Deficiencies Identified in Audits of Subcontractors

Last March, the GAO (Government Accountability Office) issued a report soundly critical of DOE (Department of Energy) contractors' oversight of their subcontracts. GAO found that DOE did not always ensure that contractors audited their subcontractors incurred costs as required by contract terms. GAO's review of 43 incurred cost assessments and audit reports identified more that $3.4 billion in subcontract costs had not been audited and some subcontractors remained un-audited or un-assessed for more than six years (important due to the six-year statute of limitations. You can read our recap of that report which includes a link to the full GAO report here. GAO made a number of recommendations including one that would have DOE develop procedures to require its offices to step up its monitoring activities of prime contractors responsibilities to audit their subcontracts.

Last week, DOE's Office of Inspector General (OIG) issued its own report on this matter - focusing on its largest contractor, Bechtel National. Bechtel National is the prime contractor for DOE's $16.8 billion waste treatment plant that began in 2000 and is still under construction. Since inception, Bechtel has paid nearly $2 Billion in reimbursements under 400 flexibly-priced subcontracts. Bechtel's contract requires it to either conduct audits of subcontractors' costs or arrange for such an audit to be performed by the cognizant Government audit agency through the contracting officer.

You can probably guess what's coming. The OIG "determined" that Bechtel has not been fulfilling the requirement withing its contract to audit flexibly-priced subcontracts. Specifically, thee OIG found that since contract inception (2000), a significant number of flexibly-priced subcontracts have not been audited. The OIG also found that the few audits that have been performed have not always been effective or reliable. In fact, Bechtel did not even have an accurate inventory of subcontracts subject to audit. The OIG concluded that these deficiencies increased the risk of passing on unallowable costs from its subcontractors to DOE and ultimately the taxpayer.

The OIG's finding of ineffective and unreliable audits were based on findings from Bechtel's corporate internal audit staff and reviews by DOE that the audits did not comply with GAGAS (Generally Accepted Government Auditing Standards) and that there were deficiencies in performing the audits. GAGAS deficiencies included independence, auditor qualifications and continuing education, quality control and assurance, audit planning, supervisory review, and documentation of audit planning and results.

The OIG made a number of recommendations to which Bechtel concurred.

The full DOE-OIG audit report can be accessed here.