[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]






                  REVIEW OF THE RESULTS OF TWO AUDITS
                       OF THE NATIONAL ECOLOGICAL
                          OBSERVATORY NETWORK

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

                                HEARING

                               BEFORE THE

              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            December 3, 2014

                               __________

                           Serial No. 113-97

                               __________

 Printed for the use of the Committee on Science, Space, and Technology

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Available via the World Wide Web: http://science.house.gov
                                  ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

92-330 PDF                     WASHINGTON : 2015 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001












              COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY

                   HON. LAMAR S. SMITH, Texas, Chair
DANA ROHRABACHER, California         EDDIE BERNICE JOHNSON, Texas
RALPH M. HALL, Texas                 ZOE LOFGREN, California
F. JAMES SENSENBRENNER, JR.,         DANIEL LIPINSKI, Illinois
    Wisconsin                        DONNA F. EDWARDS, Maryland
FRANK D. LUCAS, Oklahoma             FREDERICA S. WILSON, Florida
RANDY NEUGEBAUER, Texas              SUZANNE BONAMICI, Oregon
MICHAEL T. McCAUL, Texas             ERIC SWALWELL, California
PAUL C. BROUN, Georgia               DAN MAFFEI, New York
STEVEN M. PALAZZO, Mississippi       ALAN GRAYSON, Florida
MO BROOKS, Alabama                   JOSEPH KENNEDY III, Massachusetts
RANDY HULTGREN, Illinois             SCOTT PETERS, California
LARRY BUCSHON, Indiana               DEREK KILMER, Washington
STEVE STOCKMAN, Texas                AMI BERA, California
BILL POSEY, Florida                  ELIZABETH ESTY, Connecticut
CYNTHIA LUMMIS, Wyoming              MARC VEASEY, Texas
DAVID SCHWEIKERT, Arizona            JULIA BROWNLEY, California
THOMAS MASSIE, Kentucky              ROBIN KELLY, Illinois
KEVIN CRAMER, North Dakota           KATHERINE CLARK, Massachusetts
JIM BRIDENSTINE, Oklahoma
RANDY WEBER, Texas
CHRIS COLLINS, New York
BILL JOHNSON, Ohio















                            C O N T E N T S

                            December 3, 2014

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Lamar S. Smith, Chairman, Committee 
  on Science, Space, and Technology, U.S. House of 
  Representatives................................................     4
    Written Statement............................................     6

Statement by Representative Eddie Bernice Johnson, Ranking 
  Member, Committee on Science, Space, and Technology, U.S. House 
  of Representatives.............................................     8
    Written Statement............................................    10

                               Witnesses:

The Honorable Allison Lerner, Inspector General, National Science 
  Foundation
    Oral Statement...............................................    12
    Written Statement............................................    15

The Honorable Anita Bales, Director, Defense Contract Audit 
  Agency
    Oral Statement...............................................    25
    Written Statement............................................    27

Discussion.......................................................    39

             Appendix I: Answers to Post-Hearing Questions

The Honorable Allison Lerner, Inspector General, National Science 
  Foundation.....................................................    58

The Honorable Anita Bales, Director, Defense Contract Audit 
  Agency.........................................................    69

            Appendix II: Additional Material for the Record

Memorandum submitted by Representative Eddie Bernice Johnson, 
  Ranking Member, Committee on Science, Space, and Technology, 
  U.S. House of Representatives..................................    84

Memorandum submitted by Representative Lamar S. Smith, Chairman, 
  Committee on Science, Space, and Technology, U.S. House of 
  Representatives................................................   100

Memorandum submitted by Representative Lamar S. Smith, Chairman, 
  Committee on Science, Space, and Technology, U.S. House of 
  Representatives................................................   106

 
                      REVIEW OF THE RESULTS OF TWO
                   AUDITS OF THE NATIONAL ECOLOGICAL
                          OBSERVATORY NETWORK


                      WEDNESDAY, DECEMBER 3, 2014

                  House of Representatives,
               Committee on Science, Space, and Technology,
                                                   Washington, D.C.

    The Committee met, pursuant to call, at 10:05 a.m., in Room 
2318 of the Rayburn House Office Building, Hon. Lamar Smith 
[Chairman of the Committee] presiding.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Smith. The Committee on Science, Space, and 
Technology will come to order. Good morning to everyone here, 
and I appreciate the Member attendance we have this morning as 
well.
    Welcome to today's hearing entitled the ``Review of the 
Results of Two Audits of the National Ecological Observatory 
Network.'' I recognize myself for five minutes for an opening 
statement and then the Ranking Member.
    Today's hearing will focus on one of the National Science 
Foundation's most ambitious major research facility projects, 
the National Ecological Observatory Network, or NEON.
    We are fortunate to have with us the heads of two 
government organizations that are responsible for assuring that 
taxpayers get their money's worth from the Federal contracts 
with private entities like NEON. Our witnesses will discuss two 
audits of the NEON project conducted by the Defense Contract 
Audit Agency under contract with the National Science 
Foundation Office of the Inspector General.
    The NSF entered into a long-term agreement with NEON to 
develop and operate the project's network of more than 100 
fixed and mobile sensors. This audit identified more than $150 
million in unsupported or questionable costs in the NEON 
proposal. It concluded that there was not a ``fair and 
reasonable basis'' for NSF to enter into the contract. 
Nevertheless, NSF did not wait for the audit results. It 
instead finalized an agreement based on NEON's original cost 
proposal.
    Audits have raised questions about cost proposals that were 
accepted by NSF for several major projects. These includ the 
Ocean Observatories Initiative, the Advanced Technology Solar 
Telescope, NEON, and currently the Large Synoptic Survey 
Telescope.
    In response to these audits, NSF has made a number of 
adjustments to how the agency evaluates costs of major 
projects. The $150 million in unsupported and questionable 
costs in the NEON proposal demonstrates that major problems at 
NSF continue.
    Auditors discovered several highly questionable 
expenditures of taxpayer funds by NEON, including hundreds of 
thousands of dollars spent on lobbying, lavish parties, liquor 
for office happy hours, over $1,000 per month for premium 
coffee service, and trips to a high-end resort in France.
    These suspicious taxpayer-financed activities were not 
detailed in the audit submitted to the NSF Inspector General, 
which was limited in scope. But to his credit, the principal 
auditor, J. Kirk McGill, invoked the Whistleblower Protection 
Act to make sure that the Inspector General, Congress, and 
ultimately the public was aware of hundreds of thousands of 
taxpayers' dollars being spent on improper activities.
    I hope to hear from our witnesses on what basis NEON 
concluded, for example, that spending $25,000 for a holiday 
party last year was an appropriate use of Federal funds. And 
why did NSF allow this to happen? Our Committee may want to 
hear directly from the NSF and NEON about these audits at a 
hearing next year.
    Federal agencies must be held accountable for their waste 
and misuse of taxpayer funds. And the NSF needs to be held 
accountable for how they spend taxpayers' hard-earned dollars. 
The basic responsibility of any government agency is to act in 
the national interest. The NSF needs to meet that standard.
    That concludes my opening statement.
    [The prepared statement of Mr. Smith follows:]
   
