    [Senate Hearing 112-42]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 112-42

                      IMPROVING FEDERAL CONTRACT AUDITING

    =======================================================================

                                    HEARING

                                   before the

                  AD HOC SUBCOMMITTEE ON CONTRACTING OVERSIGHT

                                     of the

                                  COMMITTEE ON
                             HOMELAND SECURITY AND
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                FEBRUARY 1, 2011

                                   __________

                       Available via http://www.fdsys.gov

           Printed for the use of the Committee on Homeland Security
                            and Governmental Affairs

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    66-619                    WASHINGTON : 2011
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    20402-0001

            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   JOSEPH I. LIEBERMAN, Connecticut, Chairman
    CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
    DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
    THOMAS R. CARPER, Delaware           SCOTT P. BROWN, Massachusetts
    MARK PRYOR, Arkansas                 JOHN McCAIN, Arizona
    MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
    CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
    JON TESTER, Montana                  JOHN ENSIGN, Nevada
    MARK BEGICH, Alaska                  RAND PAUL, Kentucky

                      Michael L. Alexander, Staff Director
         Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                      Trina Driessnack Tyrer, Chief Clerk
                Joyce Ward, Publications Clerk and GPO Detailee

                  AD HOC SUBCOMMITTEE ON CONTRACTING OVERSIGHT

                           CLAIRE McCASKILL, Chairman
    THOMAS R. CARPER, Delaware           ROB PORTMAN, Ohio
    MARK L. PRYOR, Arkansas              SUSAN COLLINS, Maine
    JON TESTER, Montana                  JOHN McCAIN, Arizona
    MARK BEGICH, Alaska                  JOHN ENSIGN, Nevada
                         Margaret Daum, Staff Director
                    William Wright, Minority Staff Director
                           Kelsey Stroud, Chief Clerk

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator McCaskill............................................     1
        Senator Brown................................................     4

                                   WITNESSES
                           Tuesday, February 1, 2011

    Thomas P. Skelly, Director, Budget Service and Acting Chief
      Financial Officer, U.S. Department of Education................     5
    Ingrid Kolb, Director, Office of Management, Office of Deputy
      Secretary, U.S. Department of Energy...........................     8
    Hon. Brian D. Miller, Inspector General, U.S. General Services
      Administration.................................................     9
    Patrick J. Fitzgerald, Director, Defense Contract Audit Agency,
      U.S. Department of Defense.....................................    10
    Jeanette M. Franzel, Managing Director, Financial Management and
      Assurance, U.S. Government Accountability Office...............    21
    E. Sanderson Hoe, Partner, McKenna, Long, and Aldridge on behalf
      of the U.S. Chamber of Commerce................................    23
    Nick Schwellenbach, Director of Investigations, Project on
      Government Oversight...........................................    25

                         Alphabetical List of Witnesses

    Fitzgerald, Patrick J.:
        Testimony....................................................    10
        Prepared statement...........................................    55
    Franzel, Jeanette M.:
        Testimony....................................................    21
        Prepared statement...........................................    65
    Hoe, E. Sanderson:
        Testimony....................................................    23
        Prepared statement...........................................    98
    Kolb, Ingrid:
        Testimony....................................................     8
        Prepared statement...........................................    40
    Miller, Hon. Brian D.:
        Testimony....................................................     9
        Prepared statement...........................................    46
    Schwellenbach, Nick:
        Testimony....................................................    25
        Prepared statement...........................................   105
    Skelly, Thomas P.:
        Testimony....................................................     5
        Prepared statement...........................................    37

                                    APPENDIX

    Fact sheet referenced by Senator McCaskill.......................   113
    Questions and Responses for the Record from:
        Mr. Skelly...................................................   117
        Ms. Kolb.....................................................   119
        Mr. Fitzgerald...............................................   123
        Mr. Miller...................................................   130

                     IMPROVING FEDERAL CONTRACTING AUDITING

                                  ----------

                           TUESDAY, FEBRUARY 1, 2011

                                       U.S. Senate,
              Ad Hoc Subcommittee on Contracting Oversight,
                        of the Committee on Homeland Security
                                      and Governmental Affairs,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2:40 p.m., in
    room SD-342, Dirksen Senate Office Building, Hon. Claire
    McCaskill, Chairman of the Subcommittee, presiding.
        Present: Senators McCaskill and Brown.

                 OPENING STATEMENT OF SENATOR MCCASKILL

        Senator McCaskill. The Subcommittee will come to order.
        I am told that Senator Brown is on his way. So we will
    begin, and I am sure he will not mind it if I begin my opening
    statement, and we will have plenty of time for his opening
    statement when he gets here.
        If there is not enough evidence that I am strange, I will
    add more to the record, and that is that we are going to deal
    with two of my favorite topics today, auditing and the
    oversight of contracts.
        This Subcommittee hearing is all about how those two things
    need to be merged together so that we are doing the best job we
    know how to, in fact, manage contracts in the Federal
    Government.
        This is not a gotcha hearing. This is an informational
    hearing. This is a hearing so that we understand what contract
    oversight is ongoing through the very important management tool
    of contract audits.
        Last Congress the Subcommittee held a number of hearings
    that reviewed the fundamentals of contract management and
    oversight across the Federal Government. This afternoon's
    hearing continues that work with an examination of contract
    audits, one of the most important components of effective and
    efficient contract oversight.
        This is a subject which may sound dry to almost everyone
    except those sitting inside this room, and likely some of this
    room would also agree that it is a very dry subject matter, but
    this is essential to good contractor oversight.
        Contract audits help ensure the government gets what it
    pays for and are one of the best weapons the government has to
    safeguard taxpayer dollars against waste, fraud, and abuse.
        Last year the Subcommittee asked for information from 22
    Federal agencies about how they use contract audits. My staff
    has prepared a fact sheet summarizing this information, and I
    ask for unanimous consent that the fact sheet and the
    underlying data be admitted into the record.\1\ I think I have
    unanimous consent.
    ---------------------------------------------------------------------------
        \1\ The information referenced by Senator McCaskill appears in the
    appendix on page 113.
    ---------------------------------------------------------------------------
        The information the Subcommittee received showed that there
    is a wide variation in the agencies' use of contract audits.
    The Defense Department (DOD) which relies on the Defense
    Department Contract Audit Agency (DCAA), to perform audits
    conducted approximately 17,000 contract audits in 2009.
        All of the civilian agencies combined conducted fewer than
    1,800 contract audits; 17,000 in DOD, fewer than 1800 in the
    rest of the government.
        Let us put it another way. The Defense Department conducted
    an average of one audit for every 25 million it spent on the
    contracts. The rest of the government on average conducted one
    audit for every 511 million spent through contracts.
        Of course, there is a lot of variation among the agencies.
    The Department of Energy (DOE), who will testify today,
    conducted one audit for every 82 million in contracts. Another
    witness, the Department of Education, conducted one audit for
    every 1.5 billion spent through contracts.
        I am interested to hear from these witnesses about the
    different approaches their agencies take to contract auditing.
    I am also looking forward to the perspectives of Patrick
    Fitzgerald, the Director of the Defense Contract Audit Agency,
    and Brian Miller, the Inspector General (IG) of the General
    Services Administration (GSA), who can provide expert testimony
    regarding the conduct and the importance of contract auditing
    for the Federal Government.
        Let me pause for a moment and congratulate Brian Miller,
    the Inspector General of GSA, because I realize that today we
    had something that does not happen very often. We had very good
    news about the oversight capacity of the Federal Government.
        Oracle agreed to pay $46 million to settle a kickback
    complaint that came about in part because of the audit work of
    the Inspector General at GSA. A number of computer firms were
    paying government employees to recommend them for IT contracts;
    and in fact, it was the work on contract auditing that exposed
    some of these problems and ultimately brought about a number of
    different actions by the Department of Justice; and today the
    announcement that Oracle is going to repay the Federal
    Government $46 million or repay $46 million for the problems
    that they are responsible for.
        We will also hear testimony on behalf of the Chamber of
    Commerce as well as from the Project on Government Oversight
    and the Government Accountability Office (GAO) who will help us
    take a broader look at this issue.
        I am proud, very proud to be a former government auditor
    and a passionate defender of the importance of auditing but
    that does not mean that I think that more audits alone is the
    answer to good contract management and oversight.
        If the government is going to be a good steward of taxpayer
    dollars, we need to have an integrated comprehensive contract
    management; and everyone involved in the process, from the line
    contracting officials to senior leadership and department
    heads, they need to be involved, engaged, and probably most
    important accountable.
        Auditing is one part of that continuum and I hope that
    today we can have an open conversation about how auditing can
    and should fit into the overall framework of contract
    oversight.
        In a time of scarce government resources and an inadequate
    contracting workforce, the government must evaluate where it is
    most vulnerable and focus resources where they can most
    effectively protect taxpayer dollars.
        I look forward to the witnesses' testimony and the
    opportunity to discuss how we can better use contract audits to
    oversee government contracting and I encourage all of our
    witnesses, particularly the witnesses on the second panel this
    afternoon, to speak frankly and openly about what improvements
    are necessary.
        I was going to compliment Senator Brown right now and I bet
    he would rather wait to be here to hear it. That is a disease
    that most of us have around here. We love to hear good things
    about ourselves. So I will wait to compliment Senator Brown
    when he gets here, and now I will introduce the opening panel
    of witnesses that we will be hearing this morning.
        First, we have Thomas Skelly, who currently serves as a
    Director of Budget Service for the Department of Education and
    has been the Department's Acting Chief Financial Officer (CFO)
    since 2008.
        In that capacity, Mr. Skelly coordinates internal controls
    and audit follow-up and manages contracts and acquisitions for
    the Department.
        He is also responsible for the Department's 77 billion
    annual budget. Mr. Skelly has served as a Federal employee
    since 1974 and is a member of the career senior executive
    service. Welcome, Mr. Skelly.
        Ingrid Kolb has been the Director of the Office of
    Management for the Department of Energy since her appointment
    in 2005. As Director, she is responsible for the Department's
    project and acquisition management.
        Ms. Kolb has served in budget and financial management
    roles for both the Department of Homeland Security (DHS)--that
    is a tough one--and the Department of Energy.
        Prior to joining the Department of Energy, Ms. Kolb was the
    Director of the training and development center at the
    Department of Education.
        Brian Miller has served as the Inspector General for the
    General Services Administration since his conformation by the
    Senate in July 2005. He is also the Vice Chair of the National
    Procurement Fraud Task Force and a member of the Department of
    Justice's Recovery Act fraud working group. Mr. Miller received
    the Attorney General's Distinguished Service Award in 2008.
        Patrick Fitzgerald has served as the Director of the
    Defense Contract Audit Agency since his appointment in November
    2009. As Director, Mr. Fitzgerald is responsible for all
    management and operational decisions at the agency.
        He previously served as the Auditor General for the United
    States Army.
        Before we turn to your testimony, Mr. Skelly, I will tell
    Senator Brown I finished my opening statement, and my last
    paragraph of my opening statement was complimenting you, and I
    said I was going to hold off on the paragraph because I knew
    you would want to be here to hear it.
        Senator Brown. Absolutely.
        Senator McCaskill. I would like to take a moment to
    recognize his contribution to this Subcommittee. There are not
    a lot of people who wake up in the morning excited about
    talking about contract oversight and auditing. So I felt very
    lucky to have the opportunity to work with Senator Brown over
    these months.
        I do not think we know yet for sure who is going to be
    Ranking Member on the Subcommittee for this Congress, but I am
    confident that he and I will continue to work together on
    important oversight issues I hope in this Subcommittee; but if
    not, I know that work will continue.
        And I turn to you for your opening statement.

