U.S. ENVIRONMENTAL PROTECTION AGENCY 

OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

Audit Report 

Contractor Invoice Internal 

Controls Need Improvement 

Report No. 09-P-0242 

 September 23, 2009 
 

Report Contributors: Janet Kasper 

 Michael Davis 

 Melinda Burks 

 Jennifer Hutkoff 

 Shannon Schofield 

Abbreviations 

CMM Contracts Management Manual 

CO Contracting Officer 

COR Contracting Officer Representative 

EPA U.S. Environmental Protection Agency 

FAR Federal Acquisition Regulation 

FMR Financial Monitoring Review 

OAM Office of Acquisition Management 

OAR Office of Air and Radiation 

OARM Office of Administration and Resources Management 

OIG Office of Inspector General 

OMB Office of Management and Budget 

PO Project Officer 

RTP Research Triangle Park 
 

 

 

U.S. Environmental Protection Agency 09-P-0242 

Office of Inspector General September 23, 2009 

At a Glance
 

Catalyst for Improving the Environment 

Why We Did This Review 

We conducted this review to 

determine whether U.S. 

Environmental Protection 

Agency (EPA) controls ensure 

that invoiced contractor costs 

are properly supported and 

allowable in accordance with 

the Federal Acquisition 

Regulation. 

Background 

In 2008, EPA paid 

contractors $1.3 billion. To 

safeguard EPA funds, invoices 

must be reviewed to determine 

whether the submitted costs 

are allowable, allocable, and 

reasonable. 

For further information, contact 

our Office of Congressional, 

Public Affairs and Management 

at (202) 566-2391. 

To view the full report, 

click on the following link: 

www.epa.gov/oig/reports/2009/ 

20090923-09-P-0242.pdf 

Contractor Invoice Internal Controls 

Need Improvement

 What We Found 

EPA should improve its invoice review procedures to ensure costs are allowable 

and supported in accordance with the Federal Acquisition Regulation. During our 

review, we found (1) invoice reviews were not always documented as required by 

the Contracts Management Manual (CMM), (2) Project Officer reviews were 

based on incomplete information, (3) monthly progress reports did not always 

contain the information needed to evaluate invoices, and (4) Agency staff did not 

perform required rate verifications and math checks. Some responsible for invoice 

reviews were unaware of the guidance and checklists in the CMM, did not 

understand the level of documentation needed to review invoices, or did not 

adhere to the guidance. 

EPA’s Office of Acquisition Management (OAM) Financial Monitoring Reviews 

(FMRs) have identified repetitive findings related to contractor invoices. The 

FMRs continue to find errors in invoices that should have been identified when 

EPA employees reviewed the invoices prior to approval for payment. EPA did not 

develop a corrective action plan to address invoice review internal control 

weaknesses identified in FMR findings that were applicable across multiple 

contracts. Instead, FMR findings are resolved on a case-by-case basis. 

By not using information on trends identified in the FMR process to improve its 

policy and procedures, and without adequate controls over the invoice review 

process, the Agency is vulnerable to fraud, waste, abuse, and mismanagement of 

the funds that it has a fiduciary responsibility to safeguard. 

What We Recommend 

We recommend that the Assistant Administrator for Administration and Resources 

Management require OAM to modify the CMM to require use of the checklist for 

invoice reviews, and have Contracting Officers verify compliance with the policy 

during invoice reviews. Further, OAM should take corrective actions in response 

to the trends identified in the FMR reviews. EPA agreed with the findings and 

provided corrective action plans for addressing all but one of the recommendations 

in the report. 
 

 

 

 

 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL 

September 23, 2009 

MEMORANDUM 

SUBJECT:	 Contractor Invoice Internal Controls Need Improvement 

 Report No. 09-P-0242 

FROM: Melissa M. Heist 

Assistant Inspector General for Audit 

TO:	 Craig E. Hooks, Assistant Administrator 

 Office of Administration and Resources Management 

This is our report on the U.S. Environmental Protection Agency’s (EPA’s) review of contractor 

invoices. This report contains findings that describe the problems the EPA Office of Inspector 

General (OIG) has identified and corrective actions the OIG recommends. This report represents 

the position of the OIG and does not necessarily represent the final EPA position. Final 

determinations on matters in this report will be made by EPA managers in accordance with 

established audit resolution procedures. 

The estimated cost of this report – calculated by multiplying the project’s staff days by the 

applicable daily full cost billing rates in effect at the time – is $363,581. 

Action Required 

In accordance with EPA Manual 2750, you are required to provide a written response to this 

report within 90 calendar days. You should include a corrective actions plan for agreed-upon 

actions, including milestone dates. We have no objections to the further release of this report to 

the public. This report will be available at http://www.epa.gov/oig. 

If you or your staff have any questions, please contact Janet Kasper, Director, Contracts and 

Assistance Agreement Audits, at 312-886-3059 or kasper.janet@epa.gov. 
 

