I mentioned, DCAA has not issued a subpoena to a contractor 

in over two decades despite long-standing access to records problems they have faced from contractors. And we believe this is an 

indication that it is risk adverse. 

We are also concerned with the tenfold increase in the proposal 

review threshold at DOD. You mentioned earlier, Madam Chairman, that pre-award audits are highly important, especially in negotiating better deals for the taxpayer. 

Essentially, DOD has cut out DCAA from performing many of 

those pre-award audits. An audit often with the smaller contract 

proposals is where they find the biggest amount of questioned cost 

as a percentage of the proposal. 

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Without the help of DCAA auditors, contracting officers may not 

be armed with the knowledge they need to negotiate the best deal 

for the taxpayer. 

We also understand that whistle blowers who testified before the 

full Committee in 2008 feel they have not received adequate and 

public recognition from agency leadership. 

There is also a belief by some within the DCAA that there is not 

enough accountability for the deletion of audit findings or the 

gagging of a whistle blower. Bad managers must be held accountable, and DCAA’s promotion process needs to emphasize merit. 

And I will quickly conclude here. 

Besides creating a FCAA, there are opportunities to strengthen 

contract auditing. DCAA should have its own general counsel. 

While the staffing increase of 500 auditors is a step in the right 

direction, they need, perhaps, a larger workforce. 

DCAA needs more transparency. Little is known about what it 

does and we believe some reporting could be made public or to the 

Congress. 

We would also like to see more transparency with how contracting officers handle DCAA recommendations. Often DCAA 

auditors find large amounts of questioned costs or unallowable 

costs; but at the end of the day, it is up to the contracting officer 

to actually sustain those findings. 

Congress also needs to take a look at how the role of contract 

auditors has been systematically reduced over the last two decades, 

and I would also take a look at the complaint system at the DCAA. 

Is it working? 

Contract auditors provide a great return on investment and save 

far more money than they cost. We believe an FCAA makes sense; 

but even if DCAA remains within DOD, it needs to be strong as 

possible. 

And I am open to questioning. 

Senator MCCASKILL. Thank you very much. Thank all three of 

you. 

I think legitimate points have been raised by both Mr. Hoe and 

Mr. Schwellenbach. I see validity in some of the points you have 

made; and being fairly knowledgeable about the situation at DCAA, 

I do think that I understand why maybe some of the points that 

you are bringing up, Mr. Hoe, have surfaced. 

Let me talk for a minute about your testimony, Mr. Hoe. It is 

very hard for me. I will expose my bias right now. I think that the 

independence of an auditor, by definition, does not produce warm 

and fuzzy relationships between auditors and those people who are 

being audited. The biggest lie that was ever told to me as we went 

into a state agency to audit was, gosh, we are glad to see you. 

Mr. HOE. I have heard that, too. 

Senator MCCASKILL. It is not a pleasant experience because 

human nature makes one feel very defensive when they are being 

audited. In fact, a lot of the good work that audits do gets lost because the auditee is too busy being defensive and is not in the right 

place to get the constructive criticism that comes inevitably with an 

audit. 

I guess my problem with, let me talk about two things. The 

DCMA directive as it relates to DCAA. I mean is it not true that 

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the contracting officers have an ongoing relationship with the contractors that sometimes impact their ability to see everything clearly as it relates to some of the behavior of the contractors? 

Mr. HOE. Senator McCaskill, In my experience, which goes back 

a number of decades now, it has been the rare circumstance, if I 

was even aware of a single circumstance, where I believe that the 

contracting officer was co-opted by the contractor with whom he 

was dealing as a contracting officer. 

Senator MCCASKILL. I do not think you spent much time in Iraq 

then. 

Mr. HOE. I have not spent time in Iraq. 

Senator MCCASKILL. Clearly, it is the best example I can think 

of. Logistics Civil Augmentation Program (LOGCAP) by and large, 

there was a co-opting of the contracting officers. In fact, the contracting officers on the ground generally were just the low man on 

the totem pole that were handed a clipboard and had no training, 

had no capability of even asking a question like why in the world 

are we monogramming the towels in a cost-plus contract. 

Those are the kinds of things that went on there. You understand that. 