                   OPENING STATEMENT OF SENATOR BROWN

        Senator Brown. Thank you, Madam Chairman. I apologize for
    being a little late. I lost track of time.
        First of all, as the Ranking Member of the Subcommittee, it
    has also been my honor and pleasure to work with you in
    exploring important issues of this Subcommittee that go to the
    core of how government conducts its business.
        Unfortunately, this may be my last meeting as Ranking
    Member as you are aware of. So I want to just take a brief
    minute to thank you and your staff for being so cordial and
    thoughtful and helpful in welcoming me to the Subcommittee and
    also providing me with the opportunity to kind of spread my
    wings a little bit and be part of something that is very
    important. It has been a great experience and I look forward to
    continuing to work with you.
        In Fiscal Year 2009, the Federal Government contracted over
    $530 billion on goods and services. And while I intend to work
    with my fellow members of Congress to reduce this amount, it
    also means that we must be incredibly vigilant in ensuring that
    the effective contract oversight actually occurs.
        With $530 billion taxpayer dollars at stake, the government
    needs strong controls to provide reasonable assurance that
    these contract funds will not be lost to waste, fraud, and
    abuse.
        I want to commend the Chairman and former Missouri state
    auditor for calling this hearing to focus on a key part of the
    contract control system which is contract audits.
        While contract auditing can be an important control
    mechanism, in our current fiscal environment the reality is we
    cannot audit everything nor should we. We must focus our
    limited resources on examining those activities presenting the
    greatest risk to the government and which justify the return on
    the investment.
        For the audits that are necessary, we must have an
    efficient system that accomplishes the task in a cost effective
    and timely manner.
        The current system is not working the way it was intended
    and this is evidenced by the backlog in audits that prevents
    contracts from closing down in a timely manner. This delay on
    closing out contracts increases cost to contractors and to the
    government.
        And while I understand today's hearing will not discuss
    far-reaching reforms to the Federal acquisition system, we
    should keep in mind whose money we are spending and try to
    operate a government more like a business.
        In today's hearing, I am interested in finding solutions to
    the problems in Federal contract auditing, look forward to
    hearing those witness perspectives on the critical issues, and
    I thank the witnesses obviously for being here today.
        And on a more personal note, in one of the bills we were
    able to work in a bipartisan, bicameral manner, it really
    started in this Subcommittee with the Arlington National
    Cemetery.
        It was something that not only provided great insight to me
    as to what the process is but it really served a real need with
    our Nation's heroes.
        You should be commended for that and it has been an honor
    to be here in this Subcommittee. I am actually going to still
    be involved in the Subcommittee if it, in fact, works out that
    it will be obviously the contracting arm associated with it. I
    am hopeful I will still be able to participate. I still am on
    this Subcommittee if I am not mistaken so it is not like you
    are losing me totally. So thank you.
        Senator McCaskill. Thank you, Senator Brown.
        It is the custom of the Subcommittee to swear in all
    witnesses that appear before us. So if you do not mind, I would
    ask you all to stand.
        Do you swear that the testimony you will give before the
    Subcommittee will be the truth, the whole truth, and nothing
    but the truth, so help you, God?
        Mr. Skelly. I do.
        Ms. Kolb. I do.
        Mr. Miller. I do.
        Mr. Fitzgerald. I do.
        Senator McCaskill. Thank you all.
        We will be using a timing system today. We would ask that
    your oral testimony be no more than 5 minutes. Obviously your
    written testimony will be printed in the record in its
    entirety, and we will not be, as long as you do not get close
    to 7, 8, 9, or 10 minutes, we are going to be very tolerant if
    you go over slightly. I do not want anyone to feel like they
    are under the gun, so to speak, in terms of finishing their
    testimony.
        We will turn to you, Mr. Skelly, for your testimony. Thank
    you very much for being here.

       TESTIMONY OF THOMAS P. SKELLY,\1\ ACTING CHIEF FINANCIAL
                 OFFICER, U.S. DEPARTMENT OF EDUCATION

        Mr. Skelly. And thank you, Chairman McCaskill and Ranking
    Member Brown. Thank you for this opportunity to discuss Federal
    contract auditing and thank you for your leadership on this
    important issue.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Skelly appears in the appendix on
    page 37.
    ---------------------------------------------------------------------------
        My name is Tom Skelly. I am the Director of Budget Service
    in the U.S. Department of Education. Since 2008, I have also
    been delegated the authority to perform the functions and
    duties of the Chief Financial Officer.
        In this role, I lead the organization that provides
    accurate and timely accounting and financial management
    information, coordinates internal controls and audit follow-up,
    and manages contracts and acquisitions.
        I am proud to report that the Department's financial
    statements received a clean opinion for the ninth straight year
    and we also have achieved recognition for excellence in
    financial reporting from the Association of Government
    Accountants (AGA).
        In the past, we have not had many opportunities to benefit
    from contract audits. In our April 2010 response to you, we
    identified only one external audit, and we expect only one this
    year. The primary reason for not having many contract audits is
    that most of our contracts are fixed-price, and the
    government's cost risk on that type of contract is relatively
    low.
        The Department also has many competing priorities for
    administrative funding. Therefore, even with cost-reimbursement
    contracts, we limit the use of contract audits to those
    situations that need a review of incurred costs to help us
    closing out contracts.
        Although the Department has one of the largest
    discretionary budgets, the Department also has the smallest
    workforce of any cabinet-level agency. Less than one percent of
    our annual funding is spent on administrative activities.
        In fiscal year 2010, the Department had approximately 4,200
    employees. This number represents a decrease of about 10
    percent over the past decade, even though the workload has
    grown during that period.
        For example, the enactment of the Ensuring Continued Access
    to Student Loans Act of 2008 and the more recent Student Aid
    and Fiscal Responsibility Act of 2010 greatly expanded our
    student loan work.
        These loan programs and related increase in Pell Grant
    applications have been the main drivers of our increased work,
    but the Department also had a key role in the Recovery Act
    implementation through which innovative and competitive
    kindergarten through 12 education reform efforts we expanded
    through such grants as Race to the Top and Investing in
    Innovation.
        The majority of our funds, though, are really for grants
    and loans. They are not for contracts. We have used contracts
    to perform much of the increased work involving delivery of
    Federal student aid, and the dollar volume of contracts has
    increased.
        For example, we spent approximately $1.5 billion on
    contracts in 2009 and approximately $1.8 billion in 2010. Most
    of the increase was for student-aid processing and loan-
    servicing contracts. These contracts tend to require
    performance of high volumes of routine and similar tasks, like
    application processing, loan origination, and loan servicing
    and collection.
        We have contracted for these kinds of activities, and we
    have done these kinds of contracts for even three decades, but
    the work volume has increased dramatically in recent years.
        In fiscal year 2010, only 21 percent of the contract
    dollars and 9 percent of the contract actions awarded by the
    Department were cost-reimbursement, and we are further reducing
    our reliance on cost-reimbursement contracts each year.
        In fact, eight of the Department's top ten contracts,
    representing 96 percent of the spending on our largest
    contracts, are fixed-price. Examples of cost-reimbursement
    awards that we do have include contracts to analyze student
    achievement data from the National Assessment of Educational
    Progress (NAEP) and an ongoing contract we had with Reading Is
    Fundamental which distributes inexpensive books to children and
    undertakes other activities that promote reading and literacy.
        The Department's Office of Inspector General (OIG) conducts
    independent audits, investigations, inspections, and other
    reviews of programs and operations. Part of this responsibility
    includes contract audits. In determining what to review, our
    Inspector General's Office considers internal risk assessments,
    Department requests, Congressional requests, and hotline
    information and other sources that contain allegations of
    concern.
        As noted in last April's response to you about contract
    audits, in fiscal year 2009, OIG completed an incurred cost
    audit of a contract that the Department had entered into for
    the administration of part of the National Assessment of
    Educational Progress.
        The purpose of the audit was to determine whether the costs
    incurred in fiscal year 2006 under the contract were, quote,
    reasonable, allowable, and allocable in accordance with the
    terms and conditions of the contract and applicable acquisition
    regulations. The approximate cost to the Department to perform
    this audit was $255,000.
        As a direct result of this audit, our Inspector General's
    Office recommended that: One, the Department recoup unallowable
    costs paid to the contractor; and, two, to then conduct a
    follow-up review of the costs not included in Inspector
    General's sample. The Department recouped $229.7 thousand
    dollars from the contractor for the fiscal year 2006 costs
    identified by the Inspector General.
        In addition, the contractor disclosed during the audit that
    it had inappropriately billed the Department for post-
    retirement medical benefits during the period September 2002
    through December 2007. The contractor returned to the
    Department $2.7 million in April 2009 for these improper
    billings.
        I point this out because it shows we did get some
    additional benefits from the contract audit in addition to the
    amounts we recovered throughout negotiations with the vendor.
    So there is obviously some deterrent effect from doing audits.
    It encourages vendors to keep good records, revise their
    procedures, and maybe return things to us before we actually
    get into the audit.
        We considered several options for the follow-up audit that
    the IG had recommended. The IG itself decided not to devote
    limited resources to a broader audit. Then the Department
    initiated a request to the Defense Contract Audit Agency for
    audit support to review the incurred costs not included in
    OIG's sample.
        To obtain this support, the Department representatives
    worked with DCAA in 2010 to determine the scheduling and the
    cost of the follow-up audit, which was estimated to cost
    $27,000.
        In December 2010, DCAA confirmed that the requested audit
    was not programmed in its schedule for fiscal year 2011. As a
    result, since the IG did not want to do it, the DCAA did not
    want to do it, we contracted on our own for audit support
    services. The contract we obtained includes performing incurred
    cost audits of this and other kinds of activities and it will
    be providing services this fiscal year.
        The Department faces challenges regarding contract audits
    in deciding whether they take priority over other demands for
    other limited funds. The Department's Inspector General has
    multiple priorities, and DCAA cannot always accommodate non-DOD
    requests for audit support. Obtaining audit support from a non-
    governmental firm can be costly and time-consuming.
        In conclusion, we support efforts to maximize the
    performance of contractors in delivering Department services.
    We rely on many contractors to get the work done. We believe
    that fixed-price contracts are the preferred option over cost-
    reimbursement contracts as they provide a better value to the
    taxpayer.
        Thank you, Madam Chairman, for your attention to this
    important issue, and I would be happy to answer any questions.
        Senator McCaskill. Thank you very much. Ms. Kolb.