   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Smith. And the gentlewoman from Texas is 
recognized for hers, Eddie Bernice Johnson.
    Ms. Johnson. Thank you very much, Mr. Chairman.
    I have to confess that I am baffled by today's full 
Committee hearing. There may be legitimate policy and 
management issues for this committee to consider, but this 
particular hearing at this time is in my opinion premature, 
incomplete, and lacks balance. Therefore, it is impossible to 
have a full discussion on any of the legitimate oversight 
issues that we could examine.
    As I am sure you are aware, Inspector General Lerner and 
NSF's Director Dr. Cordova have initiated reviews of NSF's 
policies and oversight of management fees and those reviews are 
not yet complete. NSF is also investigating spending specific 
to NEON and that is also underway.
    Today, the most we will hear is some preliminary 
observations from IG Lerner and Ms. Bales that NSF should 
consider tightening up its policies with respect to management 
fees. Perhaps the agency should do just that but the October 
2014 DCAA audit report being reviewed today was not made 
available to NSF until two weeks ago and it made no mention of 
management fees. So while the discussion was had at the staff 
level about inviting NSF, there was agreement that it was too 
late to reasonably expect the agency to prepare testimony for 
this hearing and at the same time premature for the reasons I 
have already described. If we had postponed this hearing until 
next year, as my staff urged your staff to do, we might have 
included NSF on this panel to present their own findings and 
plans with respect to the management fees.
    We will also hear testimony from the witnesses about 
contingency fees. NSF senior management and IG Lerner have been 
at an impasse on the use and management of contingency fees for 
construction projects for four years. Both had the opportunity 
to share their views before this committee at a 2012 hearing. 
Since that time, OMB has updated its own guidance on 
contingencies. As my staff understands the update of 
regulations, some of the specific areas of dispute, such as how 
contingency expenditures are tracked, should now be settled.
    There are other areas of dispute such as how the 
contingency fund is managed that remain open to debate among 
reasonable people. That is a key point. For these particular 
policy issues there is no clear right or wrong so how do we 
expect to have any meaningful discussion about these disputes 
today without the agency at the table to represent--to present 
and defend its own positions?
    Mr. Chairman, I ask unanimous consent to submit for the 
record a 2013 memo from NSF's Chief Financial Officer that 
provides detailed justifications for the agency's current 
policies. However, a document for the record does not make this 
a balanced, complete hearing.
    Chairman Smith. Okay. Without objection.
    [The information appears in Appendix II]
    Chairman Smith. And at the same time I would like to ask 
unanimous consent to put in the record the following documents 
that are in a binder I have here. And the title of the 
documents is ``The Results of----
    Ms. Johnson. I would like to reclaim my time now.
    Chairman Smith. --``Results of the Two Audits of the 
National Ecological Observatory Network.'' And without 
objection, both your request for documents in the record and 
mind will be so ordered.
    [The information appears in Appendix II]
    Ms. Johnson. Thank you, Mr. Chairman.
    And finally, it is with some reluctance that I offer the 
following observations. DCAA, the Defense Contract Audit 
Agency, was established to audit DOD contracts subject to 
defense acquisition regulation. I am concerned that they simply 
do not have sufficient staff with expertise or experience to 
appropriately audit NSF's grants and cooperative agreements.
    My staff has heard from several entities audited by DCAA on 
behalf of the IG that the auditors repeatedly asked for the 
wrong documentation and made significant errors in their 
assessment of information. Further, auditors repeatedly failed 
to work with the audited entity in a transparent way that would 
have resolved significant costs that were later questioned in 
publicly available documents, including the IG's semiannual 
reports. Having heard common complaints from several unrelated 
entities, I am unwilling to attach too much weight to any 
adverse findings by DCAA without further review.
    Unfortunately, problems with DCAA's audit have caused 
significant and ongoing tension between the IG and NSF 
management for several years and have put credible NSF awardees 
unnecessarily at risk. These problems also color today's 
hearing.
    Ms. Bales, please do not take my comments as a personal 
criticism; I am just concerned that the auditing organization's 
skills fit the job when we are rendering judgments about the 
proper use of Federal funds and questioning the performance of 
world-class research institutions and organizations. We didn't 
even see DCAA testimony for this hearing until 5:00 last night.
    Mr. Chairman, I want to join you in conducting legitimate 
oversight of the National Science Foundation, but for the 
reasons that I have mentioned, I don't think we will--this will 
be possible for today's hearing.
    Thank you and I yield back.
    [The prepared statement of Ms. Johnson follows:]
   
   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Smith. Thank you, Ms. Johnson.
    And I will introduce our witnesses today but I will say 
preliminarily that I appreciate all the good work you all have 
done. I appreciate the fact that you are individuals of 
integrity and have contributed much to help us conduct our 
legitimate oversight responsibilities.
    Our first witness, Ms. Allison Lerner, is the Inspector 
General for the National Science Foundation and the Chair of 
the Council of the Inspectors General on Integrity and 
Efficiency. Ms. Lerner previously served in leadership 
positions at the Department of Commerce and was selected by the 
President to be a member of the Government Accountability 
Transparency Board in 2011. Ms. Lerner received her bachelor's 
and her law degree from the University of Texas. She is 
certainly no stranger to the Committee and we are happy to 
welcome her back to the witness table.
    Our second witness, Ms. Anita Bales, is the Director of the 
Defense Contract Audit Agency. The NSF Office of the Inspector 
General relies on the DCAA to perform audits of National 
Science Foundation major research facilities like NEON, which 
the Inspector General reviews and submits to the National 
Science Foundation. Before her work at DCAA, Ms. Bales served 
as the Deputy Auditor General for Forces and Financial Audits 
of the Army Audit Agency. Ms. Bales received her bachelor's 
degree in business administration from Drake University and her 
MBA from Syracuse University. She is the recipient of the 
President's Council on Integrity and Efficiency Award for 
Auditing, and we are happy to have you with us today as well.
    And, Ms. Lerner, would you begin?

           TESTIMONY OF THE HONORABLE ALLISON LERNER,

                       INSPECTOR GENERAL,

                  NATIONAL SCIENCE FOUNDATION

    Ms. Lerner. Thank you. Mr. Chairman and Members of the 
Committee, I appreciate this opportunity to discuss two audits 
of the National Ecological Observatory Network and my office's 
efforts to help ensure that NSF spends taxpayer dollars 
effectively and for the intended purpose of advancing 
scientific research.
    We contracted with DCAA in 2011 to perform an audit of 
NEON's $433 million proposed budget to determine if it was 
prepared in accordance with federal requirements and formed an 
acceptable basis for the negotiation of a fair and reasonable 
price. From July through September 2011 DCAA issued three 
inadequacy memoranda stating that NEON's proposed budget could 
not be audited. The final such report found that none of the 
proposed cost elements for labor, overhead, equipment, and 
other items reconciled to supporting data. DCAA also found the 
proposal included more than $74 million in unallowable 
contingency costs and more than $1 million in unallowable 
honoraria.
    In February 2012 NEON submitted a revised budget proposal 
which DCAA was able to audit. Despite working with NEON for 
several months to clear inadequacies in the proposal, auditors 
found a total of $154 million, or nearly 36 percent of the 
total budget, in questioned and unsupported costs. The entire 
$72.6 million proposed contingency was questioned. In addition, 
more than 13 of the $14 million in costs for materials and 
nearly $16 million of equipment costs could not be supported. 
Other questioned costs included $1.8 million in management fees 
for unallowable costs.
    As a result, in September 2012 auditors issued an adverse 
opinion stating that the proposal did not form an acceptable 
basis for the negotiation of a fair and reasonable price. Among 
other things, we recommended that NSF require NEON to submit a 
revised budget with support for all proposed costs. NSF 
disagreed with this recommendation and also stated that it had 
provided management fee and awards for the construction or 
operation of large facilities for years.
    In light of the problems with the NEON budget, we 
commissioned DCAA to audit NEON's accounting system. As the 
audit was proceeding, DCAA informed us that management fee had 
been awarded and used for unallowable costs, including $112,000 
for lobbying and $25,000 for a holiday party. We investigated 
the allegations and referred them to the Department of Justice, 
which declined to accept the case for further investigation or 
prosecution. We have added a review of the awarded use of 
management fees to our Fiscal Year 2015 audit work plan.
    It is essential for cost information for proposed budgets 
to be accurate, current, and adequately supported because the 
budget is the basis for charging costs in NSF. The problems we 
found with the budgets were not limited to the NEON project. In 
fact, we found that NSF approved proposed budgets for four 
major projects totaling more than $1.4 billion although 
significant questions existed as to the adequacy of those 
budgets. As a result, while NSF knows what it will spend on 
these projects, it is not clear whether it knows what they 
should cost.
    As we work to resolve recommendations made on audits of 
proposed costs for NSF's large facility projects, we identified 
broader weaknesses in NSF's pre- and post-work monitoring 
processes for high-dollar, high-risk projects and compounded 
our concern that unallowable costs could be charged to awards. 
We recommended that, at a minimum, NSF increase monitoring for 
its largest cooperative agreements valued at $50 million or 
more. In our judgment, the actions NSF has proposed to take to 
address OIG recommendations in this area fall short of the 
standard necessary to adequately safeguard federal funds and 
leave millions of dollars at risk.
    As a result, in May we escalated the unresolved 
recommendations. We took this step in light of the serious risk 
to federal funds posed by NSF's current processes and 
practices. NSF did not sustain our recommendation to require 
awardees to remove contingency from proposed budgets. We are 
awaiting NSF's decision on the remaining recommendations.
    We target our work to areas that pose the highest risk of 
misuse of taxpayer dollars and can lead to funds used 
inappropriately being returned to the government. To that end, 
our Fiscal Year 2015 audit work plan includes incurred cost 
audits and accounting system audits of more than 10 awardees, 
as well as the focus on the use of management fees. Incurred 
cost audits are critical to proper monitoring and can reveal 
costs claimed that are unallowable or unreasonable.
    We have been urging NSF for the past four years to 
strengthen accountability over its high-dollar, high-risk 
agreements for large facility construction projects. NSF 
applies its highest level of attention and scrutiny to 
determine the scientific merit of the projects it decides to 
fund. It is imperative that it applies the same rigorous 
attention and scrutiny to its financial management of these 
projects. The stakes are too high for the foundation to 
continue its current practice of making awards before it 
ensures that project costs are reasonable, are supported by 
adequate documentation, and will use taxpayer dollars 
efficiently. And I would be happy to answer any questions.
    [The prepared statement of Ms. Lerner follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Smith. Thank you, Ms. Lerner.
    Ms. Bales.