 

 

 

 

 

 

 

 

 

 

 

 

Contractor Invoice Internal Controls 09-P-0242 

Need Improvement 

Table of Contents 

Chapters 

1 Introduction ....................................................................................................... 1 

Purpose ...................................................................................................... 1 

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

 Noteworthy Achievements .......................................................................... 2 

 Scope and Methodology ............................................................................. 2 

2 Improvements Needed in Invoice Review Process ........................................ 4 

Guidance Requires Review of Invoices for Cost Reasonableness ............. 4 

Invoice Reviews Not Documented ............................................................. 4 

PO Reviews Based on Incomplete Information........................................... 6 

Periods of Performance Differed from Monthly Progress Reports ............. 6 

Rate and Mathematical Verification Were Not Performed .......................... 8 

 Recommendations ..................................................................................... 9 

Agency Comments and OIG Evaluation...................................................... 9 

3 Financial Monitoring Reviews Have Identified Repetitive Findings ............. 11 

Guidance Requires Internal Control Monitoring .......................................... 11 

Financial Monitoring Reviews Identify Repetitive Contractor Invoice 

Findings ............................................................................................ 12 

EPA Needs Action Plan in Response to FMR Trends ................................ 13 

 Recommendations ..................................................................................... 14 

Agency Comments and OIG Evaluation...................................................... 14 

Status of Recommendations and Potential Monetary Benefits ............................. 15 

Appendices 

A OIG Sample of Contracts and Invoices............................................................ 16 

B Invoice Findings and Contract Numbers ......................................................... 17 

C Agency Response to Draft Report.................................................................... 18 

D Distribution ......................................................................................................... 21 
 

 

09-P-0242 

Chapter 1

Introduction 

Purpose 

To safeguard U.S. Environmental Protection Agency (EPA) funds paid to 

contractors, EPA employees must review invoices to determine whether the 

submitted costs are allowable, allocable, and reasonable. Due to the importance 

of invoice review, we conducted this audit to determine whether EPA controls 

ensure that invoiced costs are properly supported and allowable in accordance 

with the Federal Acquisition Regulation (FAR). 

Background 

During Fiscal Year 2008, EPA spent $1.3 billion to procure goods and services 

from contractors. As defined in FAR Part 31.2, a cost is allowable only when it is 

(1) reasonable, (2) allocable, and (3) complies with standards promulgated by the 

United States Office of Management and Budget’s (OMB’s) Cost Accounting 

Standards Board or generally accepted accounting principles and practices 

appropriate to the circumstances, terms of the contract, and any limitations set 

forth in the FAR. A cost is reasonable if, in its nature and amount, it does not 

exceed that which would be incurred by a prudent person in the conduct of 

competitive business. A cost is allocable if it is assignable or chargeable to one or 

more cost objectives on the basis of relative benefits received or other equitable 

relationship. 

Contracting Officers (COs) are responsible for administering contracts. The FAR 

specifies that the CO is responsible for ensuring performance of all necessary 

actions for effective contracting and for safeguarding the interest of the United 

States in its contractual relationships. In undertaking this effort, COs rely on the 

contributions of numerous financial, legal, and technical experts. Due to the size 

and complexity of Agency acquisitions, COs frequently appoint Contracting 

Officer Representatives (CORs) to perform certain contract administration 

activities. 

Over the years, EPA has developed a wide range of unique titles for employees 

who perform COR duties, such as project officer, work assignment manager, 

delivery order project officer, task order project officer, and task monitor. Titles 

and roles are based on the acquisition instrument managed – contract, work 

assignment, task order, or delivery order. For purposes of this report, Project 

Officer (PO) refers to all invoice approvers. We use the term COR to refer to 

those who focus on the technical, day-to-day aspects of contract management on 

behalf of the CO and who also work closely with POs when approving invoices. 

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09-P-0242 

According to EPA’s Contracts Management Manual (CMM), the CO is 

responsible for performing periodic reviews of invoices to ensure that the 

contractor, PO, and CORs are properly fulfilling their roles, and that all issues 

relevant to contract performance are being addressed. The CMM also requires the 

CO to perform at least one detailed review of an invoice on each contract each 

year. 

Noteworthy Achievements 

EPA’s Office of Air Quality Planning and Standards has been responsive to the 

audit team’s comments regarding invoice reviews. During our field work, we 

expressed our concern about instances where POs did not ensure CORs certified 

the actual invoice, but rather allowed them to complete checklists based upon 

monthly progress reports. Immediately, the Office of Air Quality Planning and 

Standards Team Leader issued guidance to POs to ensure invoices and progress 

report were in agreement, correct, and accurate. The guidance clarified the 

process for certifying and approving contractor invoices for payment. 

Additionally, two COs called a meeting with all their POs and highly 

recommended they start using the checklist to complete their invoice reviews. 

Scope and Methodology 

We conducted this performance audit in accordance with generally accepted 

government auditing standards issued by the Comptroller General of the United 

States. These standards required that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objective. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on our audit 

objective. 

We conducted the audit from September 2008 to August 2009. We also used 

information collected as part of a separate review of the invoice process the OIG 

conducted in 2007. 

We obtained an understanding of the contract invoice review process through 

analysis of the laws, regulations, and guidance, and an evaluation of internal 

controls over the process. We reviewed the FAR, the EPA Acquisition 

Regulation, and the CMM to understand regulations and directives governing 

contract invoice review. We reviewed OMB Circular A-123 and EPA Order 

1000.24 to understand management’s responsibility for internal controls. Our 

analysis of internal controls focused on control activities. We examined the 

policies and procedures that management established to address the risks 

associated with the invoicing process. 

We visited the Office of Air and Radiation (OAR) and the Office of Acquisition 

Management (OAM), both in Washington, DC, and in Research Triangle Park 

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09-P-0242 

(RTP), North Carolina. We also visited EPA Region 9 in San Francisco, 

California, and RTP’s Financial Management Center. We interviewed COs, POs, 

CORs, managers in the payment office, and others to determine the process for 

paying invoices. We reviewed contract clauses, invoices, monthly progress 

reports and various backup documentation for invoices to determine whether costs 

were supported and allowable. 

