[Senate Hearing 112-42]
[From the U.S. Government Publishing Office]
S. Hrg. 112-42
IMPROVING FEDERAL CONTRACT AUDITING
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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
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and Governmental Affairs
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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
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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
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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.
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\1\ The information referenced by Senator McCaskill appears in the
appendix on page 113.
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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.
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\1\ The prepared statement of Mr. Skelly appears in the appendix on
page 37.
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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.
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\1\ The prepared statement of Ms. Kolb appears in the appendix on
page 40.
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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.
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\1\ The prepared statement of Mr. Miller appears in the appendix on
page 46.
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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.
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\1\ The prepared statement of Mr. Fitzgerald appears in the
appendix on page 55.
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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.
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\1\ The prepared statement of Ms. Franzel appears in the appendix
on page 65.
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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.
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\1\ The prepared statement of Mr. Hoe appears in the appendix on
page 98.
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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.
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\1\ The prepared statement of Mr. Schwellenbach appears in the
appendix on page 105.
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This hearing is an important step. We need an independent
and muscular contract audit agency that protects the taxpayer.
We believe that there should be an independent Federal Contract
Audit Agency (FCAA).
This is not a new idea but has been around since at least
the 1980s when DCAA whistle blower George Spanton exposed
serious problems at DCAA. In 2009, the GAO laid out
recommendations for congressional consideration.
This included, in the long term, possibly creating an FCAA.
While some knowledgeable insiders tell us that the location of
the agency is not a key issue, POGO believes an FCAA that
conducts most contract auditing for the entire Federal
Government makes sense, and I believe the statistics that your
staff prepared today I think bear that out to some extent.
While DOD contracts and contract proposals still represent
the bulk of DCAA's work, the DCAA has evolved since its
inception in 1965 to become a de facto FCAA.
There are several reasons why this happened. Contracting
has greatly grown outside of the DOD. DCAA has deep
institutional knowledge of contractors and utilizing the DCAA
may be cheaper for organizations than hiring or training their
own cadre of contract auditors.
DCAA provides a critical check on contractors. It helps
insure that we pay reasonable prices and spots attempts by
contractors to charge unallowable costs.
DCAA estimates that it saves slightly more than 5 dollars
for 1 dollar invested in it. It is, however, horribly
understaffed given its workload.
For example, during the early 1990s, it had more than 2,000
more employees than it currently does while there is a greater
amount of contracting now.
Non-DOD agencies can request DCAA services if they are
willing to pay. This is a disincentive to utilize DCAA. If
adequately and centrally funded, an FCAA would remove this
disincentive.
There are other possible benefits to an FCAA, the most
significant being independence. Currently, the DCAA reports to
the DOD Comptroller. Along with the GAO, we have some
reservations whether this structure ensures adequate
independence.
Furthermore, it is apparent to us that the DCAA Office of
General Counsel is not independent. Its attorneys are evaluated
by the Defense Legal Services Agency (DLSA).
A similar independence problem previously existed with the
Pentagon IG; and in 2008, the IG Reform Act gave the Pentagon
IG its own independent General Counsel. We think this has some
relationship with the unwillingness of DCAA to issue subpoenas
to contractors, and I can get into that later.
But in the meantime, we need to improve DCAA as much as
possible, and we are concerned about its current direction. You
only have to read the hundreds of comments posted on the
government executive website by people claiming to work at DCAA
to understand that some part of its workforce is deeply angry
with its direction.
As I mentioned, DCAA has not issued a subpoena to a
contractor in over two decades despite long-standing access to
records problems they have faced from contractors. And we
believe this is an indication that it is risk adverse.
We are also concerned with the tenfold increase in the
proposal review threshold at DOD. You mentioned earlier, Madam
Chairman, that pre-award audits are highly important,
especially in negotiating better deals for the taxpayer.