     TESTIMONY OF INGRID KOLB, DIRECTOR,\1\ OFFICE OF MANAGEMENT,
         OFFICE OF DEPUTY SECRETARY, U.S. DEPARTMENT OF ENERGY

        Ms. Kolb. Thank you, Chairman McCaskill and Senator Brown,
    and I, too, appreciate your leadership on this very important
    topic.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Kolb appears in the appendix on
    page 40.
    ---------------------------------------------------------------------------
        My name is Ingrid Kolb. I am the Director, Office of
    Management at the U.S. Department of Energy. I am pleased to be
    here today to discuss with you how the Department uses audit
    services to detect and prevent waste, fraud, and abuse in
    government contracts, to provide contracting officers with
    reasonable assurance whether contractor submissions are free of
    material misstatement, and also to provide contracting officers
    with assistance and advice in the establishment of fair and
    reasonable prices for products and services.
        In fiscal year 2010, the Department spent approximately $26
    billion on contracts. The bulk of the dollars, about 80
    percent, was spent on the Department's unique management and
    operating contracts. These contracts are used primarily to
    manage Department laboratories, its national laboratories as
    well as other government-owned or controlled facilities.
        The Department's Office of Inspector General is the auditor
    for management and operating contracts; and in fiscal year
    2010, the Department spent approximately $1.1 million for 17 of
    these IG audits.
        The Defense Contract Audit Agency has traditionally been
    the primary auditor for our other contracts. In fiscal year
    2010, the Department spent approximately $9.4 million for 273
    audits of varying types, performed by DCAA. The majority of
    these are for incurred cost audits.
        DCAA has provided us with excellent service in the past and
    remains our primary source of audit service for non-management
    and operating (M&O) contracts.
        However, over the past few years as DCAA has experienced
    challenges with an increasing workload and fewer resources
    which have caused some concern for the Department of Energy,
    our ability to obtain cost-incurred audits in a timely manner
    has diminished and in some instances at some procurement sites
    this has caused a backlog of closeouts for our contracts.
        In response to the increased workload associated with the
    American Recovery and Reinvestment and Recovery Act and the
    corresponding demand for the DCAA audit services around the
    government, the Department of Energy conducted a competitive
    procurement to obtain supplemental audit services.
        In coordination with DCAA, a private accounting firm was
    awarded a contract in May 2010 to provide audit services
    primarily for financial assistance awards. The contract also
    provides full contract audit services, and to date the
    contractor's performance has been timely and we have been
    satisfied with the quality of their work.
        Last month senior officials from the Department along with
    three other civilian agencies met with Pat Fitzgerald, the head
    of DCAA, who will be testifying in a few moments, to explore
    ways to work more efficiently with DCAA.
        And I am glad to report the meeting was very productive and
    there are future discussions that we have planned to help
    streamline the process. I believe that this ongoing dialog with
    DCAA will strengthen our audit function at the Department of
    Energy.
        Again thank you for this opportunity to testify before the
    Subcommittee. This completes my oral statement and I am happy
    to answer any questions the Subcommittee may have.
        Senator McCaskill. Thanks very much. Mr. Miller.

     TESTIMONY OF THE HON. BRIAN D. MILLER,\1\ INSPECTOR GENERAL,
                  U.S. GENERAL SERVICES ADMINISTRATION

        Mr. Miller. Madam Chairman, Ranking Member Brown, ladies
    and gentlemen, thank you for the opportunity to testify on the
    importance of contract audits in detecting and preventing
    fraud, waste, and abuse in government contracts, and thank you
    for your continued support of Inspectors General and for the
    Subcommittee's strong commitment to oversight.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Miller appears in the appendix on
    page 46.
    ---------------------------------------------------------------------------
        This hearing is especially important as the President and
    the Congress look to aggressively pursue fraud, waste, and
    abuse in Federal spending. Contract auditing plays a vital role
    in fighting fraud.
        A key component of the President's plan to reduce the
    national debt is rooting out fraud, waste, and abuse from
    Federal programs such as health care programs. This is no less
    true in the procurement area.
        Across the government, contract audits result in saving
    billions of taxpayer dollars and ensuring that, when Federal
    dollars are spent, they are spent wisely.
        My office has a great deal of experience with contract
    audits. In my view they provide a critical oversight mechanism
    for GSA's handling of billions of taxpayer dollars.
        Over the last 2 years, my office has identified about $1.1
    billion in potential cost avoidances and $33 million in
    questioned costs. We have also worked very closely with the
    Department of Justice in obtaining over $400 million in False
    Claims Act (FCA) recoveries.
        And thank you, Madam Chairman, for mentioning the recovery
    yesterday from Oracle and from Sun Microsystems of $46 million.
        Overall, GAO's 2008 report recognized that for every dollar
    budgeted, our office had a return on investment of $19. I am
    proud of the work our office does in saving taxpayer dollars.
        I agree with the President and the Congress that we need to
    restore fiscal discipline to the Federal Government and to find
    ways to make the government more effective. Contract auditing
    is one way to do so.
        Unlike other government programs, contract auditing saves
    Federal dollars. It identifies wasteful spending and ensures
    that taxpayer dollars are spent wisely. Most other Federal
    programs, however useful and good, do not return dollars to the
    Treasury or prevent Federal dollars from being spent.
        At a time when the acquisition workforce is stretched thin,
    overworked, and under trained, contract audits are crucial to
    protecting taxpayer dollars. Contract audits are the taxpayers'
    last line of defense against losing money to fraud, waste, and
    abuse.
        To prevent overcharging, our office reviews the pricing
    that contractors give to GSA. Too often, the prices given to
    GSA are not fair and reasonable. As the largest volume buyer,
    the Federal Government deserves the best prices. Yet our
    auditors often find that contractors have given better prices
    to other customers.
        Our success hinges on both our autonomy from the agency and
    on our contract expertise. However, we do face perennial
    oversight challenges.
        Contractor lawyers and consultants have sometimes delayed
    responses to information requests for months and, yes, at times
    even for years. These kinds of delays should not be tolerated.
        Thank you for calling attention to the need for more
    contract audits and for more effective contract audits. In
    these times of tight budgets and calls for smaller government,
    we need to continue to be serious about rooting out fraud,
    waste, and abuse.
        I am proud of the record of the GSA Office of Inspector
    General and hope that we can do more in the coming years to
    save Federal money.
        Thank you for your attention. I ask that my statement and
    written materials be made a part of the public record and I
    would be pleased to respond to the questions.
        Thank you.
        Senator McCaskill. Thank you. Mr. Fitzgerald.