We obtained a universe of 368 EPA time and material, cost-reimbursable and 

level-of-effort contracts with a current contract value of almost $8.2 billion from 

the July 2008 active contract listing. We focused on cost-reimbursable contracts, 

as opposed to fixed-price contracts, as cost-reimbursable contracts pose a greater 

risk to the government. Unlike fixed-price contracts, cost-reimbursable contracts 

charge the government for expenses incurred and do not place full fiscal 

responsibility and the resulting profit or loss with the contractor. The team 

judgmentally selected a sample of 10 EPA contracts. We chose five contracts 

each from EPA Region 9 and OAR to capture a nonstatistical sample from both a 

national headquarters program office and a region. OAR and Region 9 offices 

were selected based on the Fiscal Year 2007 OAM accomplishments reports that 

showed that these offices accounted for a sizeable share of the contract dollars in 

EPA. The two offices represented 19 percent of the universe of time and material, 

cost-reimbursable, and level-of-effort contracts. 

Once the contracts were selected, we selected two of the more recent invoices for 

each contract. The dollar amount of the invoice was a consideration but not a 

determining factor. We also selected invoices not related to the same work 

assignment, task order, or line of accounting so that we would be speaking with 

different POs and CORs. The 10 OAR invoices selected for review had a total 

invoice amount of $196,285 (.002 percent of the universe). The 10 invoices 

selected for Region 9 totaled $3,567,966, of which we reviewed $964,614 (.01 

percent of the universe). Since it was a nonstatistical sample, the error rate in the 

sample cannot be projected to the universe. See Appendix A for more details on 

the sample of contracts and invoices we reviewed. 

We reviewed the June 2004 OAM Intranet document titled Lessons Learned 

From the FMR Program, to obtain an understanding of findings identified by 

Financial Monitoring Reviews (FMRs) performed for 2004 and prior years. We 

reviewed more recent FMRs for 2005 and subsequent years to determine if these 

findings have continued. 

We are not aware of any recent prior report recommendations specifically related 

to this report’s audit objective. 

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Chapter 2

Improvements Needed in Invoice Review Process 

EPA should improve its invoice review procedures to ensure costs are allowable 

and supported in accordance with the FAR. We found that: 

•	 invoice reviews were not documented, 

•	 PO reviews were based on incomplete information, 

•	 monthly progress reports did not always contain the information needed to 

evaluate invoices, and 

•	 Agency staff did not perform required rate verifications and math checks. 

Some responsible for reviews were unaware of the guidance and checklists in the 

CMM, did not understand the level of documentation needed to review invoices, 

or did not adhere to the guidance. Without adequate controls over the invoice 

review process, the Agency becomes vulnerable to fraud, waste, abuse, and 

mismanagement. 

Guidance Requires Review of Invoices for Cost Reasonableness 

According to CMM Section 11.2.5, it is the policy of the government to review 

contract invoices thoroughly for cost reasonableness. The FAR states that no 

presumption of reasonableness shall be attached to the incurrence of costs by a 

contractor. The CMM invoice review checklists for POs and CORs illustrate the 

important items they are to verify prior to invoice approval. The following are 

some of the questions listed on the invoice review checklists. 

•	 Does the invoice period of performance cover the progress report period 

of performance? 

•	 Are the labor categories and hours billed appropriate for the work 

required? 

•	 Are indirect rates and costs billed at the authorized rates for that period of 

performance? 

•	 Are other direct costs reasonable and within the contract approved dollar 

ceiling? 

•	 Is the math accurate? 

Invoice Reviews Not Documented 

POs did not always document their review and approval of contractor invoices. 

This occurred because POs did not understand the level of documentation needed 

to sufficiently document invoice reviews. Appropriate documentation is necessary 

4
 
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to demonstrate that EPA is implementing its responsibility for invoice review. 

Without documentation, EPA does not have assurance that the costs were 

evaluated as to whether they are allowable and reasonable. 

Although the CMM provides checklists for POs and CORs to use in reviewing 

invoices, the use of the checklists is not mandatory. In the absence of checklists, 

the CMM requires that the EPA staff reviewing the invoice provide 

documentation to show that the appropriate review was performed. 

We found 12 of 20 invoices (60 percent) were not supported by evidence of 

review, either with a checklist or other documentation. For example: 

•	 An OAR contractor submitted an invoice for over $29,000 that was paid 

without any evidence of review. The COR stated that he has the checklist, 

but he does not use it every time. He explained that it would be helpful to 

have some kind of training on what he should do and what should go in 

the file. The COR stated that more guidance on what forms to use and 

what records should be kept would be beneficial. 

•	 An invoice for over $413,000 submitted to Region 9 was approved and 

paid without a checklist or any other evidence of tick marks or other 

means of showing that it had been reviewed. The PO explained that she 

spot-checks the cost among the invoice categories and did not document 

her review. 

Three factors contributed to the lack of documentation for invoice reviews. First, 

EPA staff that review invoices believed that they were insufficiently trained in 

reviewing invoices and documenting those reviews. However, EPA’s required 

training for CORs includes a chapter on the invoice review process, which 

emphasizes the importance of the function and states that the COR must maintain 

a file of all invoices, invoice review checklists, and all other documentation 

associated with the invoice. The training materials include a copy of the invoice 

review checklist from the CMM. 

A second reason for the lack of documentation to support the invoice review is 

that EPA does not require POs to use the checklist in the CMM. According to 

OAM’s Acting Director of Policy, Training and Oversight, the checklist is not 

mandatory because it is provided as general guidance on how to perform invoice 

reviews and as a tool to assist those who review invoices. 

