Anti-Drug Media Campaign: Aspects of Advertising Contract	 
Mismanaged by the Government; Contractor Improperly Charged Some 
Costs (25-JUN-01, GAO-01-623).					 
								 
This report discusses the Office of National Drug Control	 
Policy's (ONDCP) advertising contract for Phase III of the	 
National Youth Anti-Drug Media Campaign. The contractor for the  
advertising portion of the Phase III anti-drug media campaign did
not properly charge the government for some of the labor costs	 
incurred under the contract. Ogilvy & Mather's submission of time
sheets claiming hours that some employees said they did not work 
on the anti-drug media campaign was clearly improper. Moreover,  
Ogilvy should not have been awarded a cost accounting standards  
(CAS)-covered cost-reimbursement government contract until the	 
company had an adequate cost accounting system to support this	 
type of contract. The government poorly managed aspects of the	 
award and administration of the contract. The Department of	 
Health and Human Services (HHS) should not have awarded this	 
cost-reimbursement contract without determining whether the	 
contractor had an adequate cost accounting system that met CAS	 
standards. In addition, HHS should have reviewed the		 
appropriateness of the large amount of money that the contracting
officer's technical representative (COTR) recommended be	 
disallowed from the contractor's invoices or arranged for an	 
audit of the contract. The COTR appropriately brought allegations
of improper billing to the attention of ONDCP management, but	 
ONDCP management did not take prompt action to investigate the	 
allegations. Moreover, contract administration was impeded	 
because the COTR and contracting officer did not have an	 
effective working relationship. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-623 					        
    ACCNO:   A01261						        
  TITLE:     Anti-Drug Media Campaign: Aspects of Advertising Contract
             Mismanaged by the Government; Contractor Improperly Charged Some 
             Costs                                                            
     DATE:   06/25/2001 
  SUBJECT:   Cost reimbursement contracts			 
	     Labor costs					 
	     Contractor violations				 
	     Contract oversight 				 
	     Cost accounting standards compliance		 
	     Advertising					 
	     Contract administration				 
	     Contract costs					 
	     Accounting systems 				 
	     ONDCP National Youth Anti-Drug Media		 
	     Campaign						 
								 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-01-623
     
Report to the Chairman, Subcommittee on Treasury, Postal Service, and
General Government, Committee on Appropriations, House of Representatives

United States General Accounting Office

GAO

June 2001 ANTI- DRUG MEDIA CAMPAIGN

Aspects of Advertising Contract Mismanaged by the Government; Contractor
Improperly Charged Some Costs

GAO- 01- 623

Page i GAO- 01- 623 Anti- Drug Media Campaign Letter 1

Results in Brief 3 Background 5 Ogilvy?s Labor Cost Charges Were Not
Reliable 7 The Government Did Not Adequately Manage Aspects of the

Contract Pertaining to Costs Incurred by the Contractor 17 Recent and
Planned Actions 25 Conclusions 27 Recommendations for Executive Action 28

Appendix I Scope and Methodology 33

Appendix II Interviews With Ogilvy Employees Who Revised Their Time Sheets
35

Appendix III Interviews With Ogilvy Employees and Supervisors Regarding Time
Sheets Containing Changes 38

Appendix IV Comments From the Office of National Drug Control Policy 40

Appendix V Comments From Ogilvy and Mather 42

Appendix VI Comments From the Program Support Center 59 Contents

Page ii GAO- 01- 623 Anti- Drug Media Campaign Abbreviations

CAS Cost Accounting Standards COTR Contracting officer?s technical
representative DCAA Defense Contract Audit Agency FAR Federal Acquisition
Regulation HHS Department of Health and Human Services ONDCP Office of
National Drug Control Policy PSC Program Support Center RFP Request for
proposals

Page 1 GAO- 01- 623 Anti- Drug Media Campaign

June 25, 2001 The Honorable Ernest J. Istook, Jr. Chairman, Subcommittee on
Treasury, Postal Service,

and General Government Committee on Appropriations House of Representatives

Dear Mr. Chairman: This report discusses the Office of National Drug Control
Policy?s (ONDCP) advertising contract for Phase III of the National Youth
AntiDrug Media Campaign. Phase I of the media campaign was a 12- city pilot
featuring paid local television and radio advertisements that ran from
January through July 1998. Phase II was a nationwide campaign that included
all media types and ran from July through December 1998. Phase III was a
continuation of the paid advertising campaign that incorporated additional
campaign components, such as partnerships with community groups. Phase III
started in January 1999 and is planned to run through December 2003. The
Phase III advertising contract is a costreimbursement type with a base year
and 4 option years, for a total estimated value of $684 million. The
government awarded the Phase III contract to the Ogilvy & Mather (Ogilvy)
advertising agency in New York, and Ogilvy is currently performing the third
year of the contract. 1

We reviewed certain aspects of the media campaign in a July 2000 report. 2
During that review, allegations were made that the government was not

1 A separate contract was awarded to the public relations firm of Fleishman-
Hillard to provide public relations services for ONDCP regarding the
campaign. This report does not discuss that contract.

2 Anti- Drug Media Campaign: ONDCP Met Most Mandates, but Evaluations of
Impact Are Inconclusive (GGD/ HEHS- 00- 153, July 31, 2000). That report
discussed (1) whether ONDCP provided timely financial reports to Congress,
how funds for paid advertising were managed and disbursed, and whether ONDCP
complied with certain statutory requirements regarding the obligation of
funds; (2) what ONDCP did to develop and implement guidelines in response to
statutory program requirements; and (3) whether the evaluation designs for
Phases I, II, and III were appropriate; how well the Phase I and II
evaluations were implemented; and how effective Phases I and II of the
campaign were in influencing group awareness of different types of paid
anti- drug media messages and drug attitudes.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 623 Anti- Drug Media Campaign

adequately managing aspects of the Phase III contract relating to costs that
Ogilvy incurred and that the company was overbilling the government. Former
Subcommittee Chairman Jim Kolbe requested that we assess the validity of
those allegations. Further, Rep. John Mica, the former Chairman of the House
Government Reform Subcommittee on Criminal Justice, Drug Policy and Human
Resources, asked us to review, in addition to the overbilling allegations,
the former ONDCP Director?s role in deciding whether to audit the Phase III
contract. At an October 2000 hearing before that subcommittee, we testified
about those issues on the basis of our initial investigation. 3 We reported
that the former ONDCP Director knew in April 2000 about allegations of
improper billing, including possible fraudulent conduct, concerning ONDCP?s
contract with Ogilvy and that he agreed with the need to audit the contract
after contracting responsibilities were transferred later from the
Department of Health and Human Services (HHS) to the Navy.

This report provides information on the following questions: Did the
advertising contractor for Phase III properly charge the government for
labor costs incurred under this contract, and did the government adequately
manage aspects of the contract award and administration related to costs
incurred by the contractor?

Our review focused on labor charges that Ogilvy submitted because the
allegations that were raised pertained to labor costs. We reviewed these
costs by examining labor invoices that were submitted to the government for
work done under the ONDCP contract and then interviewed a sample of Ogilvy
employees whose time sheets were revised regarding the amount of time
charged to the contract. We asked these employees about why the time sheets
were revised and who made the changes. We collected other information by
conducting interviews and reviewing contract- related documentation at HHS,
which awarded and administered the contract during the first 2 years; the
Navy, which assumed responsibility for administering the contract in
November 2000; the Defense Contract Audit Agency (DCAA), which was asked by
the Navy to review Ogilvy?s accounting system and audit the contract; ONDCP;
and Ogilvy. We did not determine the contractor?s actual costs incurred
under this contract. Although we did not focus on the technical aspects of
Ogilvy?s performance, ONDCP officials said that they were very satisfied
with

3 Anti- Drug Media Campaign: Investigation of Actions Taken Concerning
Alleged Excessive Contractor Cost (GAO- 01- 34T, Oct. 4, 2000).

Page 3 GAO- 01- 623 Anti- Drug Media Campaign

Ogilvy?s technical performance regarding the anti- drug media campaign. A
detailed scope and methodology is contained in appendix I.

The contractor for the advertising portion of the Phase III anti- drug media
campaign did not properly charge the government for some of the labor costs
claimed under the contract and did not have an adequate accounting system
that could support a cost- reimbursement government contract of this value.
Ogilvy believes that it may have both underbilled and overbilled the
government for portions of its work on the campaign for 1999 and 2000, and
has disclosed this to the Department of Justice. The government disallowed
nearly $7.6 million out of about $24. 2 million in total labor charges that
Ogilvy submitted during the first 19 months of the contract. Attorneys for
the company, who retained consultants to review time charges submitted under
this contract, have proposed that about $850,000 be disallowed for that
period. However, because the contract has not yet been audited, the amount
of money that the government overpaid or should reimburse the contractor for
labor costs incurred currently cannot be determined. The Navy asked DCAA to
audit the costs for 1999 and 2000, but DCAA does not plan to begin the audit
until Ogilvy certifies its incurred cost proposal (required to establish
final costs incurred), which the company has not yet done. Ogilvy?s
attorneys said that the company expects to certify the incurred cost
proposal after it completes the disclosure process on direct labor charges
or reaches an agreement with the government.

We found that some of Ogilvy?s labor charges to the government were not
reliable and included charges for time that its employees did not work on
the contract. According to Ogilvy officials and an internal company E- mail,
after revenue on the ONDCP contract did not meet projections in the summer
of 1999, certain Ogilvy managers instructed some employees to review and
revise their time sheets. Some Ogilvy employees told us that they initially
did not record all of the time they worked on the ONDCP contract and that
they revised their time sheets to increase the number of hours that they
claimed to have worked. However, some Ogilvy employees also told us that
they did not work the amount of additional time that was added to their time
sheets or could not fully explain why they increased the number of hours
billed to the ONDCP contract. Time sheets for some other employees (not
those who revised their time sheets after certain Ogilvy managers instructed
them to) also showed changes that increased the number of hours charged for
the ONDCP work; however, some employees said that they did not make those
changes to their time sheets and could not explain who made the changes and
why. Results in Brief

Page 4 GAO- 01- 623 Anti- Drug Media Campaign

We found other problems associated with Ogilvy?s billing the government for
its ONDCP work. For example, Ogilvy inconsistently charged the government
for employees? nonbillable hours, such as paid absences and training, in its
invoices. In addition, we found that Ogilvy incorrectly billed fringe
benefits for temporary contract employees. A June 2000 consultant?s report
also found problems with Ogilvy?s accounting system and time sheets
submitted in support of invoices submitted under the contract. Ogilvy is
taking steps to restructure its accounting system and improve its
timekeeping procedures.

The government did not adequately manage aspects of the contract award. The
HHS Program Support Center, under an agreement with ONDCP, provided a
contracting officer to award and administer the contract and awarded a cost-
reimbursement contract to Ogilvy before sufficiently determining, as
required, that the contractor had an adequate accounting system to support
this type of contract. HHS also failed to obtain a required statement from
the contractor that would have disclosed the cost accounting practices that
the company planned to use under this contract. The disclosure statement
would have increased the likelihood that deficiencies in Ogilvy?s cost
accounting practices would have been identified and addressed earlier.

The government also did not adequately administer the contract by resolving
billing problems when they arose or by auditing the contractor, despite
clear indications that Ogilvy?s cost accounting system and timekeeping
procedures were deficient. The HHS contracting officer followed the
technical representative?s recommendations to disallow nearly one- third of
the labor charges that Ogilvy submitted during the first 19 months of the
contract, without reviewing the appropriateness of those disallowances or
arranging to audit the contract. Moreover, the contracting officer and the
technical representative did not have an effective working relationship,
which impeded contract administration.

We are recommending corrective action to ONDCP and HHS to address the
problems we identified and have referred our findings regarding improper
billing by the contractor to the Department of Justice. We recommend that
ONDCP work with the Navy to review the appropriateness of the disallowed
costs and other labor charges and determine the amount of money that the
government overpaid or should reimburse the contractor, ensure that Ogilvy
has an adequate cost accounting system for continued performance under the
contract, and effectively coordinate the roles and responsibilities of the
contracting officer and the contracting officer?s technical representative
(COTR). In

Page 5 GAO- 01- 623 Anti- Drug Media Campaign

providing comments on a draft of this report, ONDCP said that the report
fairly and accurately portrays the complexities of the contracting issues
regarding the advertising portion of the media campaign, and agreed with our
recommendations. ONDCP also said that significant progress has been achieved
toward resolving the problems that we identified. The HHS Program Support
Center (PSC) said that it agreed with our recommendation that controls over
contracting procedures, particularly with respect to assessing an offeror?s
accounting system, should be reexamined. In their comments, the Navy and
DCAA discussed the actions that they plan to take regarding the
recommendations that we made to ONDCP.

