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Audit Report - A-13-96-00609


Office of Audit

Review of the Social Security Administration’s Office of Acquisition and Grants Contract Preaward and Contract Close-out Reviews - A-13-96-00609 - 9/06/97

This final report presents the results of our audit of the Social Security Administration`s (SSA) contract preaward and contract close-out activities as performed by the Office of Acquisition and Grants (OAG). OAG includes an audit team that provides contract audit and accounting services. These services range from the verification of cost factors (a preaward audit activity) to helping ensure the contract file is properly documented and costs are allowable after the contract has been completed (a contract close-out activity).

In assessing OAG`s performance of SSA`s preaward and contract close-out reviews, we found OAG was performing audit functions without proper authority or standing as an audit organization. The Social Security Independence and Program Improvements Act of 1994 established the Office of the Inspector General (OIG). OIG, including its recognized audit function, was transferred from the Department of Health and Human Services (HHS) to SSA. OIG is responsible for conducting and directing audits of SSA’s operations.

In performing field audits, OAG’s work conflicts with organizational responsibilities of OIG and provisions of HHS regulations that remain applicable to OAG operations. HHS Acquisition Regulations (HHSAR) require that when an audit is warranted, the contracting officer should request an audit directly from OIG. We found that field audits were not always requested from or with the concurrence of OIG.

During the course of our review, we discussed the issue of directing and conducting audits with OAG. In cooperation, we drafted a Memorandum of Understanding (MOU) on the respective roles of OAG and OIG for performing audits of contracts and grantees. Of particular interest to OIG was OAG’s performance of audits that should have been referred to OIG. Through a collaborative effort of OAG and OIG staff, the parties agreed that OAG will discontinue performing field audits of contracts and grantees and will refer the related audits to OIG. OIG will either perform the audits or refer them to another audit entity.

However, there are several additional issues that were not resolved by the MOU. First, OAG continues to classify certain employees as auditors. We believe that these employees should not perform audits and, therefore, should not be classified as auditors. Second, we found that OAG was not completing contract close-outs in a timely manner. As a result, final payments to contractors or recoveries of overpayments could have been delayed. We recognize that some causes of the delays were out of SSA`s control. However, we believe closer coordination between the participants in close-out activities is needed if SSA is to strive toward meeting the mandated time frame for completing contract close-outs for reimbursable contracts.

As such, we recommend that SSA:

  • request its Office of Personnel (OP) to review the classification of OAG auditors to reflect their authorized duties;
  • direct OAG to discontinue the practice of referring to its contract support functions as audit functions; and
  • improve the timeliness of contract close-outs by improving the coordination between participants in close-out activities.

In SSA’s response to our report, the Agency disagreed with our recommendation to have OP review the OAG auditors’ classifications. OAG stated OP believes the positions are properly classified based on the position descriptions. We contend that the actual job functions resemble those of a Contract Cost/Price Analyst (GS-1102). Cost/Price Analysts are excluded from the Office of Personnel Management’s (OPM) standards for the auditor series. Therefore, we believe an OP reassessment of OAG’s job functions (which will exclude performing audits) would result in a different classification that more accurately reflects their job function. The Agency will consider changing the organizational title of the OAG Audit Team to the Contract Cost and Pricing Team to address our second recommendation. Finally, SSA agreed to take measures to ensure that contract close-outs are completed timely. (Refer to the section entitled Agency Comments and OIG Response).

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BACKGROUND

OAG serves as SSA`s principal buyer of products and services and administrator of SSA grant programs. It also develops and implements policies, procedures, and directives for SSA`s acquisition and grant activities. In Fiscal Year (FY) 1995, over $336 million was obligated by OAG by awarding 7,905 acquisition actions. In addition, almost $81 million was obligated by other SSA components for 152,437 actions. Although OAG handled only 4.9 percent of the total actions, it was responsible for awarding 80.6 percent of SSA`s total acquisition obligations. OAG`s Office of Acquisition Support provides SSA components with support services, which include development of acquisition policies and procedures, coordination of the Agency`s acquisition planning process, performance of acquisition status reporting, and provision of cost analysis services.