Finally, COs were not ensuring that invoice reviews were appropriately 

documented. According to the CMM, the CO is responsible for performing 

periodic reviews, as needed, to ensure that the POs and CORs are fulfilling their 

roles properly in regard to invoice review. Several COs told us that they do not 

check on how the POs and CORs are documenting their invoice reviews. 

5
 
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PO Reviews Based on Incomplete Information 

For 6 of 20 invoices (30 percent), PO invoice approvals were based on incomplete 

information. One PO approved two invoices based on invoice review checklists 

that CORs completed; these checklists were based upon cost information from the 

monthly progress report rather than the invoice. The PO did not provide the 

CORs with copies of the invoices to perform their reviews. For the remaining 

four invoices, the supporting documentation did not contain the detail needed to 

evaluate the allowability and reasonableness of invoiced costs. Without complete 

information, costs may be approved without EPA review to assess their 

allowability and reasonableness. 

The monthly progress report is an important tool in reviewing the invoice. The 

report identifies the project’s progress, difficulties encountered, and anticipated 

future activity. However, without reviewing the invoice, the COR cannot 

accurately assure that costs claimed, as identified on the invoice, are reasonable 

and commensurate with work performed. For one of the invoices the PO approved 

using COR-completed invoice review checklists, we found that the cost summary 

information in the monthly progress report was not reliable. For example, the 

hours for Professional Level III Engineer reported on the monthly progress report 

were fewer than those reported on the invoice. The COR identified no exceptions 

and recommended payment of the invoice based on the monthly progress report 

alone. The PO approved the invoice for payment. The PO checklist noted, 

“Direct charges appear to be reasonable, accurate and commensurate with the 

level of effort performed during this time period.” However, the PO’s certification 

was based on the COR’s review of information in monthly progress report and not 

the invoice. 

The contract terms require invoices to contain a description of the cost charges or 

detailed explanations for the cost categories when the costs exceeded set dollar 

amounts. We identified four invoices with other direct costs totaling $39,065 that 

POs approved for payment without a description of the costs as required in the 

contracts. For two of the invoices, the costs exceeded the amount specified in the 

contract for required detailed reporting. The PO approved the invoice in full 

without the required detailed support for other direct costs. Without detailed 

information for these costs, the PO cannot determine whether costs incurred and 

paid by the government are allowable and reasonable for work performed. 

Periods of Performance Differed from Monthly Progress Reports 

Four of 20 invoices (20 percent) had periods of performance that differed from 

the monthly progress report cost summaries. Each of the contracts required that 

the period covered by the progress reports and invoices be the same. The POs 

were aware of the different periods of performance, but not all had taken action to 

correct the issue. With different periods of performance, it’s difficult to match the 

costs reported in the monthly progress report to costs invoiced. 

6
 
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EPA Acquisition Regulation Section 1552.232-70 paragraph e.1, which is cited in 

contract terms and conditions, states, “when submitted on a monthly basis, the 

period covered by invoices or requests for contractor financing payments shall be 

the same as the period for monthly progress reports required under this contract.” 

According to the CMM, Chapter 11.2.5, Agency personnel are responsible for 

reviewing the monthly progress report’s consistency with invoices and for 

verifying compliance of both invoices and monthly progress reports with contract 

requirements. This is reflected in item number 2 of the PO and COR checklists, 

which questions whether the invoice period of performance cover the progress 

report period of performance. The CMM states that the CO is to conduct periodic 

oversight to confirm compliance with invoices and monthly report clauses in the 

contract. 

Two of the four invoices with periods of performance that differed from the 

progress report included: 

•	 For the Region 9 emergency response contract, the invoice period is based 

on when relevant documentation is ready, and the progress report is issued 

monthly. When we asked the PO how she knows that the invoiced billing 

information is correct, the PO stated that it is correct “because it is done 

out of the contractor’s accounting system.” However, just because the 

information came from the contractor’s accounting system does not ensure 

that it is accurate or allowable. A financial monitoring review of this 

contractor, performed in July 2008, determined that the contractor was not 

complying with cost accounting standards. The PO stated she was not 

aware of the results of the FMR. 

•	 For an air contract, one invoice was for a single day’s worth of subcontract 

charges, although the subcontractor invoice indicated the period of 

performance was 3 days. The corresponding progress report covered 14 

days’ worth of work. The PO explained that this contractor uses different 

periods of performance on its progress reports and invoices. For example, 

another invoice that was not in our sample covered four separate monthly 

progress reports. The PO said she depends on the CORs to tell her 

whether the contractor did the work. If there are no problems, the PO will 

approve the invoice. 

The POs were taking varying levels of action to enforce the terms of contract. 

One of the POs was working with the contractor to get the period of performance 

to be the same in the monthly progress reports and invoices. Another PO’s team 

leader said he would take action to address the issue after we brought it to his 

attention during the audit. The PO responsible for reviewing two of the sample 

invoices did not consider the differences in period of performance as a problem 

and did not take action. Invoices that are approved based upon supporting cost 

documentation that covers a different period of performance presents a significant 

7
 
 

 

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control weakness in the invoice approval process. It also illustrates a lack of 

enforcement of contract terms. 

Rate and Mathematical Verification Were Not Performed 

Agency staff did not perform their required rate verifications and math checks. 

We found that RTP’s Finance Center did not perform these activities, and POs 

and CORs performed these activities for only 20 percent (4 of 20) of the invoices. 

Without performing consistent rate verifications and math checks on invoices, 

there is increased risk that overbillings could occur and not be detected prior to 

invoice approval and payment. 

