[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




                  U.S. GOVERNMENT PRINTING OFFICE
66-619                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
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

                              ----------                              

[GRAPHIC] [TIFF OMITTED] 66619.001

[GRAPHIC] [TIFF OMITTED] 66619.002

[GRAPHIC] [TIFF OMITTED] 66619.003

[GRAPHIC] [TIFF OMITTED] 66619.004

[GRAPHIC] [TIFF OMITTED] 66619.005

[GRAPHIC] [TIFF OMITTED] 66619.006

[GRAPHIC] [TIFF OMITTED] 66619.007

[GRAPHIC] [TIFF OMITTED] 66619.008

[GRAPHIC] [TIFF OMITTED] 66619.009

[GRAPHIC] [TIFF OMITTED] 66619.010

[GRAPHIC] [TIFF OMITTED] 66619.011

[GRAPHIC] [TIFF OMITTED] 66619.012

[GRAPHIC] [TIFF OMITTED] 66619.013

[GRAPHIC] [TIFF OMITTED] 66619.014

[GRAPHIC] [TIFF OMITTED] 66619.015

[GRAPHIC] [TIFF OMITTED] 66619.016

[GRAPHIC] [TIFF OMITTED] 66619.017

[GRAPHIC] [TIFF OMITTED] 66619.018

[GRAPHIC] [TIFF OMITTED] 66619.019

[GRAPHIC] [TIFF OMITTED] 66619.020

[GRAPHIC] [TIFF OMITTED] 66619.021

[GRAPHIC] [TIFF OMITTED] 66619.022

[GRAPHIC] [TIFF OMITTED] 66619.023

[GRAPHIC] [TIFF OMITTED] 66619.024

[GRAPHIC] [TIFF OMITTED] 66619.025

[GRAPHIC] [TIFF OMITTED] 66619.026

[GRAPHIC] [TIFF OMITTED] 66619.027

[GRAPHIC] [TIFF OMITTED] 66619.028

[GRAPHIC] [TIFF OMITTED] 66619.029

[GRAPHIC] [TIFF OMITTED] 66619.030

[GRAPHIC] [TIFF OMITTED] 66619.031

[GRAPHIC] [TIFF OMITTED] 66619.032

[GRAPHIC] [TIFF OMITTED] 66619.033

[GRAPHIC] [TIFF OMITTED] 66619.034

[GRAPHIC] [TIFF OMITTED] 66619.035

[GRAPHIC] [TIFF OMITTED] 66619.036

[GRAPHIC] [TIFF OMITTED] 66619.037

[GRAPHIC] [TIFF OMITTED] 66619.038

[GRAPHIC] [TIFF OMITTED] 66619.039

[GRAPHIC] [TIFF OMITTED] 66619.040

[GRAPHIC] [TIFF OMITTED] 66619.041

[GRAPHIC] [TIFF OMITTED] 66619.042

[GRAPHIC] [TIFF OMITTED] 66619.043

[GRAPHIC] [TIFF OMITTED] 66619.044

[GRAPHIC] [TIFF OMITTED] 66619.045

[GRAPHIC] [TIFF OMITTED] 66619.046

[GRAPHIC] [TIFF OMITTED] 66619.047

[GRAPHIC] [TIFF OMITTED] 66619.048

[GRAPHIC] [TIFF OMITTED] 66619.049

[GRAPHIC] [TIFF OMITTED] 66619.050

[GRAPHIC] [TIFF OMITTED] 66619.051

[GRAPHIC] [TIFF OMITTED] 66619.052

[GRAPHIC] [TIFF OMITTED] 66619.053

[GRAPHIC] [TIFF OMITTED] 66619.054

[GRAPHIC] [TIFF OMITTED] 66619.055

[GRAPHIC] [TIFF OMITTED] 66619.056

[GRAPHIC] [TIFF OMITTED] 66619.057

[GRAPHIC] [TIFF OMITTED] 66619.058

[GRAPHIC] [TIFF OMITTED] 66619.059

[GRAPHIC] [TIFF OMITTED] 66619.060

[GRAPHIC] [TIFF OMITTED] 66619.061

[GRAPHIC] [TIFF OMITTED] 66619.062

[GRAPHIC] [TIFF OMITTED] 66619.063

[GRAPHIC] [TIFF OMITTED] 66619.064

[GRAPHIC] [TIFF OMITTED] 66619.065

[GRAPHIC] [TIFF OMITTED] 66619.066

[GRAPHIC] [TIFF OMITTED] 66619.067

[GRAPHIC] [TIFF OMITTED] 66619.068

[GRAPHIC] [TIFF OMITTED] 66619.069

[GRAPHIC] [TIFF OMITTED] 66619.070

[GRAPHIC] [TIFF OMITTED] 66619.071

[GRAPHIC] [TIFF OMITTED] 66619.072

[GRAPHIC] [TIFF OMITTED] 66619.073

[GRAPHIC] [TIFF OMITTED] 66619.074

[GRAPHIC] [TIFF OMITTED] 66619.075

[GRAPHIC] [TIFF OMITTED] 66619.076

[GRAPHIC] [TIFF OMITTED] 66619.077

[GRAPHIC] [TIFF OMITTED] 66619.078

[GRAPHIC] [TIFF OMITTED] 66619.079

[GRAPHIC] [TIFF OMITTED] 66619.080

[GRAPHIC] [TIFF OMITTED] 66619.081

[GRAPHIC] [TIFF OMITTED] 66619.082

[GRAPHIC] [TIFF OMITTED] 66619.083

[GRAPHIC] [TIFF OMITTED] 66619.084

[GRAPHIC] [TIFF OMITTED] 66619.085

[GRAPHIC] [TIFF OMITTED] 66619.086

[GRAPHIC] [TIFF OMITTED] 66619.087

[GRAPHIC] [TIFF OMITTED] 66619.088

[GRAPHIC] [TIFF OMITTED] 66619.089

[GRAPHIC] [TIFF OMITTED] 66619.090

[GRAPHIC] [TIFF OMITTED] 66619.091

[GRAPHIC] [TIFF OMITTED] 66619.092

[GRAPHIC] [TIFF OMITTED] 66619.093

[GRAPHIC] [TIFF OMITTED] 66619.094

[GRAPHIC] [TIFF OMITTED] 66619.095

[GRAPHIC] [TIFF OMITTED] 66619.096

                                 