OAG has a seven-member component which provides cost analysis services. OAG describes the core function of this cost analysis group as providing audit, accounting, and financial advisory services in support of the negotiation, administration, settlement, and close-out of SSA contracts. (Close-out procedures help ensure the contract file is properly documented and the contract has been completed correctly.) These services include:

  • preaward audit/cost and price analysis,
  • development of cost models/tables,
  • participation in negotiations,
  • review of financial capability statements,
  • review/approval of public vouchers for cost-type contracts, and
  • close out of completed contracts.

The OAG cost analysis group also audits grantees` indirect cost rate proposals and participates in the negotiation of indirect cost rates.

OAG reported that during FY 1995, the cost analysis group had:

  • performed forward pricing audits for which it estimated cost avoidances of $10.1 million, representing funds which were put to better use;
  • identified a total of $253,013 in overpayments of unallowable costs relating to the close-out of completed cost plus fixed fee contracts;
  • performed 583 proposal evaluations representing more than $7.4 billion in total evaluated costs;
  • reviewed 421 public vouchers totaling more than $40.7 million relating to cost-type contracts; and
  • issued 325 audit reports concerning a variety of audits, cost/price analyses, and financial support services.

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SCOPE

Our audit of SSA`s contract preaward and contract close-out functions was performed in accordance with generally accepted government auditing standards. Our review focused on OAG`s work in performing SSA`s preaward and contract close-out reviews. Our objectives were to assess:

  • management oversight of the OAG cost analysis group’s activities; and
  • review procedures for timeliness, accuracy, and comprehensiveness.

For our survey work, we segmented the OAG cost analysis group’s activities in accordance with the categories listed in the group’s assignment log. As a result of our survey, we found no reason to extend our audit procedures into the areas of preaward cost and price analysis, cost models and tables development, financial capability review, and miscellaneous activity except as to how they pertained to audit activity. We reviewed: (1) a cross-section of the report folders listed in the FY 1994 OAG cost analysis group’s assignment log; (2) the report folders of contract close-out reviews completed during FYs 1993, 1994, and 1995; and (3) the job descriptions of the OAG cost analysis personnel to determine what audit services were being provided. We also reviewed applicable sections of the Federal Acquisition Regulation (FAR), HHSAR, and the Inspector General Act of 1978, as amended (IG Act) to ascertain the regulations governing contracting activity. Additionally, we reviewed OAG’s acquisition instructions and interviewed OAG staff to gain an understanding of their processes and/or procedures. Furthermore, we reviewed OAG annual reports for FYs 1994 and 1995 to verify the reported achievements of OAG.

Our work was conducted at SSA Headquarters in Baltimore, Maryland, from July 1995 to May 1996. Appendix C identifies the SSA component reviewed.

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RESULTS OF AUDIT

Our audit of SSA`s contract preaward and contract close-out function identified some OAG operations that were being performed in conflict with Federal regulations. Specifically, OAG:

  • performed tasks that were outside the scope of its authorized duties;
  • did not always refer the specified contracts to OIG for close-out audits; and
  • did not perform contract close-outs in a timely manner.

OAG Performed Tasks Outside the Scope of Its Authorized Duties

Our review of OAG activities showed OAG performed audits. The IG Act grants authority to conduct audits to the OIG. Specifically, section 4 of the IG Act provides that, with respect to the Agency in which the office is established, it is the duty and responsibility of each Inspector General (IG) to:

  • provide policy direction for, and conduct, supervise, and coordinate audits relating to the programs and operations; and
  • recommend policies for, and conduct, supervise, or coordinate other activities carried out or financed by such an agency for the purpose of promoting economy and efficiency, or preventing and detecting fraud and abuse.