Mr. HOE. Oh, yes, I do, and I do understand that a large part 

of the analysis that explains Iraq was the need to get into the 

country quickly, to set up quickly, to provide contract services. 

Senator MCCASKILL. I do not think that explains monogramming 

the towels, Mr. Hoe. 

Mr. HOE. Excuse me. 

Senator MCCASKILL. I do not think that explains monogramming 

the towels. That is not consistent with getting in there quickly. 

That is consistent with running up the price to maximize the 

amount of money the contractor was being paid, . 

We could sit here all day. I mean I guess what I am saying is 

I do not want businesses to feel like they are being punished for 

doing business with the Federal Government. 

But it is hard for me from where I sit in this Subcommittee and 

the work we have done to think that we are being so aggressive 

with our auditing that they believe that it is no longer a place they 

want to do business. I mean I guess I have to tell you it is hard 

for me to think that. 

Mr. HOE. I do not think the solution to the problem that you 

state is necessarily to take away the authority that contracting officers have held for decades and decades, if not a century, in handling government contracts. 

Contracting Officers, currently by law as well as by tradition, are 

the central clearinghouse, if you will, for all aspects of contracting 

and, of course, contracting involves not just cost accounting, billing, 

estimating, and so forth, it involves performance and full compliance with many other socio-economic provisions. 

All of that currently filters through a single source, the contracting officer, and I think there is good reason for that. There 

may be, with further thought, some reason to separate out some 

portion of the audit function, but it would be a very unique circumstance and I think it would be an unfortunate assessment of 

what contracting officers are and what they do. 

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There are problems, there were problems, and probably currently 

exist problems, as you say, in Iraq and Afghanistan and some of 

those areas. I do not think that is representative of the entirety 

and history of Federal Government contracting. 

Senator MCCASKILL. I will not belabor the point. I think there is 

a fine line between cooperation and being co-opted, and I think 

independence, an auditor always has to err on the side of not being 

co-opted which means maybe a little less cooperation. 

I am not sure that the contracting officers traditionally, particularly in the Department of Defense, have taken that. Their independence is not something that was front and center like it is with 

an auditor’s. 

So if we are talking about pricing information, I will look into 

what we talk about today and make sure I understand what has 

occurred and make sure it is lawful. 

But I like the idea that auditors are telling contracting representatives what the prices should be in my book that is good 

news. 

Mr. HOE. If I may, Madam Chairman, that assumes the questions related to audited costs or prices up front on the fixed-price 

contract are quite clear. 

I do not think that is a true picture of the situation. There are 

many areas, as I mentioned in my opening statement, of regulations that state certain standards or principles for the allowability 

of a cost or the accounting for a cost that create a good bit of debate and discussion amongst the auditors, the contracting officers, 

and the contractors that goes on every day. 

Often the outcome is not precisely what one party or another 

stated at the beginning. It is the result of a negotiation, and contracting officers hold the role of the party negotiating on behalf of 

the government. 

They certainly do, and they are commanded by the Federal Acquisition Regulation to take input from their advisors, which include the auditors, the lawyers, the technical people. 

That all ought to come through the contracting officer. It is the 

contracting officer who centralizes all those facts, all those considerations, and renders a final judgment. 

If the view is to take a different tact going forward, I think it 

deserves some debate. 

Senator MCCASKILL. Some discussion. 

Mr. HOE. Yes. 

Senator MCCASKILL. Fair enough. 

Ms. Franzel, you talked about preventative controls. I think this 

is a huge point that needs to be made here. I think that accounting 

system reviews, invoice reviews, all of the things are incredibly important. 

Do you think the right balance is being struck now between time 

being spent on those measures versus the time we spend on auditing? 

Ms. FRANZEL. I think that we do need to evaluate this both from 

the contract management side of the house as well as the auditing 

side of the house because if contract management or contracting officers are not doing their job then a huge preventive mechanism is 

being lost. 

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There are also certain types of audits that have great value as 

a preventive mechanism. And rather than waiting for the detective 

mechanism, we have seen examples in agencies where because the 

final billing rates, indirect billing rates were never determined, the 

contractors were actually booking payables on their financial statements to the government because they knew they owed the government money and there is a backlog in these audits. 