       TESTIMONY OF PATRICK J. FITZGERALD,\1\ DIRECTOR, DEFENSE
           CONTRACT AUDIT AGENCY, U.S. DEPARTMENT OF DEFENSE

        Mr. Fitzgerald. Good afternoon, Chairman McCaskill, Ranking
    Member Senator Brown. Thank you for the opportunity to appear
    before you today. I am pleased to provide you with an overview
    of the role that the Defense Contract Audit Agency plays in
    performing contract audits for agencies other than the
    Department of Defense.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Fitzgerald appears in the
    appendix on page 55.
    ---------------------------------------------------------------------------
        I became the Director of the Defense Contract Audit Agency
    15 months ago, and prior to that, I was the Auditor General of
    the Army and headed up the Army audit agency. I am a Certified
    Public Accountant (CPA) and have over 30 years of government
    auditing experience.
        The Defense Contract Audit's mission supports efforts to
    obtain the best value for dollars spent in government
    contracts.
        To carry out this mission, we have about 4,700 dedicated
    employees at 114 field offices around the world. We have hired
    500 auditors in the last 2 years. Currently 99 percent of our
    auditors have a four-year college degree, and in addition 29
    percent hold advanced degrees and 28 percent are certified
    public accountants.
        I consider the work we do for civilian agencies an
    important part of our contract audit mission. The Defense
    Contract Audit Agency has performed contract audits for
    civilian agencies since its creation in 1965. The type and
    scope of our efforts in civilian agencies are very similar to
    the audits we perform in the Department of Defense.
        Since 2000, the percent of our total budget devoted to the
    reimbursable work has ranged from 9 to 13 percent, and the
    total reimbursable funding has ranged from about $45 million to
    $58 million.
        In an average year, we provide audit services to more than
    30 civilian agencies. However, our reimbursable work is heavily
    weighted toward just a few civilian agencies. For example, just
    two civilian agencies, National Aeronautics and Space
    Administration (NASA) and the Department of Energy, make up
    more than 50 percent of the reimbursable work that we do.
        As a result of our DOD audits, we have already established
    a presence at many of the civilian agency contractors. In 2010,
    over 90 percent of the contractors we audited were engaged in
    some type of DOD work.
        Using DCAA for contract audit at these locations is a cost-
    effective use of both government and contractor resources and
    provides assurance that comprehensive audits are accomplished.
        Over the past several years, the Department of Defense has
    taken initiatives that have improved contract processes. I
    would like to highlight three that, in my opinion, will provide
    similar benefits throughout the Federal Government.
        These are, one, establishing a formal adjudication policy
    that ensures that contract audit findings and recommendations
    receive timely and adequate consideration; two, developing new
    business system rules that will strengthen contractor systems
    to prevent fraud, waste, and abuse by improving the
    transparency and oversight of these systems.
        And finally, creating a risk-based approach to ensure that
    the limited auditing resources are focused on the areas with
    the greatest risk and largest payback to the taxpayer.
        Let me assure you we are committed to providing civilian
    agencies with high-quality audits that protect the interests of
    the American taxpayer.
        Over the past year, we have implemented many initiatives to
    improve the quality of our audits and improve the work
    environment of our talented workforce. To assist in developing
    our workforce, we are overhauling our training programs as well
    as making changes to our hiring and promotion policies.
        We have also issued extensive audit policy and process
    changes to improve the quality of our audit services and
    audits. These changes have resulted in auditors performing
    additional tests of contractors' controls and transactions.
        We are reaching out to our stakeholders to better inform
    them of our process improvements while working with them to
    revisit the contracting time frames to allow sufficient time to
    perform thorough audits that are necessary to protect the
    taxpayer's interest.
        In summary, we have changed the way the Defense Contract
    Audit Agency does audits by using a more collaborative and
    comprehensive approach to contracting audits.
        We have institutionalized these initiatives in our recently
    issued strategic plan that provides a clear roadmap for
    executing these changes. We believe we have made significant
    strides but recognize there is more work to be done, and I know
    our workforce is committed to providing high-quality audits
    that serve the American taxpayer.
        Again I appreciate the opportunity to testify before you
    today, and I would be glad to answer any of your questions.
    Thank you.
        Senator McCaskill. Thank you, Mr. Fitzgerald. Let me start
    by, I am trying to get a handle on, I know that the work you
    are doing, the majority of it is in a few agencies and I know
    the majority of it is with agencies that have some connection
    to the Department of Defense.
        The large policy issue that I want this hearing to talk
    about is--are there sufficient contract auditing resources in
    the Federal Government, do agencies have the ability to be
    aggressive about contract audits, and how is that process
    working now?
        It is not clear to me; and if you can help, is there an
    overall risk assessment that is being done across all of the
    agencies that anybody has responsibility to look at and say we
    have a cost-plus contract over here at Interior that no one has
    ever looked at and there has never been a question asked about
    it and it has grown and it is a fairly large contract now.
        Is there someplace that there should be--I mean, are we
    doing this in stove pipes and you are just being called in on a
    piecemeal basis? Reassure me that there is some overall
    strategy here as to where these audit resources are going.
        Mr. Fitzgerald. Senator McCaskill, from the defense
    contract audit point of view, we have worked over the last year
    with the Department of Defense and all the stakeholders
    involved with that to make sure that our auditors are being
    allocated to the highest risk, the highest priority work.
        We are now starting to work with each individual civilian
    agency to do that, realizing that one, a risk-based approach
    for DOD may not be the same thing for DOE or something like
    that.
        So we are working civilian agency by civilian agency to
    make sure that we are providing the service and allocating our
    resources where we believe and they believe are the highest
    risk area.
        Senator McCaskill. So is there some document that is being
    prepared in each civilian agency about a risk assessment in
    terms of contract audit work?
        Mr. Fitzgerald. Senator McCaskill, I am not sure but what I
    would like to do is, because I think I can meet the needs of
    the civilian agencies if I know what that workload is----
        Senator McCaskill. Right.
        Mr. Fitzgerald [continuing]. For the future so I can build
    the workforce capacity to do that.
        Senator McCaskill. Well, it looks like you by default are
    it. Is that a fair assessment?
        I do not mean you are the only game in town. Therefore, we
    got to use you. I mean, obviously you are a strong agent, audit
    agency with a lot of professionals.
        Well, let me ask. I mean, do you sense, Ms. Kolb, is there
    a risk assessment that your agency is doing that prioritizes
    contract audit work within your agency?
        Ms. Kolb. Yes, we definitely prioritize contract audit work
    within our agency. We have certain dollar thresholds that
    trigger an audit, trigger a contracting officer to request an
    audit. And so that is how we go about determining the risk
    level.
        Senator McCaskill. And in Education the same thing?
        Mr. Skelly. Pretty much. Our biggest audit, our biggest
    contracts are fixed-price so we do not see as much need for
    that; but if we are closing out one of the cost-plus contracts,
    then we do see a need to.
        Senator McCaskill. Well, there has actually been some waste
    in fixed-price contracts, too. I know they are not as risky as
    cost-plus.
        Mr. Skelly. Just overall I think our strategy is to try to
    maximize fixed-price contracts. That is the biggest contract
    reform we are trying to implement and we have direction from
    the White House and the Office of Management and Budget (OMB)
    on doing that.
        Senator McCaskill. If I could just make sure that the
    Defense Department had as many fixed-price contracts as you
    have, I would be a happy camper. There is certainly not the
    level of cost-plus going on in your agency that there is in
    Defense.
        So I guess what I am getting at here is that it appears to
    me that we have never really had across the government anyone
    going, OK, are we doing the right audit work? Your priority has
    to be Defense because you are the Defense Contracting Audit
    Agency and the other agencies.
        And what is a comparison of price? When you get reimbursed
    for your cost, Mr. Fitzgerald, how does that compare with
    contracting with private sector auditors to do contract work?
        Give me an apples to apples comparison here.
        Ms. Kolb. I can give you a comparison with the experience
    we have had with our independent auditor. The price that we pay
    for DCAA is about $114 an hour. The comparison with our
    independent private sector auditor is $150 an hour.
        However, I will say that one of the big issues for us is
    timeliness, and DCAA is stretched fairly thin, and sometimes it
    is very difficult for them to free up auditors to perform high
    priority work. So we have had to go to our independent auditor.
        But for us, it is worthwhile because we need the audit work
    in order to make timely business decisions. So we have had to
    pay that extra amount in order to get that service.
        Senator McCaskill. Right. Senator Brown.
        Senator Brown. I guess my biggest concern when we do all
    these hearings is, are we getting the most bang for our buck,
    is there something we can do better, or you can do better, or
    we can give you guidance to do better.
        So why do I not just start with Mr. Fitzgerald, if that is
    OK. Is there something we are not doing correctly to the
    maximum bang for our buck?
        Mr. Fitzgerald. Well, Senator, I think having this hearing
    is helpful to bring some light on contract auditing. Our agency
    did not grow through the boom that happened in DOD. As result
    of some external reports, we have the support from the
    Department to grow our workforce.
        We are making sure that we are doing a quality product for
    not only DOD but our civilian agencies too.
        We have made some changes over the last year but we believe
    we are seeing, as result of doing a better quality product and
    service, that the amount of dollars that we are questioning,
    that has significantly gone up over the last 2 years as we have
    done, in what we believe, a more comprehensive and thorough
    approach to our audits.
        Senator Brown. At some point does it not lose its cost
    effectiveness? There are some audits that I cannot believe we
    are auditing their people. Do you ever have that moment in your
    office?
        Mr. Fitzgerald. I think one of the first things we did was
    to look at a risk-based approach, and we have made some
    adjustments where we have decided, based on the risk, that we
    would reallocate our auditors to contracts above a certain
    dollar threshold, and only do below that threshold if there was
    additional risk or we do believe we might kind of use the
    Internal Revenue Service (IRS) model where we will do some work
    in that area just on a random basis but clearly our focus will
    be on higher dollar value, higher risk contracts because we
    will never have nor would we be purporting to have auditors be
    able audit every contract.
        So we are looking to make sure that our limited audit
    capability is applied and allocated to the highest risk area.
        Senator Brown. So you are doing that now?
        Mr. Fitzgerald. Yes, sir.
        Senator Brown. Is it true that you are about 10 percent
    over in terms of the actual close-outs that there are some that
    have been going on for, as I think has been discussed already,
    for a while.
        Is it about 10 percent or do you have that number?
        Mr. Fitzgerald. Senator Brown, to be very up front with
    you, our cincurred audits, which are the audits that we do at
    the end of the contract, and many times they are needed to
    close out the contract, that backlog has quadrupled over the
    last 8 years. So again that is why we are using----
        Senator Brown. Quadrupled from what to what, just in rough
    numbers so everyone knows approximately. We do not need an
    exact number. I mean, has it gone from like one to four?
        Mr. Fitzgerald. No, it is a significant backlog that we
    have to work. I could give you specific numbers.
        Senator Brown. The reason I am kind of zeroing in on this
    particular area because we have a lot of Massachusetts
    businesses that deal in this type of work.
        And not only are they waiting for close-out, it is costing
    them real money, real dollars. So in addition to the health
    care bill and the taxes they are paying and the regulations
    that they are dealing with and now they have audits so it is
    like--what is next.
        They need closure and they need certainty. And is there a
    way, is there something that we can provide you or is there
    something that you need that we are not giving you to get these
    things done? They have been going on, some of them, for years.
        Mr. Fitzgerald. Senator, we have to get after that backlog.
    Hiring 500 new auditors over the last 2 years will be helpful
    in that. And I would add, not to mitigate that at all, but we
    do work closely with the contracting officers to make sure that
    their billing rates are appropriate so that there are no
    overages or shortages so that the contractors get the money
    that they need to be paid as we monitor the billing throughout
    the contract before we do a final cost-incurred audit. We work
    closely to make sure that is a minimum amount.
        Senator Brown. Sure. You are saying you are hiring 500 new
    auditors. Can you believe it, folks? We are doing 500 new
    auditors in addition to the thousands of other new auditors in
    various agencies.
        I mean, at what point do we actually just hire new workers,
    like new construction folks, or just a regular private sector
    employee.
        The fact that we are hiring 500 new auditors just smacks of
    me saying, ``Wow, something is broken somewhere.'' There is a
    disconnect somewhere.
        So hiring 500 new auditors to deal with a load that has
    been quadrupled after a period of time, some of these audits
    have gone on for years.
        So I guess at what point do we say, ``My gosh, something is
    broken.'' Are we auditing the proper folks that need to be
    audited, the entities that need to be audited? Where is the
    breakdown?
        It is not kind of working for me really.
        Mr. Fitzgerald. Senator, just to try to put it a little in
    perspective. The DOD procurement budget just exploded from 2000
    to 2010. DCAA's workforce was flat throughout that period.
        In the early 1990s the Defense Contract Audit Agency was
    about 7,000 folks. That steadily went down and then stayed
    flat. We are working to both adjust to workload requirements
    and build the workforce capacity to get a good balance there so
    that we can effectively provide a quality product which is, in
    my opinion, a quality product must be a timely product.
        Senator Brown. I will reserve for the next round.
        Senator McCaskill. I wanted to point out that Senator Brown
    was not yet a Senator when all hell broke loose at DCAA. To say
    that Mr. Fitzgerald had a challenge is an understatement. It
    was determined that DCAA was not meeting yellow book standards
    for government auditing.
        There were some real management challenges, not that there
    are not, and I want to say this on the record, thousands of
    wonderful auditors at DCAA. I do not mean to disparage the
    wonderful people that work at DCAA because literally we would
    not have known about the problems if somebody at DCAA had not
    come forward. But they had some real management issues.
        And Mr. Fitzgerald was drafted to take over an agency which
    had traditionally only had the people move up in the
    organization to head the organization. I think it may have