Phase III of ONDCP?s National Youth Anti- Drug Media Campaign was initiated
in January 1999 as a 5- year effort to reduce youth drug use. The campaign
consists of nationwide print and broadcast advertisements that are to run
through December 2003. Although paid advertisements are the centerpiece of
the campaign, it is part of a broader ONDCP effort that also includes
partnerships with community groups, corporate participation, public
information and news media outreach, collaboration with the entertainment
industry, and use of interactive media. Paid advertisements for the campaign
are to be supplemented by matching advertisements donated by media outlets
on a matching basis. In discussions with Ogilvy?s attorneys regarding
billing issues, the attorneys asserted that the government received more
value than the company was required to provide under the contract. For
example, the attorneys said that Ogilvy matched 115 percent of the paid
advertisements with pro bono advertisements, compared to the contract?s 100
percent matching requirement. 4

According to ONDCP officials, because the Executive Office of the President,
of which ONDCP is a part, did not have the procurement resources to award
and administer a large contract, ONDCP arranged for a contracting officer
from the PSC to serve as its contracting officer. This arrangement gave HHS
overall responsibility for awarding and administering the Phase III contract
in return for a fee, and ONDCP was to monitor technical aspects of the
contractor?s performance. ONDCP paid

4 The matching of paid and pro bono advertisements was not part of this
review, and we did not verify this assertion. Background

Page 6 GAO- 01- 623 Anti- Drug Media Campaign

HHS $452,000 to award and administer the Phase III advertising contract in
1999 and 2000.

The request for proposals (RFP) issued by HHS for the Phase III contract
contemplated the award of a type of cost- reimbursement contract known as a
cost- plus- fixed- fee contract. Under this type of contract, in addition to
being reimbursed for costs properly incurred, the contractor is paid a
negotiated fee that is fixed at the inception of the contract. HHS indicated
that the awarding of a cost- reimbursement contact was a joint decision of
ONDCP and the HHS contracting office. According to HHS, a costreimbursement
contract was used primarily because ONDCP?s specific needs for the
advertising campaign could not be determined in advance and the cost of
performing this work could not be forecast with a reasonable degree of
accuracy, and therefore a fixed- price contract was impractical.

The RFP notified competitors that the resulting cost- reimbursement contract
would be subject to federal government Cost Accounting Standards (CAS) and
applicable regulations governing the accounting for costs by the contractor.
The RFP required each competitor to submit a disclosure statement (in a
format established by the government) of its cost accounting practices that
would be used by the government to determine the adequacy of the prospective
contractor?s cost accounting system. During the competition for the
contract, Ogilvy submitted to the government a cost proposal in June 1998
and a best and final offer in November 1998, but not the required disclosure
statement.

Three offerors had submitted proposals for the advertising portion of the
Phase III contract and Ogilvy made the lowest- priced offer. In December
1998, HHS competitively awarded the cost- reimbursement contract to Ogilvy,
with performance to begin in January 1999. Of the $128.8 million value of
the contract award for the first year, $18.9 million was for Ogilvy?s labor
costs, and the rest was for media and subcontractor costs.

In November 2000, attorneys representing Ogilvy disclosed to the Justice
Department?s Civil Division that they had conducted a preliminary review of
Ogilvy?s ONDCP contract costs and found certain ?slices of unreliability? in
the company?s accounting system and employee time sheets. According to the
attorneys, the initial review began in response to the October 2000 hearing
before the House Government Reform Subcommittee on Criminal Justice, Drug
Policy and Human Resources. The attorneys said that they disclosed to the
Justice Department deficiencies in the company?s timekeeping systems, which
they said

Page 7 GAO- 01- 623 Anti- Drug Media Campaign

resulted in possible underbilling of labor costs for the period January
through June 1999, and possible overbilling of labor costs for the last
quarter of 1999. We also referred our findings regarding Ogilvy?s improper
billing under this contract to the Department of Justice. Ogilvy has hired
consultants to help determine the amounts that should have been billed and
to implement an acceptable cost accounting system with improved timekeeping
procedures.

Also, in November 2000, ONDCP transferred contracting responsibilities from
HHS to the Navy after a breakdown in ONDCP?s working relationship with HHS
regarding the contract, which is discussed in more detail later in this
report. In January 2001, the Navy exercised the option (Option Year 2) to
Ogilvy for the third year of the contract, with an estimated value of $137
million. On December 6, 2000, the Navy asked DCAA to review Ogilvy?s
accounting system and conduct an historical audit of costs incurred under
this contract.

The contractor for the advertising portion of the Phase III anti- drug media
campaign did not properly charge the government for some of the labor costs
claimed under the contract and did not have an adequate accounting system
that could support a cost- reimbursement government contract of this value.
Ogilvy believes that it may have both underbilled and overbilled the
government for portions of its work on the campaign for 1999 and 2000. We
found that some of Ogilvy?s labor charges to the government were not
reliable and included charges for time that its employees did not work on
the contract. Attorneys for the company, who retained consultants to review
time charges submitted under this contract, have proposed that the
government disallow about $850,000 out of about $24.2 million in labor
charges submitted during the first 19 months of the contract. However,
because the contract has not yet been audited, the amount of money that the
government overpaid or should reimburse the contractor for labor costs
incurred currently cannot be determined.

According to Ogilvy officials and an internal company E- mail, after
learning in the summer of 1999 that revenue on the ONDCP contract was about
$3 million lower than projected, certain Ogilvy managers instructed some
employees to review and revise their time sheets. Ogilvy?s attorneys
provided documents indicating that these revisions added about 3,100 hours
to employees? time sheets for the ONDCP contract, which increased charges to
the government by about $238,000. Some of these Ogilvy employees told us
that they initially did not record all of the time they Ogilvy?s Labor Cost

Charges Were Not Reliable

Some of Ogilvy?s Charges Were for Time Employees Did Not Work

Page 8 GAO- 01- 623 Anti- Drug Media Campaign

worked on the ONDCP contract and that they revised their time sheets to
increase the number of hours that they claimed to have worked. However, some
of the employees also told us that they did not work the amount of
additional time that was added to their time sheets or could not fully
explain why they increased the number of hours billed to the ONDCP contract.
Time sheets for some other employees that we reviewed (which were not
included among those for the employees who added 3,100 hours to their time
sheets) also showed changes that increased the number of hours that were
charged for the ONDCP work; however, some of those employees said they did
not make those changes to their time sheets and could not explain who made
the changes and why.

A July 28, 1999, E- mail sent by Ogilvy?s former government contracts
manager to the company?s finance director, and copied to the project
director 5 and media director, explained the revenue shortfall on the
contract and the time sheet revision effort. The E- mail stated that, on the
basis of an April 1999 staffing plan, Ogilvy had projected an income of
$15.7 million on the ONDCP contract, but that revenue was about $3 million
less than that. In the E- mail, the former government contracts manager
stated the following:

?As we?ve progressed through the year, with real ?new hires? taking somewhat
longer to accomplish than originally estimated, staffing needs fluctuating,
and actual labor numbers coming in under those projected on an individual-
by- individual basis, we have gotten somewhat away from that number. (We are
currently approximately $3, 000, 000 under.) Nevertheless, [the project
director] is confident that we can reach the number we committed to as long
as we take some specific steps as soon as possible.?

The E- mail detailed positions to be filled that would increase revenue on
the contract. The E- mail from the former government contracts manager
continued:

?Lastly, a significant contributing factor to our low actuals are [sic] that
much of our existing staff (primarily in media) are spending much less time
that [sic] projected. All of these time sheets are being reviewed (primarily
by?[ the project director, the media director, and the former government
contracts manager]) and are subject to revision.

5 Ogilvy had two project directors working on the ONDCP contract until the
first project director left the company in March 2000. The E- mail cited
above and this report refer to the current project director.

Page 9 GAO- 01- 623 Anti- Drug Media Campaign

Again,?[ the project director] still believes that we can hit our projection
of $15, 700,000 but only if we put into effect all of the above- detailed
measures at a minimum.?

We asked Ogilvy?s media director, project director, and finance director
about the issues and actions described in this E- mail. The media director
said that the company?s finance department provided him with the time sheets
for about 50 media department employees who were working on the ONDCP
contract, representing hundreds of individual time sheets, which he passed
on to the media department?s four group heads for them to distribute to
their employees for review. The media director said that he continually
received employee time sheets to be revised, but mainly in September 1999.
He also said that, if the amount of time that employees had charged to the
ONDCP contract was not consistent with what they were projected to work, the
group heads were to ask their employees to reexamine their time sheets to
determine their accuracy.

The project director explained that employees spent less time working on the
account at the beginning of the contract than expected because some tasks
were still being performed by the previous media campaign contractor and
because employees were still being hired for the work. 6 However, the
project director said that she was not involved in revising time sheets, and
that she only asked her secretary and one other employee to review their
time sheets with regard to the time billed against the ONDCP contract.
According to a document provided by Ogilvy?s attorneys, the project
director?s secretary added 375 hours to her time sheets for the ONDCP
contract for time worked from January through May 1999. This document
indicated that the revised time sheets were entered into Ogilvy?s accounting
system on September 2, 1999. The other employee whom the project director
asked to review her time sheets reduced the amount of time she billed to the
ONDCP contract by 3 hours, according to the company document.

The project director said that the time sheet revision effort mentioned in
the E- mail referred to an ongoing effort to track time worked accurately,
and was not a single review task. She also provided a memorandum dated June
17, 1999, that she had prepared for Ogilvy staff working on the ONDCP
contract, which stressed the importance of accurate and timely preparation
of time sheets. She added that in a meeting held in the late

6 ONDCP?s media director said that a fully integrated media campaign did not
begin until July 1999, even though the contract began in January 1999.

Page 10 GAO- 01- 623 Anti- Drug Media Campaign

summer of 1999 involving Ogilvy?s president, finance director, former
government contracts manager, former co- project director, and herself, the
company?s president was ?angry? about low revenue on the ONDCP contract, but
that he did not instruct anyone to do anything regarding employee time
sheets. In an interview with our Office of Special Investigations, the
company president said that he had conversations with the finance director
and project director about the low forecasts of revenue on the ONDCP
contract, but that he never told anyone at the company to review or revise
his or her time sheets.

Regarding the July 28, 1999, E- mail, Ogilvy?s finance director said that
the government contracts manager, along with other managers, was reviewing
whether employees had charged the correct account for time spent working for
ONDCP. He said that some employees had initially charged the wrong account
for work on the ONDCP contract. The finance director added that the company
did not place a high priority on employees? preparation of time sheets
because the company is paid by other clients primarily on the basis of
commissions and fixed fees, rather than on a cost- reimbursement basis. In
providing comments on a draft of this report, Ogilvy?s attorneys said that
this comment attributed to the finance director does not fully capture his
perspective. The attorneys said that, while the subject matter of
timekeeping was discussed during this interview, the finance director does
not believe that he discounted the importance of timekeeping accuracy in the
manner ascribed to him. Instead, the attorneys said, the finance director
believes he was describing a practice by some employees that emphasized the
importance of achieving accuracy within quarters and yearly, rather than on
a daily time sheet basis.

Ogilvy?s attorneys provided documents indicating that 28 employees had
prepared revised time sheets, primarily in September and October 1999, 7
thereby adding a total of 3,127 hours to the ONDCP contract. Ogilvy?s
attorneys provided an estimate of the value of those additional hours, which
was calculated by their consultants, of $87,536, which, when overhead and
fringe benefits costs were included, amounted to $237,733. 8 We interviewed
3 of those 28 employees about when and why they revised

7 According to the document, some revised time charges were also added for
work done in May, June, November, and December 1999. 8 We used the
provisional rates of 126 percent for overhead costs and 20 percent for
fringe benefits costs.

Page 11 GAO- 01- 623 Anti- Drug Media Campaign

their time sheets. 9 One of the 3 employees said that she did not work the
485 hours that she added to the ONDCP contract; another employee generally
could not recall the work that he did for ONDCP with respect to most of the
402 hours that he added to his time sheets; and the third employee, who was
the media director, said that he added 67 hours to the ONDCP contract after
reviewing his calendar and finding that he had worked more hours on ONDCP
that he originally reported on his time sheets. Details regarding our
interviews with these three employees and how we selected them to interview
are contained in appendix II.

We also reviewed time sheets that Ogilvy submitted to ONDCP as support for
the labor invoices in 1999 and found hundreds 10 containing scratchouts,
white- outs, and other changes to the amount of time billed to the ONDCP
contract, all lacking the employees? initials. We interviewed 12 Ogilvy
employees whose time sheets were changed to add time to the ONDCP contract
about why the changes were made. (These were not the same employees who
revised their time sheets after certain Ogilvy managers instructed them to
do so.) Four of the 12 employees said that they did not make the changes
indicated on their time sheets regarding ONDCP and did not know who made the
changes, which added at least 55 hours to the ONDCP contract. 11 The other 8
employees said that they made the changes for various reasons, such as
mathematical errors, charging time to the wrong account, and recording the
wrong office departure times. Details regarding our interviews with the
supervisors of the four employees who said they did not make the changes
made on their time sheets, as well as how we selected these time sheets for
review, are contained in appendix III.

We were unable to determine whether Ogilvy billed the government or if the
government paid for all of the hours that were added to the ONDCP contract
as a result of the time sheet revision effort because, in some cases, we
could not determine whether the invoices reflected the original or revised
time sheets. We also recognize that we questioned employees

9 We chose to interview a sample of these employees because of resource
limitations. According to an Ogilvy attorney, 15 of the 28 employees were no
longer employed at the company in January 2001, including one who
transferred 435 hours and another who transferred 322 hours from other
company accounts to the ONDCP contract.