Essentially, DOD has cut out DCAA from performing many of
those pre-award audits. An audit often with the smaller
contract proposals is where they find the biggest amount of
questioned cost as a percentage of the proposal.
Without the help of DCAA auditors, contracting officers may
not be armed with the knowledge they need to negotiate the best
deal for the taxpayer.
We also understand that whistle blowers who testified
before the full Committee in 2008 feel they have not received
adequate and public recognition from agency leadership.
There is also a belief by some within the DCAA that there
is not enough accountability for the deletion of audit findings
or the gagging of a whistle blower. Bad managers must be held
accountable, and DCAA's promotion process needs to emphasize
merit.
And I will quickly conclude here.
Besides creating a FCAA, there are opportunities to
strengthen contract auditing. DCAA should have its own general
counsel. While the staffing increase of 500 auditors is a step
in the right direction, they need, perhaps, a larger workforce.
DCAA needs more transparency. Little is known about what it
does and we believe some reporting could be made public or to
the Congress.
We would also like to see more transparency with how
contracting officers handle DCAA recommendations. Often DCAA
auditors find large amounts of questioned costs or unallowable
costs; but at the end of the day, it is up to the contracting
officer to actually sustain those findings.
Congress also needs to take a look at how the role of
contract auditors has been systematically reduced over the last
two decades, and I would also take a look at the complaint
system at the DCAA. Is it working?
Contract auditors provide a great return on investment and
save far more money than they cost. We believe an FCAA makes
sense; but even if DCAA remains within DOD, it needs to be
strong as possible.
And I am open to questioning.
Senator McCaskill. Thank you very much. Thank all three of
you.
I think legitimate points have been raised by both Mr. Hoe
and Mr. Schwellenbach. I see validity in some of the points you
have made; and being fairly knowledgeable about the situation
at DCAA, I do think that I understand why maybe some of the
points that you are bringing up, Mr. Hoe, have surfaced.
Let me talk for a minute about your testimony, Mr. Hoe. It
is very hard for me. I will expose my bias right now. I think
that the independence of an auditor, by definition, does not
produce warm and fuzzy relationships between auditors and those
people who are being audited. The biggest lie that was ever
told to me as we went into a state agency to audit was, gosh,
we are glad to see you.
Mr. Hoe. I have heard that, too.
Senator McCaskill. It is not a pleasant experience because
human nature makes one feel very defensive when they are being
audited. In fact, a lot of the good work that audits do gets
lost because the auditee is too busy being defensive and is not
in the right place to get the constructive criticism that comes
inevitably with an audit.
I guess my problem with, let me talk about two things. The
DCMA directive as it relates to DCAA. I mean is it not true
that the contracting officers have an ongoing relationship with
the contractors that sometimes impact their ability to see
everything clearly as it relates to some of the behavior of the
contractors?
Mr. Hoe. Senator McCaskill, In my experience, which goes
back a number of decades now, it has been the rare
circumstance, if I was even aware of a single circumstance,
where I believe that the contracting officer was co-opted by
the contractor with whom he was dealing as a contracting
officer.
Senator McCaskill. I do not think you spent much time in
Iraq then.
Mr. Hoe. I have not spent time in Iraq.
Senator McCaskill. Clearly, it is the best example I can
think of. Logistics Civil Augmentation Program (LOGCAP) by and
large, there was a co-opting of the contracting officers. In
fact, the contracting officers on the ground generally were
just the low man on the totem pole that were handed a clipboard
and had no training, had no capability of even asking a
question like why in the world are we monogramming the towels
in a cost-plus contract.
Those are the kinds of things that went on there. You
understand that.
Mr. Hoe. Oh, yes, I do, and I do understand that a large
part of the analysis that explains Iraq was the need to get
into the country quickly, to set up quickly, to provide
contract services.
Senator McCaskill. I do not think that explains
monogramming the towels, Mr. Hoe.
Mr. Hoe. Excuse me.