    been, I do not know, was it the first time, Mr. Fitzgerald,
    that somebody came from outside the organization to head it?
        Mr. Fitzgerald. Yes, Senator.
        Senator McCaskill. So they never had anybody come from
    outside in a management capacity. So I am usually not the one
    making, I do not mean to sound like I am making excuses but I
    know the challenges that he faced.
        And while I do not think they are there yet, they have made
    significant progress in, I think, turning around the management
    capacity at DCAA since his arrival. So for what that is worth.
        Senator Brown. May I make a note on that?
        Senator McCaskill. Sure.
        Senator Brown. Listen, I do not disagree. I am aware. I
    have obviously done my homework and I am aware of your
    challenges. I just want to make sure that we are auditing the
    right entities and that we are not wasting our money and that
    the audits that we are participating in, it affects real
    people, real jobs, real companies, not only in my State but in
    yours, and that is why I asked is there something that we can
    do or that we are missing to help you get that closure so
    people can move on and just start creating real jobs.
        Senator McCaskill. I certainly agree. I think that this is
    one of those areas where we've got to be careful because there
    are areas of government where the investment that we make comes
    back.
        That segues into the question I want to ask you all and
    that is pre-award and post-award auditing. I would like any of
    your all's take on that. I just think there is, I know that you
    have done a lot of it at GSA but it appears to me, Mr. Miller,
    that you all could do a lot more of it because every time you
    have done it, we found real money, have we not?
        Mr. Miller. We have, Madam Chairman, and we could do a lot
    more of it. And I think it would save Federal money. That may
    sound ironic, but we will save money if we do more contract
    audits, if we invest the money there.
        I would like to say briefly that we do not currently use
    DCAA. We have used DCAA in the past a few times in relatively
    limited capacities but currently, we do the auditing at GSA and
    that has worked out very well.
        One of the areas that you point out is the pre-award and
    post-award audits. The Sun Microsystems settlement of $46
    million that you mentioned earlier started off as an audit in
    our office that we worked up, developed, and referred over to
    the Department of Justice. It was later on combined with the
    Qui Tam action and settled.
        But we do save lots of money. As I pointed out in my
    testimony, $1.1 billion in cost avoidances for the last 2
    years. So thank you for asking that.
        Senator McCaskill. Well, and I think many times those pre-
    award audits have what I would call a deterrent effect because
    everyone who is out there competing for Federal contracts it
    gives them a heads up that somebody is going to be paying
    attention to their numbers before all the documentation is
    signed and before the contract is executed.
        And I think that kind of has everyone on better behavior as
    it relates to Federal contracting.
        Let me address Mr. Skelly and Ms. Kolb. As we began what I
    am going to call the lean era in the Federal Government which I
    believe the next decade will be, I do not think you are going
    to see much expansion of either one of your departments.
        I think, in fact, you will see some contraction at both the
    Department of Education and Department of Energy. I am not
    saying that we are talking about massive layoffs. But I am just
    thinking that the whole footprint, I believe, will shrink to
    some extent just because we are going to have a real obligation
    to begin to cut back on all kinds of spending, including
    discretionary.
        Be honest with me. What kind of pressure is that going to
    put on you to squeeze the resources you spend on contract
    auditing because there will be some other pressure to keep the
    money in programming at your agencies?
        Mr. Skelly. I think it is going to be a significant
    pressure. We have been squeezed already. I think I have
    mentioned that we declined about 10 percent in the last decade
    in staff already.
        We have tried to make investments in key areas such as
    contract officers, contract officers' representatives so they
    can do a better job at monitoring our contracts. I think that
    is a priority since we are going to rely on contracts to get a
    lot of our student loan and student aid work done in
    particular.
        I think it is a good investment, though, and I encourage
    you not to reduce our footprint at the Department of Education,
    particularly our administrative funds.
        We need the money to make sure that we award these
    contracts and deliver our aid. And indeed, in our direct loan
    program which we went to 100 percent as a result of the Student
    Aid and Fiscal Responsibility Act (SAFRA) legislation, we
    believe we will actually save about $5 billion a year.
        It will be a savings of $5 billion per year or more in the
    mandatory area but we are going to have to spend a couple
    hundred million dollars more as noted in contracts in our
    discretionary budget.
        I think there will be pressure on things like contract
    audits and anything else that is not directly related to some
    of our providing our services and doing them very well.
        Senator McCaskill. Who is doing the audits now? You are
    contracting with people in terms of the application process.
    Who is doing the checking on whether or not the people that are
    getting this money actually even exist on the Pells? Who is the
    check on--there is always a different thing.
        I think the current cable TV ads are that you can become a
    culinary chef online which I think is tricky but that is the
    latest profit center for some of these institutions is stay in
    your kitchen and become a world-class chef if you just sign up
    to make sure we get your Pell grant money. Who is doing that
    audit work?
        Mr. Skelly. Well, our Inspector General is independent in
    the Department of Education and can decide which areas to look
    into and looks into areas that have the highest risk where
    there might be abuses on the part of some parties in our
    programs.
        We also have, in looking at the contracts that provide our
    services, we are relying primarily on our first line of defense
    with our contract officers and our contract officers'
    representatives.
        Those are the employees in the Department of Education who
    work with the contracts, make sure they are doing what they are
    supposed to do. If the work statement is clear, if the
    expectations are clear, if their performance measures in the
    contract, then it is easier for those employees to check up on
    whether the contractor is performing.
        These contracts are just providing the mechanical operation
    in getting the aid to the students and colleges. We have other
    people who are assigned the job of making sure that colleges
    are complying with the rules.
        They have certain reports they have to file. We are
    reviewing those. Both our program officers are doing that but
    also our Office of Inspector General is looking into that.
        Senator McCaskill. I would give them a heads up. I do not
    think we need a hotline to figure out that there may be a
    little bit of over marketing in the area of the become a world-
    class culinary chef from the comfort of your own home.
        Mr. Skelly. Also I think one of the other committees here
    in the Senate got a report from the Government Accountability
    Office recently where they had also looked into the situation.
        Senator McCaskill. Right.
        Ms. Kolb, the question about whether or not your auditing
    resources are going to get squeezed as the top line budget may
    get squeezed.
        Ms. Kolb. Actually, I think that we do a very efficient job
    of ensuring that we have the audits available that we need to
    make business decisions.
        Last year, for example, we spent a total of about $10
    million for $32 billion worth of contracts and financial
    assistance awards that were made. That is a very small
    percentage. I would envision us staying committed to providing
    that level audit work.
        So I do not think that the consolidation will impact our
    commitment to putting forward those dollars. We will stay with
    that.
        Just to pick up on a few points that Pat Fitzgerald was
    making. First of all, he was talking about moving to a more
    risk-based approach. We completely support that, and we are
    doing a few things at the Department to try and move in that
    direction.
        First of all, we do not always need a comprehensive audit,
    and DCAA does a very thorough job, and their preference is to
    conduct a thorough, comprehensive audit.
        We want to work with DCAA to make sure that where a
    targeted audit is all that is needed and that is what we end up
    doing. We believe that is very important and this will ensure
    that there is a more efficient use of resources.
        Then also I had mentioned earlier that we have thresholds
    that trigger an audit. We are in the process of raising those
    thresholds to make sure that we are really targeting those
    contracts where we need the audit work completed.
        Senator McCaskill. That is great. Senator Brown.
        Senator Brown. Thank you, Ms. Kolb.
        Also you speak of a decline in the DCAA audit support for
    the use of contractor's price proposals which has impacted the
    Department's ability to negotiate fair and reasonable prices,
    and we have heard from other agencies, business groups, and
    Project on Government Oversight (POGO) that DCAA's current
    practices submitting these audits to the Generally Accepted
    Government Auditing Standards (GAGAS) standards is both
    unnecessary and may contribute to these reviews taking more
    time and is uncostly.
        Is that your opinion of what they are saying about this
    whole process?
        Ms. Kolb. The concern that we have had with the services
    provided by DCAA, and Pat Fitzgerald and I have talked about
    this, really is one of timeliness.
        We think that DCAA does a very good job. Again, we would
    like to see more targeted audits as opposed to comprehensive
    audits unless they are absolutely needed. But the timeliness
    issue has to be addressed and DCAA is committed to making those
    improvements.
        Senator Brown. Should proposal reviews of cost and pricing
    data be considered financial advisory services which are not
    subject to all the GAGAS requirements?
        Ms. Kolb. In the pre-award area, we depend heavily on DCAA
    to examine the prices and we want to continue to have them look
    at the proposed prices above a certain threshold.
        Senator Brown. Mr. Skelly, you have been awfully lucky
    tonight so I figured I just you----
        Mr. Skelly. My whole life, I think, Senator.
        Senator Brown. I know the feeling.
        According to your testimony, the Department of Education
    spent approximately $1.5 billion on contracts in fiscal year
    2009 and $1.8 billion in fiscal year 2010.
        A key concept in contract auditing is that the cost of
    control activity should not outweigh the benefit.
        With over a billion dollars at stake, what contract
    controls does the Department of Education have in place to
    ensure that the taxpayers' money is spent wisely in accordance
    with applicable regulation and the Department is receiving the
    best value possible for its money?
        Kind of an extension of what I asked Mr. Fitzgerald.
        Mr. Skelly. Our main strategy is to use fixed-price
    contracts. Approximately 71 percent of our contract dollars are
    awarded through fixed-price contracts at least where the unit
    price is fixed in a contract.
        We found that it is the best solution. One ounce of
    prevention is worth a pound of cure. We are better off doing at
    the start, stipulating what is expected to be delivered under
    the contract, having good performance measures, following up
    that work through the work of our contract officers and our
    contract officers' representatives. We have to do that to make
    sure that we are spending our money well.
        When we do use contract audits, it is for the incurred
    costs. It is sort of after-the-fact, after the contract is
    finished, and we are trying to close it out. But because we
    have relatively few cost reimbursement contracts, there is not
    as much for the auditors to find.
        Senator Brown. So based on your experience, just somebody
    who is listening or watching, if somebody is not adhering to
    the terms of their contract, what do you actually do? What is a
    typical scenario?
        Mr. Skelly. It is notifying them that they are not living
    up to the standard. A report has come in. We are monitoring the
    activity. We get management information reports, for example,
    on how many people are applying, how many people are using the
    free application for Federal student assistance, the Free
    Application for Federal Student Aid (FAFSA) form.
        About 20 million people use that form to apply. Many of
    them are doing it over the web. So it is easy to monitor how
    many are coming in and going out. We check those management
    information reports to see are they coming in timely.
        There is actually an incentive built into the contract for
    the contractor to process those quickly. We have incentives in
    our servicing contracts where the contractors are given
    additional funds if they make sure that people do not go into
    delinquencies or defaults.
        So we try to build those incentives into the contract up
    front, and we try to monitor that as closely as we can.
        Senator Brown. Have there ever been any instances that you
    are aware of where there has just been a total breach of the
    contract or not adherence to the terms of the contract?
        Mr. Skelly. I am sure we have lots of humans involved in
    this and we are making mistakes, but I do not recall
    specifically.
        Senator Brown. I have nothing further. Thank you.
        Senator McCaskill. Thank you, Senator Brown.
        I want to thank the panel very much for your work and I
    appreciate the time and effort you put into appearing at this
    hearing today.
        And we will take the second panel.
        I said I would not put the witnesses in a hot box. As it
    turned out, it kind of is hot. Is it as hot out there as it is
    up here? Hot out there. Man, it is hot in here. It is not going
    to kill us.
        I want to thank the witnesses.
        First, let me introduce this panel.
        Jeanette Franzel is the Managing Director of the Financial
    Management and Assurance Team at the Government Accountability
    Office, GAO. In her role, she heads GAO's oversight of
    financial management and auditing issues across the Federal
    Government which includes review of internal control, financial
    management systems, cost management, improper payments and
    accountability, and corporate governance issues.
        Ms. Franzel is also responsible for overseeing the GAO's
    development of the government Auditing Standards, also known to
    all of us who know and love it as the Yellow Book, the
    standards used in the United States and as a model for the
    private sector and governments around the world as it relates
    to auditing standards.
        Nick Schwellenbach is the Director of Investigations for
    the Project on Government Oversight. Mr. Schwellenbach conducts
    investigations which include examination of the effectiveness
    of government oversight.
        He has previously worked as a writer for the Center for
    Public Integrity and is a reporter and researcher for the
    Nieman Watchdog, a project of the Nieman Foundation for
    Journalism at Harvard University.
        E. Sanderson Hoe is a partner at the law firm of McKenna,
    Long, and Aldridge. He has practiced government contract law
    for over 36 years. He has expertise in areas including contract
    formation, the structuring of complex private financing of
    government contracts, and resolution of post-award contract
    disputes.
        He co-chaired the Committee on Privatization, Outsourcing,
    and Financing at the Public Contract Law section of the
    American Bar Association since 1999, and he is currently
    serving as a pro-bono counsel to the government of Liberia in
    the drafting of a new procurement code.
        Thank you all for being here, and we will begin, oh, I have
    to swear you in.
        It is the custom to swear in the witnesses in the
    Subcommittee. I would ask you to stand.
        Do you swear that the testimony you will give before this
    Subcommittee will be the truth, the whole truth, and nothing
    but the truth, so help you God? Thank you very much.
        Ms. Franzel. I do.
        Mr. Hoe. I do.
        Mr. Schwellenbach. I do.
        Senator McCaskill. Ms. Franzel, we welcome your testimony.