In accordance with the IG Act, the authority and responsibility for SSA`s audit activity should reside with OIG. In response to our inquiry concerning the source of OAG’s audit authority, OAG cited part 15 of the FAR system as the source of its audit authority. However, our review of FAR determined it did not call for the establishment of an audit organization. Without a legal foundation authorizing the conduct of audits, we believe OAG does not have the audit authority of organizations such as OIG.

In addition, by conducting audits OAG did not follow a provision of HHSAR [304.870(c)(4)]. HHSAR states: "When an audit is warranted prior to closing out a contract, the contracting officer should request the audit directly from the Department of Health and Human Services, Office of Inspector General, Office of Audits."

OAG performed audits of contractors. We reviewed all 23 of the contract close-outs performed during FYs 1993, 1994, and 1995 and judgmentally sampled 4 of OAG’s 39 "miscellaneous" assignments performed during FY 1994 to determine the source of any audit work. Our review found four cost audits performed by OAG of contracts awarded in amounts varying from $409,000 to $9.7 million. Three of the audits were conducted for close-outs and the fourth was a miscellaneous assignment. OAG contends that these audits were performed with the agreement of HHS, OIG. Our review of that agreement revealed that OAG was only authorized to do desk audits, not field audits.

When authorized, a desk audit may be performed by the contracting officer, or the contracting officer’s designee, in lieu of an actual audit by an accredited audit organization. A desk audit is the review of a contract file to determine the amount to be paid under the contract based on knowledge of appropriate contract cost principles and the contractor’s accounting and billing procedures. A field audit, which would include an examination of the contractor’s internal control system and accounting records, is needed to verify a contractor’s actual costs under a contract.

Prior to April 1995, SSA was an operating division of HHS. As an HHS division, SSA was one of several components vying for scarce HHS audit resources. Some SSA requests for audit services, including audits required by HHSAR and requested by contracting officers, were denied by HHS. Consequently, OAG developed an operating protocol that included requests for audit services directly from OAG to the Defense Contract Audit Agency (DCAA) and the performance of audits by OAG. However, SSA is now an independent agency with a legislatively mandated OIG. The MOU that is being developed between OAG and OIG will eliminate the need for OAG to request audit services from DCAA and to perform audits. Additionally, having two audit groups would represent a duplication of resources and effort.

Also, classifying OAG staff as GS-511 auditors and presenting the results of its price/cost analyses as audit reports inappropriately gives the appearance that OAG is an authorized audit organization. The majority of the OAG cost analysis group`s work was price/cost analysis, not auditing. We believe OAG should assign a more appropriate classification series to its cost analysis personnel and not describe its price/cost analyses as audit results.

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Nonreferral of Required Cases to OIG

OAG did not refer all required contract close-out audits to OIG as mandated by HHSAR. For cost reimbursement type contracts, HHSAR [304.870(c)(1)] states:

"Field audits will be conducted for contracts in excess of $500,000 awarded to commercial organizations and nonprofit organizations . . . for which an agency other than HHS has audit cognizance. Field audits will also be conducted each year on approximately 25 of the same type contractors for which HHS has audit cognizance." HHSAR [304.870(c)(4)] states: "When an audit is warranted prior to closing out a contract, the contracting officer should request the audit directly from the Department of Health and Human Services, Office of Inspector General, Office of Audits."

We found that a $33 million contract was finalized without an audit of all the costs of the prime contractor and its subcontractors. The costs of the prime contractor were audited by DCAA. However, DCAA assist audits of the subcontractors were not included in their work. DCAA provided data on the indirect costs, but did not audit the claimed direct costs for one subcontractor. Similarly, DCAA provided only partial audit coverage for three of the remaining subcontractors who were paid a total of $2.5 million on the contract. OAG should have requested additional audit coverage from OIG. Instead, OAG used available cost data and alternative methods to: (1) determine the missing final cost rates and allowable costs, and (2) close out the contract.

In another case involving a $3.8 million contract, a field audit of direct costs was performed by OAG rather than referring it to OIG. When OAG performs audit activity without proper audit authority, SSA does not have the required audit assurances that the work was performed in accordance with audit standards.