10 About 12, 000 time sheets were submitted to ONDCP for work done during
1999. 11 More hours may have been added, but it was not possible to
determine what numbers had been whited out or marked out on some time
sheets.

Page 12 GAO- 01- 623 Anti- Drug Media Campaign

about their work activities up to 2 years after they occurred and that the
passage of time may have affected their recollections.

Ogilvy submitted labor invoices to the government that were calculated on
the percentage of time that employees worked on the ONDCP contract, compared
to all time worked for the company during each month. However, in applying
that methodology, the company inconsistently charged the government for paid
absences and training. In addition, Ogilvy incorrectly billed fringe
benefits for temporary contract employees. Moreover, although the contract
required the contractor to bill monthly, Ogilvy did not submit a labor
invoice to the government until 5 months after the beginning of the
contract. The company later voided its first labor invoice and submitted
another invoice to the government 4 months later. The company also submitted
multiple versions of invoices covering the same time periods.

Ogilvy?s cost proposal and best and final offer were not clear about how the
company planned to bill the government for its labor costs. The company?s
June 1998 cost proposal indicated that the government would be billed on the
basis of the number of hours that employees worked on the ONDCP contract
multiplied by their hourly salary rates, assuming a 40- hour work week.
However, the company?s response to the government?s question about
uncompensated overtime in its November 1998 best and final offer, which
modified the initial proposal, indicated that Ogilvy would bill the
government on the basis of the percentage of time that employees worked for
ONDCP multiplied by their salaries during that month. 12 Despite the lack of
clarity regarding how Ogilvy planned to bill the government, it appears that
billing on the basis of the percentage of time that employees worked on the
ONDCP contract can be an acceptable method under the Federal Acquisition
Regulation (FAR) and CAS cost allocation principles and DCAA audit guidance
for employees who work uncompensated overtime and work on more than one
account. However, we note that, although Ogilvy stated in its cost proposal
that its employees work a 40- hour work week, the company?s actual work week
is 35 hours and 32 hours in the summer. Because working less than 40 hours a
week may increase the cost of the government?s pro- rata share for Ogilvy?s

12 The contract required Ogilvy to report direct labor costs by providing ??
all persons, listing the person?s name, title, number of hours or days
worked, hourly rate, the total cost per person and a total amount for this
category.? Ogilvy?s Labor Invoices

Incorrectly Billed Certain Costs

Page 13 GAO- 01- 623 Anti- Drug Media Campaign

employees working on the ONDCP contract, the government will need to
determine the acceptability of this practice with regard to the ONDCP
contract.

In March 2001, after completing an internal review of billing practices,
Ogilvy?s attorneys and consultants told us that they had found the
percentage of time billing methodology was not always properly implemented.
For example, they said that Ogilvy failed to add paid absences to the base
of total hours worked, which resulted in an increase in the percentage of
time Ogilvy?s employees worked on the ONDCP contract. In addition, attorneys
and consultants said that the company misclassified some costs, such as
bonuses, by charging them as part of direct labor rates to individual cost
objectives (client accounts), rather than including them as overhead, but
that the misclassifications would be corrected in a ?true- up? of the
contract. Ogilvy?s attorneys defined a ?trueup?

as the process contemplated by the contract to determine the final actual
incurred costs through which the government and the contractor ultimately
settle the amount of costs reimbursable to the contractor for the contract
year.

We found that Ogilvy inconsistently charged the government for nonbillable
hours, such as paid absences and training, in its invoices. Ogilvy?s
calculation of the percentage of time that employees worked on the ONDCP
contract at times included, and at other times excluded, paid absences (sick
leave, holidays, and vacations) and training in the denominator representing
the total number of hours that employees worked. In its cost proposal,
Ogilvy did not indicate that paid absences (sick leave, holidays, and
vacations) were included in the company?s overhead. However, in a required
disclosure statement that Ogilvy submitted to the Navy in March 2001
regarding the company?s accounting practices, which was prepared to be
effective January 1, 1999, Ogilvy indicated that sick leave, holidays, and
vacations would be included in its overhead. In addition, when Ogilvy billed
employees? entire monthly salaries without deducting the value of time that
they spent on training, it may have resulted in double counting, because
training was already included in Ogilvy?s overhead. In administering this
contract, the Navy will need to determine how nonbillable hours should be
charged to the government, including resolving the proper charges for these
costs during the first 2 years of the contract.

We also found that Ogilvy?s invoices included labor charges for temporary
contract employees, which, when the percentage of time methodology was
applied, appeared to result in overbilling. The company?s September 1999

Page 14 GAO- 01- 623 Anti- Drug Media Campaign

invoice, for example, billed 15.5 hours for a temporary employee?s work, all
of which was dedicated to the ONDCP contract. The invoice also indicated
that the company paid this employee $11,000 that month. 13 When Ogilvy
applied its percentage of time billing methodology, this temporary contract
employee?s entire monthly salary was allocated to the 15. 5 hours he worked,
resulting in a direct labor bill of $11,100 (or an effective labor rate of
$716 per hour) to the government. After adding overhead and fringe benefit
costs to this invoice, Ogilvy charged the government a total of $30,146 for
15.5 hours of work performed by this employee in September 1999. ONDCP
records indicated that the salary for this employee could not be
substantiated by a payroll register, and therefore the contracting officer?s
technical representative (COTR) recommended disallowing charges for this
employee.

In explaining the billing for this temporary contract employee, attorneys
for Ogilvy said that the $11,100 billed was not for the 15.5 hours of work
indicated on the September 1999 invoice, but for 133 hours that the employee
worked in July and August 1999. The attorneys stressed that Ogilvy did not
disguise this bill to ONDCP and that there should be no inference that the
company attempted to ?sneak? this charge past the government. The attorneys
also said that the cumulative billing to ONDCP for the employee (the 15.5
hours billed in September 1999 and the remainder of the 133 hours billed in
the next invoice) would not have any material differences, and that any
actual errors, such as misallocation of costs, would be adjusted in the
true- up of the costs incurred under the contract that is currently under
way.

Ogilvy?s attorneys also said that Ogilvy billed the government for a total
of 22 employees who worked for the firm that provided the temporary contract
labor in the foregoing example. We found that the same overhead and fringe
benefit costs were charged for the temporary contract employees as they were
for Ogilvy employees. 14 In commenting on a draft of this report, Ogilvy?s
attorneys said that the company did not correctly apply the permissible
fringe rate to this group of contract employees. The

13 Other than the 15. 5 hours recorded as worked on the ONDCP contract, the
time sheets submitted to ONDCP did not indicate what this employee worked on
during the rest of the month. The time sheets were approved by a supervisor.

14 We found that the government paid for 19 of these 22 temporary employees.
It appeared that the remaining three temporary employees were not paid
because of missing time sheets or payroll data.

Page 15 GAO- 01- 623 Anti- Drug Media Campaign

attorneys added that, according to PricewaterhouseCoopers and a reasonable
reading of the FAR, charging the same overhead for regular and temporary
contract employees is proper. In a required disclosure statement that Ogilvy
submitted to the Navy in March 2001 (to be effective January 1, 1999), the
company indicated that it would charge the same overhead for temporary
contract and regular employees. This issue is expected to be resolved
between the government and Ogilvy. As of May 2001, this disclosure statement
had yet to be approved by the government.

Ogilvy also delayed in submitting its first labor invoice to the government.
The contract required the company to submit its labor invoices monthly,
starting with January 1999. Ogilvy?s finance director said that the company
submitted its first labor invoice to the government in May 1999, but that
the COTR rejected it because the invoice was not in the correct format. The
finance director also said that it was unclear what the COTR wanted
regarding the invoice and that the COTR did not provide a sample format
until June 1999. Ogilvy did not submit another labor invoice until September
1999- 9 months after the contract began.

The COTR said that ONDCP did not cause Ogilvy?s billing delay and that ONDCP
did not reject Ogilvy?s first labor invoice. Instead, the COTR said that
Ogilvy?s delay in submitting the first labor invoice was the result of the
company?s lack of government contracting experience and because Ogilvy did
not hire a government contracts manager until 5 months after the contract
began. The COTR added that after he met with Ogilvy?s government contracts
manager in mid- June 1999 about the invoice, the former government contracts
manager sent the COTR an E- mail on June 21, 1999, voiding the invoice. In
that E- mail, the former government contracts manager said that ?[ a] fter
our meeting, based on info [sic] received at that time, we voided those
invoices and have been preparing new ones in accordance with your payroll
and time sheet needs.?

Ogilvy also regularly submitted two or more invoices for the same period,
with the subsequent invoices charging time for additional employees and
adding more hours for employees previously billed. For example, the company
submitted a total of four invoices for labor charges incurred during July
and August 1999. According to ONDCP, the COTR recommended that duplicative
billings contained in multiple invoices be disallowed. Ogilvy did not stop
billing for 1999 until June 2000, and had not submitted any labor invoices
from July 2000 to the present, as of March 2001.

Page 16 GAO- 01- 623 Anti- Drug Media Campaign

In April 2000, Ogilvy retained American Express Tax and Business Services to
analyze its accounting systems and procedures and overhead rates with
respect to the ONDCP contract. In June 2000, American Express reported that
it had reviewed Ogilvy?s December 1999 invoice for ONDCP and found, among
other problems, that time sheets contained erasures, scratch- outs, and
white- outs without the employees? initials on the changes; in one instance,
a supervisor?s approved signature was rubberstamped on the time sheet; and
employees were not completing their time sheets and submitting them to the
accounting department on a timely basis. American Express recommended that
Ogilvy establish written time sheet policies and procedures and inform
employees of these policies and procedures, both orally and in writing, as
well as the penalties for not complying.

American Express also reported in June 2000 that Ogilvy?s accounting system
segregated direct costs from indirect costs as required, and identified and
accumulated direct costs by contract, but that Ogilvy?s general ledger did
not provide for a segregation of unallowable expenses from allowable
expenses and the company?s reporting system did not allow for it to have a
full and complete profit and loss statement. Using an overhead model it had
developed, American Express also concluded that Ogilvy significantly
overbilled ONDCP for overhead in 1999, and that upon audit and final
determination of the rates, Ogilvy would be required to return the
overbilled funds to the government. In discussions with Ogilvy?s attorneys
about the American Express report, they pointed out that American Express?s
use of the word ?overbilling? in this context was misleading because Ogilvy
billed its overhead costs pursuant to a contractually agreed upon
provisional rate that the parties understood was subject to revision after
the actual rate was determined. Ogilvy?s uncertified incurred cost proposal
for its New York office for 1999 contained lower overhead and fringe
benefits rates than the provisional ones contained in the contract.
Consultant Found

Problems With Ogilvy?s Accounting System

Page 17 GAO- 01- 623 Anti- Drug Media Campaign

The government awarded a cost- reimbursement contract to Ogilvy before
sufficiently determining, as required, that the contractor had an accounting
system able to support this type of contract. In addition, the government
did not obtain from the contractor the required disclosure statement
regarding its cost accounting practices until 27 months after the contract
began and has not obtained the company?s certified incurred cost proposal
for 1999. 15 HHS and ONDCP did not resolve billing disputes between the COTR
and the contractor, and failed to perform an audit after allegations that
the contractor was submitting improper time charges were raised. Moreover,
the contracting officer and the COTR did not have an effective working
relationship, which impeded contract administration.

Under the FAR, a cost- plus- fixed- fee (cost- reimbursement) contract is
not to be awarded unless the contracting officer determines that the
contractor?s accounting system is adequate for determining costs of the
contract. Further, at the time the RFP for the Phase III contract was
issued, an entity selected to receive a federal contract of $25 million 16
or more covered by the Cost Accounting Standards (CAS) was required to
submit a CAS disclosure statement, which is a description of its accounting
practices and procedures. A disclosure statement would have shown whether
Ogilvy could meet the government?s cost accounting standards. 17

15 In March 2001, Ogilvy provided the Navy with an incurred cost proposal
for 1999, but it was not certified. The incurred cost proposal is required
to be certified, by statute and the FAR, before the proposal will be
accepted by the government (unless certification is waived by the
government). Specifically, a contractor official no lower than the level of
a vice president or chief financial officer is to certify that, to the best
of his or her knowledge and belief, all costs included in the proposal are
allowable in accordance with the FAR cost principles and that the proposal
does not include any costs that are expressly unallowable. Ogilvy?s
attorneys indicated that the required certification is delayed pending the
completion of the disclosure process on direct labor charges, on which the
incurred cost proposal for 1999 must be based.

