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).
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.
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.
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.
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.
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.
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