OAG did not refer contracts to OIG for contract close-out audits because it perceived itself as a legitimate audit organization and believed that it had been given authority to perform field audits in a February 1, 1994 memorandum from the Division of Acquisition Policy and Oversight, Office of Grants and Acquisition Management (OGAM), Assistant Secretary for Management and Budget (ASMB), HHS. Additionally, OAG felt that it could, at times, perform audits more timely than DCAA or OIG. However, the ASMB memorandum indicated that the Contract Audit Users Work Group would select the contracts to be audited. Also, the memorandum only authorized components to perform desk audits, not field audits of contractors.

The MOU between OAG and OIG will contain a provision that OAG will request audit services from OIG. OIG will either perform the audits or refer them to another audit entity.

Contract Close-outs Not Completed Timely

We reviewed OAG’s compliance with provisions of HHSAR [304.804-1(3)] requiring completion of contract close-outs within prescribed time frames. HHSAR requires close-out of cost reimbursement type contracts within 20 months after the contracting officer receives evidence that the contract has been physically completed. Only 1 of the 23 contract close-outs performed during FYs 1993 through 1995 met that criterion. The others were completed in a range from 24 to 100 months.

The following chart illustrates the average number of months to complete contract close-outs.

AVERAGE MONTHS TO COMPLETE
CONTRACT CLOSE-OUTS

FISCAL YEAR
NUMBER OF MONTHS
1993

60.0

1994

46.1

1995

54.4


An October 5, 1982 memorandum from the HHS Deputy Assistant Secretary for Procurement, Assistance and Logistics, incorporated into HHSAR, advises that the cost/benefit ratio of audits decreases with the age of the records to be audited. Audits are not recommended for contracts if more than 5 years have elapsed after the physical completion of the contract without the initiation of an audit.

OAG often attributed the lack of timeliness in contract close-outs to delays in receiving audit results from DCAA on final indirect cost rates. OAG delayed final settlement with contractors until it received these final indirect cost rates. We recognize that delays in receiving audit results from DCAA were out of OAG`s control. However, we believe that better coordination between the participants in close-out activities can help to meet the 20-month time frame for completing contract close-outs of reimbursable contracts.

OAG maintains a record of reimbursable contracts and their expected completion dates. Contracts can be referred for close out in a more timely manner. A review of the 23 contract close-outs revealed that the number of months that elapsed between the completion of the contract and receipt of the contract from the contracting officer for close out varied from 1.5 months to 77.5 months and averaged 21 months.

We reviewed seven contracts on a list of completed contracts but not on the list of contracts in close-out processing to determine the causes for the delays. Our inquiries of contracting officers and cost analysis personnel designated to perform close-out activities determined that three of the contracts had been forwarded for close out. They were not on the close-out list because of timing differences or unknown causes. Four of the seven contracts had not been referred for close out at the time of our March 1996 inquiries. One of the four contracts had not been completed and was not eligible for close out. Another, completed on June 30, 1995, was awaiting submission of the final invoice from the contractor. The remaining two, although ready for close out, had not been forwarded by the contracting officers. One contracting officer had been transferred and appeared to have lost track of the contract which had been completed on May 31, 1994. A second contracting officer explained that higher priority work was the reason the contract completed on March 29, 1995 had not been forwarded for close out.

The cost/benefit ratio of close-out audits drops rapidly with the passage of time. The time and effort needed to retrieve aged data impairs the ability to audit costs and increases the cost of performing the audit. Data may have to be retrieved from storage, thereby raising the cost of obtaining the data. The passage of time also increases the odds that some data may be lost. Missing data will become harder, or impossible, to recreate as it ages. As such, timeliness is critical to the ability to audit contract data.

Better coordination between OAG contract close-out personnel, contractors, and OIG auditors would enable SSA to move toward meeting the established time frame for completing contract close-outs for reimbursable contracts.