16 This amount has since been increased to $50 million. 17 HHS officials
believed that CAS did not require a disclosure statement to be submitted
until 90 days after the contract award because this would be Ogilvy?s first
CAS- covered contract awarded at the beginning of the company?s current
fiscal year. However, we believe, on the basis of our review of the CAS
regulation, that this 90- day extension was not applicable here. In any
event, Ogilvy did not submit its disclosure statement until March 2001,
which was about 2 years after the 90- day extension. The Government Did

Not Adequately Manage Aspects of the Contract Pertaining to Costs Incurred
by the Contractor

The Government?s Analysis of the Contractor?s Accounting System Was
Insufficient

Page 18 GAO- 01- 623 Anti- Drug Media Campaign

The FAR requires that the contracting officer ensure that the offeror has
submitted the required disclosure statement. 18 As a general matter, a
contracting officer is not to award a CAS- covered contract until a written
determination (by the administrative contracting officer) has been made that
the required disclosure statement is adequate. 19 The cognizant auditor is
responsible for conducting reviews of disclosure statements for adequacy and
compliance, and the cognizant administrative contracting officer is
responsible for determinations of adequacy and compliance of the disclosure
statement. The HHS contracting officer said that she verbally asked Ogilvy?s
former government contracts manager for the disclosure statement once or
twice in May or June 1999 (about a half -year after the contact award), and
then repeated the request to the subsequent government contracts manager
three or four times starting in January 2000, but did not receive one. In
March 2001, more than 2 years after the contract award, Ogilvy submitted a
CAS disclosure statement to the Navy and DCAA.

HHS contracting officials said that they relied on the work of an HHS cost
analyst in determining the adequacy of Ogilvy?s accounting system before
awarding the contract. The contracting officer said that the cost analyst
verbally informed her before the contract was awarded that Ogilvy had an
adequate accounting system, but the cost analyst told us that he did not
recall that. The contracting officer also said that the cost analyst should
have documented his determination about Ogilvy?s accounting system in
writing before the contract award. In March 2000, an HHS cost analyst sent
an E- mail to HHS contracting officials stating that Ogilvy had an
accounting system that could ?estimate, accumulate, and record costs on a
job- by- job basis.? The cost analyst also said in his E- mail that the
financial documentation that Ogilvy supplied demonstrated that the company
used generally accepted accounting principles, that its accounting system
provided for the segregation of direct and indirect costs, and that the

?identification and accumulation of direct costs by contract is taking place
and there is a logical and consistent method for the allocation of indirect
costs to a final cost objective.? The cost analyst told us that he did not
prepare this E- mail until March 2000, which was 15 months after the

18 FAR 30. 202- 6. 19 Under FAR 30. 202- 6, the contracting officer may
waive the requirement for an adequacy determination before award in order to
protect the government?s interest. However, there is no indication that such
a waiver was made here. Where a waiver is made, the determination of
adequacy is required as soon as possible after the award.

Page 19 GAO- 01- 623 Anti- Drug Media Campaign

contract award, because the HHS contracting officer did not ask him to until
then.

In November 2000, in connection with our review of the award and
administration of this contract, the HHS cost analyst prepared a memorandum
to HHS contracting officials providing additional information about his
basis for concluding that Ogilvy had an acceptable accounting system to
support a cost- reimbursement contract. In his memorandum, the cost analyst
indicated that the analysis of the proposal to award a cost- reimbursement
contract to Ogilvy involved a cursory review of the offeror?s accounting
system and that neither a pre- award survey nor a complete audit of Ogilvy?s
methods and processes was done. The analyst stated that he considered Ogilvy
to have an acceptable accounting system on the basis of the company?s (1)
statement in its proposal that it used an accounting system that could
estimate, accumulate, and record costs on a job- by- job basis; (2)
provision of a detailed schedule of indirect cost expenditures and a
financial statement for the company that corresponded with the schedule of
indirect costs; (3) statement in its proposal that it had full access to the
company?s public relations office in Washington, D. C., which had managed
major government contracts since 1987; and (4) the fact that Ogilvy?s public
relations office 20 had been audited by DCAA, which demonstrated that its
accounting methods and procedures met government standards.

However, even if the cost analyst informed the contracting officer that
Ogilvy?s accounting system was adequate prior to award, we believe this
limited analysis was an insufficient basis for determining that Ogilvy?s
cost accounting system was adequate to support a cost- reimbursement
contract of this magnitude. Because this was the first federal contract
received by Ogilvy?s New York office, the company?s schedule of indirect
costs and its statement that it was using an accounting system that could
estimate, accumulate, and record costs for this contract warranted further
in- depth review. Such an analysis should have included a review of Ogilvy?s
accounting system and timekeeping procedures in its New York office. Further
review should have also been triggered by the clear indications in Ogilvy?s
proposal that the company thought the contract

20 ONDCP noted that Ogilvy public relations is not an entity that was
involved in the ONDCP advertising contract award. Ogilvy?s attorneys
confirmed that Ogilvy public relations, which was an unsuccessful bidder on
another portion of the solicitation that was awarded as a separate contract,
did not have any involvement with the ONDCP advertising contract post-
award.

Page 20 GAO- 01- 623 Anti- Drug Media Campaign

was not subject to the CAS regulations and that Ogilvy was not submitting a
disclosure statement even though the RFP itself established that the
resulting contract would be subject to full CAS coverage. Because these
issues were not resolved, the government?s determination regarding the
adequacy of Ogilvy?s accounting system and its compliance with CAS was
insufficient.

The government?s award of the Phase III advertising contract to Ogilvy
without sufficiently determining whether the company had an adequate cost
accounting system and without performing the required review and
determination of the adequacy of the required CAS disclosure statement
contributed to the unresolved labor billing problems. Had the requirement
for Ogilvy to submit the necessary disclosure statement been enforced in a
timely manner, it is likely that the company?s cost accounting practices
already would have been subject to review and scrutiny by the government.
Such scrutiny would have increased the likelihood that deficiencies in
Ogilvy?s cost accounting practices would have been identified and addressed
earlier.

Further, the HHS cost analyst?s reliance on DCAA?s audits of Ogilvy?s
Washington, D. C., public relations office to validate the cost accounting
practices of Ogilvy?s New York office under this contract was misplaced.
Full access by the contractor to the Washington, D. C., office of another
business unit within the same firm does not mean that the New York office
would be using the same accounting and timekeeping systems that had been
approved under the other federal contracts with the Washington, D. C.,
office. No specific information was provided in the cost proposal regarding
the similarity or compatibility of Ogilvy?s cost accounting systems in its
New York and Washington, D. C., offices.

Finally, HHS contracting officials also referred to a September 21, 1998,
cost analysis of Ogilvy?s proposal as support for the adequacy of the
contractor?s accounting system. However, that analysis noted cost
discrepancies within the proposal and did not indicate that Ogilvy had an
adequate accounting system to support a cost- reimbursement contract. Given
that the RFP for Phase III contemplated the award of a high- dollar value
CAS- covered contract, the fact that Ogilvy?s New York office did not
already have government approval of its cost accounting practices and did
not submit the required CAS disclosure statement should have been viewed as
a significant risk by government contracting officials.

Page 21 GAO- 01- 623 Anti- Drug Media Campaign

The government has not paid nearly one- third of the labor costs that Ogilvy
billed for work performed under the ONDCP contract. However, HHS did not
review the appropriateness of these disallowances, which were recommended by
the COTR. Further, the government did not audit the contract, despite the
large amount of money that was being disallowed from the contractor?s
invoices or after allegations of improper time charges were raised.
Attorneys for Ogilvy said that they believe that about $6.8 million of the
$7.6 million disallowed under the contact was improperly disallowed.

The labor invoice that Ogilvy submitted in September 1999 covered charges
back to the beginning of the contract. In that and subsequent invoices, the
COTR routinely recommended that HHS? contracting officer disallow portions
of them for payment. As part of his review of the contractor?s labor
invoices, the COTR recalculated them and made disallowance recommendations
on the basis of his adjustments. 21 The COTR said that he made these
adjustments in an attempt to ensure that the government only paid the
contractor?s actual costs under the contract.

The COTR recommended disallowing payment for labor costs claimed where (1)
time sheets were not provided in support of labor invoices; (2) employee
salary data were not provided; (3) employee salaries exceeded those proposed
by the contractor; (4) bonuses or other unallowable compensation, such as
car allowances and health club fees, were claimed; (5) salaries exceeded
allowable limits; and (6) computational errors were made by the contractor.
In addition, the COTR recalculated the invoices to include nonbillable hours
in the base of hours that employees worked at the company, which Ogilvy?s
attorneys and consultants told us in March 2001 was, they believed, an
appropriate adjustment to the percentage of time billing methodology. The
contracting officer generally followed the COTR?s recommendations and
disallowed payment of about $7.6 million out of about $24. 2 million, or
about 31 percent, in labor charges from Ogilvy during the first 19 months of
the contract.

In April 2000, the COTR wrote a memorandum to the ONDCP Director reporting
?irregularities? with Ogilvy?s billing under the contract, including

?suspicions of fraudulent conduct? relayed by a former Ogilvy employee. The
COTR recommended an immediate audit of the base year of the

21 ONDCP paid an accounting firm $300, 000 per year to review Ogilvy?s
invoices. The accounting firm reported to the COTR. The Government Did Not

Resolve Billing Disallowances or Audit the Contract

Page 22 GAO- 01- 623 Anti- Drug Media Campaign

contract in his memorandum and reported several problems, including a
substantial increase in the number of Ogilvy employees working on the
contract; the submission of multiple invoices for the same billing period;
time sheets that were illegible or contained many changes that increased the
number of hours charged to ONDCP; billing for pro bono work, excessive
salaries, and unallowable compensation; and the use of an erroneous billing
methodology. In addition, the COTR indicated that he had asked HHS for
documentation regarding the acceptability of Ogilvy?s accounting system, but
that he had only received a statement in response from HHS that the company
used generally accepted accounting principles.

The memorandum also indicated that a former Ogilvy employee informed ONDCP
about suspicions of fraudulent conduct regarding the contract. According to
this former Ogilvy employee (who was a former senior manager and wished to
remain anonymous), after Ogilvy?s president complained in the summer of 1999
about a lack of revenue on the ONDCP contract, Ogilvy employee time sheets
were altered to increase the number of hours billed to the contract. The
COTR also indicated in this memo that he asked the HHS contracting officer
for an audit, but that HHS responded that its policy was to conduct an audit
at the end of the contract (which, if all of the option years were
exercised, would have been in December 2003) and that ONDCP would have to
pay for an audit conducted prior to then. A copy of the memo containing the
ONDCP Director?s handwritten notes indicated that he agreed with the need
for an external audit. However, ONDCP officials told us that they did not
arrange for an audit at that time because HHS wanted ONDCP to pay for it,
which ONDCP declined to do, and that ONDCP planned to transfer contracting
responsibilities from HHS to the Navy and have the Navy arrange for an audit
after taking over the contract.

We asked the HHS contracting officer when she first heard allegations of
improper charges being submitted on the contract, what she learned, and what
action was taken. The contracting officer said that, after Ogilvy began
submitting labor invoices in September 1999, the COTR verbally informed her
that the contractor might be overbilling the government and possibly engaged
in fraudulent conduct. However, the contracting officer said that the COTR
did not elaborate or provide any support for his suspicion. The contracting
officer said that she did not believe the allegations were credible because
no evidence of improper time charges was provided and that, therefore, an
audit was not needed.

Page 23 GAO- 01- 623 Anti- Drug Media Campaign

HHS contracting officials also said that, if they had had credible
allegations of improper charges being submitted by the contractor, they
could have referred the matter to the HHS Inspector General, who they said
could have ordered an immediate audit of the contract. HHS contracting
officials said, for example, that ONDCP did not provide them with a copy of
the COTR?s April 2000 memo to the ONDCP Director regarding improper time
charges. However, ONDCP officials said that they believed an audit should
have been done, even without specific knowledge of evidence of fraudulent
charges, because of the large amount of money that was being disallowed from
the contractor?s invoices. The COTR said that it was an ONDCP management
decision not to share the unsubstantiated allegations of improper time
charges with HHS contracting officials and not to refer the matter to the
HHS Inspector General. ONDCP indicated that its actions were based on the
lack of evidence substantiating the allegations and the fact that an audit
of questioned billings was expected to occur immediately after the
responsibility for contract administration was transferred from HHS to the
Navy, which ONDCP expected would occur in the near future. Further, ONDCP
indicated that it believed that ONDCP?s request to HHS to withhold payment
of Ogilvy?s underlying claim protected the government until the audit could
occur.

At the beginning of the contract, HHS appointed an ONDCP employee as the
COTR to handle contractual technical issues. However, the HHS contracting
officer and the COTR did not have an effective working relationship, which
impeded contract administration and led to the transfer of contracting
responsibilities from HHS to the Navy. 22 The contracting officer said that
the COTR did not work within the boundaries of his appointment. However,
ONDCP indicated that the COTR started performing duties normally performed
by the contracting officer only because the contracting officer was not
actively engaged in the administration of the contract, gave the COTR
permission, or acquiesced to the COTR?s performing the duties. Further, the
COTR said that the working relationship with HHS contracting officials
deteriorated because he refused pressure from the contracting officer to
recommend payment for costs that the COTR believed to be questionable or
unsupported by the

22 HHS officials said that they initiated the transfer of contract
responsibilities to the Navy. However, ONDCP officials said that they began
exploring the transfer of contracting responsibilities, unbeknownst to HHS,
after meeting with HHS in November 1999. Contracting Officer and

COTR Did Not Have an Effective Working Relationship

Page 24 GAO- 01- 623 Anti- Drug Media Campaign

contractor. In some instances, we found documentary evidence to support the
different parties? accounts of events, although with regard to other
incidents we found no documentation to resolve the differing views.