            TESTIMONY OF THE HONORABLE ANITA BALES,

            DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY

    Ms. Bales. Chairman Smith, Representative Johnson, and 
Members of the Committee, thank you for the opportunity to 
appear before you today. I have submitted written testimony for 
the record, and this morning I want to provide you a brief 
overview of DCAA and its audit role with the National Science 
Foundation and the National Ecological Observatory Network, 
which I shall refer to as NEON.
    DCAA performs contract audits for DOD components and other 
federal agencies to help ensure contractors comply with 
government contract regulations. Based on its audit findings, 
DCAA makes recommendations to contracting officers who then 
make final contract decisions based on their assessment of 
those recommendations. The National Science Foundation 
requested DCAA's help with NEON, a nonprofit organization 
required to follow the cost principles in OMB Circular A-122 
for determining costs of grants, contracts, and other 
agreements.
    DCAA performed two significant audits at NEON. First, at 
the request of the NSF Inspector General, in August 2011 DCAA 
attempted to perform a proposal evaluation of NEON's 
cooperative agreement for major research equipment and 
construction of the National Ecological Observatory Network. 
Despite significant coordination with NEON, DCAA was not able 
to perform an audit because of several inadequacies in this 
proposal.
    About a year later, DCAA began an audit of a revised 
proposal. While there were still major inadequacies associated 
with this proposal, DCAA was able to issue an audit report in 
September 2012. Of the roughly $434 million proposed by NEON, 
DCAA questioned about $102 million and concluded that an 
additional $52 million was unsupported. Questioned costs are 
costs the auditor considers not acceptable for negotiating a 
reasonable contract price or not acceptable for reimbursement. 
Unsupported cost denotes instances where the contractor has not 
provided specific evidence or documentation to support 
assertions.
    The inadequacies noted in our audit report were significant 
enough for us to recommend that the proposal not be considered 
acceptable as a basis for negotiating a fair and reasonable 
cooperative agreement price.
    It is also important to note that our proposal review of 
NEON was different from our normal forward pricing reviews in 
two respects. First, we were asked to review the proposal more 
than 7 months after the cooperative agreement had been awarded 
and a price established. Normally, contracting officers request 
a proposal audit before the award so they can make use of the 
auditor's recommendations to negotiate a fair and reasonable 
price. Second, we were asked to perform for the NSF IG. Audit 
requests normally come from the contracting officer who was 
responsible for awarding the contract and has the ability to 
make changes in response to the recommendations.
    In addition to the forward pricing proposal and also at the 
request of the NSF IG, we reviewed NEON's accounting system and 
issued our report in October 2014. Our audit disclosed a 
material noncompliance with NEON's timekeeping system. 
Specifically, NEON's actual timekeeping practices did not 
comply with its written policies and procedures.
    Our audit also disclosed two material noncompliances with 
Circular A-122 that were corrected during the course of our 
fieldwork. First, NEON failed to comply with the requirement 
that organizations receiving more than $10 million in federal 
funding of direct cost in a Fiscal Year must break out indirect 
costs into two broad categories: facilities and administration. 
Prior to our audit, NEON had reported these indirect costs 
together. Second, NEON excluded unallowable costs from the 
general and administrative overhead base. Unallowable costs 
must be included in the G&A allocation base so they absorb 
their share of an organization's indirect expenses. Our field 
work verified that NEON corrected both of these conditions 
after we identified them. We also issued a management letter to 
the NSF IG that recommended potential improvements in NSF's 
internal controls over contract costs.
    In closing, let me assure you that we are committed to 
providing NSF and all civilian agencies with high-quality 
audits that protect the interests of the American taxpayer. 
Moving forward, we would like to work with NSF acquisition or 
grants managers and the IG through the normal contracting 
process to provide comprehensive contract audit services for 
NEON and other NSF contractors.
    I appreciate the opportunity to testify before you today 
and I will be glad to respond to questions. Thank you.
    [The prepared statement of Ms. Bales follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Smith. Thank you, Ms. Bales.
    Let me recognize myself for five minutes for questions. And 
while I will direct my first question to Ms. Lerner, Ms. Bales, 
if you will respond as well and we will go back-and-forth.
    Ms. Lerner, the question is this: In my opening statement I 
cited a number of examples of what I would consider to be a 
misuse of management fees. And let me just focus on one. By the 
way, the total cost of this misuse of management fees in my 
opinion is close to a half a million dollars. I mentioned one. 
Let me go back to that. And that was a holiday party last year 
that cost $25,000, which amounted to about $140 for every 
person who attended. Other agencies have written rules against 
using taxpayers' dollars for these types of expenditures. Does 
the National Science Foundation have any similar kind of rule, 
and if not, why not?
    Ms. Lerner. I am not aware of any specific rules that the 
Foundation has. Obviously, cost principles that would apply to 
the awards that are funded by the Foundation would generally 
prohibit expenditures on parties and food.
    Chairman Smith. Okay. Thank you. And, Ms. Bales, do you 
want to add anything to that? I might add that, for instance, 
NASA has a rule that prohibits use of dollars for anything like 
this and other agencies have similar types of rules. But do you 
have any recommendations for the National Science Foundation?
    Ms. Bales. We--in terms of the holiday party, it was 
covered by the management fee----
    Chairman Smith. Yes.
    Ms. Bales. --and because that is not considered a separate 
cost, we didn't look at it as a separate cost and looked at it 
as the management fee. If the fee had been--if the cost of the 
holiday party had been reported separately, we would have 
questioned that. Our recommendation would be to look at the use 
of management fees and what is covered by management fees.
    Chairman Smith. It is my understanding that for the last 
several years the National Science Foundation has been on 
notice that a lot of its management fees were being used in 
ways that would not be considered appropriate and has ignored 
past audits at least until a few days ago when I think because 
of this hearing they decided to look at some of their 
practices. In any case, the fact that they were warned for 
several years and did nothing is troublesome to me. Do you see 
the National Science Foundation as following best practices 
when it comes to the use of management fees, Ms. Lerner?
    Ms. Lerner. Our office, in an attempt to eliminate a kind 
of murky issue, prepared a white paper that looked at the 
history of management fees in the Federal Government. They go 
back about as long as I do, to 1960s, and because of the lack 
of clarity about what management, they are intended essentially 
to help entities that primarily do business with the Federal 
Government and that in order to maintain financial viability 
need to have some ability to be reimbursed for expenses that 
would ordinarily be un-reimbursable.
    Chairman Smith. Okay.
    Ms. Lerner. So they are intended to reimburse un-
reimbursable expenses, but there has been controversy over time 
because no one has set limits on what those normal and ordinary 
expenses should be and sometimes you find situations----
    Chairman Smith. Don't most agencies set limits but the 
National Science Foundation has not?
    Ms. Lerner. I don't know that anyone has concrete limits. I 
know some people--the Department of Defense looks very 
carefully at the amounts that are proposed. I don't know that 
they set actual limits. We did not identify any concrete limits 
on what you could use a management fee for in our effort to 
assess----
    Chairman Smith. Okay.
    Ms. Lerner. --the landscape.
    Chairman Smith. Other than an example--in the specific 
examples that I gave you, clearly those would be inappropriate 
if they had been itemized----
    Ms. Lerner. It is hard for me to see that a holiday party 
is a normal and ordinary operating expense.
    Chairman Smith. Okay. Thank you.
    Ms. Bales, let me ask a couple questions and direct them to 
you first. Let's go to the subject of construction contingency. 
That is normal practice. You set aside a certain percentage for 
contingencies, 18, 19 percent, sometimes 20 percent. But what 
is different about the National Science Foundation here? And if 
you will go into a little bit of detail in regard to NEON, 
their contingency I think started at $60 million, went up to 
$74 million. To my knowledge those expenses were not justified, 
were not itemized, and were not documented, which I think is 
fairly highly unusual. But if you will just comment on the 