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RECOMMENDATIONS

We recommend that SSA:

  • request its OP to review the classification of OAG auditors to reflect their authorized duties;
  • direct OAG to discontinue the practice of referring to its contract support functions as audit functions; and
  • improve the timeliness of contract close-outs by improving the coordination between the participants in close-out activities.

Agency Comments and OIG Response

The Agency provided comments in response to our draft report, dated July 29, 1997.

The Agency disagreed with our recommendation for SSA to request its OP to review the classification of OAG auditors to reflect their authorized duties. SSA cited two reasons why they believed an assessment was not required:

  • OP staff have indicated that OAG auditors are properly classified by position title and series based on their position description; and
  • Many staff belong to professional organizations and have attained various accounting and auditing certifications.

The job functions of the OAG auditors resemble the duties and responsibilities of a Contract Cost/Price Analyst (GS-1102). OPM guidance for the auditing series specifically excludes individuals performing contract cost/price analysis from the GS-511 (auditor) series. Contract Cost/Price Analysts, as well as others, are excluded from the auditor series because the duties require less than full professional knowledge of accounting and auditing and have a subject matter field as the paramount qualification requirement. That is, the individuals must have knowledge of contracting regulations, but not necessarily accounting and auditing. While the position descriptions may be written to support a GS-511 (auditor) classification, the actual job functions of the OAG auditors are more related to contract cost and price analysis. Therefore, we still contend that OP should assess the job functions of the OAG auditors.

Second, the professional organizations to which some of OAG’s staff belong and their professional certifications have no bearing on the job functions they perform or the related job classification. Since the Agency has agreed to consider changing the OAG Audit Team’s title to the Contract Cost and Pricing Team, we believe the job title of auditor would be contradictory to the actual job functions and title of the component. Furthermore, because the OAG auditors will no longer engage in audits, we believe that an official review of the OAG job functions will result in a position description resembling that of a Contract Cost/Price Analyst.

To address our second recommendation, SSA stated that they will consider changing the title of the OAG Audit Team to the Contract Cost and Pricing Team. While they do not intend to change the position descriptions, we believe the work performed is commensurate with that of a Contract Cost/Price Analyst.

While the Agency agreed with our final recommendation, they also provided additional comments related to the following:

OAG’s Performance of Tasks Outside the Scope of Its Authorized Duties

While OAG may have believed they were authorized to perform desk and/or field audits, there are two factors we believe support our position. First, we identified no law or regulation granting field audit authority to OAG. Second, the cited memorandum does not give OAG authority to perform field audits. The memorandum clearly states that "contracts that are not selected for audit may be closed on the basis of a ‘desk’ audit." In addition, OAG’s operating procedures only address desk audits--not field audits. As such, we contend that OAG’s performance of field audits was outside the scope of its authorized duties. As stated in the report, the IG Act and the HHSAR clearly give responsibility for performing field audits to OIG; therefore, we believe these laws and regulations take precedence over any procedures OAG may have unilaterally implemented.

In addition, we edited the report to reflect the range of contracts for which field audits were performed. The figures were changed from "$611,000 to $9.7 million" to "$409,000 to $9.7 million." We believe this correction will alleviate any misunderstandings about the contracts to which we referred.

Nonreferral of Required Cases to OIG

SSA contended that the two contracts cited in the draft report did not have to be referred to OIG. For the first contract, totaling $33 million, SSA believed that the contract did not have to be referred because all the costs were audited either by field audits performed by DCAA or desk audits performed by OAG.

To the contrary, the audit evidence obtained during our review supports the statements contained in our report. The contract close-out report for this contract indicated that:

  • DCAA did not audit direct or indirect costs for a subcontractor paid $9.2 million.
  • Information concerning indirect costs was obtained from DCAA, but direct costs were accepted on the basis of an audit conducted by the contractor of the subcontractor.
  • For a second subcontractor paid $1.4 million, the OAG report stated that DCAA did not include the SSA contract in its review and did not provide any information on questioned direct costs. For close out purposes, OAG assumed that the subcontractor’s voluntary disallowances were based on application of past DCAA audit findings.