In December 1998, the HHS contracting officer issued the COTR an appointment
letter authorizing him to (1) correspond and hold conferences with the
contractor on matters of a technical nature, (2) conduct inspections and
perform evaluations permitted by the contract, (3) approve technical data
required by the contract, and (4) maintain the official technical file. In
addition, the appointment letter indicated that all significant actions
taken by the COTR would be documented and a copy provided to the contracting
officer, including trip reports, memorandums for the file, and
correspondence with the contractor. Moreover, the letter indicated that the
appointment did not authorize the COTR to issue or approve changes or enter
into any agreement, modification, or any other matter affecting the cost or
terms and conditions of the contract.

The contracting officer said that the COTR did not comply with his duties
and responsibilities in certain instances. For example, the contracting
officer said that the COTR did not provide contractor performance reports,
which under the contract were required to be submitted 9 months after the
contract award and yearly thereafter. The COTR said that he did not provide
contractor performance reports because the contracting officer never asked
him for them. We found that the contract files contained an April 16, 1999,
fax from the contracting officer to the COTR providing a form for measuring
the contractor?s performance. We also found an October 27, 1999, letter from
the contracting officer to the COTR indicating that the contractor
performance report was due and that, because the report was required by the
contract, either the report needed to be prepared or the contract had to be
modified to delete the requirement. The contracting officer asked the COTR
how he wanted to proceed on this issue, but we did not find evidence that
the COTR responded in writing. When we asked the COTR about these documents,
he said that ONDCP provided the contractor with an assessment of its
performance on an ongoing basis and was unable to wait until the end of the
performance period to provide this type of assessment.

The contracting officer also said that the COTR allowed the contractor to
bill four times a month, rather than once a month, without asking HHS to
amend the contract. However, the COTR said that he allowed the contractor to
bill more than once a month because he wanted to segregate first and second
year costs, as well as media and nonmedia costs. We found in the contract
files a June 6, 2000, letter from Ogilvy?s government

Page 25 GAO- 01- 623 Anti- Drug Media Campaign

contracts manager to the contracting officer, informing her that a meeting
had been held with the COTR during which it was agreed that Ogilvy would
submit four invoices per month. The letter indicated that billing four times
monthly would help track and identify travel costs, media and nonmedia
billing, and labor costs for 1999 and 2000. We did not find any
correspondence from the contracting officer to the COTR or the contractor
that disagreed with this billing plan.

A November 11, 1999, E- mail that Ogilvy?s former government contracts
manager sent to HHS contracting officials addressed the company?s concerns
about the administration of the contract. In the E- mail, Ogilvy?s former
government contracts manager described ?relationship issues with the COTR
creating difficulty in the management of the contract,? including the COTR?s
?reluctance to involve HHS/ Procurement in any contract issues? and
?inability to supply [the] agency with adequate direction or explanation of
needs.? (The COTR, however, said that he never told Ogilvy staff that they
could not contact HHS.) Ogilvy sent this E- mail to HHS after the company?s
project director, finance director, and former government contracts manager
met with HHS contracting officials on October 21, 1999, to discuss concerns
they had regarding the contract. During that meeting, HHS officials asked
Ogilvy officials to put their concerns in writing. However, Ogilvy?s finance
director said that HHS officials took no action in response to the E- mail,
and Ogilvy?s project director said that payments on the contract did not
begin until after the company contacted ONDCP?s General Counsel in November
or December 1999. ONDCP?s General Counsel told us, however, that he was not
responsible for expediting payments to Ogilvy as the payment process took
its normal course and that he did not discuss this issue with Ogilvy?s
project director. According to ONDCP, it took several weeks to sift through
the invoice that Ogilvy submitted on September 27, 1999, and that ONDCP was
able to authorize payment of a substantial portion of the claimed costs by
November 11, 1999.

In response to the October 2000 hearing before the House Government Reform
Subcommittee on Criminal Justice, Drug Policy and Human Resources, Ogilvy
hired PricewaterhouseCoopers in November 2000 to restructure its accounting
system to meet government contracting standards for a CAS- covered cost-
reimbursement contract. This included developing a disclosure statement
regarding Ogilvy?s accounting system, which was required to be submitted at
the beginning of the contract, and an incurred cost proposal for 1999, which
was originally due no later than June 30, 2000. Recent and Planned

Actions

Page 26 GAO- 01- 623 Anti- Drug Media Campaign

In March 2001, attorneys for Ogilvy met with us to discuss an estimate of
charges that they proposed be disallowed from the amounts already billed
under the contract. The estimate, which had been developed by
PricewaterhouseCoopers, was for about $850,000, including overhead and
fringe benefits, out of about $24.2 million that was billed for ONDCP work
during the first 19 months of the contract. According to Ogilvy?s attorneys,
PricewaterhouseCoopers did not conduct an audit of all of the ONDCP time
charges to determine what charges were or were not appropriate. However, the
attorneys said that PricewaterhouseCoopers reviewed all of Ogilvy?s time
charges regarding ONDCP to complete three distinct tasks: (1) assist Ogilvy
and its attorneys in developing statistical confirmation of anecdotal
reports of overcharging or mischarging, (2) quantify areas identified with
the attorneys as being ?clearly suspect,? and (3)

?conservatively estimate charges in areas identified as being probably
suspect that could not otherwise be precisely quantified.? The attorneys
said that these ?conservative assumptions were made in the government?s
favor.? Further, the attorneys said that they did not find $850, 000 to be

?improper,? but rather developed an ?overestimate of erroneous charges.? A
PricewaterhouseCoopers manager told us that his firm reviewed time charges
in selected areas directed by Ogilvy?s attorneys. We did not verify the
information that Ogilvy?s attorneys or consultants provided to us regarding
the amount of money that they proposed be disallowed, including the
methodology that PricewaterhouseCoopers used in developing the $850,000
estimate, because our scope of work did not include determining the total
actual costs incurred under this contract. We expect that DCAA will address
the appropriateness of Ogilvy?s time charges as part of the audit that Navy
asked DCAA to conduct.

On March 2, 2001, Ogilvy provided an ?advance copy? of an incurred cost
proposal to the Navy, which was not certified. An Ogilvy attorney said that
the FAR requires a contractor to include all direct labor costs in the base
used to determine the indirect rates claimed in the incurred cost proposal.
According to the attorney, such inclusion benefits the government even when
the company does not expect to be paid for all of the direct labor costs
used for the base, as in this case. The attorney said that, in this
circumstance, the company is unable to certify the incurred cost proposal
for indirect rates until the contracting officer and the company agree on
the allowable direct labor. He added that certifying the incurred cost
proposal at this point theoretically could be viewed as wrongly certifying
direct labor charges that the company does not intend to collect. Further,
the attorney said that Ogilvy fully expects to certify an incurred cost
proposal that can be audited by DCAA pending completion of the

Page 27 GAO- 01- 623 Anti- Drug Media Campaign

voluntary disclosure process or through agreement with the Navy, DCAA, and
the Department of Justice.

In addition to retaining consultants to restructure its accounting system to
meet government contracting requirements, Ogilvy indicated that it has taken
actions to improve the preparation of employee time sheets. In January 2001,
Ogilvy issued its employees revised time sheet guidance prepared by
PricewaterhouseCoopers containing detailed time sheet procedures and
penalties for falsifying them. Also in January 2001, PricewaterhouseCoopers
began providing time sheet training to Ogilvy employees.

For its part, ONDCP indicated that it has taken actions to improve the
administration of the contract with Ogilvy, such as transferring the
contracting responsibilities from HHS to the Navy. ONDCP also indicated that
it split the COTR?s duties so that the Media Campaign Office will have
various technical representatives, rather than having one COTR handling all
of the media campaign contracts. In addition, ONDCP said that its media
campaign staff have been trained and certified as COTRs. According to ONDCP,
since contracting responsibilities were transferred to the Navy,
communication has been substantially enhanced between the COTRs and the
contracting officer, and regular meetings are scheduled between the COTRs,
the contracting officer, and the contractor to resolve issues.

In March 2001, DCAA began reviewing Ogilvy?s accounting system but does not
plan to start an historical cost audit until the company certifies its
incurred cost proposal. DCAA also plans to routinely review Ogilvy?s future
labor invoices.

The contractor for the advertising portion of the Phase III anti- drug media
campaign did not properly charge the government for some of the labor costs
incurred under the contract. Ogilvy?s submission of time sheets claiming
hours that some employees said they did not work on the antidrug media
campaign was clearly improper. Moreover, Ogilvy should not have been awarded
a CAS- covered cost- reimbursement government contract until the company had
an adequate cost accounting system to support this type of contract. Ogilvy
did not comply with FAR and CAS requirements regarding its accounting system
for this cost- reimbursement contract. Although ONDCP is pleased with the
technical aspects of Ogilvy?s work, the company did not make substantial
progress toward restructuring its accounting system to meet government
requirements until nearly 2 years after the contract was awarded.
Conclusions

Page 28 GAO- 01- 623 Anti- Drug Media Campaign

The government poorly managed aspects of the award and administration of the
contract. HHS should not have awarded this cost- reimbursement contract
without determining whether the contractor had an adequate cost accounting
system that met CAS standards. In addition, HHS should have reviewed the
appropriateness of the large amount of money that the COTR recommended be
disallowed from the contractor?s invoices or arranged for an audit of the
contract. The COTR appropriately brought allegations of improper billing to
the attention of ONDCP management, but ONDCP management did not take prompt
action to investigate the allegations. Moreover, contract administration was
impeded because the COTR and contracting officer did not have an effective
working relationship.

Because the contract has not yet been audited, the appropriateness of the
disallowed charges and the actual costs incurred is currently unknown. In
assuming contracting responsibilities for the ONDCP contract, the Navy must
determine whether Ogilvy has adequately restructured its accounting system
to meet government requirements and the allowability of costs charged to the
contract, including Ogilvy?s nonbillable hours and temporary contract
employee labor charges. The government should not exercise the next contract
option year with Ogilvy unless substantial progress has been made toward
resolving these issues and ONDCP has considered both Ogilvy?s administrative
and technical performance under the contract to date.

The Director of ONDCP should direct ONDCP staff to work with the Navy to (1)
review the appropriateness of the disallowed costs and temporary contract
employee labor charges from Ogilvy?s invoices and determine the amount of
money that the government overpaid or should reimburse the contractor
regarding these invoices, (2) ensure that Ogilvy has an adequate cost
accounting system for continued performance under the contract, and (3)
coordinate the roles and responsibilities of the contracting officer and
COTR and ensure that these roles and responsibilities are effectively
carried out. Further, ONDCP should request that the Navy not exercise the
next option year of the contract with Ogilvy until the company has
adequately restructured its accounting system to meet government
requirements and ONDCP has considered the contractor?s administrative as
well as technical performance under the contract to date. In this regard,
ONDCP and the Navy should immediately begin to plan contracting alternatives
for the subsequent Phase III media campaign should they decide not to
exercise the next contract option year with Ogilvy. Recommendations for

Executive Action

Page 29 GAO- 01- 623 Anti- Drug Media Campaign

To improve HHS? compliance with contracting procedures and prevent the
awarding of CAS- covered cost- reimbursement contracts to companies lacking
adequate accounting systems to support that type of contract, the Director
of the HHS Program Support Center (PSC) should direct that PSC?s controls
over contracting procedures be assessed to ensure that they are adequate for
awarding and administering CAS- covered costreimbursement contracts. These
controls would include ensuring the adequacy of potential contractors? cost
accounting systems (including auditor approval), obtaining the required
disclosure statements, arranging for audits of contracts when significant
billing problems arise, and resolving billing disputes involving substantial
disallowances on a timely basis.

We provided copies of a draft of this report for comment to the Acting ONDCP
Director; the PSC Director; the Director of Contracts for the Navy?s Fleet
and Industrial Supply Center, Norfolk Detachment, in Washington, D. C.;
DCAA?s Branch Manager in New York City; and the President of Ogilvy in New
York City. On May 22, we received written comments from attorneys
representing Ogilvy, which are reprinted in appendix V; on May 23, we
received written comments from the Deputy Director of ONDCP, which are
reprinted in appendix IV; and on May 24, we received written comments from
the PSC Director, which are reprinted in appendix VI. We received oral
comments from the Department of Defense (DOD), which included comments from
the Navy and DCAA.

The Deputy Director of ONDCP said that ONDCP believes that, in general, the
report fairly and accurately portrays the complexities of the contracting
issues regarding the advertising portion of the anti- drug media campaign.
The Deputy Director also said that ONDCP agrees with the recommendations in
the report and offered some additional comments to clarify actions taken by
ONDCP. He said that action already has been under way for some time and
significant progress has been achieved regarding our recommendations to (1)
resolve the appropriateness of the disallowed costs and subcontractor labor
charges and determine amounts overpaid for which the contractor should be
reimbursed; (2) certify Ogilvy?s cost accounting system for continued
performance under the contract; and (3) coordinate contracting officer and
COTR responsibilities, ensuring effective contract administration.