practice of the National Science Foundation when it comes to 
the way they handle the construction contingencies.
    Ms. Bales. The National Science Foundation has guidance 
that allows for the use of contingency in budget, so as part of 
their budget process, they will include here is the cost and 
then here is an amount for contingency. And when that money has 
been awarded--or the cooperative agreement or a grant is 
awarded, the money goes to the awardee and then the--there are 
practices in place where if there has to be, say, the limit is 
over 250,000 and it needs to be reallocated, that then has to 
be improved by--approved by NSF management. So----
    Chairman Smith. And what about the increase from the 60 to 
74 and was that documented or was that--were they sort of 
operating without many rules and restrictions?
    Ms. Bales. The--we did the proposal audit and looked at 
those contingency fees. Part of the issue was the basis for how 
much was being included in the contingency was not well 
documented.
    Chairman Smith. Okay. Thank you, Ms. Bales. That concludes 
my time.
    The gentlewoman from Texas, Ms. Johnson, is recognized for 
her questions.
    Ms. Johnson. Thank you, Mr. Chairman.
    Ms. Lerner, on August 21, 2014, the Office of the Inspector 
General of the Department of Defense released an evaluation of 
DCAA's quality control system. The review found numerous 
instances where DCAA failed to properly document its audit 
conclusions, as required by the generally accepted government 
auditing standards and the statements on standards for 
attestation engagements of the American Institute of Certified 
Public Accountants. This resulted in DCAA receiving a rate of 
``pass with deficiencies'' indicating that DCAA still has 
serious work to do in order to fully comply with the relevant 
professional standards.
    On September the 8th, 2014, the DOD IG released a report 
that found one or more significant deficiencies in over 81 
percent of DCAA's audits from Fiscal Year 2012 and 2013 sampled 
as part of the review. On September the 17th, 2014, Kellogg 
Brown & Root Services Incorporated, KBR, filed a suit against 
the United States Government in federal court seeking to 
recover $12.5 million in legal fees incurred by KBR in 
defending against findings from a flawed DCAA audit. Were you 
aware of these significant adverse findings regarding the 
quality of DCAA's audit work and are you at all concerned with 
relying on DCAA audit findings in your own work?
    Ms. Lerner. I would say a ``pass with deficiencies----
    Ms. Johnson. I am sorry?
    Ms. Lerner. Sorry about that. A ``pass with deficiencies'' 
is not the outcome that anyone would seek in a peer-review 
process so that is a matter of concern. But when our office has 
DCAA do work for us, we have audit monitors that oversee the 
work that they do to--and, you know, I feel that if they had 
identified issues, we would have followed up with DCAA and 
attempted to ensure that those concerns were addressed. So it 
is a matter of concern but I do think we have some controls in 
place where we attempt to ensure the quality of the work that 
is done for us.
    Ms. Johnson. Ms. Bales, committee staff have heard from 
numerous entities audited by DCAA auditors in the last few 
years that there were significant communication problems that 
resulted in millions or hundreds of millions in questioned 
costs that in some cases have already been resolved down to a 
few hundred thousand dollars. We have heard the same type of 
complaints from all of these entities, namely that the auditors 
were unclear or incompetent in their request and that they 
failed to work with an audited entity in a transparent way that 
might easily have resolved the misunderstandings that led to 
significant questioned costs.
    In the meantime, the reputation of world-class research 
institutions have been put at risk. Given that there is one 
common party here and that is DCAA, I am inclined to attach 
significant weight to these complaints and I am concerned that 
DCAA does not have the staff expertise or experience with 
grants and cooperative agreements or with the science 
construction projects. Are you aware of these complaints from 
these entities audited by your agency on behalf of NSF IG or 
have you taken any steps to address the concerns going forward?
    Ms. Bales. I am not aware of the specific complaints that 
you are referring to from the NSF entities that we have 
audited. No one has raised those to me. However, over the time 
frame we have entered and issued what we call rules of 
engagement to our audit staff that does encourage them to 
communicate with both the contractors or grantees that we 
audit, as well as the contracting officers to make sure that as 
we go through our audits, everyone is aware of what we are 
doing, that we issue draft reports and findings and have those 
discussions as we go along so that if there are issues, that 
maybe misunderstandings, that we have those discussions as we 
go through.
    If specific complaints do come to my attention, we respond 
to those and look through them and see is there really a valid 
complaint there and how do we work through that?
    Ms. Johnson. So you have not heard of any of these 
complaints?
    Ms. Bales. Not the specific--I mean you are talking 
complaints specific to NSF, correct?
    Ms. Johnson. Yes.
    Ms. Bales. Yes. No----
    Ms. Johnson. And you haven't heard about any of them?
    Ms. Bales. None of the NSF awardees have come to me to say 
that my auditors are not working with them and that they are 
not understanding what we are saying.
    Ms. Johnson. Thank you. I yield back.
    Chairman Smith. Thank you, Ms. Johnson.
    The gentleman from California, Mr. Rohrabacher, is 
recognized for his questions.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman.
    And, Mr. Chairman, I would like to thank you for holding 
this hearing. I think that our oversight responsibility is of 
tremendous importance to the people of the United States. If 
they are to have faith in their government and faith in this 
Congress, they have to know that we are doing our job and this 
oversight hearing is part of the job and the task of these 
witnesses today is to ensure that the American people know that 
their hard-earned money is not being wasted.
    And quite frankly, attacking the people who are doing an 
investigation is not a refutation of the findings of an 
investigation or does it justify any type of, let's say, 
holding back on the part of investigators. In fact, we should 
be encouraging our investigators rather than try to find fault 
with them. Let's find out whether or not what they have to say 
is something that is going to be significant to the taxpayers 
or not.
    In this case, what we have here is 36 percent of a budget 
was found to be--have an unacceptable level of accounting. This 
budget was 435--$434 million and that is a very significant sum 
for American people who are struggling to make--to pay their 
own bills at home. So we--no one should be making light of this 
or trying to focus their efforts on undercutting the people who 
are trying to see if we are spending our money correctly or not 
for our taxpayers' money correctly or not.
    Now, it seems to me that what we have here--this is not--a 
complaint over on the other side of the aisle seems to be that 
this was too late and it was premature at the same time, this 
investigation. Well, I guess too late and premature means it 
was just about right.
    So let's get down to some of the details here. Let's make 
it very clear, the money that we are talking about here, this 
36 percent of the budget, that money, out of a $434 million 
budget, that reflects money that comes directly from National 
Science Foundation research funds, does it not?
    Ms. Lerner. It does.
    Mr. Rohrabacher. Okay. So what we are talking about here--
--
    Ms. Lerner. Well, MREFC funds.
    Mr. Rohrabacher. Okay. Well, so what we are talking about 
is important research funds that have been allocated for 
research that may have been going to lavish parties, to trips 
to various places, lobbying--as well as lobbying efforts, that 
we are using taxpayers' funds for lobbying efforts and lavish 
Christmas parties. This is very much important for us to look 
into--because it sends a message to other government agencies 
that we don't want--not only do we not want our research funds 
misused but we don't want any government funds to be misused 
simply because we are going through contractors here.
    Let me ask Ms. Lerner. When your office raised this--these 
issues with the National Science Foundation about the concerns 
about this major research facility costs and the costs 
described in your testimony, has the National Science 
Foundation done anything in response to your findings rather 
than trying to attack you as the investigator?
    Ms. Lerner. They have made changes. They--when we started 
looking at contingency amounts, initially the threshold for 
which NSF approval had to be sought was $250-$200,000 for many 
awardees, so, you know, most amounts were under that. When we 
surfaced this issue, NSF did lower the amount that----
    Mr. Rohrabacher. Okay. So now people don't have as much----
    Ms. Lerner. --required approval.
    Mr. Rohrabacher. People don't have as much discretion----
    Ms. Lerner. Exactly.
    Mr. Rohrabacher. Okay. That is fine.
    Ms. Lerner. So they did do that.
    Mr. Rohrabacher. Well, did you find that the National 