Even though Agency guidance identifies the RTP Finance Center as having 

primary responsibility for verifying rates and mathematical accuracy of invoices, 

it is not performing this function. A payment section team leader explained that 

the RTP Finance Center does not perform the verification because they believe 

the task is more suitable to CORs. 

Section 11.2.5.1 of the CMM delegates primary responsibility for rate verification 

and mathematical accuracy on the invoice to RTP’s Finance Center. In particular, 

the Finance Center is responsible for confirming that the rates billed for indirect 

costs, as well as for fixed or provisional rates for labor and equipment, are billed 

consistently with the contract rates. The Finance Center is also required to 

confirm that total current and cumulative costs are correctly summed, and that 

rates are correctly multiplied to produce dollars billed for direct and indirect costs 

(on a sample basis). 

According to the CMM, the PO and COR are secondarily responsible for 

verifying rates and mathematical accuracy of the invoice, but performed this 

function on only 20 percent (4 of 20) of the invoices we reviewed. In one case 

where the rates were not verified, we identified an overpayment to the contractor 

of $368. This overpayment resulted from a fixed fee that was calculated using an 

incorrect base. According to the terms of the contract, the rate for fixed fee was 

to be applied to professional labor hours. However, the base on the invoice 

calculation was for professional and nonprofessional labor hours. The PO 

confirmed that the same problem occurred on additional invoices, which resulted 

in a total overbilling of $560. This error would have been identified if either the 

RTP Finance Center or COR had verified the mathematical accuracy of the fixed 

fee calculation. 

While the CMM designates RTP Finance Center as having primary responsibility 

for rate and math verification, our observation is that the PO and COR are in a 

better position to conduct this review. The PO and COR maintain files that 

include the invoices and contract documents that would be needed to verify that 

the contractor is billing the correct rates. The PO, when approving the invoice, is 

expressing an opinion as to whether EPA should approve the invoice, which 

8
 
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would require verification of the rates and mathematical accuracy of the invoice. 

OAM should reassign the responsibility for rate and math verifications to the POs 

and CORs. 

Although in our sample of 20 invoices the amount overpaid was minimal, it 

illustrates the importance of checking math and verifying rates. Given that RTP 

pays out more than $1 billion annually in contract payments, this dollar value 

could escalate considerably if controls are not in place to prevent overpayment. 

When the rate verification and math checks are not performed, the Agency is 

susceptible to paying costs that are unallowable or unsupported. See Appendix B 

for more details on invoice findings. 

Recommendations 

We recommend that the Assistant Administrator for the Office of Administration 

and Resources Management: 

2-1 Modify the CMM to require use of the checklist for invoice reviews the 

CORs perform, and to ensure CORs receive invoices and supporting 

documentation to assist their reviews. 

2-2 Where the progress report and invoice did not cover the same time period, 

require the contractors identified during this review to revise their progress 

reports to match the time period of the invoice. 

2-3 Re-evaluate the assignment of the responsibility for math and rate 

verifications on contractor invoices and update the CMM accordingly. 

2-4 Require that the COs, as part of the annual invoice review, perform 

periodic reviews to make certain that the POs and CORs are: 

a. 

b. 

Implementing changes to the CMM made in response to the audit 

report. 

Requiring contractors to submit invoices and progress reports with 

matching periods of performance. 

Agency Comments and OIG Evaluation 

In responding to the draft report, EPA agreed to take action to address all of the 

recommendations, and provided milestone dates for most of the 

recommendations. 

•	 Recommendation 2-1. OAM agreed that the CMM should be modified to 

better define documentation needs at two levels: first, the supporting 

documentation that needs to be supplied by the contractor to assist the COR in 

invoice reviews; and second, the documentation that the COR needs to 

9
 
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prepare to prove that a sufficient invoice review has been performed. OAM 

will encourage the use of the checklist, and will define the specific 

documentation that is needed when the checklist is not used. An interim 

policy notice will be issued by December 31, 2009. The CMM will also be 

revised, but that may take an additional 6 months. 

•	 Recommendation 2-2. EPA contracting officers will send a letter to 

contractors reminding them of the requirement that progress reports and 

invoices cover the same time period. The letter will be issued by 

December 31, 2009. 

•	 Recommendation 2-3. OAM agreed that math and rate verifications are 

important and that they would discuss the issue of who is responsible for the 

function with the Office of the Chief Financial Officer in greater depth by 

November 30, 2009. Based on that discussion, OAM will provide an action 

plan for addressing the recommendation. In responding to the final report, 

EPA needs to provide an action plan, with milestone dates, to address 

Recommendation 2-3. 

•	 Recommendation 2-4. OAM agreed that contracting officer reviews will be 

used to verify compliance with the report recommendations. The quality 

assessment plan policy in the EPA’s acquisition handbook will be updated by 

December 31, 2009. 

The Agency’s full response is provided in Appendix C. 

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Chapter 3

Financial Monitoring Reviews Have Identified 

Repetitive Findings 

OAM FMRs have identified repetitive findings related to contractor invoices. 

The FMRs continue to find errors in invoices, some of which the PO and CORs 

should have identified when reviewing the invoice. EPA did not develop a 

corrective action plan to address invoice review internal control weaknesses 

identified in FMR findings that were applicable across multiple contracts. 

Instead, FMR findings are resolved solely on a case-by-case basis for a specific 

contract. To maximize the usefulness of FMRs as an internal control tool, the 

Agency should identify trends in FMR findings and recommendations. The 

Agency can use this information to review and improve its invoice review process 

and other areas. Doing so will help reduce the Agency’s vulnerability to fraud, 

waste, abuse, and mismanagement. 