        TESTIMONY OF JEANETTE M. FRANZEL,\1\ MANAGING DIRECTOR,
          FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT
                         ACCOUNTABILITY OFFICE

        Ms. Franzel. Good afternoon, Madam Chairman.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Franzel appears in the appendix
    on page 65.
    ---------------------------------------------------------------------------
        Thank you for the opportunity to be here today to discuss
    the role that contract audits can serve in effective contract
    oversight and internal control in the government.
        As the government has become increasingly reliant on
    contractors over recent years, effective contract oversight is
    key to protecting the taxpayers' interests. In fiscal year
    2010, Federal agencies reported obligating approximately $535
    billion for contracted goods and services. The sheer size of
    Federal contract spending poses significant risk if effective
    oversight and controls are not in place.
        Today, I will describe the contracting cycle and related
    internal controls, DCAA's role in performing contract audits,
    and risks associated with ineffective contract controls and
    auditing.
        In preparing this testimony, we relied on the work we
    performed during our DCAA engagements as well as our extensive
    body of work on Federal contract management.
        The contracting cycle consists of activities throughout the
    acquisition process including pre-award and award, contract
    administration and management, and ultimately the contract
    closeout.
        Effective contract oversight includes internal control
    throughout the process, and the Standards for Internal Control
    cover agencies' control environment, risk assessment, control
    activities, information and communication, and monitoring.
        As we heard in the previous panel, the type of contract
    used really determines the types of internal control and
    contract auditing activities needed to help protect the
    government's interest.
        Specifically, contract types can be grouped into three
    broad categories: Fixed-price, cost-reimbursable, and time and
    materials contracts.
        For fixed-price contracts, the government agrees to pay a
    set price for goods or services regardless of the actual cost
    to the contractor. So in those cases, the contractor is
    assuming most of the cost risk.
        Under cost-reimbursement contracts, the government agrees
    to pay contractor costs that are allowable, reasonable, and
    allocable based on the contract. Consequently, the government
    assumes most of the cost risk in a cost-reimbursement contract,
    and it is a similar situation for time and materials contracts.
        Contract audits are intended to be a key control in the
    contracting process to help ensure that prices paid by the
    government for goods and services are fair and reasonable and
    that contractors are charging the government in accordance with
    applicable laws; the Federal Acquisition Regulation (FAR); cost
    accounting standards; and contract terms.
        DCAA plays a critical role in contract oversight by
    providing contract auditing services that DOD and other
    agencies rely on when making these contract decisions and when
    providing oversight.
        The majority of DCAA audits focus on cost-reimbursable and
    time and materials contracts as these contract types pose the
    highest risk to the government.
        For example, the FAR requires government contracting
    officers to determine the adequacy of a contractor's accounting
    system before awarding a cost reimbursement or other flexibly-
    priced contract.
        Also billing system audits support decisions to authorize
    contractors to submit invoices directly to the government for
    payment without further government review.
        Audits of contractor incurred cost, claims and voucher
    reviews directly support the contract payment process by
    providing the information necessary to certify payment of
    claimed costs.
        And finally, closeout audits include reviews of final
    vouchers and the cumulative costs and may include adjustments
    and recoveries, if necessary.
        Our work has identified significant contract management
    weaknesses in Federal agencies, problems with agency controls
    over payments, and weaknesses in contract auditing; and all of
    these pieces need to fit together in order to have effective
    contract oversight. These weaknesses increase the risk of
    improper payments; fraud, waste, abuse; and mismanagement.
        For example, our work at various agencies has found that
    contract officers are not performing detailed reviews of
    invoices prior to paying invoices. In some cases even if the
    contract officer had attempted to review the invoices, the
    invoices provided by the contractor did not provide sufficient
    detail to facilitate such a review.
        There were also instances in which contracting officials
    decided to rely primarily on DCAA's audits rather than
    performing normal internal control procedures.
        We also discovered cases in which contracting officers did
    not even use the DCAA audits that are available to them. We
    also found instances in which the agency was not obtaining the
    required audits of contractors' accounting systems and incurred
    audits.
        Finally, our work has found problems with contracting
    auditing itself. In 2009, we reported on audit quality problems
    at DCAA offices nationwide. We found serious quality problems
    in the 69 audits that we reviewed including compromise of
    auditor independence, insufficient audit testing, and
    inadequate planning and supervision.
        As a result of our work, DCAA rescinded over 80 audit
    reports and has been making many changes in its operations.
        We concluded that at the root of DCAA's audit problems was
    DCAA's focus on a production-oriented mission that emphasized
    performing a large quantity of audits with inadequate attention
    to performing quality audits.
        In our 2009 report, we made 17 recommendations to DOD and
    the DOD IG to improve DCAA's management environment, audit
    quality, and oversight.
        And in response DOD and DCAA have taken a number of
    actions. Our 2009 report also offered some potential actions
    for strengthening the organizational effectiveness of DCAA and
    the contract audit function in the Federal Government.
        Those potential actions would require further study as well
    as potential congressional action and include actions intended
    to strengthen DCAA's independence, including potential
    organizational changes.
        Madam Chairman, this concludes my statement and I will be
    happy to answer any questions that you have.
        Senator McCaskill. Thank you very much. Mr. Hoe.

     TESTIMONY OF E. SANDERSON HOE,\1\ PARTNER, MCKENNA, LONG, AND
          ALDRIDGE, ON BEHALF OF THE U.S. CHAMBER OF COMMERCE

        Mr. Hoe. Madam Chairman, my name is Sandy Hoe, and I am a
    partner at the law firm McKenna Long and Aldridge LLP. I am
    pleased to be here to testify before you today on behalf of the
    United States Chamber of Commerce.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Hoe appears in the appendix on
    page 98.
    ---------------------------------------------------------------------------
        As you indicated in your opening statement, I have been
    practicing government contract law on behalf of the contractor
    community for more than 37 years.
        Today's hearing is very important to the government
    contractor community. Contractors understand and accept that by
    providing goods, supplies, and services to the Federal
    Government in exchange for taxpayer funds, they are agreeing to
    contract auditing requirements.
        The need for such audits is not being questioned. How the
    audits are conducted is something on which the contractor
    community has definite views.
        Of the three auditing organizations who have appeared here
    today, the Government Accountability Office, the Inspector
    General, and the DCAA, government contractors interface most
    frequently with the DCAA.
        There are a number of concerns that the government
    contracting community has as it works with the DCAA, and you
    have heard many of these issues before, such as the length of
    time it takes to complete an audit and the quality of the
    audits themselves.
        There are, however, more recent issues facing the
    contractor community. The first is the role that the auditor is
    taking in relation to the contracting officer. Both
    traditionally and by law, contracting officers have exercised
    authority to make decisions regarding the implementation and
    performance of government contracts.
        Recently, however, there is evidence that the auditing
    community may be usurping some of the contracting officers'
    role. Let me provide you with a specific example from the
    Department of Defense.
        On January 4 of this year, DOD published a memorandum
    assigning new roles for the Defense Contract Management Agency
    (DCMA), which houses the administrative contracting officers
    for the Department of Defense, and the DCAA regarding forward
    pricing rates for contracts.
        The memorandum provides that contracting officers shall
    adopt the DCAA's recommended rates. This is a significant
    change of policy and conflicts with current law.
        Under current law, contracting officers have the authority
    to administer contracts, taking advice from auditors, lawyers,
    and technical experts.
        Industry does not see the wisdom of separating this one
    auditing function from the contracting officer who otherwise is
    the final arbiter for the government on all contract matters.
    We believe this change could cause problems in the future.
        Another issue that concerns industry today is DCAA's recent
    stridency in its application of regulations during the conduct
    of audits. Some in the industry have noticed a sharp upturn in
    DCAA's reluctance to engage in the discussion of audit issues
    when they arise through the performance of an audit.
        The Federal Acquisition Regulation cost principles and
    other cost and price compliance regulations are relatively
    explicit but still cannot and do not cover every circumstance
    that may arise. Judgment often is necessary in applying the
    regulations to resolve issues.
        Unfortunately, since 2008 and 2009, DCAA seems to have lost
    its appetite for analyzing of the intent of a regulation versus
    its literal interpretation.
        Once DCAA it has applied the literal language, it seems
    little moved by any argument that the result reached is
    nonsensical or could not have been what the drafters intended.
        This has confounded some in the contractor community who
    believe that the goal of the regulations and of government
    contracting generally is to reach correct and rational results.
        I would like to end my statement with an idea for improving
    government contracting. Consider that an audit can have at
    least two perspectives and, Madam Chairman, you mentioned this
    in your comments earlier.
        An audit can be forward looking where the intent is to
    identify steps to ensure that a contractor's system, policies,
    and procedures will comply with government contract
    requirements.
        A contract audit also can be backward looking where its
    purpose is to test the contractor's actual compliance with the
    contract and regulatory requirements.
        The first is affirmative, seeking to assure future
    compliance. The latter is more investigative and often
    associated with the concept of rooting out fraud, waste, and
    abuse.
        Each one is important but the first could be referred to as
    the carrot, as the affirmative emphasis by the government and
    the contractor on getting things right up front; and the other,
    the stick.
        Both will give a contractor incentive to be in compliance,
    as, Senator McCaskill, I believe you noted earlier. However, we
    believe the carrot is much more likely to achieve the goal.
        And by analogy from the manufacturing sector, there is a
    saying that you cannot inspect your way to a quality product.
    It is a phrase that is often heard. The lesson from this is
    that quality needs to be built into a product up front.
        Inspecting quality after the fact is far less effective,
    and I think that lessons from the manufacturing industry can
    provide some lessons for the auditing community.
        Thank you again for inviting me to testify and I look
    forward to any questions you may have.
        Senator McCaskill. Thank you, Mr. Hoe. Mr. Schwellenbach.