Science Foundation either explicitly or implicitly allowed 
NEON, the group that we are talking about now, this contractor 
that we are talking about, to use these management fees for 
lobbying and--or liquor or lavish Christmas parties or any of 
the other expenditures that are very questionable?
    Ms. Lerner. The record seems to--you know, the record 
reflects that NSF approved a management fee for NEON and NEON 
used that management fee for----
    Mr. Rohrabacher. Did they know when they approved it that 
there--that it was going for questionable purposes or is this--
or they didn't know?
    Ms. Lerner. I believe the first tranche of management fees, 
the first year's worth were paid after the fact and there was--
so in--there was some awareness on NSF's part for what those 
expenditures were for. In subsequent years, they were provided 
a percentage and I don't know that the agency had clarity as to 
how the management fees were used in those years.
    Mr. Rohrabacher. Yes, sometimes there is a willful amount 
of knowing certain wrongdoing is going on.
    And, Ms. Bales, the--has the DCAA ever identified the use 
of management fees for lobbying?
    Ms. Bales. No, we haven't.
    Mr. Rohrabacher. Okay. Well, thank you very much. Thank 
you, Mr. Chairman, again, for holding this hearing.
    Chairman Smith. Okay. If the gentleman will yield, and I 
know his time is up, that is a subject for us to revisit 
because about a quarter of a million dollars was spent in 
lobbying fees, and had it been itemized, I think it would have 
been very, very improper. But we will get to those distinctions 
in a minute.
    The gentleman from Massachusetts, Mr. Kennedy, is 
recognized for his questions.
    Mr. Kennedy. Thank you, Mr. Chairman, thank you to the 
witnesses for appearing today.
    And I want to echo the comments of the Ranking Member in 
her opening statement indicating that there are some very much 
legitimate oversight issues that the Committee can be pursuing 
with regard to the management and cooperative agreements for 
large facilities at NSF. I do wish that NSF was a--had been--
was here today and that I understand that some of the reports 
that we are discussing are preliminary. And so I hope that 
there will be another opportunity to dive into this in a more 
comprehensive way rather than just being able to touch on the 
initial findings at this point and making sure that there is a 
balance to the hearing.
    Ms. Lerner, if I can direct the first question at you. You 
had mentioned in your testimony the need for projects such as 
NEON to obtain updated cost estimates before being approved for 
funding by the agency. The design and development of any large 
facility accounts for roughly ten percent or more of the total 
project costs I believe. At NSF these costs are deducted by--
from the research account, I think as one of my colleagues 
pointed out, which means that there are in fact fewer research 
grants. Some significant fraction of that cost is developing 
rigorous cost estimates, so estimates in order to make those--
for those studies.
    Even if we use a conservative estimate, about 10 to 20 
percent of those design costs, you are still talking about 
millions of dollars a year. Updating those estimates takes a 
significant amount of time, effort, energy, financial 
resources, money, perhaps sometimes months because it requires 
project management to go back again into each and every one of 
the vendors and continue to redo these estimates.
    So when it comes to managing project risk, isn't there a 
trade-off between approving potentially outdated cost estimates 
and the increased cost and time required to update those 
estimates over and over and over again, particularly for a 
major project for final design review? There is also analytical 
tools available to develop reasonable costs and models for 
escalation for final proposal, and NSF I believe makes use of 
those tools, so any estimates that are--it is still just an 
estimate when there is obviously some risk involved.
    In the final analysis NSF has concluded that the trade-off 
that I have mentioned favors moving forward with the project 
even with price quotes that might be a bit outdated. Have you 
come to the--you have seem to have come to the opposite 
conclusion and I would just like to understand how you arrived 
at that conclusion. Is there any OMB guidance on a date of 
expiration for those cost estimates for construction projects? 
It says after 6 months, a year, 18 months that it should be 
reevaluated?
    Ms. Lerner. I am not aware of any specific hard and fast 
time frame but I do think that some of the concerns that we--
that were found in the audits that were conducted for us were 
when estimates were used that were 4 and 6 and eight years old 
and----
    Mr. Kennedy. What--if I can ask----
    Ms. Lerner. Um-hum.
    Mr. Kennedy. --what do you think would be a reasonable time 
frame in order to reevaluate those costs? Would it be 6 months, 
a year, two years. Do you have some basis in there to say--or 
are there external factors that you look at----
    Ms. Lerner. You know, I----
    Mr. Kennedy. --the economy, inflation? What triggers that 
reanalysis?
    Ms. Lerner. I think it is probably not a one-size-fits-all 
because different costs you have to look at differently, but I 
would say, you know, you wouldn't want to go--I think you could 
definitely go back a year and potentially even two years, but 
when you are back much beyond that, then the quality of the 
estimate is weakened. And I think the important thing is when a 
final decision is made to fund a project that you have a really 
good sense of what that project is going to cost. And what we 
have seen is, because of the risks, one of the reasons that we 
have large amounts of contingencies is to address uncertainties 
with respect, you know, to costs over time. And so----
    Mr. Kennedy. So I understand you correctly just so that I 
do, you are saying that there is essentially no one size fits 
all, that it is a--and no particular factor that you can point 
to to say this should trigger a reevaluation or not but kind of 
a totality of the circumstances, evaluation of it. Do you 
have--can you point to any particular factors that would go 
into that analysis to provide some guidance to NSF or anybody 
to say these are the factors that we should be looking for 
before we make this reevaluation?
    Ms. Lerner. Certainly. I think you want to look at the age 
of the estimates, you want to look at the quality of the 
estimates. Sometimes there were costs that were questioned 
because there was--the cost was--a portion of it was supported 
by an estimate but a portion of it was just kind of someone's 
best guess as to what things would cost. And so the more you 
are relying on concrete cost-related data to support your 
costs, the more--the greater the likelihood is that you will 
have a good idea of what those costs should be.
    Mr. Kennedy. So you are calling into question the 
underlying--the initial estimate because you are saying that 
wasn't done properly?
    Ms. Lerner. In some instances.
    Mr. Kennedy. Okay. Chairman, I yield back.
    Chairman Smith. Thank you, Mr. Kennedy.
    The gentleman from Indiana, Mr. Bucshon, is recognized.
    Mr. Bucshon. Thank you, Mr. Chairman.
    Ms. Lerner, were the--these reports preliminary, as has 
been described, the reports that you have done?
    Ms. Lerner. The audits that were issued by DCAA were not 
preliminary. There were some initial inadequacy memos but then 
the final 2012 audit was final and the accounting system audit 
is final as well.
    Mr. Bucshon. Okay. So to clarify again the reports are 
final reports, not preliminary----
    Ms. Lerner. Correct.
    Mr. Bucshon. --evaluations. And as far as that goes, does--
do--whoever wants to take this, did the NSF know that money was 
being spent for lobbying services?
    Ms. Bales. I believe that there was--in the first year of 
the management fee in the NEON project there was a statement 
that certain funds would be used for government outreach I 
think was how it was characterized. I don't know if that--if 
NSF read that and understood that to mean lobbying. I am not 
sure that they saw more than that particular document.
    Mr. Bucshon. Okay. So that information was available 
about--I mean I have the breakdown here in front of me.
    Ms. Bales. Right. That is from the accounting records of 
NEON.
    Mr. Bucshon. That is available.
    Ms. Bales. Yes.
    Mr. Bucshon. I don't have any other questions but I will 
make a brief comment.
    I am looking forward to the next Congress and the testimony 
that will be provided to the Committee by NSF. As most of you 
know, I was the Chairman of the Research and Technology 
Subcommittee, and on that subcommittee there has been some 
resistance from National Science Foundation as it relates to 
transparency and I hope that that does not continue. For 
example, in some instances we have been asked to come to 
National Science Foundation to review documents rather than 
have them released, and at that time much of what is in the 
documents has been redacted.
    And so I do think that Congress has a very important 
oversight role and I fully support the National Science 
Foundation's ability to make judgments on which scientific 
studies should be funded. All I think we are asking for is the 
justification and that is part of our oversight, which is 
extremely important.
    With that, Mr. Chairman, I yield back.
    Chairman Smith. Okay. Thank you, Dr. Bucshon.