Senator McCaskill. I do not think that explains
monogramming the towels. That is not consistent with getting in
there quickly. That is consistent with running up the price to
maximize the amount of money the contractor was being paid, .
We could sit here all day. I mean I guess what I am saying
is I do not want businesses to feel like they are being
punished for doing business with the Federal Government.
But it is hard for me from where I sit in this Subcommittee
and the work we have done to think that we are being so
aggressive with our auditing that they believe that it is no
longer a place they want to do business. I mean I guess I have
to tell you it is hard for me to think that.
Mr. Hoe. I do not think the solution to the problem that
you state is necessarily to take away the authority that
contracting officers have held for decades and decades, if not
a century, in handling government contracts.
Contracting Officers, currently by law as well as by
tradition, are the central clearinghouse, if you will, for all
aspects of contracting and, of course, contracting involves not
just cost accounting, billing, estimating, and so forth, it
involves performance and full compliance with many other socio-
economic provisions.
All of that currently filters through a single source, the
contracting officer, and I think there is good reason for that.
There may be, with further thought, some reason to separate out
some portion of the audit function, but it would be a very
unique circumstance and I think it would be an unfortunate
assessment of what contracting officers are and what they do.
There are problems, there were problems, and probably
currently exist problems, as you say, in Iraq and Afghanistan
and some of those areas. I do not think that is representative
of the entirety and history of Federal Government contracting.
Senator McCaskill. I will not belabor the point. I think
there is a fine line between cooperation and being co-opted,
and I think independence, an auditor always has to err on the
side of not being co-opted which means maybe a little less
cooperation.
I am not sure that the contracting officers traditionally,
particularly in the Department of Defense, have taken that.
Their independence is not something that was front and center
like it is with an auditor's.
So if we are talking about pricing information, I will look
into what we talk about today and make sure I understand what
has occurred and make sure it is lawful.
But I like the idea that auditors are telling contracting
representatives what the prices should be in my book that is
good news.
Mr. Hoe. If I may, Madam Chairman, that assumes the
questions related to audited costs or prices up front on the
fixed-price contract are quite clear.
I do not think that is a true picture of the situation.
There are many areas, as I mentioned in my opening statement,
of regulations that state certain standards or principles for
the allowability of a cost or the accounting for a cost that
create a good bit of debate and discussion amongst the
auditors, the contracting officers, and the contractors that
goes on every day.
Often the outcome is not precisely what one party or
another stated at the beginning. It is the result of a
negotiation, and contracting officers hold the role of the
party negotiating on behalf of the government.
They certainly do, and they are commanded by the Federal
Acquisition Regulation to take input from their advisors, which
include the auditors, the lawyers, the technical people.
That all ought to come through the contracting officer. It
is the contracting officer who centralizes all those facts, all
those considerations, and renders a final judgment.
If the view is to take a different tact going forward, I
think it deserves some debate.
Senator McCaskill. Some discussion.
Mr. Hoe. Yes.
Senator McCaskill. Fair enough.
Ms. Franzel, you talked about preventative controls. I
think this is a huge point that needs to be made here. I think
that accounting system reviews, invoice reviews, all of the
things are incredibly important.
Do you think the right balance is being struck now between
time being spent on those measures versus the time we spend on
auditing?
Ms. Franzel. I think that we do need to evaluate this both
from the contract management side of the house as well as the
auditing side of the house because if contract management or
contracting officers are not doing their job then a huge
preventive mechanism is being lost.
There are also certain types of audits that have great
value as a preventive mechanism. And rather than waiting for
the detective mechanism, we have seen examples in agencies
where because the final billing rates, indirect billing rates
were never determined, the contractors were actually booking
payables on their financial statements to the government
because they knew they owed the government money and there is a
backlog in these audits.
If this could have been handled properly up front, these
types of problems would not be occurring.
But I want to emphasize that this is really on both sides
of the house. The contracting officers need to do their jobs
properly and implement the appropriate preventive controls over
their responsibilities.
