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.
Showing posts with label audit. Show all posts
Showing posts with label audit. Show all posts
Thursday, November 21, 2019
Monday, January 15, 2018
What is "Forensic Auditing"
The term "forensic audit" is tossed around a lot these days. The word "forensic" has an ominous ring to it - perhaps because of its use in popular crime shows. Most often, its use is a misuse of the term. Not all audits are forensic audits. In the context of Government contracting, a forensic audit is something that occurs when a contractor is suspected of committing fraud.
A "forensic audit" typically involves an evaluation of a company's financial information for use as evidence in court. It includes investigative activities related to fraud, embezzlement or other financial claims (e.g. claims filed by the Government under the False Claims Act (FCA).
Forensic auditing is a specialization within the field of accounting and auditors are called upon to render expert testimony during trial proceedings. Most large CPA firms have forensic auditing departments. Similarly, DCAA (Defense Contract Audit Agency) has its own cadre of individuals that specialize in forensic auditing.
Most of the Justice Department fraud cases we report on these pages rely on forensic auditing. Of course there is an investigative agency that leads the charge (e.g. FBI, Inspector Generals, NCIS, AFOSI, or CID) but these investigators, in turn, must rely upon the work of experts to prove their case - someone with the expertise, understanding, and experience to determine how irregularities were buried.
The actual auditing process is not that much different than one would find in a financial statement audit or an audit of an incurred cost proposal. There are the typical planning, reviewing and reporting phases. It it pertained to fraud, there would be an attempt to determine impact.
During the planning stage, the auditor defines objectives such as determining whether fraud has been committed, it duration, the parties involved, calculating the loss, and recommending fraud prevention measures. The collection of evidence however is more important and perhaps more disciplined than one would find in a non-forensic audit as it may end up being used in a court case.
The types of fraud typically found in Government contracting involve timecard manipulation, product substitution, bribery, kickbacks, over-billings, and falsification of socio-economic status.
Government contractors have the right to know and understand the scope of any audit. Most contract audits are routine reviews of pricing proposals, progress payment requests, incurred costs, etc. But if an auditor cannot articulate his/her scope or is being evasive or circumspect as to why certain information is being requested, it may be more than a routine audit. That might be a good time to find an attorney.
A "forensic audit" typically involves an evaluation of a company's financial information for use as evidence in court. It includes investigative activities related to fraud, embezzlement or other financial claims (e.g. claims filed by the Government under the False Claims Act (FCA).
Forensic auditing is a specialization within the field of accounting and auditors are called upon to render expert testimony during trial proceedings. Most large CPA firms have forensic auditing departments. Similarly, DCAA (Defense Contract Audit Agency) has its own cadre of individuals that specialize in forensic auditing.
Most of the Justice Department fraud cases we report on these pages rely on forensic auditing. Of course there is an investigative agency that leads the charge (e.g. FBI, Inspector Generals, NCIS, AFOSI, or CID) but these investigators, in turn, must rely upon the work of experts to prove their case - someone with the expertise, understanding, and experience to determine how irregularities were buried.
The actual auditing process is not that much different than one would find in a financial statement audit or an audit of an incurred cost proposal. There are the typical planning, reviewing and reporting phases. It it pertained to fraud, there would be an attempt to determine impact.
During the planning stage, the auditor defines objectives such as determining whether fraud has been committed, it duration, the parties involved, calculating the loss, and recommending fraud prevention measures. The collection of evidence however is more important and perhaps more disciplined than one would find in a non-forensic audit as it may end up being used in a court case.
The types of fraud typically found in Government contracting involve timecard manipulation, product substitution, bribery, kickbacks, over-billings, and falsification of socio-economic status.
Government contractors have the right to know and understand the scope of any audit. Most contract audits are routine reviews of pricing proposals, progress payment requests, incurred costs, etc. But if an auditor cannot articulate his/her scope or is being evasive or circumspect as to why certain information is being requested, it may be more than a routine audit. That might be a good time to find an attorney.
Thursday, June 4, 2015
Obstructing a Federal Auditor Could Cost You Fines and Prison Time
An Army contracting officer working for the Army Contracting Command - Redstone is in a heap of trouble for obstructing a federal auditor. Her arraignment is set for later this month, at which time she will plead guilty.
18 USC 1516 - Obstruction of Federal Audit makes it unlawful to obstruct, or attempt to obstruct a federal auditor. The statute dates back to 1988 during a time when the Government was auditing significant allegations of contractor fraud, waste, and abuse. We don't know how often this statute has been used to prosecute audit obstruction cases but probably not often.
The Statute states:
In September 2011, ACC-Redstone awarded a $9 million task order to Company 1 to perform cockpit modifications on Russian -made Mi-17 helicopters. In April 2011, ACC-Redstone modified the contract by $12.8 million for overhauling five Pakistan Mi-17 helicopters. In May 2011, the defendant modified the contract again, this time adding $9 million for replacement parts in the event that parts on the aircraft could not be overhauled.