    TESTIMONY OF NICK SCHWELLENBACH,\1\ DIRECTOR OF INVESTIGATIONS,
                    PROJECT ON GOVERNMENT OVERSIGHT

        Mr. Schwellenbach. Chairman McCaskill, thank you for
    inviting me today to testify on ways to improve contract
    auditing including the possible benefits of an independent
    contract audit agency.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Schwellenbach appears in the
    appendix on page 105.
    ---------------------------------------------------------------------------
        This hearing is an important step. We need an independent
    and muscular contract audit agency that protects the taxpayer.
    We believe that there should be an independent Federal Contract
    Audit Agency (FCAA).
        This is not a new idea but has been around since at least
    the 1980s when DCAA whistle blower George Spanton exposed
    serious problems at DCAA. In 2009, the GAO laid out
    recommendations for congressional consideration.
        This included, in the long term, possibly creating an FCAA.
    While some knowledgeable insiders tell us that the location of
    the agency is not a key issue, POGO believes an FCAA that
    conducts most contract auditing for the entire Federal
    Government makes sense, and I believe the statistics that your
    staff prepared today I think bear that out to some extent.
        While DOD contracts and contract proposals still represent
    the bulk of DCAA's work, the DCAA has evolved since its
    inception in 1965 to become a de facto FCAA.
        There are several reasons why this happened. Contracting
    has greatly grown outside of the DOD. DCAA has deep
    institutional knowledge of contractors and utilizing the DCAA
    may be cheaper for organizations than hiring or training their
    own cadre of contract auditors.
        DCAA provides a critical check on contractors. It helps
    insure that we pay reasonable prices and spots attempts by
    contractors to charge unallowable costs.
        DCAA estimates that it saves slightly more than 5 dollars
    for 1 dollar invested in it. It is, however, horribly
    understaffed given its workload.
        For example, during the early 1990s, it had more than 2,000
    more employees than it currently does while there is a greater
    amount of contracting now.
        Non-DOD agencies can request DCAA services if they are
    willing to pay. This is a disincentive to utilize DCAA. If
    adequately and centrally funded, an FCAA would remove this
    disincentive.
        There are other possible benefits to an FCAA, the most
    significant being independence. Currently, the DCAA reports to
    the DOD Comptroller. Along with the GAO, we have some
    reservations whether this structure ensures adequate
    independence.
        Furthermore, it is apparent to us that the DCAA Office of
    General Counsel is not independent. Its attorneys are evaluated
    by the Defense Legal Services Agency (DLSA).
        A similar independence problem previously existed with the
    Pentagon IG; and in 2008, the IG Reform Act gave the Pentagon
    IG its own independent General Counsel. We think this has some
    relationship with the unwillingness of DCAA to issue subpoenas
    to contractors, and I can get into that later.
        But in the meantime, we need to improve DCAA as much as
    possible, and we are concerned about its current direction. You
    only have to read the hundreds of comments posted on the
    government executive website by people claiming to work at DCAA
    to understand that some part of its workforce is deeply angry
    with its direction.
        As I mentioned, DCAA has not issued a subpoena to a
    contractor in over two decades despite long-standing access to
    records problems they have faced from contractors. And we
    believe this is an indication that it is risk adverse.
        We are also concerned with the tenfold increase in the
    proposal review threshold at DOD. You mentioned earlier, Madam
    Chairman, that pre-award audits are highly important,
    especially in negotiating better deals for the taxpayer.
        Essentially, DOD has cut out DCAA from performing many of
    those pre-award audits. An audit often with the smaller
    contract proposals is where they find the biggest amount of
    questioned cost as a percentage of the proposal.
        Without the help of DCAA auditors, contracting officers may
    not be armed with the knowledge they need to negotiate the best
    deal for the taxpayer.
        We also understand that whistle blowers who testified
    before the full Committee in 2008 feel they have not received
    adequate and public recognition from agency leadership.
        There is also a belief by some within the DCAA that there
    is not enough accountability for the deletion of audit findings
    or the gagging of a whistle blower. Bad managers must be held
    accountable, and DCAA's promotion process needs to emphasize
    merit.
        And I will quickly conclude here.
        Besides creating a FCAA, there are opportunities to
    strengthen contract auditing. DCAA should have its own general
    counsel. While the staffing increase of 500 auditors is a step
    in the right direction, they need, perhaps, a larger workforce.
        DCAA needs more transparency. Little is known about what it
    does and we believe some reporting could be made public or to
    the Congress.
        We would also like to see more transparency with how
    contracting officers handle DCAA recommendations. Often DCAA
    auditors find large amounts of questioned costs or unallowable
    costs; but at the end of the day, it is up to the contracting
    officer to actually sustain those findings.
        Congress also needs to take a look at how the role of
    contract auditors has been systematically reduced over the last
    two decades, and I would also take a look at the complaint
    system at the DCAA. Is it working?
        Contract auditors provide a great return on investment and
    save far more money than they cost. We believe an FCAA makes
    sense; but even if DCAA remains within DOD, it needs to be
    strong as possible.
        And I am open to questioning.
        Senator McCaskill. Thank you very much. Thank all three of
    you.
        I think legitimate points have been raised by both Mr. Hoe
    and Mr. Schwellenbach. I see validity in some of the points you
    have made; and being fairly knowledgeable about the situation
    at DCAA, I do think that I understand why maybe some of the
    points that you are bringing up, Mr. Hoe, have surfaced.
        Let me talk for a minute about your testimony, Mr. Hoe. It
    is very hard for me. I will expose my bias right now. I think
    that the independence of an auditor, by definition, does not
    produce warm and fuzzy relationships between auditors and those
    people who are being audited. The biggest lie that was ever
    told to me as we went into a state agency to audit was, gosh,
    we are glad to see you.
        Mr. Hoe. I have heard that, too.
        Senator McCaskill. It is not a pleasant experience because
    human nature makes one feel very defensive when they are being
    audited. In fact, a lot of the good work that audits do gets
    lost because the auditee is too busy being defensive and is not
    in the right place to get the constructive criticism that comes
    inevitably with an audit.
        I guess my problem with, let me talk about two things. The
    DCMA directive as it relates to DCAA. I mean is it not true
    that the contracting officers have an ongoing relationship with
    the contractors that sometimes impact their ability to see
    everything clearly as it relates to some of the behavior of the
    contractors?
        Mr. Hoe. Senator McCaskill, In my experience, which goes
    back a number of decades now, it has been the rare
    circumstance, if I was even aware of a single circumstance,
    where I believe that the contracting officer was co-opted by
    the contractor with whom he was dealing as a contracting
    officer.
        Senator McCaskill. I do not think you spent much time in
    Iraq then.
        Mr. Hoe. I have not spent time in Iraq.
        Senator McCaskill. Clearly, it is the best example I can
    think of. Logistics Civil Augmentation Program (LOGCAP) by and
    large, there was a co-opting of the contracting officers. In
    fact, the contracting officers on the ground generally were
    just the low man on the totem pole that were handed a clipboard
    and had no training, had no capability of even asking a
    question like why in the world are we monogramming the towels
    in a cost-plus contract.
        Those are the kinds of things that went on there. You
    understand that.
        Mr. Hoe. Oh, yes, I do, and I do understand that a large
    part of the analysis that explains Iraq was the need to get
    into the country quickly, to set up quickly, to provide
    contract services.
        Senator McCaskill. I do not think that explains
    monogramming the towels, Mr. Hoe.
        Mr. Hoe. Excuse me.
        Senator McCaskill. I do not think that explains
    monogramming the towels. That is not consistent with getting in
    there quickly. That is consistent with running up the price to
    maximize the amount of money the contractor was being paid, .
        We could sit here all day. I mean I guess what I am saying
    is I do not want businesses to feel like they are being
    punished for doing business with the Federal Government.
        But it is hard for me from where I sit in this Subcommittee
    and the work we have done to think that we are being so
    aggressive with our auditing that they believe that it is no
    longer a place they want to do business. I mean I guess I have
    to tell you it is hard for me to think that.
        Mr. Hoe. I do not think the solution to the problem that
    you state is necessarily to take away the authority that
    contracting officers have held for decades and decades, if not
    a century, in handling government contracts.
        Contracting Officers, currently by law as well as by
    tradition, are the central clearinghouse, if you will, for all
    aspects of contracting and, of course, contracting involves not
    just cost accounting, billing, estimating, and so forth, it
    involves performance and full compliance with many other socio-
    economic provisions.
        All of that currently filters through a single source, the
    contracting officer, and I think there is good reason for that.
    There may be, with further thought, some reason to separate out
    some portion of the audit function, but it would be a very
    unique circumstance and I think it would be an unfortunate
    assessment of what contracting officers are and what they do.
        There are problems, there were problems, and probably
    currently exist problems, as you say, in Iraq and Afghanistan
    and some of those areas. I do not think that is representative
    of the entirety and history of Federal Government contracting.
        Senator McCaskill. I will not belabor the point. I think
    there is a fine line between cooperation and being co-opted,
    and I think independence, an auditor always has to err on the
    side of not being co-opted which means maybe a little less
    cooperation.
        I am not sure that the contracting officers traditionally,
    particularly in the Department of Defense, have taken that.
    Their independence is not something that was front and center
    like it is with an auditor's.
        So if we are talking about pricing information, I will look
    into what we talk about today and make sure I understand what
    has occurred and make sure it is lawful.
        But I like the idea that auditors are telling contracting
    representatives what the prices should be in my book that is
    good news.
        Mr. Hoe. If I may, Madam Chairman, that assumes the
    questions related to audited costs or prices up front on the
    fixed-price contract are quite clear.
        I do not think that is a true picture of the situation.
    There are many areas, as I mentioned in my opening statement,
    of regulations that state certain standards or principles for
    the allowability of a cost or the accounting for a cost that
    create a good bit of debate and discussion amongst the
    auditors, the contracting officers, and the contractors that
    goes on every day.
        Often the outcome is not precisely what one party or
    another stated at the beginning. It is the result of a
    negotiation, and contracting officers hold the role of the
    party negotiating on behalf of the government.
        They certainly do, and they are commanded by the Federal
    Acquisition Regulation to take input from their advisors, which
    include the auditors, the lawyers, the technical people.
        That all ought to come through the contracting officer. It
    is the contracting officer who centralizes all those facts, all
    those considerations, and renders a final judgment.
        If the view is to take a different tact going forward, I
    think it deserves some debate.
        Senator McCaskill. Some discussion.
        Mr. Hoe. Yes.
        Senator McCaskill. Fair enough.
        Ms. Franzel, you talked about preventative controls. I
    think this is a huge point that needs to be made here. I think
    that accounting system reviews, invoice reviews, all of the
    things are incredibly important.
        Do you think the right balance is being struck now between
    time being spent on those measures versus the time we spend on
    auditing?
        Ms. Franzel. I think that we do need to evaluate this both
    from the contract management side of the house as well as the
    auditing side of the house because if contract management or
    contracting officers are not doing their job then a huge
    preventive mechanism is being lost.
        There are also certain types of audits that have great
    value as a preventive mechanism. And rather than waiting for
    the detective mechanism, we have seen examples in agencies
    where because the final billing rates, indirect billing rates
    were never determined, the contractors were actually booking
    payables on their financial statements to the government
    because they knew they owed the government money and there is a
    backlog in these audits.
        If this could have been handled properly up front, these
    types of problems would not be occurring.
        But I want to emphasize that this is really on both sides
    of the house. The contracting officers need to do their jobs
    properly and implement the appropriate preventive controls over
    their responsibilities.
        And then the audits, I think there is certainly room for
    taking a look at the different types of audits that are being
    conducted--where do we get the best bang for the buck?
        It is not always going to be a one size fits all though.
    Some contractors are very risky for unique reasons, and for
    those contractors, it may be best to go in and do an after-the-
    fact audit to try to recover certain fraudulent charges.
        So everybody needs to be working diligently on this but
    there is certainly benefit for those detective audits.
        Senator McCaskill. I believe the number is $55 billion in