If this could have been handled properly up front, these types of 

problems would not be occurring. 

But I want to emphasize that this is really on both sides of the 

house. The contracting officers need to do their jobs properly and 

implement the appropriate preventive controls over their responsibilities. 

And then the audits, I think there is certainly room for taking 

a look at the different types of audits that are being conducted— 

where do we get the best bang for the buck? 

It is not always going to be a one size fits all though. Some contractors are very risky for unique reasons, and for those contractors, it may be best to go in and do an after-the-fact audit to try 

to recover certain fraudulent charges. 

So everybody needs to be working diligently on this but there is 

certainly benefit for those detective audits. 

Senator MCCASKILL. I believe the number is $55 billion in improper payments at the Department of Health and Human Services 

(HHS). Does that sound right? 

Ms. FRANZEL. I think that is about right, yes. The government- wide total is $125 billion, and I think HHS is a very large chunk 

of that. 

Senator MCCASKILL. I will make one bold statement here. That 

would never happen in the private sector, ever, ever, ever happen 

in the private sector. 

We would not let that money go out the door as we have without 

putting more preventative controls in place up front, and it is very 

hard to get the government’s attention about improper payments 

because it is not like it impacts anybody’s bottom line. 

It does not impact profit margin. It does not impact their discussions with the bank. It does not impact anything of that. 

So I think that we need to do more work in this Subcommittee 

about preventative measures as it relates to contracting. Maybe 

drill down even deeper as to what is being done in the various 

agencies and what is not being done, just through the lens of preventative measures before the money goes out the door because I 

think it is something that we have to focus on to the extent that 

we need to. 

I know GAO has done some good work here but we have a lot 

more we need to be doing. 

Mr. Schwellenbach, I understand, I like to say that in government we can grow when somebody has a good idea and gets enough 

votes. 

Businesses cannot grow unless they have the revenue stream to 

pay for it; and if they do grow and their idea about growing does 

not work, they cut it. 

So government is very inefficient when it relates to creating the 

programs. I am beyond reluctant, after looking at what happened 

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when we created Homeland Security and looking what happens 

whenever we create a new program. 

We generally do not check to see if it is really duplicative. We 

generally do not check to see if there are any metrics, if the program is doing what is supposed to be doing very well. Job training 

is a great example. 

Broadband deployment is another great example. We have two 

different agencies that are both ostensibly running broadband deployment programs, both Agriculture and Commerce. 

I am really not excited about creating a new agency even if it is 

auditing. If there ever was going to be a subject matter I would 

want to create a new agency, it would the auditing. 

Why can we not make DCAA, why can we not just improve 

DCAA to be the main repository of auditors that agencies can go 

to when they need audit work done within the agencies? 

Mr. SCHWELLENBACH. Madam Chairman, I think you are absolutely right. I think as GAO recognized in their 2009 report it is 

a risky suggestion. You could possibly make things worse. If you 

created a new agency, there could be a lot of up front costs. 

Senator MCCASKILL. And the wrong kind of competition. 

Mr. SCHWELLENBACH. Absolutely. 

So we do believe in a perfect world you would have an FCAA 

that is centrally funded, that removes the disincentive for non-DOD 

agencies to utilize its services. 

We think obviously that would be the best of all worlds. Clearly, 

we have budget limitations. You yourself mentioned, we are probably entering some lean times. So why not make the system as it 

exists now work better, which is one thing I tried to address in my 

testimony. 

I think there are a lot of more modest reforms such as giving the 

DCAA its own independent general counsel, another issue the GAO 

pointed out in its 2009 report. I think that could do a lot of good. 

Senator MCCASKILL. Like we did for the IGs? 

Mr. SCHWELLENBACH. Yes, as we did for the IGs. I think that is 

a common sense solution. I do not think there would be much cost 

involved beyond what we are already paying. 

There are also ways DCAA uses its workforce that perhaps need 

to be reviewed. I am not entirely convinced that only looking at 

large contract dollars is a risk-based approach. 

For example, a lot of the smaller contracts involve nontraditional 

government contractors that may not have the internal control systems that are government-compliant in place. 

So sometimes they are the riskier actors rather than the Boeings 

and Lockheeds of the world, not to say they have not done anything wrong which they clearly have in the past. 