Guidance Requires Internal Control Monitoring 

OMB Circular A-123, Management’s Responsibility for Internal Control, states 

that once internal control activities are put into place, continuous monitoring and 

testing should help to identify poorly designed or ineffective controls. Findings in 

audit and internal management reviews are one source of information about the 

effectiveness of internal controls. In addition, a systematic process should be in 

place for addressing deficiencies. EPA Order 1000.24, which implements OMB 

Circular A-123, states that all methods of internal controls serve as the first line of 

defense against fraud, waste, abuse, and mismanagement. 

EPA’s Cost Advisory personnel (i.e., the Financial Analysis Service Center at 

Headquarters and for the Regions, or the Cost Analysis staffs at RTP and 

Cincinnati, Ohio) perform FMRs on selected contracts. EPA schedules FMRs on 

active contracts in excess of $5 million. The CO and Financial Administrative 

Contracting Officer are responsible for resolving cost and financial issues raised 

during these reviews. The FMRs target current contractor invoices to determine 

whether there is adequate contractor data in the accounting records and systems to 

support the contractor’s billings, and to identify potential internal control issues 

that might not otherwise be found until an audit is performed years later. 

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Financial Monitoring Reviews Identify Repetitive Contractor Invoice 

Findings 

OAM FMRs have identified repetitive findings related to contractor invoices, 

meaning similar issues were identified during FMR reviews at different 

contractors. The OAM Intranet document titled Lessons Learned From the FMR 

Program (June 2004) identified issues that were noted during FMR reviews, 

including: 

•	 overbilling of indirect costs 

•	 costs exceeding contract ceilings 

•	 inadequate support for contract billings 

•	 ineffective internal controls 

•	 inadequate policies and procedures 

•	 noncompliance with contractual and/or regulatory requirements 

•	 billing costs that are either unallowable, unallocable, or unreasonable 

•	 missing mandatory contract clauses 

•	 incorrect billing of fees 

We found weaknesses and invoice errors during our review of 20 sample 

contractor invoices similar to the findings identified in the FMRs. For example: 

•	 For 4 of 20 invoices, the monthly progress report dates differed from the 

invoice dates, contrary to the requirements stipulated in the contract 

terms. 

•	 For 4 of 20 invoices, there was inadequate support for other direct costs. 

•	 For 1 of 20 invoices, the fee was calculated incorrectly, resulting in an 

overbilling of the fixed fee. 

Because OAM’s list of findings was several years old, we reviewed more recent 

FMRs to determine if the issues continued. According to more recent FMRs we 

obtained for 2005 and subsequent years, these FMR findings have continued. 

Overall, there were a total of 51 findings identified in the more recent FMRs and 

our invoice reviews combined. Of the 17 FMR findings from the OAM Intranet 

document, the more recent FMRs and invoice reviews identified 12 of these 

findings as continuing, with the most prevalent findings being (1) noncompliance 

with contractual and/or regulatory requirements, and (2) inadequate support for 

contract billings. Table 3-1, on page 13, illustrates the trends identified by the 

FMR findings and this audit. 

The FMRs continue to find errors in invoices that should have been identified 

when EPA employees reviewed the invoices prior to approval for payment. For 

example, overbillings of costs and incorrect fixed fee calculations should be 

identified during invoice review. Improved internal controls over the invoice 

review process, such as requiring the use of the invoice review checklist and 

12
 
 09-P-0242 

ensuring math checks and rate verifications are performed, would help ensure 

such errors are detected prior to invoice approval for payment. 

Table 3-1: Trends Identified by Repetitive FMR Findings and OIG Review 

FMR Repetitive Findings 

(2004 and Prior Years) 

More Recent FMR 

Findings (2005 

and Subsequent 

Years) 

OIG Review of 

20 Sample 

Contractor 

Invoices 

Total Findings 

Identified by More 

Recent FMRs and OIG 

Review of Invoices 

Overbilling of direct or 

indirect costs 

3 1 4 

Gross underfunding of 

indirect costs 

1 0 1 

Cost overruns/exceeding 

contract ceilings 

1 1 2 

Inadequate support for 

contract billings 

5 8 13 

Noncompliance with 

contractual and/or 

regulatory requirements 

8 6 14 

Pre-billing of subcontractor 

cost 

1 0 1 

Billing costs that are either 

unallowable, unallocable, or 

unreasonable 

2 0 2 

Inadequate invoices 3 0 3 

Missing mandatory contract 

clauses 

2 1 3 

Incorrect billing of fee 1 1 2 

Incorrect level of effort 

computations 

2 0 2 

Actual rates/cost 

significantly higher than the 

contractor’s best and final 

offer 

4 0 4 

Totals 33 18 51 

Source: OIG Analysis of Recent FMR Findings and Results of OIG Review of Sample Invoices 

EPA Needs Action Plan in Response to FMR Trends 

EPA has not used the FMR findings to identify changes that are needed in Agency 

policy and procedures. Consequently, EPA did not develop a corrective action 

plan to address invoice review internal control weaknesses identified in FMR 

findings that were applicable across multiple contracts. Instead, FMR findings 

are resolved on a case-by-case basis for the specific contract reviewed. 

FMRs are useful tools that serve as a valuable internal control to identify trends 

that should be addressed. EPA is not using the FMRs as a tool to identify where 

improvements may be needed in EPA processes. In accordance with OMB 

Circular A-123, EPA should take corrective actions in response to the trends 

identified in the FMR findings. These changes may decrease the number of 

13
 
 09-P-0242 

repetitive findings and invoice errors identified by the FMRs for contractor 

billings and reduce vulnerability of contract funds to fraud, waste, abuse, and 

mismanagement. 