    improper payments at the Department of Health and Human
    Services (HHS). Does that sound right?
        Ms. Franzel. I think that is about right, yes. The
    government-wide total is $125 billion, and I think HHS is a
    very large chunk of that.
        Senator McCaskill. I will make one bold statement here.
    That would never happen in the private sector, ever, ever, ever
    happen in the private sector.
        We would not let that money go out the door as we have
    without putting more preventative controls in place up front,
    and it is very hard to get the government's attention about
    improper payments because it is not like it impacts anybody's
    bottom line.
        It does not impact profit margin. It does not impact their
    discussions with the bank. It does not impact anything of that.
        So I think that we need to do more work in this
    Subcommittee about preventative measures as it relates to
    contracting. Maybe drill down even deeper as to what is being
    done in the various agencies and what is not being done, just
    through the lens of preventative measures before the money goes
    out the door because I think it is something that we have to
    focus on to the extent that we need to.
        I know GAO has done some good work here but we have a lot
    more we need to be doing.
        Mr. Schwellenbach, I understand, I like to say that in
    government we can grow when somebody has a good idea and gets
    enough votes.
        Businesses cannot grow unless they have the revenue stream
    to pay for it; and if they do grow and their idea about growing
    does not work, they cut it.
        So government is very inefficient when it relates to
    creating the programs. I am beyond reluctant, after looking at
    what happened when we created Homeland Security and looking
    what happens whenever we create a new program.
        We generally do not check to see if it is really
    duplicative. We generally do not check to see if there are any
    metrics, if the program is doing what is supposed to be doing
    very well. Job training is a great example.
        Broadband deployment is another great example. We have two
    different agencies that are both ostensibly running broadband
    deployment programs, both Agriculture and Commerce.
        I am really not excited about creating a new agency even if
    it is auditing. If there ever was going to be a subject matter
    I would want to create a new agency, it would the auditing.
        Why can we not make DCAA, why can we not just improve DCAA
    to be the main repository of auditors that agencies can go to
    when they need audit work done within the agencies?
        Mr. Schwellenbach. Madam Chairman, I think you are
    absolutely right. I think as GAO recognized in their 2009
    report it is a risky suggestion. You could possibly make things
    worse. If you created a new agency, there could be a lot of up
    front costs.
        Senator McCaskill. And the wrong kind of competition.
        Mr. Schwellenbach. Absolutely.
        So we do believe in a perfect world you would have an FCAA
    that is centrally funded, that removes the disincentive for
    non-DOD agencies to utilize its services.
        We think obviously that would be the best of all worlds.
    Clearly, we have budget limitations. You yourself mentioned, we
    are probably entering some lean times. So why not make the
    system as it exists now work better, which is one thing I tried
    to address in my testimony.
        I think there are a lot of more modest reforms such as
    giving the DCAA its own independent general counsel, another
    issue the GAO pointed out in its 2009 report. I think that
    could do a lot of good.
        Senator McCaskill. Like we did for the IGs?
        Mr. Schwellenbach. Yes, as we did for the IGs. I think that
    is a common sense solution. I do not think there would be much
    cost involved beyond what we are already paying.
        There are also ways DCAA uses its workforce that perhaps
    need to be reviewed. I am not entirely convinced that only
    looking at large contract dollars is a risk-based approach.
        For example, a lot of the smaller contracts involve
    nontraditional government contractors that may not have the
    internal control systems that are government-compliant in
    place.
        So sometimes they are the riskier actors rather than the
    Boeings and Lockheeds of the world, not to say they have not
    done anything wrong which they clearly have in the past.
        So I do think there are a lot of modest measures that need
    to be looked at. The subpoena, the lack of subpoenas over the
    last two decades I think is a major issue.
        We know DCAA has problems with getting access to records. A
    few successful uses of the subpoena by DCAA could really shake
    up the contractor community and make them open up their books
    more often and reduce a lot of the issues with access to
    records and timeliness that currently exists.
        Senator McCaskill. I think you are right about that. I
    think that we do need to begin to ask the question--has there
    never been an occasion that DCAA has not gotten the information
    it needed; and if there has been, what is the reason?
        And we will propose that question for the record for Mr.
    Fitzgerald and his agency.
        I recall vividly that it was, in fact, a lawyer at DOD who
    wrote the very offensive letter to the whistle blower basically
    telling the whistle blower that she was not allowed to speak.
    It was very un-American, the letter that was composed by the
    counsel at the Department of Defense as it related to what
    happened at DCAA.
        Mr. Schwellenbach. I would say that because that general
    counsel is not directly accountable to the Director of DCAA, it
    is more difficult to hold that general counsel accountable.
        Senator McCaskill. Yes. We had a hard time. We have a hard
    time.
        Let me ask. Are there any other barriers to businesses that
    you see, Mr. Hoe, that I need to make sure that we keep on the
    radar as it relates to auditing work?
        Is there something we could be asking of our contractors
    that they do on their side of the equation that would prevent
    some of the less than productive interaction with the auditors?
        Should we be requiring them to do more of the internal
    audits that then can be sampled and approved by auditors within
    the IG Departments of these various agencies?
        Mr. Hoe. Senator McCaskill, I think that is an excellent
    suggestion, and in fact, there are currently in place a number
    of programs designed to encourage, if not require, contractors
    to examine their own operations prior to a government auditor
    or investigator coming to the company to assess its systems or
    its performance.
        The voluntary disclosure program was in existence for a
    number of years but is now replaced or supplanted with the
    mandatory disclosure requirement that is placed in new
    contracts and obligates contractors to come forward and
    disclose on their own certain acts that may rise to a certain
    level of malfeasance that encourages----
        Senator McCaskill. Like looking at the competitor's fact
    sheet on the joint tanker competition?
        Mr. Hoe. Yes, very definitely.
        Senator McCaskill. That would definitely be one.
        Mr. Hoe. I believe that would very definitely be one, and
    there are certainly others. I can say from my own experience
    that there are many contractors out there who, since the
    implementation of that program, have been raising questions
    with people like myself to understand what the requirements are
    and what kind of looking they need to do within their company,
    how extensive, what needs to be disclosed, and what does not
    rise to the level of disclosure.
        It is having a substantial effect. I think, taking into
    account what is already in place, one would want to consider
    that before deciding whether there are additional affirmative
    steps that would be required by law or otherwise, for
    contractors to undertake themselves.
        There are many incentives currently for contractors to look
    at their own systems and to make them compliant or try to make
    them as compliant as they can.
        Senator McCaskill. I am sure, Ms. Franzel, you are familiar
    with the single audit and the way the decisions are made in
    terms of prioritization of audits that are done under the
    single audit.
        And I guess, and I should have asked Mr. Fitzgerald this
    when he was testifying. It seems to me that the way in which
    States are told they must prioritize audit work for the Federal
    Government, that exercise would be fairly simple to implement
    within the Federal Government.
        In other words, agencies deciding how many of their
    programs are what, in the single audit I think it is ``A'',
    ``B'' and ``C'' I think, is it not?
        Ms. Franzel. ``A'' and ``B''.
        Senator McCaskill. ``A'' and ``B''. We probably did a lot
    of ``C``s where I was because I like doing some of the smaller
    programs. And ``A'' is the size of the program. ``B'' is those
    that are high risk for other reasons. And then if you wanted to
    do other programs, then it had to be in consultation and
    cooperation with the Federal Government signing off on it.
        Do we have that kind of risk assessment going on in each
    agency so that in a very simple way DCAA could look at
    government-wide where are the big threshold programs?
        But then on the other hand, where are these programs? I
    mean the example I like to use is weatherization under the
    American Recovery and Reinvestment Act (ARRA). That was a lot
    of money getting pumped into a program that had, up until that
    time, had very modest appropriations. A lot of labor involved,
    a lot of a shotgun-type approach across the country in how the
    money was used.
        And even though it was not as large as say a Medicaid and
    Medicare program, the opportunity for lack of internal
    controls, the opportunity for a lot of money walking away with
    somebody's nephew in a pickup truck was real.
        The other part of the question I want to ask is, Is anyone
    using the software programs that are out there right now that
    allow the integration of data point sets to really expose risks
    similar to what we did on ARRA where we contracted with a
    company to try to detect fraud by overlays of integrated data
    sets to show where there might be the most risk?
        Ms. Franzel. Certainly. I do believe that the risk
    assessment function can be made better and bolstered, and I
    think it is being done inconsistently across agencies. So I
    think that is really the next big step in terms of looking at
    how contract audits are done and to what extent across the
    Federal Government.
        And let me emphasize across the Federal Government because
    similar to the single audit for contracting, there is the
    cognizant agency concept. And so one contractor may actually be
    doing work for multiple agencies but one agency is the
    cognizant agency.
        So what kind of communication and coordination is happening
    for all of the affected agencies? I think that is probably
    something else that can be improved and that can feed back into
    this risk assessment process.
        And frankly if the agencies are coordinating, one would
    hope it would make it a little easier on the affected
    contractors.
        So I think risk assessment is something that definitely
    needs to be looked at and probably improved as well as
    coordination across the government agencies.
        Senator McCaskill. Is that something we could get the IG
    counsels to do, to do a better job of coordination of risk
    assessment across all agencies that would then be a document
    that could be a point of reference for DCAA when they get
    requests?
        Ms. Franzel. Yes. That would certainly be one place. In
    fact, we were having this discussion at GAO, how would this
    coordination happen, perhaps it could be under OMB. It would
    have be some sort of centralized----
        Senator McCaskill. Let us not go there.
        Ms. Franzel [continuing]. That really it could be an IG. It
    could be the Council of Inspectors General on Integrity and
    Efficiency (CIGIE). So we do need some kind of centralized risk
    assessment function, I think, in coordination across agencies,
    and frankly, somebody or an entity to serve as technical
    expertise and consultation to the agencies because we have seen
    varying degrees of internal controls over the contracting
    function and the contracting officer's diligence to the
    preventive controls and other controls.
        So there is just huge room for improvement here.
        Your final question was about taking the data points that
    were used for the recovery monies, and I do believe that the
    recovery board is looking at how to get that out to agencies
    and use that going forward, but that is something where we need
    institutionalize in government going forward.
        Senator McCaskill. Really. I have seen the software
    demonstrated. In fact, I believe they are using it with (SERP).
        Ms. Franzel. It is very impressive.
        Senator McCaskill. They are overlaying attacks versus
    population versus SERP money to make the assessment of whether
    not the SERP funds are truly getting at the cause that we want
    them to get at in terms of stabilizing different regions of
    Afghanistan.
        I think that is something that we will continue to take a
    look at because I think technology that is available now, as
    long as we do not create a new agency to do this technology, if
    we could effectively and efficiently access the technology that
    is out there right now, I think we could save a lot of man-
    hours just by using data that is available and that can be
    digested, synthesized, and spit back out in a way that helps us
    manage risk.
        I want to thank all of you today. I think we have some
    things to work on. I think this risk assessment government-wide
    is important, getting some consistency.
        I think looking at some of the things we have talked about
    in terms of DCAA and making sure they have the independence
    they need if they are going to be the go-to contract agency and
    importantly looking at preventative measures going forward and
    making sure they are getting the emphasis they need so we are
    not trying to claw back but rather we are preventing up front.
        So most Americans cannot even comprehend over $100 billion
    in improper payments. That dog does not hunt. We have to figure
    how to get at that.
        I appreciate everyone's time today, and we will continue to
    follow up with you because we will have a few more questions
    for the record.
        Thank you very much.
        This hearing is adjourned.
        [Whereupon, at 4:28 p.m., the Subcommittee was adjourned.]

                                A P P E N D I X

                                  ----------

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