And then the audits, I think there is certainly room for
taking a look at the different types of audits that are being
conducted--where do we get the best bang for the buck?
It is not always going to be a one size fits all though.
Some contractors are very risky for unique reasons, and for
those contractors, it may be best to go in and do an after-the-
fact audit to try to recover certain fraudulent charges.
So everybody needs to be working diligently on this but
there is certainly benefit for those detective audits.
Senator McCaskill. I believe the number is $55 billion in
improper payments at the Department of Health and Human
Services (HHS). Does that sound right?
Ms. Franzel. I think that is about right, yes. The
government-wide total is $125 billion, and I think HHS is a
very large chunk of that.
Senator McCaskill. I will make one bold statement here.
That would never happen in the private sector, ever, ever, ever
happen in the private sector.
We would not let that money go out the door as we have
without putting more preventative controls in place up front,
and it is very hard to get the government's attention about
improper payments because it is not like it impacts anybody's
bottom line.
It does not impact profit margin. It does not impact their
discussions with the bank. It does not impact anything of that.
So I think that we need to do more work in this
Subcommittee about preventative measures as it relates to
contracting. Maybe drill down even deeper as to what is being
done in the various agencies and what is not being done, just
through the lens of preventative measures before the money goes
out the door because I think it is something that we have to
focus on to the extent that we need to.
I know GAO has done some good work here but we have a lot
more we need to be doing.
Mr. Schwellenbach, I understand, I like to say that in
government we can grow when somebody has a good idea and gets
enough votes.
Businesses cannot grow unless they have the revenue stream
to pay for it; and if they do grow and their idea about growing
does not work, they cut it.
So government is very inefficient when it relates to
creating the programs. I am beyond reluctant, after looking at
what happened when we created Homeland Security and looking
what happens whenever we create a new program.
We generally do not check to see if it is really
duplicative. We generally do not check to see if there are any
metrics, if the program is doing what is supposed to be doing
very well. Job training is a great example.
Broadband deployment is another great example. We have two
different agencies that are both ostensibly running broadband
deployment programs, both Agriculture and Commerce.
I am really not excited about creating a new agency even if
it is auditing. If there ever was going to be a subject matter
I would want to create a new agency, it would the auditing.
Why can we not make DCAA, why can we not just improve DCAA
to be the main repository of auditors that agencies can go to
when they need audit work done within the agencies?
Mr. Schwellenbach. Madam Chairman, I think you are
absolutely right. I think as GAO recognized in their 2009
report it is a risky suggestion. You could possibly make things
worse. If you created a new agency, there could be a lot of up
front costs.
Senator McCaskill. And the wrong kind of competition.
Mr. Schwellenbach. Absolutely.
So we do believe in a perfect world you would have an FCAA
that is centrally funded, that removes the disincentive for
non-DOD agencies to utilize its services.
We think obviously that would be the best of all worlds.
Clearly, we have budget limitations. You yourself mentioned, we
are probably entering some lean times. So why not make the
system as it exists now work better, which is one thing I tried
to address in my testimony.
I think there are a lot of more modest reforms such as
giving the DCAA its own independent general counsel, another
issue the GAO pointed out in its 2009 report. I think that
could do a lot of good.
Senator McCaskill. Like we did for the IGs?
Mr. Schwellenbach. Yes, as we did for the IGs. I think that
is a common sense solution. I do not think there would be much
cost involved beyond what we are already paying.
There are also ways DCAA uses its workforce that perhaps
need to be reviewed. I am not entirely convinced that only
looking at large contract dollars is a risk-based approach.
For example, a lot of the smaller contracts involve
nontraditional government contractors that may not have the
internal control systems that are government-compliant in
place.
So sometimes they are the riskier actors rather than the
Boeings and Lockheeds of the world, not to say they have not
done anything wrong which they clearly have in the past.