The ONDCP Deputy Director also said that an excellent working relationship
has been established with the Navy, that all media campaign staff have been
trained and certified as COTRs, and that the Navy has Agency and Ogilvy

Comments ONDCP Comments

Page 30 GAO- 01- 623 Anti- Drug Media Campaign

agreed to have a full- time contracting officer on- site at ONDCP?s Media
Campaign office. The Deputy Director said that these changes will greatly
facilitate communication and resolution of problems, as well as speed
implementation of the program. The Deputy Director also said that the Navy,
DCAA, and the Department of Justice are actively pursuing a solution to
Ogilvy?s certification of its costs incurred under the contract.

The ONDCP Deputy Director also said that ONDCP has notified the Navy that
the next year option of the contract should not be exercised unless Ogilvy?s
cost accounting system has been approved, and that ONDCP will coordinate
with the Navy on determining whether to exercise that option. The Deputy
Director said that ONDCP has notified the Navy that acquisition planning is
under way to prepare for offering a new contract for bid should the decision
be made not to exercise the next year option on the contract. Further, the
Deputy Director said that a statement of work is being prepared for a
possible new contract offering and that a timeline has been proposed to the
Navy that would provide for a new contract award prior to the current
contract?s option date.

Although ONDCP indicated that significant progress has been achieved toward
resolving the appropriateness of the disallowed costs and resolving
subcontractor labor charges, we note that DCAA?s audit of the contract has
not yet begun. As also noted in the report, the Navy has asked DCAA to audit
the costs that Ogilvy incurred under the contract in 1999 and 2000, but that
DCAA does not plan to begin the audit until the company certifies its
incurred cost proposal, which Ogilvy has not yet done. Further, although
Ogilvy?s attorneys said that the company expects to certify the incurred
cost proposal after it completes the disclosure process on direct labor
charges or reaches an agreement with the government, we are not a party to
these negotiations and cannot comment on their status. With regard to
?subcontractor? labor charges, which we referred to in our draft report,
after consulting with Ogilvy?s attorneys and reviewing an agreement that
Ogilvy had made with a firm that provided temporary contract labor to the
company, we agreed to refer to ?temporary contract? employees, rather than
?subcontractor? employees, in the report.

With regard to ONDCP?s comments that significant progress has been made
toward certifying Ogilvy?s cost accounting system for continued performance
under the contract, we recognize, as noted in the report, that DCAA began
reviewing Ogilvy?s accounting system in March 2001, but we have not assessed
the progress of that work.

Page 31 GAO- 01- 623 Anti- Drug Media Campaign

Regarding ONDCP?s comments that significant progress has been made toward
coordinating contracting officer and COTR responsibilities, we recognize, as
noted in the report, the efforts that ONDCP indicated have been made to
train and certify its employees as COTRs.

ONDCP also suggested some technical clarifications to the report, which we
incorporated where appropriate.

Ogilvy?s attorneys provided comments on many issues addressed in this
report. In general, Ogilvy?s attorneys said that the report was fair; that
the company regrets the billing errors that were made and is making
extensive efforts to correct the problems; and that, despite the billing
problems, the government ultimately benefited from the company?s
extraordinary performance under the contract. Our specific responses to the
attorneys? comments are included in appendix V. The attorneys did not make
any comments on the recommendations. They also suggested specific technical
changes to clarify our report, which we have made where appropriate.

The PSC Director said that, while PSC believes that adequate contracting
procedures are in place to ensure that awards of CAS- covered
costreimbursement contracts are made to companies with adequate accounting
systems, it concurs that the PSC controls over contracting procedures,
particularly with respect to assessing an offeror?s accounting system,
should be examined. The Director said that PSC has initiated such a review
and will strengthen procedures whenever possible.

DOD provided a summary of oral comments from the Navy and DCAA. In their
comments, the Navy and DCAA discussed the actions that they plan to take
regarding the recommendations that we made to ONDCP. DOD indicated that,
since taking over the ONDCP contract administration from HHS, the Navy has
requested that DCAA perform audits of Ogilvy?s cost accounting system and
historical audits of all past invoices to determine what, if any, money the
government has overpaid or should reimburse Ogilvy. DOD also said that,
until Ogilvy?s cost accounting system is approved by DCAA and the
contracting officer, DCAA is providing audit support for all invoices to
determine the appropriate amount to reimburse the contractor. In addition,
according to DOD, the respective roles of the contracting officer, the Navy
contracting officer?s technical representative, and DCAA have been
coordinated and clarified between the Navy and ONDCP to ensure that these
roles and responsibilities are effectively carried out. Ogilvy Comments

PSC Comments Navy Comments

Page 32 GAO- 01- 623 Anti- Drug Media Campaign

DOD also indicated that the Navy is working with Ogilvy and ONDCP to
restructure the contract to better track the funds to appropriate categories
under the contract. However, DOD indicated that Ogilvy has not provided a
certified copy of its indirect costs, which prevents DCAA from conducting
that portion of the requested audit and will delay the resolution and
payment of the outstanding invoices. DOD also indicated that DCAA is working
with Ogilvy to ensure that its cost accounting system meets government
requirements. Moreover, DOD indicated that, should ONDCP and the Navy decide
not to exercise the next contract option year, alternative plans are being
made with ONDCP to cover Phase III of the media campaign.

We are sending copies of this report to the Chairman and Ranking Minority
Member, House Committee on Appropriations; the Ranking Minority Member,
House Appropriations Subcommittee on Treasury, Postal Service, and General
Government; the Chairman and Ranking Minority Member, Senate Committee on
Appropriations; and the Chairman and Ranking Minority Member, Senate
Appropriations Subcommittee on Treasury and Postal Service. We are also
sending copies of this report to the Acting Director of the Office of
National Drug Control Policy; the Director of HHS? Program Support Center;
the President of Ogilvy and Mather in New York; and the Administrator of the
Office of Federal Procurement Policy in her capacity as Chairman of the Cost
Accounting Standards Board. Copies will also be made available to others
upon request.

Major contributors to this report were Bob Homan, John Baldwin, Jason Bair,
Seth Taylor, Adam Vodraska, Jim Higgins, and Mark Connelly. If you have any
questions, please contact me on (202) 512- 8387 or at

ungarb@ gao. gov

Sincerely yours, Bernard L. Ungar Director, Physical Infrastructure Issues

Appendix I: Scope and Methodology Page 33 GAO- 01- 623 Anti- Drug Media
Campaign

In conducting this review, we interviewed HHS, Navy, and ONDCP officials
involved in awarding and administering the Phase III media campaign
contract. We also reviewed relevant documentation, including the
contractor?s cost proposal and best and final offer; the contract; invoices
and supporting documentation, including time sheets and payroll registers;
correspondence between HHS, ONDCP, and the contractor; consultant reports;
and previous GAO reports and testimony on the media campaign.

To determine whether the government and the contractor followed the FAR and
CAS requirements in awarding and administering the contract related to
ensuring the acceptability of the contractor?s accounting system, we
compared the actions taken, as evidenced in the contract documentation and
interviews that we conducted, with the actions that should have been taken
under FAR and CAS. We also interviewed DCAA officials about their audit
plans and procedures regarding the ONDCP contract.

To determine whether the contractor properly billed the government, we
analyzed the invoices that were submitted, the cost proposal, contract, and
the FAR and CAS, and we interviewed contractor officials and employees,
including those who prepared the cost proposal and invoices. In addition, we
met with Ogilvy?s attorneys and consultants who reviewed the contractor?s
invoices and accounting practices. We interviewed 3 of 28 employees who were
identified by an Ogilvy attorney as having revised their time sheets for the
ONDCP contract. We chose two of those three employees for our sample because
they added the largest number of hours to the ONDCP contract on their time
sheets, according to a company document. We chose the third employee because
he was the media director who supervised many of the employees who worked on
the ONDCP contract. We did not interview the rest of the employees who were
identified as having revised their time sheets because of resource
limitations and because 15 of the 28 employees were no longer employed at
the company as of January 2001.

We also identified employees with changes on their time sheets for the ONDCP
contract by reviewing copies of the time sheets that were submitted to ONDCP
as supporting documentation. From this set of time sheets with changes, we
judgmentally selected a sample of 20 employees with the largest number of
hours added to the ONDCP contract. An Ogilvy attorney told us that 12 of
those 20 employees were still working at the company in December 2000, and
we interviewed those 12 employees in December 2000 and January 2001. We also
interviewed the supervisors for Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 34 GAO- 01- 623 Anti- Drug Media
Campaign

the four employees who said someone else made the changes that were shown on
their time sheets.

Our review objective did not include determining the amount of money that
the government overpaid or should reimburse for labor costs. In addition,
other problems with employee time sheets could have existed that we or the
company (or its attorneys and consultants) did not identify. We did not
verify the information that the company or its attorneys and accountants
provided. We also did not review the costs of media that Ogilvy incurred for
the government. Further, although we reviewed Ogilvy invoices that included
charges for temporary contract employees and discussed the billing of a
temporary contract employee in this report, we did not review the billing
for all of the temporary employees. We also did not review the overall award
process used for the initial contract award.

We did our work from September 2000 through April 2001 in Washington, D. C.,
and New York City in accordance with generally accepted government auditing
standards. We provided a draft of this report to ONDCP, HHS, the Navy, DCAA,
and Ogilvy. Their comments and our evaluation are provided at the end of our
letter and in appendix V.

Appendix II: Interviews With Ogilvy Employees Who Revised Their Time Sheets

Page 35 GAO- 01- 623 Anti- Drug Media Campaign

Ogilvy?s attorneys provided documents indicating that 28 employees prepared
revised time sheets, primarily in September and October 1999, and added a
total of 3,127 hours to the ONDCP contract. We judgmentally selected a
sample of 3 of those 28 employees to interview about when and why they
revised their time sheets. 1 We chose two of the three employees for our
sample because they had added the largest number of hours to the ONDCP
contract, according to the document that Ogilvy?s attorneys provided to us.
We chose the third employee because he was the media director who supervised
many of the employees who worked on the ONDCP contract.

One of the three employees in our sample prepared revised time sheets for 16
weeks, covering time from January through May 1999, and added 485 hours to
the ONDCP contract. However, this employee said that she did not work an
extra 485 hours on the anti- drug media campaign and revised her time sheets
because an Ogilvy manager instructed her to do so. This employee said that
the manager told her to add the extra hours to the ONDCP contract because
her original charges did not reflect the amount of time that she was
projected to work on the anti- drug media campaign. The employee could not
recall which Ogilvy manager gave her those instructions, but said it was
either the former government contracts manager or the project director. (The
former government contracts manager, through his attorney, declined to
comment on this matter. The project director said that she did not instruct
this employee to add the 485 hours to her time sheets. 2 )

Ogilvy?s finance department did not retain the original versions of the time
sheets that this employee prepared before adding the 485 hours to the ONDCP
contract. However, the employee kept copies of her original and revised time
sheets, which showed that time charges were transferred from other company
accounts in the first set of time sheets to the ONDCP contract in the second
set. In the original set of time sheets, no time had been charged to the
ONDCP contract in 8 of the 16 weeks. In addition, the total number of hours
claimed as worked during particular weeks

1 We chose to interview a sample of these employees because of resource
limitations. According to an Ogilvy attorney, 15 of the 28 employees were no
longer employed at the company in January 2001, including one who
transferred 435 hours and another who transferred 322 hours from other
company accounts to the ONDCP contract.

2 These revised time sheets were signed by the employee?s supervisor, who is
also Ogilvy?s project director for the ONDCP contract. Appendix II:
Interviews With Ogilvy

Employees Who Revised Their Time Sheets

Appendix II: Interviews With Ogilvy Employees Who Revised Their Time Sheets

Page 36 GAO- 01- 623 Anti- Drug Media Campaign

remained unchanged in both sets of time sheets. The employee could not
recall when she revised her time sheets, but a document provided by Ogilvy?s
attorneys indicated that the revised time sheets were entered into the
company?s timekeeping system on September 2, 1999. Ogilvy?s consultants
calculated the value of these 485 hours to be $6,199, which, when we added
overhead and fringe benefits costs, totaled $16,836.

Another of the three employees in our sample prepared revised time sheets
for 14 weeks, covering time from January through May 1999, and added 402
hours to the ONDCP contract. This employee said that his supervisor asked
him to revise his time sheets because the employee?s original time charges
did not reflect the number of hours that he was projected to work on the
ONDCP contract. The employee said that he added the 402 hours to his time
sheets in the summer of 1999 on the basis of his memory of time worked. He
also said that he believed the revised time sheets were more accurate than
the originals. When asked why he added time to the ONDCP contract, this
employee said that, early in 1999, he was doing tasks for multiple clients
that involved gathering information about the media market in general, but
that also benefited ONDCP. (This employee originally did not charge any time
to ONDCP in January and February 1999, but added 238 hours to the ONDCP
contract in his revised time sheets for those 2 months.) This employee also
said he was working for ONDCP in mid- April 1999 in preparation for a
presentation, but could not recall why he added more time to the ONDCP
contract for the other weeks.