    The gentlewoman from Oregon, Ms. Bonamici, is recognized 
for her questions.
    Ms. Bonamici. Thank you very much, Mr. Chairman. And thank 
you to both of our witnesses for being here at the committee 
today.
    There are few issues that spark the ire of our constituents 
more than the potential misuse of their hard-earned tax 
dollars, and we hear about that, so I hope at least we can 
clear up some of those concerns today. I do want to start by 
aligning myself with Ranking Member Johnson's comments and Mr. 
Kennedy's comments about the need to have a more balanced 
hearing to hear from the NSF, so I want to say that I hope we 
can really have a more balanced look at this situation.
    I want to say that the National Ecological Observatory 
Network, NEON, is an ambitious project, we know, with the 
potential to yield significant advancements in our 
understandings about how humans interact with the planet, 
including the potential threat posed by invasive species. This 
includes collaborations with academic researchers across the 
country like at Oregon State University in my home State where 
they have looked at the impact of temperature variability on 
the release of carbon from soils. Deepening our understanding 
of the Earth's natural processes and the impacts that human 
beings can have on those processes is essential and I hope that 
this hearing will yield some constructive solutions to assist 
the NSF in developing NEON. So I don't want us to lose sight of 
the importance of NEON.
    I want to start with Ms. Lerner. In your testimony you 
stated that when DCAA notified you about the use of a 
management fee for unallowable services, you referred the 
matter to the United States Department of Justice but they 
declined to accept the case. Were you given any reason from the 
DOJ to explain why the case was not accepted?
    Ms. Lerner. I don't believe that we were. I mean sometimes, 
you know, there are any number of reasons that the Department 
of Justice chooses not to proceed with an investigation. And I 
don't recall that we received express--explicit feedback on 
that point.
    Ms. Bonamici. And I want to follow up on Ms. Johnson's line 
of questioning a bit earlier. In preparing for the hearing, I 
heard concerns from various entities that DCAA may not have the 
technical competency to accurately assess a major science 
construction project like NEON. And as--you know, and with due 
respect to Ms. Bales, DCAA was established to audit DOD 
contracts. And in fact when I was reading Ms. Bales' bio, it 
really talks about the Department of Defense. So did you ever 
consider having a different auditor look at--into this 
particular project? Can you follow up on that a bit and discuss 
that?
    Ms. Lerner. At the point at which we were doing these 
audits, we were primarily using DCAA for that type of audit 
support. We have other options now. But I would say I have 
heard many concerns, some raised in this hearing, about the 
approachability and the interactions that DCAA auditors had 
with NEON and with other auditees, and I went back and spoke to 
our monitors and I just want to clarify that there was a great 
deal of conversation and back and forth between my staff, the 
Foundation's staff both from the program and from the Budget, 
Finance, and Accounting Division, NEON, and DCAA about what the 
purpose of the audits were, what the findings were.
    When we had these series of proposal audits done, that all 
came to a conclusion with a lack of--with real concerns raised 
about contingencies. In particular, we heard back from the 
auditees. We have the information. DCAA didn't ask the right 
questions or talk to the right people, and so we said all 
right. If there was--a process fail, we will go back. So, we 
sat down, all of us, and talked about those three awards and we 
went back to each of the entities to do a deeper dive. And we 
had a great, you know, people from all the concerned parties 
around the table at the initial deeper dive. We sent audit 
folks to Denver to meet with the NEON staff, DCAA 
representatives were there, NSF folks and additional people 
from our office filed in from Boston and I believe even the 
financial statement----
    Ms. Bonamici. Ms. Lerner, I don't mean to cut you off but I 
want to----
    Ms. Lerner. Right.
    Ms. Bonamici. --I just have a few seconds left----
    Ms. Lerner. Sure. Sorry.
    Ms. Bonamici. --and I want to ask----
    Ms. Lerner. There was a lot of communication.
    Ms. Bonamici. I understand. Ms. Bales, during the initial 
audit of NEON's accounting systems, DCAA found eight instances 
of noncompliance with federal requirements, including the use 
of management fees for some unallowable costs. But in the final 
2014 audit only one instance was included and that focuses on 
timekeeping and did not mention management fees. Can you 
explain why the initial findings did not make it into the final 
report?
    Ms. Bales. Specifically to the management fee, that was 
really not with--totally within the scope of an accounting 
system, but once we saw that the management fee was being used 
for those type of expenses, we can't not report that. So we 
reported that in a separate memorandum and--rather than 
including it in the report related to the accounting system 
because of the scope of what an accounting system audit is. And 
the other findings--we identified two findings that had been 
corrected by NEON during our fieldwork and there were other 
findings that, as we looked through the supervisor review 
process, that there needed to be additional work and that work 
was done and they were not continued to be supported.
    Ms. Bonamici. Thank you. And my time is expired. I yield 
back.
    Thank you, Mr. Chairman.
    Chairman Smith. Thank you, Ms. Bonamici.
    The gentleman from Kentucky, Mr. Massie, is recognized for 
his questions.
    Mr. Massie. Thank you, Mr. Chairman.
    This question is for Ms. Bales. Given the number of issues 
that were discovered in the NSF audits, how does that compare 
with other audits that have been done by DCAA?
    Ms. Bales. Other audits just in general or----
    Mr. Massie. Like other agencies, do they have a similar 
number of issues that are significant or questionable with 
unsupported costs?
    Ms. Bales. It is really very different based on----
    Mr. Massie. I mean----
    Ms. Bales. --contract to contract, organization to 
organization, and it really--it is hard to make a general 
conclusion in terms of the number of problems because there is 
just such a wide range of different types of audits that we do 
and different contractors. We do frequently find issues as we 
go through contracts in terms of the same number. That is 
really hard to answer.
    Mr. Massie. In general though, were these--do you find this 
across government? Is this an epidemic that we have?
    Ms. Bales. When you say ``this,'' do you mean the----
    Mr. Massie. The----
    Ms. Bales. --management fee type issues or----
    Mr. Massie. Yes, all of the things that you found in the 
audits--that were found in your audits.
    Ms. Bales. We do find--frequently we find problems with 
accounting systems and we work through those. We find--often, 
you know, one of the things is we are working through a lot of 
proposals. We have a lot of inadequacies. As we talk with other 
contractors, we say one of the things that you as the contract 
community can really help us out in doing our job is making 
sure that your proposals are adequate. So it is--different 
inadequacies in proposals are common.
    Mr. Massie. Well, let's talk about the proposals then. Is 
it normal to audit a proposal and then have that proposal 
accepted before the audit is finalized?
    Ms. Bales. Normally, no, because again as--the purpose 
behind----
    Mr. Massie. Why was that done here then?
    Ms. Bales. When we accepted the audit and in talking with 
the NSF IG, there was still the ability--even though the 
cooperative agreement had been awarded, there was still the 
ability to have an impact on the price so they could go back in 
and make an adjustment. But normally we would do that ahead, 
before the negotiation happens on the issuance of a contract or 
grant or an award because, as we look at that proposal and we 
find different things to question or that aren't supported, 
that provides the contracting officer or the grant manager the 
ability to go into that negotiation with information that 
allows them to really do a good negotiation to get a fair and 
reasonable price. If the contract had been finalized and there 
wasn't the ability to reopen and go in and make adjustments to 
the price, then we really wouldn't have a value to add in 
reviewing a proposal after it had been awarded. But there was, 
as the IG indicated to us, an ability to go back in and affect 
the amount of this cooperative agreement.
    Mr. Massie. Okay. This question is for Ms. Lerner or Ms. 
Bales or both. In reviewing the audits, what appears to be the 
source of the issues? I mean is it that--is it NEON for not 
doing a sufficient job of maintaining the books or is it the 
NSF for not conducting the responsible oversight? Ms. Lerner, 
would you care to answer?
    Ms. Lerner. I think ultimately the costs proposed are 
proposed by NEON and they were not supported in ways that they 
should have been to be compliant with OMB's Circular A-122. I 
would imagine that NEON would say that what they were doing was 
compliant with NSF's Large Facilities Manual but, you know, the 
Large Facilities Manual and the cost principles should both 