Recommendations 

We recommend that the Assistant Administrator for the Office of Administration 

and Resources Management: 

3-1 Analyze FMRs to identify findings that are recurring on multiple 

contracts. 

3-2 Develop a corrective action for addressing the common findings identified 

in FMRs. 

Agency Comments and OIG Evaluation 

In responding to the draft report, EPA agreed with the recommendations and 

provided milestone dates for completing corrective actions. EPA agreed to 

conduct an analysis of the results of financial monitoring reviews by 

November 30, 2009, and to develop a corrective action plan for addressing 

common findings by December 31, 2009. The Agency’s full response is provided 

in Appendix C. 

14
 
 

 

 

 

 

 

 

 

 

 

09-P-0242 

Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Rec. 

No. 

2-1 

2-2 

2-3 

2-4 

3-1 

3-2 

Page 

No.

9 

9 

9 

9 

14 

14 

 Subject 

Modify the CMM to require use of the checklist for 

invoice reviews the CORs perform, and to ensure 

CORs receive invoices and supporting 

documentation to assist their reviews. 

Where the progress report and invoice did not 

cover the same time period, require the contractors 

identified during this review to revise their progress 

reports to match the time period of the invoice. 

Re-evaluate the assignment of the responsibility for 

math and rate verifications on contractor invoices 

and update the CMM accordingly. 

Require that the COs, as part of the annual invoice 

review, make certain that the POs and CORs are: 

a. Implementing changes to the CMM made in 

response to the audit report. 

b. Requiring contractors to submit invoices and 

progress reports with matching periods of 

performance. 

Analyze FMRs to identify findings that are recurring 

on multiple contracts. 

Develop a corrective action for addressing the 

common findings identified in FMRs. 

Status1 

O 

O 

U 

O 

O 

O 

Action Official 

Assistant Administrator for 

the Office of Administration 

and Resources Management 

Assistant Administrator for 

the Office of Administration 

and Resources Management 

Assistant Administrator for 

the Office of Administration 

and Resources Management 

Assistant Administrator for 

the Office of Administration 

and Resources Management 

Assistant Administrator for 

the Office of Administration 

and Resources Management 

Assistant Administrator for 

the Office of Administration 

and Resources Management 

Planned 

Completion 

Date 

6/30/2010 

12/31/2009 

11/30/2009 

12/31/2009 

11/30/2009 

12/31/2009 

Claimed 

Amount 

Agreed To 

Amount 

1 O = recommendation is closed with agreed-to corrective actions pending 

C = recommendation is closed with all agreed-to actions completed 

U = recommendation is undecided with resolution efforts in progress 

15
 
 

 

 

 

 

 

 

 

09-P-0242 

Appendix A 

OIG Sample of Contracts and Invoices 

Table A-1: Sample of 10 Contracts and 20 Invoices 

Contract Number Invoice Number 

Invoice Period of 

Performance 

Total Invoice 

Amount 

OIG Reviewed 

Amount 

Office of Air and 

Radiation (OAR) 

Contracts 

EP-W-07-072 11005 6/1/08 – 6/30/08 $ 6,397.00 $ 6,397.00 

11006 6/1/08 – 6/30/08 29,396.76 29,396.76 

EP-D-06-011 8626 12/1/07 – 12/14/07 20,948.18 20,948.18

 8634 12/14/07 2,234.67 2,234.67 

EP-W-06-008 25 1/1/08 – 1/27/08 13,552.29 13,552.29 

2 5/26/08 – 6/30/08 23,695.48 23,695.48 

EP-D-07-102 5-35468-8 5/1/08 – 5/31/08 39,713.89 39,713.89 

5-35468-9 6/1/08 – 6/30/08 43,885.54 43,885.54 

EP-W-06-016 BVN0005 6/22/08 6,779.15 6,779.15

 BVN0006 8/24/08 9,682.72 9,682.72 

OAR Totals $ 196,285.68 $ 196,285.68 

Region 9 

Contracts 

68-W-98-225 269 5/31/08 – 6/27/08 $ 1,354,174.04 $ 7,167.13 

271 6/28/08 – 7/25/08 1,055,408.54 1,864.18 

EP-W-06-006 A026 2/25/08 – 3/30/08 122,455.00 55,988.89 

A030 6/30/08 – 7/27/08 164,847.68 28,513.48 

EP-W-07-022 262-001-005 2/26/08 – 7/18/08 74,995.72 74,995.72 

262-015-002 6/3/08 – 8/17/08 413,350.43 413,350.43 

EP-R9-08-01 2 7/26/08 – 8/29/08 171,964.36 171,964.36 

1 7/15/08 – 7/25/08 2,909.44 2,909.44 

EP-R9-07-02 10 7/9/08 92,324.58 92,324.58 

11 7/1/08 – 7/31/08 115,536.76 115,536.76 

Region 9 Totals $ 3,567,966.55 $ 964,614.97 

Grand Totals $ 3,764,252.23 $ 1,160,900.70 

Source: Financial Data Warehouse 

16
 
 

 

 

 

 

 

 

 

 

 

 

 

 