So I do think there are a lot of modest measures that need to 

be looked at. The subpoena, the lack of subpoenas over the last two 

decades I think is a major issue. 

We know DCAA has problems with getting access to records. A 

few successful uses of the subpoena by DCAA could really shake 

up the contractor community and make them open up their books 

more often and reduce a lot of the issues with access to records and 

timeliness that currently exists. 

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Senator MCCASKILL. I think you are right about that. I think 

that we do need to begin to ask the question—has there never been 

an occasion that DCAA has not gotten the information it needed; 

and if there has been, what is the reason? 

And we will propose that question for the record for Mr. Fitzgerald and his agency. 

I recall vividly that it was, in fact, a lawyer at DOD who wrote 

the very offensive letter to the whistle blower basically telling the 

whistle blower that she was not allowed to speak. It was very unAmerican, the letter that was composed by the counsel at the Department of Defense as it related to what happened at DCAA. 

Mr. SCHWELLENBACH. I would say that because that general 

counsel is not directly accountable to the Director of DCAA, it is 

more difficult to hold that general counsel accountable. 

Senator MCCASKILL. Yes. We had a hard time. We have a hard 

time. 

Let me ask. Are there any other barriers to businesses that you 

see, Mr. Hoe, that I need to make sure that we keep on the radar 

as it relates to auditing work? 

Is there something we could be asking of our contractors that 

they do on their side of the equation that would prevent some of 

the less than productive interaction with the auditors? 

Should we be requiring them to do more of the internal audits 

that then can be sampled and approved by auditors within the IG 

Departments of these various agencies? 

Mr. HOE. Senator McCaskill, I think that is an excellent suggestion, and in fact, there are currently in place a number of programs 

designed to encourage, if not require, contractors to examine their 

own operations prior to a government auditor or investigator coming to the company to assess its systems or its performance. 

The voluntary disclosure program was in existence for a number 

of years but is now replaced or supplanted with the mandatory disclosure requirement that is placed in new contracts and obligates 

contractors to come forward and disclose on their own certain acts 

that may rise to a certain level of malfeasance that encourages—— 

Senator MCCASKILL. Like looking at the competitor’s fact sheet 

on the joint tanker competition? 

Mr. HOE. Yes, very definitely. 

Senator MCCASKILL. That would definitely be one. 

Mr. HOE. I believe that would very definitely be one, and there 

are certainly others. I can say from my own experience that there 

are many contractors out there who, since the implementation of 

that program, have been raising questions with people like myself 

to understand what the requirements are and what kind of looking 

they need to do within their company, how extensive, what needs 

to be disclosed, and what does not rise to the level of disclosure. 

It is having a substantial effect. I think, taking into account 

what is already in place, one would want to consider that before 

deciding whether there are additional affirmative steps that would 

be required by law or otherwise, for contractors to undertake themselves. 

There are many incentives currently for contractors to look at 

their own systems and to make them compliant or try to make 

them as compliant as they can. 

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Senator MCCASKILL. I am sure, Ms. Franzel, you are familiar 

with the single audit and the way the decisions are made in terms 

of prioritization of audits that are done under the single audit. 

And I guess, and I should have asked Mr. Fitzgerald this when 

he was testifying. It seems to me that the way in which States are 

told they must prioritize audit work for the Federal Government, 

that exercise would be fairly simple to implement within the Federal Government. 

In other words, agencies deciding how many of their programs 

are what, in the single audit I think it is ‘‘A’’, ‘‘B’’ and ‘‘C’’ I think, 

is it not? 

Ms. FRANZEL. ‘‘A’’ and ‘‘B’’. 

Senator MCCASKILL. ‘‘A’’ and ‘‘B’’. We probably did a lot of ‘‘C‘‘s 

where I was because I like doing some of the smaller programs. 

And ‘‘A’’ is the size of the program. ‘‘B’’ is those that are high risk 

for other reasons. And then if you wanted to do other programs, 

then it had to be in consultation and cooperation with the Federal 

Government signing off on it. 

Do we have that kind of risk assessment going on in each agency 

so that in a very simple way DCAA could look at government-wide 

where are the big threshold programs? 