support each other and not to be in conflict.
    Mr. Massie. So to answer that question, you think it is 
more on NEON's noncompliance with the standards for accounting?
    Ms. Lerner. I mean ultimately it was their proposal.
    Mr. Massie. Um-hum.
    Ms. Lerner. So I think you have to--they have to be the 
ones--they were the ones who made the proposal. NSF had a role 
in providing guidance through the Large Facilities Manual but 
it was NEON's proposal.
    Mr. Massie. Thank you. And, Ms. Bales, what is your opinion 
of that?
    Ms. Bales. I would agree with Ms. Lerner. In terms of the 
proposal, it is the responsibility of the service provider to 
put together a proposal that can't, from our perspective, be 
audited and allows the contracting officer or grant manager to 
know what is coming in and be able to make a decision on.
    Mr. Massie. Thank you. And I yield back 1 second.
    Chairman Smith. Thank you, Mr. Massie.
    My colleague from Texas Mr. Veasey is recognized for 
questions.
    Mr. Veasey. Thank you, Mr. Chairman.
    I wanted to ask Ms. Lerner a question. Ms. Lerner, 
according to the NSF, the agency sustained $20 million in 
questioning cost from NEON's proposal. This contradicts the 
statement that you made in your written testimony when you 
implied that NSF upheld the full proposal in April 2014. NSF 
further told us that they have been unable to take any steps to 
reduce NEON's total budget accordingly because you escalated 
your finding to the agency's audit follow-up official who must 
now weigh in before any further action can be taken. Were you 
aware that NSF in fact sustained nearly $20 million in question 
costs?
    Ms. Lerner. We are aware of that now.
    Mr. Veasey. Okay. And also I wanted to ask you another 
statement that was made a little bit earlier. I understand that 
you feel very strongly about your views on contingency funds 
and of course there has been some disagreement, you know, with 
that. When you had the opportunity to make your case before the 
OMB, it seems to me that you were overruled. Is there a 
specific OMB regulation that you believe NSF to be in violation 
of? And if--and I actually have a copy of the text if Members 
would like to see it, but I just wanted to get your opinion on 
that as well.
    Ms. Lerner. If you look at the--are you speaking about the 
new provision in the uniform guidance?
    Mr. Veasey. The--okay. It was December 26.
    Ms. Lerner. Yes, it is the uniform guidance.
    Mr. Veasey. Yes, right, exactly.
    Ms. Lerner. The change that was made there added a Section 
B that speaks specifically about the ability to have 
contingencies in budget estimates and that has never been the 
concern of my office. Our concern has been with the final 
provision of that section subpart C, which says payments made 
by the federal awarding agency to the nonfederal entity's 
contingency reserve or any similar payment made for events, the 
occurrence of which cannot be foretold with certainty as to the 
time, intensity, or with an assurance of their happening, are 
unallowable.
    What we see with contingencies at NSF is that they 
accumulate them WBF level by WBF level into a large reserve, 
and those--the contributions to that reserve, many of them 
don't meet the certainty requirement that is set forth in that 
subparagraph. And so that has been our concern, not--we have 
never taken the position that you cannot have contingencies in 
a budget, simply that when you make a contribution to a 
reserve, there needs to be certainty as to the factors set 
forth in the principal.
    Mr. Veasey. Okay. All right. Okay. Well, let me just--can 
I--if--do you mind, very quickly, if I can just read some of 
this----
    Ms. Lerner. Sure.
    Mr. Veasey. --statement from you a little bit earlier. This 
is--I am going to read directly. Let's see. ``Some commentators 
recommended additional provisions for further clarity on the 
types of costs that are allowable for contingencies and 
recommended additional controls on how federal agencies provide 
oversight over these funds. In particular, commentators 
suggested adding a requirement to track funds that are spent as 
contingency funds throughout the nonfederal entity's records. 
The COFAR reviewed the language and concluded that it does 
provide sufficient controls to federal agencies to manage 
federal awards. The COFAR noted that through a diversity of 
techniques that are available to establish contingency 
estimates, the estimates must be based on broadly accepted cost 
estimating methodologies. Budgeted amounts would be explicitly 
subject to federal agency approval at time of award and funds 
will be drawn down unless in accordance with all other 
applicable provisions of this guidance. The actual costs 
incurred must be verifiable from the nonfederal entity's 
records. The COFAR considered this last requirement to be 
sufficient for tracking the use of funds as contingency funds 
should be most properly--should most properly be charged not as 
contingency fund specifically but according to cost category in 
which they naturally fall. The COFAR did not recommend any 
changes to the proposed language.''
    Ms. Lerner. Well, with respect to the statement of that the 
contingencies have to be verifiable from the nonfederal 
entity's records, that scenario of where we have had concern 
because while we can look at a change log and see that the 
awardee says that they are going to expend contingencies in 
certain amounts on certain--for certain purchases, we can't 
verify that those expenditures were actually made in the 
financial records of the awardees, and so that has been an area 
of great concern to us.
    When you have 30--you know, $77 million worth of 
contingencies that will be expended but we can't determine how 
they are expended in the actual accounting records, that is an 
area of risk because people can say that they are going to 
expend it one way and then expend it another way and we won't 
be able to tell. They can also hide, you know, cost schedules 
with cost--cost overruns in ways that we won't be able to see. 
So we do have concerns about the ability for the--to verify the 
expenditures from the nonfederal entity's records.
    Mr. Veasey. Thank you.
    Thank you, Mr. Chairman.
    Chairman Smith. Thank you, Mr. Veasey.
    The gentleman from Arizona, Mr. Schweikert, is recognized.
    Mr. Schweikert. Thank you, Mr. Chairman.
    For many of us here, we start to delve into this and we are 
concerned because we want to see NSF be successful. I mean this 
isn't beating them up; this is sort of doing our constitutional 
duty but also, you know, it is an organization that is 
important when they--you know, when they hit their mark.
    Ms. Lerner, Ms. Bales, how long have you been in shall we 
say the auditing business?
    Ms. Lerner. Well, I have been in the IG community since 
1991.
    Mr. Schweikert. Ms. Bales?
    Ms. Bales. I have been auditing since 1984.
    Mr. Schweikert. Okay. So you have sort of been doing it 
forever?
    Ms. Bales. Yes.
    Mr. Schweikert. Nothing personal on that. I am actually 
married to one of your kind so--should I at least be a little 
bit surprised and maybe I just was a little sensitive to it, 
some of the reaction of beat up the auditor, I mean how often 
have you had that experience where instead of digging into 
saying, okay, here is how we could fix this, it is, no, let's 
beat up the auditor? I was just a little surprised at the tone 
of both some of the questions but also some of the things I 
have seen written. Has that been an experience in the past, I 
mean shoot the messenger?
    Ms. Bales. Well, having been an auditor forever----
    Mr. Schweikert. It is nothing personal.
    Ms. Bales. No, that is fine.
    Auditors--I mean no one is comfortable when an auditor 
comes into their house and so we do tend to be a target when 
things--when people hear maybe what they don't want to hear. So 
there have been times when, throughout my career, it was like, 
well, you just don't understand. You don't have the expertise. 
You are coming in. So it is not unusual to hear that but then 
it is our responsibility to go back and show this is how we 
know what we are doing, this is our competence, these are the 
regulations that we are following----
    Mr. Schweikert. But if you have been doing it since the 
mid-'80s, sorry, you have probably seen everything. And, Ms. 
Lerner, have you ever sort of had this sort of personal sort 
of----
    Ms. Lerner. Well----
    Mr. Schweikert. --pushback?
    Ms. Lerner. --before I was wearing the audit hat, I was a 
lawyer so I have experienced pushback----
    Mr. Schweikert. Is that two strikes against you?
    Ms. Lerner. Pretty much. One more I don't know what will 
happen.
    So you have to have a really thick skin and a strong 
stomach to do what we do, and, you know, I----
    Mr. Schweikert. But how do we convince----
    Ms. Lerner. --you sign up for it.
    Mr. Schweikert. --our brothers and sisters around here we 
are actually doing this for love and success and protecting the 
taxpayers and the agency, and sometimes we have got to have 
these honest conversation?
    Ms. Bales, okay, your specialty has been a lot of defense 
contracts?
    Ms. Bales. Yes. I have been with the Defense Contract Audit 
Agency for about 3-1/2 years.
    Mr. Schweikert. In modern defense contracts, as you review 
their success, their compliance, what would happen if it was a 
defense contractor that was spending money on alcohol and other 