09-P-0242 

Appendix B 

Invoice Findings and Contract Numbers 

Table B-1: Invoice Review Findings and Related Contract Numbers 

Contract 

Number 

Invoice 

Number 

Invoice 

Reviews Not 

Documented 

PO Review 

Based on 

Incomplete 

Information 

Monthly 

Progress 

Reports Do 

Not Always 

Contain 

Information 

Needed to 

Evaluate 

Invoices 

Rate and 

Mathematical 

Verification 

Were Not 

Performed 

EP-W-07-072 11005 X X 

 11006 X X 

EP-D-06-011 8626 X X 

8634 X X X 

EP-W-06-008 25 X 

2 X 

EP-D-07-102 5-35468-8 X 

5-35468-9 X 

EP-W-06-016 BVN0005 X X X 

BVN0006 X X 

68-W-98-225 269 X X 

271 X X 

EP-W-06-006 A026 X 

A030 X X 

EP-W-07-022 262-001-005 X X 

 262-015-002 X X 

EP-R9-08-01 2 X 

1 X X 

EP-R9-07-02 10 X X X 

11 X X X 

Totals 12 6 4 16 

Source: OIG review of 10 sample contracts, and 2 recent invoices for each contract 

17
 
 

 

09-P-0242 

Appendix C 

Agency Response to Draft Report 

September 16, 2009 

MEMORANDUM 

SUBJECT: Response to Draft Audit Report: Contractor Invoice Internal Controls 

Improvement, Project OA-FY08-0373 

FROM: Craig E. Hooks 

 Assistant Administrator 

TO: Janet Kasper 

Director, Contracts and Assistance Agreements 

Office of the Inspector General 

We appreciate the opportunity to comment on the report entitled “Contractor Invoice 

Internal Controls Need Improvement,” dated August 10, 2009. Our comments on the report and 

recommendations are below: 

Recommendation 2-1 - We recommend that the Assistant Administrator (AA) for the 

Office of Administration and Resources Management (OARM) modify the Contract 

Management Manual (CMM) to require the use of the checklist for invoice reviews the 

contracting officer representatives (CORs) perform, and for CORs to receive invoices and 

supporting documentation to assist their reviews. 

Response - We agree that the CMM needs to be modified to better define documentation needs 

at two levels: first, the supporting documentation that needs to be supplied by the contractor to 

assist the COR in invoice reviews; and secondly, the documentation that the COR needs to 

prepare to prove that a sufficient invoice review has been performed. We will encourage CORs 

to use the checklist if it is applicable to their specific contract. However, that particular list is not 

suitable for all contracts or all invoices. For cases where it does not apply, we will define the 

specific documentation that the COR needs to prepare to properly document that an invoice 

review has been performed. We propose to develop the new documentation definitions by 

December 31, 2009, which we will promulgate via an Interim Policy Notice. (Formal CMM 

revisions generally take about 6 months to complete.) 

18
 
 09-P-0242 

Recommendation 2-2 - We recommend that the AA for OARM require contractors, where 

the progress report and invoice do not cover the same time period, to revise their progress 

reports to match the time period of the invoice. 

Response - We concur with this recommendation. EPA’s contracting officers (COs) will notify 

their contractors of this requirement, via a written letter, by December 31, 2009. In cases where 

the contracts do not contain the requirement that progress report and invoice periods match, the 

contracts will be modified. 

Recommendation 2-3 - We recommend that the AA for OARM reassign the responsibility 

for math and rate verification on contractor invoices to project officers (POs) and CORs, 

and update the CMM accordingly. 

Response - While we agree that math and rate verifications on invoices are an important internal 

control that should be required, we believe that assigning responsibility for these reviews needs 

to be further discussed. In some case, the PO or COR is the most logical candidate to perform 

such checks; in other cases, OCFO-RTP may be in a better position to do so. We suggest that 

you modify your recommendation and remove the identification of a specific party as being 

responsible in all cases. We need to discuss this issue with OCFO in greater depth, and will do 

so by November 30, 2009. Once this discussion has been held, we will respond to this 

recommendation accordingly. 

Recommendation 2-4 - We recommend that AA for OARM require that the COs perform 

periodic reviews to make certain that POs and CORs are: (a) implementing changes to the 

CMM made in response to the audit report; and (b) requiring contractors to submit 

invoices and progress reports with matching periods of performance. 

Response - We agree with these recommendations. These reviews will be carried out in each 

COs annual review of invoices as required by their Division’s or Region’s Quality Assessment 

Plan (QAP). The QAP policy will be modified accordingly in EPA’s Acquisition Handbook, by 

December 31, 2009. 

Recommendation 3-1 - We recommend that the AA for OARM analyze financial 

monitoring reviews to identify findings that are recurring on multiple contracts. 

Response - We agree with this recommendation. The analysis will be completed by November 

30, 2009. 

Recommendation 3-2 - We recommend that the AA for OARM develop a corrective action 

for addressing the common findings identified in financial monitoring reviews. 

Response - We concur with this recommendation. The corrective action plan will be developed 

by December 31, 2009. 

19
 
 09-P-0242 

Should you have any questions regarding this response, please contact John Oliver in the 

Office of Acquisition Management, at (202) 564-4399. 

cc: John Gherardini 

 Cris Thompson 

 Joan Wooley

 John Oliver 

 Yvonne Stiso 

Elena de Leon 

 Bernie Davis-Ray 

 Sandy Womack-Butler 

 Brandon McDowell 

20
 
 09-P-0242 

Appendix D 

Distribution 

Office of the Administrator 

Assistant Administrator for Administration and Resources Management 

Acting Chief Financial Officer 

Acting Director, Office of Acquisition Management 

Agency Follow-up Official (the CFO) 

Agency Follow-up Coordinator 

Acting Director, Office of Financial Management 

Acting Director, Office of Financial Services 

General Counsel 

Associate Administrator for Congressional and Intergovernmental Relations 

Associate Administrator for Public Affairs 

Audit Follow-up Coordinator, Office of Administration and Resources Management 

Acting Inspector General 

21