Ogilvy?s finance department retained this employee?s original and revised
time sheets for 5 of the 14 weeks for which he added 402 hours to the ONDCP
contract. In addition, Ogilvy sent copies of original and revised time
sheets for 4 other weeks (among the 14 weeks) to ONDCP as support for its
labor invoices, which we reviewed. Those time sheets showed that time
charges were transferred out of other company accounts in the first set of
time sheets to the ONDCP contract in the revised set, while the total number
of hours worked during individual weeks was generally left unchanged in both
versions. 3 A document provided by Ogilvy?s attorneys indicated that the
revised time sheets were entered into the company?s timekeeping system on
September 14, 1999. Ogilvy?s consultants

3 For one week, the total number of hours worked was reduced by 1 hour in
the revised time sheet, while the total number of hours worked was reduced
by 2 hours in another week?s revised time sheet.

Appendix II: Interviews With Ogilvy Employees Who Revised Their Time Sheets

Page 37 GAO- 01- 623 Anti- Drug Media Campaign

calculated the value of these 402 hours to be $13,403, which, when we added
overhead and fringe benefits costs, totaled $36,401.

The third employee in our sample, Ogilvy?s media director, 4 prepared
revised time sheets for 7 weeks, covering time from January through June
1999, and added 67 hours to the ONDCP contract. This media director said
that he added the time after reviewing his calendar and finding that he had
worked more hours on ONDCP than originally claimed. Ogilvy?s finance
department retained copies of this employee?s original and revised time
sheets, which showed that time charges were transferred from other company
accounts in the first set of time sheets to ONDCP in the second set of time
sheets. The total number of hours worked during individual weeks remained
unchanged in both versions. A document provided by Ogilvy?s attorneys
indicated that the revised time sheets were entered into the company?s
timekeeping system on September 14, 1999. Ogilvy?s consultants calculated
the value of these 67 hours to be $5,147, which, when we added overhead and
fringe benefits costs, totaled $13,978.

4 The media director was also the supervisor for the employee who added 402
hours to his time sheets for the ONDCP work.

Appendix III: Interviews With Ogilvy Employees and Supervisors Regarding
Time Sheets Containing Changes

Page 38 GAO- 01- 623 Anti- Drug Media Campaign

We reviewed time sheets that Ogilvy submitted to ONDCP as support for the
labor invoices in 1999 and found hundreds 1 containing scratch- outs, white-
outs, and other changes to the amount of time billed to the ONDCP contract,
all lacking the employees? initials. We judgmentally selected a sample of 20
employees? time sheets with such changes that added time to the ONDCP
contract and asked to interview the employees about why the changes were
made. These time sheets were selected for our sample because, after
reviewing all of the time sheets that were submitted to ONDCP, they appeared
to have the most time added for the ONDCP contract. 2 In some cases, Ogilvy
had submitted to ONDCP two versions of time sheets for the same employee,
and, in those instances, we questioned those employees about the reasons for
the differences between the two sets of time sheets. In other cases, we only
had copies of the time sheets containing the changes, and we questioned the
employees about why the revisions were made. Attorneys representing Ogilvy
indicated that 12 of those 20 employees whose time sheets were included in
our sample were still employed at the company as of December 2000.

During our interviews with those 12 employees, 4 said that they did not make
the changes indicated on their time sheets for ONDCP work and did not know
who made the changes, which added at least 55 hours to the ONDCP contract. 3
The other eight employees said that they made the changes for various
reasons, such as mathematical errors, charging time to the wrong account,
and recording the wrong office departure times.

We interviewed the three supervisors of these four employees who said that
they did not make the changes indicated on their time sheets regarding the
ONDCP contract. (One supervisor approved the time sheets for two of the four
employees.) The supervisor for two of the four employees said that he
changed one employee?s time sheets, adding at least 14 hours 4 charged to
ONDCP, after his supervisor instructed him to

1 About 12, 000 time sheets were submitted to ONDCP for work done during
1999. 2 Our sampling methodology was similar to that prescribed in the DCAA
Audit Manual (January 2001) for reviewing labor costs. Paragraph 6- 404.8
(Pre- interview Analysis) of the manual advises that once high- risk areas
are identified, such as labor charge adjustments that are more than normal
corrections, and the corresponding employee population identified, employees
with the most questionable labor charges are normally interviewed.

3 More hours may have been added, but it was not possible to determine what
numbers had been whited- out or marked- out on some time sheets. 4 More
hours may have been added, but it was not possible to determine what numbers
had been whited- out on the some time sheets. Appendix III: Interviews With
Ogilvy

Employees and Supervisors Regarding Time Sheets Containing Changes

Appendix III: Interviews With Ogilvy Employees and Supervisors Regarding
Time Sheets Containing Changes

Page 39 GAO- 01- 623 Anti- Drug Media Campaign

make the changes. This supervisor said that he did not change the time
sheets of his other employee in our sample. According to an Ogilvy attorney,
the supervisor who was identified by this supervisor as instructing him to
make the changes is no longer employed at the company.

The supervisor for the third employee said that she did not make the changes
to her employee?s time sheet and did not know who did. In that case, the
employee originally recorded that she did not work on a particular day, but
that the ?0? hours had been written over with ?7? hours. That employee said
that she was returning from a personal foreign trip and was not doing work
for Ogilvy that day.

The supervisor for the fourth employee said that she did not add to her
employee?s time sheet the number of hours worked on the ONDCP contract on a
certain day. However, she thought that the change made was appropriate
because the employee had recorded on the time sheet when she arrived and
departed that day, but apparently had forgotten to record the number of
hours that she worked. The supervisor said that it would have ?made sense?
for the accounting department to have made that change.

Appendix IV: Comments From the Office of National Drug Control Policy

Page 40 GAO- 01- 623 Anti- Drug Media Campaign

Appendix IV: Comments From the Office of National Drug Control Policy

Appendix IV: Comments From the Office of National Drug Control Policy

Page 41 GAO- 01- 623 Anti- Drug Media Campaign

Appendix V: Comments From Ogilvy and Mather

Page 42 GAO- 01- 623 Anti- Drug Media Campaign

Appendix V: Comments From Ogilvy and Mather

Note: GAO comments supplementing those in the report text appear at the end
of this appendix.

See comment 1.

Appendix V: Comments From Ogilvy and Mather

Page 43 GAO- 01- 623 Anti- Drug Media Campaign

Appendix V: Comments From Ogilvy and Mather

Page 44 GAO- 01- 623 Anti- Drug Media Campaign

Appendix V: Comments From Ogilvy and Mather

Page 45 GAO- 01- 623 Anti- Drug Media Campaign

Now on p. 16. See comment 3. See comment 2.

Appendix V: Comments From Ogilvy and Mather

Page 46 GAO- 01- 623 Anti- Drug Media Campaign

See comment 4. See comment 2.

See comment 7. Now on p. 10. See comment 6.

See comment 5.

Appendix V: Comments From Ogilvy and Mather

Page 47 GAO- 01- 623 Anti- Drug Media Campaign

See comment 9. See comment 8.

See comment 12. Now on p. 15. See comment 11. See comment 10. Now on p. 12.

Appendix V: Comments From Ogilvy and Mather

Page 48 GAO- 01- 623 Anti- Drug Media Campaign

See comment 17. Now on p. 35. See comment 16.

See comment 15. See comment 14.

Now on p. 21. Now on p. 27. See comment 13.

Appendix V: Comments From Ogilvy and Mather

Page 49 GAO- 01- 623 Anti- Drug Media Campaign

See comment 19. See comment 18.

Appendix V: Comments From Ogilvy and Mather

Page 50 GAO- 01- 623 Anti- Drug Media Campaign

The following are GAO?s comments on the letter from attorneys representing
Ogilvy & Mather dated May 22, 2001.

1. Ogilvy?s attorneys said that the billing errors that the company
voluntarily made known to the government are a source of profound
disappointment to Ogilvy, but that notwithstanding the billing
irregularities, the government ultimately benefited from the company?s

?extraordinary performance.? Ogilvy?s attorneys cited several examples of
how they believed the government received more value under the contract than
the contract required. The attorneys indicated that the company (1) provided
more advertising per labor dollar than the contract required; (2) gave ONDCP
a lower effective commission rate than its commercial clients, after
applying a hypothetical effective commission rate analysis; (3) saved ONDCP
additional sums by controlling overhead to reduce the overhead rate to be
applied in the true- up; (4) outperformed the contract?s requirement of a
100 percent pro bono match; (5) provided many high quality intangibles under
the contract; and (6) recorded millions of dollars less in direct labor
costs than the government thought it would, given the contract and
additional tasks undertaken in 1999. However, Ogilvy?s attorneys said that
despite these observations, the company does not intend to excuse the
billing errors that were made.

Although we cannot comment on the company?s claims regarding its technical
performance under this contract because the scope of our review was limited
to aspects of the award and administration of the contract and Ogilvy?s
billing practices, as noted in this report, ONDCP is pleased with Ogilvy?s
technical performance regarding the anti- drug media campaign. We agree with
Ogilvy?s attorneys that the company?s claims of extraordinary performance do
not excuse the billing problems that were found to have occurred.

2. Ogilvy?s attorneys suggested that our treatment of the report by American
Express Tax and Business Services be expanded in our report. The attorneys
said that American Express made a number of observations that ?would (and
did) lead reasonable financial managers to believe that the Ogilvy
accounting system and billing to the government was essentially sound and
could reasonably be relied upon by both the company and the government.? We
did not attempt to provide a comprehensive summary of the American Express
report, but chose to report problems that American Express found that
corroborated some of our findings. We also did not agree with some of
American Express? findings. For example, Ogilvy?s attorneys asked us GAO
Comments

Appendix V: Comments From Ogilvy and Mather

Page 51 GAO- 01- 623 Anti- Drug Media Campaign

to include in our report that American Express had found that Ogilvy?s
method of accounting for paid absences (vacation, sick, and holiday time)
was consistent with industry practice. However, we found that the company
inconsistently charged the government for paid absences.

Ogilvy?s attorneys also noted that the American Express report

?reinforced the company?s view that a CAS disclosure statement was not
required in the first year of the contract.? The attorneys also said that,
if American Express was correct, ?then neither the government nor Ogilvy?s
failure to have a disclosure statement in place is critical to what occurred
under this contract.? In addition, the attorneys said that Ogilvy and its
counsel and consultants believe that a CAS- compliant accounting system
should have been in place and that having a disclosure statement would have
provided a basis not only for preventing many of the issues, but also for
ensuring open dialogue with the COTR, which Ogilvy does not believe
currently exists. Ogilvy?s attorneys continued that ?there has been neither
the ?ongoing

assessment? of Ogilvy?s performance attributed to the COTR in the report,
nor have there been the ?regular? meetings that the COTR reports to have
arranged.?

We believe that, because the ONDCP contract was a CAS- covered contract over
a certain value, Ogilvy was required to provide a disclosure statement at
the time of the award. We were unable to verify whether the COTR provided an
?ongoing assessment? of Ogilvy?s performance because, as noted in the
report, the COTR said that he did not prepare a formal contractor
performance report. We also did not verify whether regular meetings have
recently been scheduled and taken place between the COTR and Ogilvy.

3. Ogilvy?s attorneys also indicated that the American Express report was

?wholly consistent with the feedback that the company received from the
government? and other feedback that was understood by virtue of a review
conducted by government auditors at the Finance Department in December
1999.? We understand from discussions with Ogilvy?s attorneys that this
review refers to work conducted by us in connection with our July 2000
report regarding the anti- drug media campaign. However, the scope of that
review, which is detailed in footnote 2 of this report, did not include
determining the adequacy of Ogilvy?s accounting system with respect to the
ONDCP contract. As indicated in the July 2000 report, we did not conduct a
financial audit of the campaign?s fiscal operations or review the related
internal controls to determine the accuracy of the campaign?s obligations
and

Appendix V: Comments From Ogilvy and Mather

Page 52 GAO- 01- 623 Anti- Drug Media Campaign

expenditures. Our records do not indicate that we met with Ogilvy financial
staff in December 1999, but rather that we met with Ogilvy media staff in
September 1999, and the discussion focused on billing media, rather than
labor costs. Further, our record of that meeting does not indicate that we
provided feedback regarding the adequacy of Ogilvy?s accounting or
timekeeping systems.

Ogilvy?s attorneys also said that, in light of the review conducted by
government auditors in December 1999, it was reasonable for the company to
take an ?iterative approach? to systems enhancement until the late summer of
2000, when it learned of the more serious matters raised regarding billing
reliability, at which time the company stopped billing the government
altogether. Therefore, they said, the inference that the company is ?late?
in sending bills seemed unfair when the delay was intentional and the
reasons for the delay have been explained to the government as being
motivated by a desire to ensure accurate and FAR- compliant billing. We did
not mean to imply that the company had been late in billing the government
after problems were raised in late summer 2000. We understand that Ogilvy
has stopped billing for labor until it has completed restructuring its
accounting system to meet government contracting requirements. However, we
did intend to indicate that Ogilvy was late in billing the government for
labor at the beginning of the contract. Ogilvy did not provide the
government with its first labor invoice until May 1999, even though the
contract, which began in January 1999, required the company to bill the
government on a monthly basis. Ogilvy should have had the processes and
staff in place to bill the government in accordance with the contract terms
at the beginning of the contract.

4. Ogilvy?s attorneys said that the revenue shortfall on the ONDCP contract
was ?perceived as clerical insofar as the hours seemingly devoted to the
project were not being captured by those seemingly under- reporting time on
the project.? However, if the revenue shortfall was perceived solely as a
recordkeeping problem, the actions that some Ogilvy employees took in
response, which included adding time charged against the contract that some
employees said they did not work, was not the proper solution. Further, we
were not able to comment on the perceptions of Ogilvy management at the time
or whether their perceptions, whatever they were, were accurate.

