Friday, March 22, 2019

Defense Department Fails its Audit

Last November, the Pentagon announced that it had failed its financial audit - the first audit that it ever had to undergo. The auditors hired to conduct the audit "disclaimed" an audit opinion meaning they were unable to render an opinion because the records were, in some cases unavailable, and in other cases, nonexistent.

The Defense Department has struggled for many years to comply with the law that mandates an audit. It is the largest of all Federal agencies with more than $2.7 trillion in assets and more than two million personnel working all over the world.

One of the problems is that the military was not built for accountability but was built incrementally over time to win wars. Today, it finds itself composed of a multitude of overlapping and diverse financial and inventory systems and processes.

We do not know what the final cost of the audit totaled. One estimate last year was $918 million - $367 million for the audit and $551 million to correct problems disclosed by the audit (that's enough to buy nine F-35 fighters).

The Heritage Foundation made the following recommendation concerning future audits of the Defense Department:
To make the audit more effective, Congress must take the lead. Lawmakers must engage with  the Pentagon and, together with the Federal Accounting Standards Advisory Board, implement commonsense changes to the audit. For example, Congress could remove non-value-added areas such as balance-sheet valuation and accounting for the existence and completeness of major military equipment - an area in which no problems were found in the 2018 audit.
It would probably be an unsuccessful defense for contractors to cite DoD's failure to pass an audit as justification for its own deficiencies. We don't think that contract auditors will buy the argument that we are no worse than you are.


Thursday, March 21, 2019

Stipends Paid for Business Use of Personal Cell Phones

We recently encountered a situation where a Government contracting officer questioned stipends paid to two employees to cover the business use of their personal cell phones. We do not know whether the contracting officer is acting on recent guidance or if he/she is acting on his/her own accord. We did note that the challenge was made without benefit to a regulatory basis such as the FAR Part 31 cost principles.


Contrary to this particular contracting officer's challenge, the practice of paying a stipend to employees for business use of personal cell phones is very common among small businesses and small business Government contractors. Paying stipends for such use benefits the Government because the cost of a stipend is usually significant less than the cost for the contractor to purchase a separate cell phone plan and assign it to the employee. It also benefits the employee who otherwise, would need to carry around multiple cell phones. Stipends do not represent windfalls to employees. Using personal phones for business use often requires employees to increase their usage limits at extra cost. A stipend then is simply a reimbursement for business expenses borne by the employee(s). Stipends for business use of personal cell phones is very similar to someone using their POV (privately owned vehicle) for business use and obtaining reimbursement from their employer. No one has ever questioned the propriety of that.

The questions that contractors should ask themselves before paying stipends are these:
  1. Is a cell phone necessary for the conduct of contractor business?
  2. If yes, is the employee willing to use his/her personal cell phone for business purposes in exchange for a stipend?
  3. If yes, is the stipend reasonable, that is, is it less than the cost of a company sponsored plan?
The costs, whether in the form of a stipend or a new business-only service must be allocated correctly. A determination needs to be made whether to charge the costs direct to a contract or to an indirect cost pool for allocation across multiple cost objectives.

Unless the employee remains tethered to a desk full time, the practicalities of a cell phone should be rather obvious. Cell phones make employees more efficient in a lot of ways. They can conduct business while driving between clients. They can conduct business during down time. They can return phone calls more expeditiously and not have to wait until they return to their desks before checking messages.


Are we off base here? Let us know.

Wednesday, March 20, 2019

Internal Control Noncompliances in Purchase Card Program

Just like commercial companies including Government contractors, the U.S. Government issues purchase cards to selected employees to streamline the acquisition process. Purchase cards provide a low-cost, efficient way to obtain goods and services directly from vendors. All companies have (or should have) effective internal controls to manage the cards and ensure the propriety of purchases paid through such cards. Larger companies often have internal audit departments that periodically assess employee compliance with such controls. Smaller companies may not have the resources available to dedicate to such internal auditing. As a result, they may be at more risk for fraud, waste, and abuse than larger companies. No company (or Government contractor) that we know of shares the results of their internal auditing publicly. So we never really know the effectiveness of controls put in place by contractors or the level of compliance achieved. We don't have that problem with internal audits by Government entities. Most of their internal control reports are available to the public. And these reports are often instructive for companies to review and find out what works and what might not be effective when it comes to protecting company assets.