types--let's call them externalities? Would that be tolerated 
in--on that side of the world?
    Ms. Bales. If we were to audit a contract and see that 
there was a cost that was reported that was alcohol, use that 
as an example, we would question that cost as unallowable. And 
this is one of the differences between FAR 31, which covers the 
defense world and to kind of respond to the issue about our 
competency to look at National Science Foundation contractors 
because they are not defense. We do understand that FAR covers 
much more in detail than what OMB A-122, which covers the 
National Science Foundation contractors. But because A-122 does 
not have that spelled out of what is expressly unallowable as 
the FAR does, but OSD would respond to the FAR and it would say 
alcohol is expressly unallowable and we would question that.
    Mr. Schweikert. So this was nothing personal? It wasn't a 
vendetta----
    Ms. Bales. Absolutely not.
    Mr. Schweikert. I mean this is just standard practice of 
how you would do your job?
    Ms. Bales. Correct.
    Mr. Schweikert. In the way you designed your audit, okay, 
you pointed out the number of sins and the misappropriations 
and some of the failure to manage the contractor, but within 
that, didn't you also provide a series of suggestions of how to 
solve this problem in the future?
    Ms. Bales. We did because one of the reasons because there 
was a management fee and these expenses were covered by a 
management fee, we did not question them as unallowable because 
once the management fee has been awarded and there has been a 
determination from management to attach an award fee--or a 
management fee in that award, we have to audit to the terms of 
that collaborative agreement contract grant, and because a 
management fee was awarded, there are no restrictions on what 
the management fee can be used for.
    Mr. Schweikert. Well, Mr. Chairman, forgive me for going a 
few seconds over. Did you audit in depth sort of the design of 
the contract?
    Ms. Bales. The design in terms of----
    Mr. Schweikert. The reporting requirements, the design, the 
protocols, the mechanics within the agreement?
    Ms. Bales. I would say we don't audit that in depth because 
our----
    Mr. Schweikert. If you--from what you have seen, should we 
go back and delve into those contracts and really break them 
open and do a sort of a forensics within those contracts?
    Ms. Bales. In terms of what costs were incurred, you know, 
we would, at the end of any cost type contract, we would 
advocate that a good oversight is to come in and do and 
incurred cost audit that covers both indirect and direct costs 
to make sure that the costs were in accordance with guidance 
and in accordance with the agreement.
    Mr. Schweikert. And so that is something we can look 
forward to in the future?
    Ms. Bales. We could.
    Mr. Schweikert. All right. Thank you, Mr. Chairman.
    Chairman Smith. Thank you, Mr. Schweikert.
    The gentleman from Texas, Mr. Weber, is recognized.
    Mr. Weber. Thank you, Mr. Chairman.
    Actually, this is a question--well, first of all, let me 
just say to Ms. Lerner and Ms. Bales, you all do this for a 
living, is that right? Do they pay you to do this?
    Ms. Lerner. Yes, sir.
    Ms. Bales. Yes.
    Mr. Weber. Okay. Do they take--and I don't mean to pry. Do 
they take taxes out of your paycheck?
    Ms. Lerner. Yes, sir.
    Ms. Bales. Yes, they do.
    Mr. Weber. Okay. And you are okay if they double the amount 
they are taking out or would you rather government be run as 
effectively and efficiently as possible to mitigate any taxes 
they might take out of your paycheck?
    Ms. Lerner. Well, you know, we are in the business of 
trying to pursue an efficient government.
    Mr. Weber. That is a simple yes.
    Ms. Lerner. It is.
    Mr. Weber. Yes.
    Ms. Bales. Efficiency, effectiveness, this is what we look 
at.
    Mr. Weber. Absolutely. So you have a vested interest when 
you are doing this. And there is something called generally 
accepted accounting principles--or what do you all call that, 
GAAP?
    Ms. Lerner. Yes.
    Ms. Bales. Yes.
    Mr. Weber. Okay. And so you all are experienced in that. 
And so when you go in and you look at this way, it is kind of 
like David Schweikert, my colleague over here said, you know, 
we are doing this for the right reasons. We want to make sure 
that our taxpayer dollars are expended in the wisest, best--
bestest use. That is probably not good English but that is what 
we want. And so I appreciate you all doing that and I, too, 
echo his comments. It saddens me that sometimes the messenger 
gets shot in that endeavor, but thank you for doing that.
    It seems as though it should be a standard operating 
procedure for any federal agency that commits 400 or more 
billion dollars to a construction project to have a cost 
proposal audit and resolve those problems before that 
construction begins and then also to have a post construction 
audit of actual expenses. Now, that just seems to be a good 
generally accepted accounting principle to me. I own an air-
conditioning company; I am a business guy. Would you all agree 
with that?
    Ms. Bales. I would. In terms of what we do our audits, we 
think that we can add good value before the audit is awarded by 
again providing information to the contracting officer to be 
able to go in with a good negotiating position and then after 
the fact to make sure that the costs were accurate and 
allowable, reasonable, and allocable.
    Mr. Weber. Okay. I may have misspoke, 400 million, I am 
sorry.
    Ms. Bales. Yes.
    Mr. Weber. But go ahead. You know, 400--a billion here, a 
billion there, it is real money. Ms. Lerner, what do you think?
    Ms. Lerner. I agree. And we have made both of those 
recommendations to the Foundation for its large, high-risk, 
high-dollar construction agreements. You know, step up the--
both the pre- and the post-award oversight.
    Mr. Weber. Are there plans to perform an incurred cost 
audit for NEON and the other NSF major projects? Do you know?
    Ms. Lerner. You know, do you mind if I look at my--we are 
looking at management fee for this year----
    Mr. Weber. Um-hum.
    Ms. Lerner. --but I would assume that down the road we 
would consider auditing--doing incurred cost audits in some of 
these large construction agreements. But we aren't the only 
ones. The Foundation can also do that. It is not just an 
oversight responsibility; it is a management responsibility.
    Mr. Weber. Are you making that request to them? Are you 
making that a strong suggestion to them?
    Ms. Lerner. We suggested in our alert memo on large 
cooperative agreements that they do require incurred cost 
submissions and that they undertake incurred cost audits for 
those types of awards.
    Mr. Weber. And hopefully if they haven't had too much 
alcohol on the taxpayer dime they were able to read that and 
digest it. Okay.
    Question for Ms. Bales, if a preconstruction cost proposal 
audit for a DOD project disclosed huge amounts of unsupported 
and/or questionable costs to that particular project, what 
happens to it?
    Ms. Bales. We turn that information over to the contracting 
officer and they use that information through negotiations. If 
the proposal is grossly inadequate, they would probably go back 
to the contractor and ask them to fix the proposal and fix the 
inadequacies in it so it could be used to negotiate.
    Mr. Weber. To they come back to you all for approval for 
the changes they make or input--I guess I should say input by 
you all?
    Ms. Bales. They, the contractor?
    Mr. Weber. Um-hum.
    Ms. Bales. Yes, if they went back and redid their 
proposal----
    Mr. Weber. Um-hum.
    Ms. Bales. --it would come back to us to audit again.
    Mr. Weber. Okay. And then you have the ability to say that 
looks better or it looks the same or worse?
    Ms. Bales. Yes.
    Mr. Weber. Okay. All right. And, Ms. Lerner, in answer to 
your question, three strikes, I guess you could go to work for 
the IRS. But I will leave that alone.
    Thank you all for being here.
    Chairman Smith. Thank you, Mr. Weber.
    That concludes our questions. And let me thank both 
witnesses for their insightful answers, which are very much 
appreciated. And the responses that we got and your testimony 
today was both informative, enlightening, and sobering.
    And, clearly, problems within the National Science 
Foundation have existed for many years. And let me say that the 
new director has only been in office for 8 months. I believe 
that she wants to correct these problems and I am hopeful that 
they will be corrected. But--including the problems that have 
been there for a long time, and as I say, I am hopeful of being 
able to work with the director and being able to address some 
of the deficiencies that you all have mentioned here today.
    Thank you very much for your testimony and we will look 
forward to staying in touch.
    [Whereupon, at 11:21 a.m., the Committee was adjourned.]


                               Appendix I

                              ----------                              


                   Answers to Post-Hearing Questions
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                              Appendix II

                              ----------                              
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Memorandum submitted by Ranking Member Eddie Bernice Johnson

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 [all]