5. Regarding the low revenue that Ogilvy realized on the ONDCP contract in
the late summer and fall of 1999, the company?s attorneys said that Ogilvy
New York was ahead of its officewide performance budget by

Appendix V: Comments From Ogilvy and Mather

Page 53 GAO- 01- 623 Anti- Drug Media Campaign

the third quarter and eventually exceeded those projections by more than 20
percent. Ogilvy?s officewide performance in 1999 was outside of the scope of
our review of the ONDCP contract.

6. Ogilvy?s attorneys noted that they made disclosures regarding the
company?s billing practices under this contract not only to the Justice
Department, but also to ONDCP, HHS, the Navy, and GAO?s Office of Special
Investigations. We did not verify Ogilvy?s disclosures to all other
government agencies.

7. Ogilvy?s attorneys said that a statement attributed to the financial
director (referred to in our report as the ?finance director?) did not fully
capture his perspective regarding Ogilvy?s timekeeping procedures. The
attorneys provided an additional statement regarding his perspective, which
we added to the report.

8. Ogilvy?s attorneys said that the 3,127 hours that employees added to the
ONDCP contract should be viewed in the context of the more than 150,000
hours worked on the project in 1999. Because we found that some of the time
sheets that Ogilvy submitted to the government in 1999 were not reliable, we
did not calculate the total number of hours that Ogilvy?s employees worked
on the ONDCP contract in 1999.

9. Ogilvy?s attorneys said that the company?s submission of repetitive
invoices for the same months was necessitated by the COTR?s direction to
bill only individual employees who had submitted all time sheets for a
particular month and by the difficulty Ogilvy had in securing timely
submission of time sheets by its employees. The attorneys also said that
such repetitive billing does not appear to have resulted in double- billing
for the same labor time. We did not determine whether any double- billing
for the same labor time occurred, but expect that issue will be examined as
part of the contract ?true- up? and DCAA audit.

Ogilvy?s attorneys also said that, with regard to the billing of overhead
and fringe benefits for certain temporary contract workers, Ogilvy did not
correctly apply the permissible fringe rate to this group of employees, but
that the failure to maintain separate rates was not material and is expected
to be resolved in the true- up. The attorneys also said that charging the
same overhead for regular and temporary contract employees is proper. This
issue is expected to be resolved between the government and Ogilvy.

Appendix V: Comments From Ogilvy and Mather

Page 54 GAO- 01- 623 Anti- Drug Media Campaign

10. Ogilvy?s attorneys said that, although there is a genuine costaccounting
issue under the FAR with regard to a 35- hour corporate work week, it should
be noted that company employees worked hundreds of hours of uncompensated
and unbilled overtime on the ONDCP project. The government will need to
resolve whether a 35hour work week is appropriate under this contract. We
also note that Ogilvy?s billing methodology contemplated uncompensated
overtime and the company?s timekeeping system should have captured all hours
worked on the contract.

In addition, the attorneys said that some of the cost allocations questioned
in the draft report, although rejected by the COTR, were nonetheless
verbally approved by HHS. We were unable to determine which cost allocations
were verbally approved by HHS. However, in response to questions that we
posed to the HHS contracting officer regarding the contract administration,
the contracting officer wrote us in November 2000 that a determination had
not been made about whether bonuses and perquisites were allowable or
allocable costs under the contract and that no payments were made to Ogilvy
for these costs.

11. Ogilvy?s attorneys also said that some of the costs that were described
as ?incorrectly billed? are more properly described as ?misclassified?

because some charges that may not belong in the direct labor bill would
nonetheless have an offsetting effect in relation to the overhead rate under
the FAR. Accordingly, we revised a statement contained in the draft report
attributed to Ogilvy?s attorneys to indicate that certain costs were
?misclassified? rather than ?incorrectly allocated.?

12. Ogilvy?s attorneys said that the company?s submission of its first labor
invoice in May 1999 followed numerous consultations with the COTR and was
accomplished with the help of an outside consultant on the format. They also
said that the bill was withdrawn when the COTR made additional formatting
demands as a condition of payment. A June 21, 1999, E- mail that Ogilvy?s
former government contracts manager sent to the COTR, which is described in
the report, appears to corroborate Ogilvy?s assertion that the COTR provided
direction on how the invoices should be prepared. In that E- mail, the
former government contracts manager indicated that the original invoices had
been voided and that they were preparing new ones ?in accordance with your
[the COTR?s] payroll and time sheet needs.?

Appendix V: Comments From Ogilvy and Mather

Page 55 GAO- 01- 623 Anti- Drug Media Campaign

13. Ogilvy?s attorneys said that, although not ideal from the perspective of
either the government or Ogilvy, the practice of backbilling as complete
sets of time sheets for employees were received and entered into the billing
system was done with the approval of the COTR. However, it appears that
labor charges could not have been properly calculated until an employee?s
entire set of time sheets for that billing period were submitted when
applying the methodology that was used to prepare labor invoices under this
contract- the percentage of time that each employee worked on the ONDCP
contract during that billing period. Further, in his April 2000 memorandum
to the then ONDCP Director, the COTR expressed concern about Ogilvy?s delays
in billing. In the memorandum, the COTR said that, as of April 2000, the
company had billed only 58 percent of the estimated value of the first year
of the contract.

14. Ogilvy?s attorneys said that, once the public relations contract for the
anti- drug media campaign was awarded to another company, Ogilvy New York
did not have the benefit of Ogilvy?s Washington, D. C., public relations
firm?s government cost accounting expertise, as anticipated when submitting
the best and final offer. However, once this was realized by Ogilvy, it
should have obtained any needed expertise from other sources, which it
apparently did not do until 16 months after the contract began. We did not
examine the relationship, if any, between the accounting systems of Ogilvy?s
Washington, D. C., public relations and its New York City advertising
offices.

15. Ogilvy?s attorneys said that, while the contracting officer approved the
COTR?s disallowances, as noted, pending the provision of additional
documentation, numerous decisions by the COTR to withhold payment were
overruled by the contracting officer. However, HHS contracting officials
told us that they generally followed the COTR?s disallowance
recommendations. We were unable to determine how frequently the contracting
officer followed the COTR?s disallowance recommendations regarding labor
costs because the payment records combined both media and labor costs.

The attorneys also said that it is Ogilvy?s position that the withholding of
payments for labor costs claimed was done largely for erroneous reasons. The
appropriateness of the disallowed costs is expected to be examined and
resolved in an audit of the contract.

16. Ogilvy?s attorneys said that they disagreed with our conclusion in the
draft report that the company ?did not begin making serious efforts to

Appendix V: Comments From Ogilvy and Mather

Page 56 GAO- 01- 623 Anti- Drug Media Campaign

restructure its accounting system to meet government requirements until
nearly 2 years after the contract was awarded.? They also said that, while
the efforts may not have produced the desired system within the time frame
referenced, the seriousness of the effort in the intervening time cannot be
seriously questioned. The attorneys noted that in 1999 the company hired a
government contracts specialist, an accounting consultant, and a government
contracts lawyer, none of whom are currently in those positions, and that it
promulgated timesheet policies and attempted to have a dialogue with the
COTR on contract requirements. The attorneys added that, although none of
these efforts prevented the billing problems that they reported to the
government, the efforts were nonetheless good faith efforts to create an
accounting system acceptable to the government by a novice government
contractor.

We recognize, as indicated in the report, that Ogilvy retained American
Express Tax and Business Services in April 2000, which was 16 months after
the contract award, to review billing and accounting system issues related
to the ONDCP contract. However, although American Express reported in June
2000 that it had found several problems regarding the company?s accounting
and timekeeping systems, our review indicated that significant progress
toward restructuring Ogilvy?s accounting system to meet government
contracting requirements did not occur until after the company retained
PricewaterhouseCoopers in November 2000, which was nearly 2 years after the
contract award. We also believe that Ogilvy should have had an accounting
system in place to meet government contracting requirements at the beginning
of the contract. Therefore, we revised our statement to indicate that
?Ogilvy

did not make significant progress toward restructuring its accounting system
to meet government requirements until nearly 2 years after the contract was
awarded.? The report indicated that Ogilvy had issued new time sheet
guidance in January 2001. As noted in comment 2, we did not verify whether
regular meetings have recently been scheduled and taken place between the
COTR and Ogilvy.

17. Ogilvy?s attorneys said that, although there was a clear failure of
recollection by the employee who added 485 hours to her time sheets
regarding which manager instructed her to add that time, there is

?strong, if not conclusive, extrinsic evidence that the manager who gave the
instruction was the Ogilvy contract coordinator? (who is referred to in the
report as the ?former government contracts manager?). The attorneys said
that the former government contracts manager ?admits as much and the account
manager [who is referred to

Appendix V: Comments From Ogilvy and Mather

Page 57 GAO- 01- 623 Anti- Drug Media Campaign

in the report as the ?project director?] denied doing so.? In addition, the
attorneys said that ?the contemporaneous handwritten instructions to move
the time are in his and not the account manager?s handwriting.? However, we
could not substantiate these statements made by Ogilvy?s attorneys because
we were unable to ask the former government contracts manager whether he
instructed this employee to add the 485 hours or whether the handwritten
instructions to add the time to the ONDCP contract on this employee?s time
sheets were his. As indicated in the report, the former government contracts
manager, through his attorney, declined to discuss this matter with us. The
report also indicated that the project director denied that she had
instructed this employee to add the 485 hours to the ONDCP contract.

18. Ogilvy?s attorneys said that the discussion of the audit activity
regarding white- outs and extraneous markings on time sheets should include
two contextual observations. First, the attorneys said, as appendix II makes
clear, most of the markings were explained as innocent self- correction with
some of the unidentified changes being corrections of obvious math errors.
In addition, the attorneys said that such extraneous markings, though viewed
as auditing red- flags, ?are

not all uncommon in government and private time sheet reviews.? However, the
fact that 4 of 12 employees in our sample, or one- third, said that they did
not make the changes shown on their time sheets adding time charged to the
ONDCP contract, raises serious questions about the reasons why the changes
were made and who made them, as well as about the accuracy of the time
billed to the government. (We note that one of the four employees and her
supervisor provided a possible explanation for the change that was made to
the employee?s time sheet, as described in appendix III.) We had no data
that would confirm whether these types of ?extraneous markings? are not all
uncommon in government and private time sheet reviews,? as indicated by
Ogilvy?s attorneys. We also note that Ogilvy?s recently revised timekeeping
policy requires employees and their immediate supervisors to initial all
changes made to their time sheets, which was not done for the changes made
to the time sheets in our sample. Further, we note that guidance contained
in DCAA?s audit manual (Section 5- 909.1) requires that corrections to
timekeeping records be

?made in ink, initialed by the employee, properly authorized, and provide a
sufficient and relevant explanation for the correction.?

19. Finally, Ogilvy?s attorneys said they believed that the report should
reflect some of the positive comments we made during the informal review
process regarding the company?s ?admirable openness during

Appendix V: Comments From Ogilvy and Mather

Page 58 GAO- 01- 623 Anti- Drug Media Campaign

the audit process.? The attorneys noted that the company helped broaden the
focus of our work beyond our initial extraneous marking analysis of the time
sheets, and that the accounting issues have been the subject of a review by
PricewaterhouseCoopers on a time sheet by time sheet basis and shared with
the various government agencies involved. The attorneys also said that,
although Ogilvy does not intend to excuse the billing errors that were made,
they should be understood in the context of the manner in which the contract
was administered, and ultimately assessed in light of the value of the
service delivered. Further, the attorneys said that although they recognized
that we did not review the efficacy of the campaign, by all independent and
reported measures, the anti- drug media campaign was a success.

As noted in the report, we recognize that Ogilvy, with the assistance of
PricewaterhouseCoopers, has made significant recent efforts to restructure
the company?s accounting system to meet government contracting requirements
and that the company voluntarily provided us data on the 28 employees who
prepared new time sheets, revising the amount of time that they charged to
the ONDCP contract. However, as stated in the report, we cannot comment on
the efficacy of the anti- drug media campaign.

Appendix VI: Comments From the Program Support Center

Page 59 GAO- 01- 623 Anti- Drug Media Campaign

Appendix VI: Comments From the Program Support Center

(393001)

The first copy of each GAO report is free. Additional copies of reports are
$2 each. A check or money order should be made out to the Superintendent of
Documents. VISA and MasterCard credit cards are also accepted.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U. S. General Accounting Office P. O. Box 37050 Washington, DC 20013

Orders by visiting:

Room 1100 700 4 th St., NW (corner of 4 th and G Sts. NW) Washington, DC
20013

Orders by phone:

(202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537

Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email
message with ?info? in the body to:

Info@ www. gao. gov or visit GAO?s World Wide Web home page at: http:// www.
gao. gov

Contact one:

 Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm

 E- mail: fraudnet@ gao. gov

 1- 800- 424- 5454 (automated answering system) Ordering Information

To Report Fraud, Waste, and Abuse in Federal Programs
*** End of document. ***