The State Department's Office of Inspector General recently concluded an audit of the Department's purchase card program to determine whether (i) card holders used their Government card only for purchases allowed by laws and regulations, (ii) card holders recorded purchases, documented purchases, and reconciled monthly statements as required by Department policy, and (iii) the Department administered the purchase card program in accordance with established policies. Contractors with purchase card programs should study this report and assess their level of vulnerability in inappropriate purchasing.

The IG reviewed 580 purchase card transactions selected from nearly 2,000 State Department card holders and noted only 17 exceptions. Three purchases had been split into six separate transactions to circumvent micro-purchase limitations. Eleven transactions were used to inappropriately pay for catering services. Most notably however, the IG did not find any instances of cardholder fraud, wast or abuse.

The IG did find that record keeping was a mess. They found that 27 percent of the 580 transactions were missing one or more pieces of required documentation and nine percent failed to provide evidence that monthly statements were reconciled (as required). These record keeping deficiencies were attributable to the fact that cardholders did not maintain required documents.

Had this failure occurred at a Government contractor, there wold be a strong likelihood that contract auditors would have questioned the costs for lack of support and equally likely that the contracting officer would have sustained the finding. Would you want that to happen?

Read the full State Department report here.

Tuesday, March 19, 2019

GAO Criticizes DOE for Subcontractor Oversight Practices

Prime contractors are responsible for oversight of their subcontracts. That is a well grounded and established principle of Government contracting. The Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) dedicate a significant number of resources to ensuring the propriety of subcontract costs passed along to the Government through prime contractor billings. These include pre-award policies and procedures involving purchasing systems and consent to subcontract requests all the way to incurred cost audit procedures.

The GAO was asked to review contracting at DOE, the largest civilian contracting agency where 90 percent of their appropriations are spent on contracts. The review focused on (i) the parties that participated in DOE's largest prime contracts and the extent to which they subcontracted their work, (ii) the extent to which DOE ensured that those contractors audited subcontractors' costs, as required, and (iii) the extent to which DOE ensured the contractors met other subcontract oversight requirements.

GAO reviewed the 24 largest prime contracts which totaled $23.6 billion in fiscal year 2016 obligations. Of that $23.6 billion, prime contractors subcontracted about $6.9 billion (30 percent) to thousands of subcontractors.

GAO found that DOE did not always ensure that contractors audited subcontractors' incurred costs as required in their contracts. GAO's review of 43 incurred cost assessment and audit reports identified more than $3.4 billion in subcontract costs that had not been audited and some subcontractors remained unaudited or unassessed form more than six years (important due to the six year statute of limitations).

GAO blamed this lax oversight on DOE headquarters lack of procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the six year statute of imitation period preventing DOE from recovering those costs.

GAO made several recommendations that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits. DOE concurred with most of the recommendations.

You can read the full GAO report here.

Monday, March 18, 2019

Bid Protest Costs must be Adequately Supported to be Reimbursable

When companies are successful in winning a bid protest before the GAO (Government Accountability Office), the GAO often also recommends that the successful protester be reimbursed reasonable costs of filing and pursuing its protest. Such a recommendation to reimburse successful protesters however, is not a blank check. A protester seeking to recover the costs of pursuing its protest must submit sufficient documentation to support its monetary claim.

Although the GAO has recognized from time to time that the requirement for such documentation may entail certain practical difficulties, it does not consider it unreasonable to require a protester to document in some detail the amount and purposes of activities associated with the claimed effort and establish that the claimed hourly rates reflect the concerned individuals' actual rates or compensation. Ultimately, the burden is on the protester to submit sufficient evidence to support its claim. That burden is not met by general, inadequately-supported statements that particular costs have been incurred.

A company name AeroSage LLC learned about the need to adequately support its claim the hard way. AeroSage won its bid protest and was invited by GAO to submit a proposal for its cost in pursuing the protest. AeroSage submitted a claim totalling $26 thousand. Ultimately, all it got was the $350 EPDS (Electronic Protest Docketing System) fee. AeroSage's claim consisted primarily the hours incurred by its President in pursuing the bid protest (110 hours) at $250 per hour. The problem for AeroSage however was that there was no data to back up the number of hours or the hourly rate other than general statements that the amounts represented accurate data or data that was inconclusive as to its relevance to the claim.

The full GAO decision can be found here.