The application of desk audits to the amounts in question contravenes the provisions of the HHSAR as noted above in the report. In addition, the HHS Project Officers’ Contracting Handbook reaffirms the provision in a discussion of audit requirements for contract close-outs. The handbook states that when a contract is below a certain limit (currently $500,000), ". . . a desk audit may be performed by the contracting officer in lieu of an actual audit conducted by the HHS Audit Agency." When a contract exceeds that amount, ". . . a verification of actual costs must be made by the HHS Audit Agency or the Defense Contract Audit Agency for cost-type contracts. . . ."

In reference to the second contract cited in the draft report, SSA said that OAG was required to perform the field audit because the contract did not meet certain criteria established by the HHS OGAM, but fails to cite the criteria that it thought it was to follow. Our reading of the OGAM memorandum determined that OAG was to submit all contracts deemed to be in need of an audit to an audit committee. The audit committee would determine which contracts could be audited because budgetary and resource limitations made it impossible to conduct all the required audits. The contracts the committee did not select for audit could be closed on the basis of desk audits subject to any later on-site audit findings. The memorandum did not authorize SSA or any other component to perform audits.

Contract Close-outs Not Completed Timely

In attempting to explain why contract close-outs were not completed within the prescribed time period, SSA stated that only 6 of the 23 contracts reviewed were not under DCAA cognizance and, therefore, OAG did not have to wait for DCAA audit reports. Further, SSA said that these contracts were closed out in an average of 15 months from the date on which the contracting officer requested the close-out action. SSA indicated that this 15-month average was well within the prescribed 20-month time frame. Based on their comments, it appears that SSA is attributing the delay in closing out contracts to their having to wait for DCAA reports. We recognize the reality of time delays related to DCAA reports. However, we also found that for the 17 contracts handled by DCAA, it took SSA contracting officers an average of 19 months to refer the contracts to OAG for close out. While there was a time delay in receiving reports from DCAA, on average, the 20-month time frame has almost expired before close-out action can begin.

In addition, we found that the 15-month average for the six non-DCAA reports is not an accurate representation of the time taken to close out those contracts. As noted in the report, the HHSAR requirement is that the close-out be completed within 20 months of the contract’s physical completion, which would include the time it takes the contracting officer to provide the contract to the OAG auditors and request the close-out. As indicated above, SSA’s 15-month average is from the time the contracting officer requests close-out to actual completion of the close-out. This time factor does not include the period between physical completion of the contract to the time the contracting officer requests close-out. As such, it fails to provide an accurate assessment of the timeliness of contract close-outs.

One of the contracts not under DCAA cognizance was received by the OAG auditors for close out 2 months after being completed. The close-out was completed within 2 more months for a total of 4 months from completion to close out. The remaining five contracts were received by OAG auditors from the contracting officers in a range of from 10 to 69 months after the contracts were completed. It was another 3 to 35 months before close-outs were completed for these contracts. Therefore, the total time to be applied toward the 20-month time frame ranged from 29 to 79 months for the remaining five contracts not under DCAA cognizance (an average of about 48 months).

SSA disagreed with the idea presented in the draft report that the cost/benefit ratio of close-out audits decreases with the passage of time. Our report cited this concept from the HHS Deputy Assistant Secretary for Procurement, Assistance and Logistics memorandum. This same concept was quoted by OAG in a close-out report to justify not having all the costs of the contract audited. The fact that OAG recovered over $1.2 million in the 23 close-out actions reviewed during our audit does not negate the validity of the concept. Perhaps a greater amount could have been recovered if the close-outs had been completed more timely. Quicker recoveries also prevent interest losses.

- David C. Williams

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APPENDICES

APPENDIX B

MAJOR CONTRIBUTORS TO THIS REPORT

Office of the Inspector General

Albert Darago, Acting Director
Lance Chilcoat, Acting Team Leader
Gale Stone, Team Leader
William Richardson, Auditor

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