So I do think there are a lot of modest measures that need
to be looked at. The subpoena, the lack of subpoenas over the
last two decades I think is a major issue.
We know DCAA has problems with getting access to records. A
few successful uses of the subpoena by DCAA could really shake
up the contractor community and make them open up their books
more often and reduce a lot of the issues with access to
records and timeliness that currently exists.
Senator McCaskill. I think you are right about that. I
think that we do need to begin to ask the question--has there
never been an occasion that DCAA has not gotten the information
it needed; and if there has been, what is the reason?
And we will propose that question for the record for Mr.
Fitzgerald and his agency.
I recall vividly that it was, in fact, a lawyer at DOD who
wrote the very offensive letter to the whistle blower basically
telling the whistle blower that she was not allowed to speak.
It was very un-American, the letter that was composed by the
counsel at the Department of Defense as it related to what
happened at DCAA.
Mr. Schwellenbach. I would say that because that general
counsel is not directly accountable to the Director of DCAA, it
is more difficult to hold that general counsel accountable.
Senator McCaskill. Yes. We had a hard time. We have a hard
time.
Let me ask. Are there any other barriers to businesses that
you see, Mr. Hoe, that I need to make sure that we keep on the
radar as it relates to auditing work?
Is there something we could be asking of our contractors
that they do on their side of the equation that would prevent
some of the less than productive interaction with the auditors?
Should we be requiring them to do more of the internal
audits that then can be sampled and approved by auditors within
the IG Departments of these various agencies?
Mr. Hoe. Senator McCaskill, I think that is an excellent
suggestion, and in fact, there are currently in place a number
of programs designed to encourage, if not require, contractors
to examine their own operations prior to a government auditor
or investigator coming to the company to assess its systems or
its performance.
The voluntary disclosure program was in existence for a
number of years but is now replaced or supplanted with the
mandatory disclosure requirement that is placed in new
contracts and obligates contractors to come forward and
disclose on their own certain acts that may rise to a certain
level of malfeasance that encourages----
Senator McCaskill. Like looking at the competitor's fact
sheet on the joint tanker competition?
Mr. Hoe. Yes, very definitely.
Senator McCaskill. That would definitely be one.
Mr. Hoe. I believe that would very definitely be one, and
there are certainly others. I can say from my own experience
that there are many contractors out there who, since the
implementation of that program, have been raising questions
with people like myself to understand what the requirements are
and what kind of looking they need to do within their company,
how extensive, what needs to be disclosed, and what does not
rise to the level of disclosure.
It is having a substantial effect. I think, taking into
account what is already in place, one would want to consider
that before deciding whether there are additional affirmative
steps that would be required by law or otherwise, for
contractors to undertake themselves.
There are many incentives currently for contractors to look
at their own systems and to make them compliant or try to make
them as compliant as they can.
Senator McCaskill. I am sure, Ms. Franzel, you are familiar
with the single audit and the way the decisions are made in
terms of prioritization of audits that are done under the
single audit.
And I guess, and I should have asked Mr. Fitzgerald this
when he was testifying. It seems to me that the way in which
States are told they must prioritize audit work for the Federal
Government, that exercise would be fairly simple to implement
within the Federal Government.
In other words, agencies deciding how many of their
programs are what, in the single audit I think it is ``A'',
``B'' and ``C'' I think, is it not?
Ms. Franzel. ``A'' and ``B''.
Senator McCaskill. ``A'' and ``B''. We probably did a lot
of ``C``s where I was because I like doing some of the smaller
programs. And ``A'' is the size of the program. ``B'' is those
that are high risk for other reasons. And then if you wanted to
do other programs, then it had to be in consultation and
cooperation with the Federal Government signing off on it.
Do we have that kind of risk assessment going on in each
agency so that in a very simple way DCAA could look at
government-wide where are the big threshold programs?