But then on the other hand, where are these programs? I mean 

the example I like to use is weatherization under the American Recovery and Reinvestment Act (ARRA). That was a lot of money getting pumped into a program that had, up until that time, had very 

modest appropriations. A lot of labor involved, a lot of a shotguntype approach across the country in how the money was used. 

And even though it was not as large as say a Medicaid and Medicare program, the opportunity for lack of internal controls, the opportunity for a lot of money walking away with somebody’s nephew 

in a pickup truck was real. 

The other part of the question I want to ask is, Is anyone using 

the software programs that are out there right now that allow the 

integration of data point sets to really expose risks similar to what 

we did on ARRA where we contracted with a company to try to detect fraud by overlays of integrated data sets to show where there 

might be the most risk? 

Ms. FRANZEL. Certainly. I do believe that the risk assessment 

function can be made better and bolstered, and I think it is being 

done inconsistently across agencies. So I think that is really the 

next big step in terms of looking at how contract audits are done 

and to what extent across the Federal Government. 

And let me emphasize across the Federal Government because 

similar to the single audit for contracting, there is the cognizant 

agency concept. And so one contractor may actually be doing work 

for multiple agencies but one agency is the cognizant agency. 

So what kind of communication and coordination is happening 

for all of the affected agencies? I think that is probably something 

else that can be improved and that can feed back into this risk assessment process. 

And frankly if the agencies are coordinating, one would hope it 

would make it a little easier on the affected contractors. 

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34 

So I think risk assessment is something that definitely needs to 

be looked at and probably improved as well as coordination across 

the government agencies. 

Senator MCCASKILL. Is that something we could get the IG counsels to do, to do a better job of coordination of risk assessment 

across all agencies that would then be a document that could be 

a point of reference for DCAA when they get requests? 

Ms. FRANZEL. Yes. That would certainly be one place. In fact, we 

were having this discussion at GAO, how would this coordination 

happen, perhaps it could be under OMB. It would have be some 

sort of centralized—— 

Senator MCCASKILL. Let us not go there. 

Ms. FRANZEL [continuing]. That really it could be an IG. It could 

be the Council of Inspectors General on Integrity and Efficiency 

(CIGIE). So we do need some kind of centralized risk assessment 

function, I think, in coordination across agencies, and frankly, 

somebody or an entity to serve as technical expertise and consultation to the agencies because we have seen varying degrees of internal controls over the contracting function and the contracting officer’s diligence to the preventive controls and other controls. 

So there is just huge room for improvement here. 

Your final question was about taking the data points that were 

used for the recovery monies, and I do believe that the recovery 

board is looking at how to get that out to agencies and use that 

going forward, but that is something where we need institutionalize in government going forward. 

Senator MCCASKILL. Really. I have seen the software demonstrated. In fact, I believe they are using it with (SERP). 

Ms. FRANZEL. It is very impressive. 

Senator MCCASKILL. They are overlaying attacks versus population versus SERP money to make the assessment of whether not 

the SERP funds are truly getting at the cause that we want them 

to get at in terms of stabilizing different regions of Afghanistan. 

I think that is something that we will continue to take a look at 

because I think technology that is available now, as long as we do 

not create a new agency to do this technology, if we could effectively and efficiently access the technology that is out there right 

now, I think we could save a lot of man-hours just by using data 

that is available and that can be digested, synthesized, and spit 

back out in a way that helps us manage risk. 

I want to thank all of you today. I think we have some things 

to work on. I think this risk assessment government-wide is important, getting some consistency. 

I think looking at some of the things we have talked about in 

terms of DCAA and making sure they have the independence they 

need if they are going to be the go-to contract agency and importantly looking at preventative measures going forward and making 

sure they are getting the emphasis they need so we are not trying 

to claw back but rather we are preventing up front. 

So most Americans cannot even comprehend over $100 billion in 

improper payments. That dog does not hunt. We have to figure how 

to get at that. 

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35 

I appreciate everyone’s time today, and we will continue to follow 

up with you because we will have a few more questions for the 

record. 

Thank you very much. 

This hearing is adjourned. 

[Whereupon, at 4:28 p.m., the Subcommittee was adjourned.] 

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