In September 2011, Company 2 submitted to Company 1 a list of parts it proposed to provide Company 1 under the parts contract. The proposed price was $7 million. In December 2011, Company 1 submitted submitted to the defendant a proposal to purchase the parts set forth on that list at the quoted prices. Company 1's proposal was in excess of $8 million and consisted of $7 million to be paid to Company 2 plus other fees.
No written analysis was ever performed by Government personnel as to whether the parts on Company 1's December 2011 proposal were needed and/or would be needed and/or whether the prices Company 1 proposed paying Company 2 for those parts were fair and reasonable. The Government paid Company 1 approximately $8 million in 2012.
In December 2011, the Department of Defense Office of Inspector General (DoD-IG) began an audit of the contract to determine whether the Government paid a reasonable price for the parts, whether the parts that were purchased were needed, and whether the contracting officer and contracting personnel followed correct contracting procedures in connection with executing and implementing the parts contract.
Between January and August 2012, the defendant, with the intent to deceive and defraud the US, endeavored to influence, obstruct, and impede a Federal auditor, that is, auditors of the DoD-IG in the performance of their official duties.
In June 2012, the contracting officer directed a contracting specialist to prepare a pre-negotiation objective memorandum and back date it to May 6, 2011 and to prepare a price negotiation memorandum and back date it to May 7, 2011. There were many other altered documents as well. The dates on Company 1's price proposal was altered. So were the dates of a Government technical evaluation.
The statute was originally intended to prevent contractors from obstructing an audit. Here, it has been used to prosecute a Government employee who obstructed an audit.
18 USC 1516 - Obstruction of Federal Audit makes it unlawful to obstruct, or attempt to obstruct a federal auditor. The statute dates back to 1988 during a time when the Government was auditing significant allegations of contractor fraud, waste, and abuse. We don't know how often this statute has been used to prosecute audit obstruction cases but probably not often.
The Statute states:
Whoever, with intent to deceive or defraud the United States, endeavors to influence, obstruct, or impede a Federal auditor in the performance of official duties relating to a person, entity, or program receiving in excess of $100,000, directly or indirectly, from the United States in any 1 year period under a contract or subcontract, grant, or cooperative agreement, ... shall be fined up to $250,000 for an individual or $500,000 for an organization or imprisoned not more than 5 years, or both.
For purposes of this section, the term Federal auditor means any person employed on a full or part-time or contractual basis to perform an audit or a quality assurance inspection for or on behalf of the United States.The defendant was a contracting officer assigned to the Army Contracting Command - Redstone (ACC-Redstone). Company 1 was a US company located in Alabama that contracted with the Government. Company 2 was a Lithuanian company that subcontracted with Company 1.
In September 2011, ACC-Redstone awarded a $9 million task order to Company 1 to perform cockpit modifications on Russian -made Mi-17 helicopters. In April 2011, ACC-Redstone modified the contract by $12.8 million for overhauling five Pakistan Mi-17 helicopters. In May 2011, the defendant modified the contract again, this time adding $9 million for replacement parts in the event that parts on the aircraft could not be overhauled.
In September 2011, Company 2 submitted to Company 1 a list of parts it proposed to provide Company 1 under the parts contract. The proposed price was $7 million. In December 2011, Company 1 submitted submitted to the defendant a proposal to purchase the parts set forth on that list at the quoted prices. Company 1's proposal was in excess of $8 million and consisted of $7 million to be paid to Company 2 plus other fees.
No written analysis was ever performed by Government personnel as to whether the parts on Company 1's December 2011 proposal were needed and/or would be needed and/or whether the prices Company 1 proposed paying Company 2 for those parts were fair and reasonable. The Government paid Company 1 approximately $8 million in 2012.
In December 2011, the Department of Defense Office of Inspector General (DoD-IG) began an audit of the contract to determine whether the Government paid a reasonable price for the parts, whether the parts that were purchased were needed, and whether the contracting officer and contracting personnel followed correct contracting procedures in connection with executing and implementing the parts contract.
Between January and August 2012, the defendant, with the intent to deceive and defraud the US, endeavored to influence, obstruct, and impede a Federal auditor, that is, auditors of the DoD-IG in the performance of their official duties.
In June 2012, the contracting officer directed a contracting specialist to prepare a pre-negotiation objective memorandum and back date it to May 6, 2011 and to prepare a price negotiation memorandum and back date it to May 7, 2011. There were many other altered documents as well. The dates on Company 1's price proposal was altered. So were the dates of a Government technical evaluation.
The statute was originally intended to prevent contractors from obstructing an audit. Here, it has been used to prosecute a Government employee who obstructed an audit.
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