But then on the other hand, where are these programs? I
mean the example I like to use is weatherization under the
American Recovery and Reinvestment Act (ARRA). That was a lot
of money getting pumped into a program that had, up until that
time, had very modest appropriations. A lot of labor involved,
a lot of a shotgun-type approach across the country in how the
money was used.
And even though it was not as large as say a Medicaid and
Medicare program, the opportunity for lack of internal
controls, the opportunity for a lot of money walking away with
somebody's nephew in a pickup truck was real.
The other part of the question I want to ask is, Is anyone
using the software programs that are out there right now that
allow the integration of data point sets to really expose risks
similar to what we did on ARRA where we contracted with a
company to try to detect fraud by overlays of integrated data
sets to show where there might be the most risk?
Ms. Franzel. Certainly. I do believe that the risk
assessment function can be made better and bolstered, and I
think it is being done inconsistently across agencies. So I
think that is really the next big step in terms of looking at
how contract audits are done and to what extent across the
Federal Government.
And let me emphasize across the Federal Government because
similar to the single audit for contracting, there is the
cognizant agency concept. And so one contractor may actually be
doing work for multiple agencies but one agency is the
cognizant agency.
So what kind of communication and coordination is happening
for all of the affected agencies? I think that is probably
something else that can be improved and that can feed back into
this risk assessment process.
And frankly if the agencies are coordinating, one would
hope it would make it a little easier on the affected
contractors.
So I think risk assessment is something that definitely
needs to be looked at and probably improved as well as
coordination across the government agencies.
Senator McCaskill. Is that something we could get the IG
counsels to do, to do a better job of coordination of risk
assessment across all agencies that would then be a document
that could be a point of reference for DCAA when they get
requests?
Ms. Franzel. Yes. That would certainly be one place. In
fact, we were having this discussion at GAO, how would this
coordination happen, perhaps it could be under OMB. It would
have be some sort of centralized----
Senator McCaskill. Let us not go there.
Ms. Franzel [continuing]. That really it could be an IG. It
could be the Council of Inspectors General on Integrity and
Efficiency (CIGIE). So we do need some kind of centralized risk
assessment function, I think, in coordination across agencies,
and frankly, somebody or an entity to serve as technical
expertise and consultation to the agencies because we have seen
varying degrees of internal controls over the contracting
function and the contracting officer's diligence to the
preventive controls and other controls.
So there is just huge room for improvement here.
Your final question was about taking the data points that
were used for the recovery monies, and I do believe that the
recovery board is looking at how to get that out to agencies
and use that going forward, but that is something where we need
institutionalize in government going forward.
Senator McCaskill. Really. I have seen the software
demonstrated. In fact, I believe they are using it with (SERP).
Ms. Franzel. It is very impressive.
Senator McCaskill. They are overlaying attacks versus
population versus SERP money to make the assessment of whether
not the SERP funds are truly getting at the cause that we want
them to get at in terms of stabilizing different regions of
Afghanistan.
I think that is something that we will continue to take a
look at because I think technology that is available now, as
long as we do not create a new agency to do this technology, if
we could effectively and efficiently access the technology that
is out there right now, I think we could save a lot of man-
hours just by using data that is available and that can be
digested, synthesized, and spit back out in a way that helps us
manage risk.
I want to thank all of you today. I think we have some
things to work on. I think this risk assessment government-wide
is important, getting some consistency.
I think looking at some of the things we have talked about
in terms of DCAA and making sure they have the independence
they need if they are going to be the go-to contract agency and
importantly looking at preventative measures going forward and
making sure they are getting the emphasis they need so we are
not trying to claw back but rather we are preventing up front.
So most Americans cannot even comprehend over $100 billion
in improper payments. That dog does not hunt. We have to figure
how to get at that.
I appreciate everyone's time today, and we will continue to
follow up with you because we will have a few more questions
for the record.
Thank you very much.
This hearing is adjourned.
[Whereupon, at 4:28 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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