TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Invoice Audit of the Microsoft
Consulting Services Contract – TIRNO-03-K-00191
June 2006
Reference Number: 2006-10-086
This
report has cleared the Treasury Inspector General for Tax Administration disclosure
review process and information determined to be restricted from public release
has been redacted from this document.
Phone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site
| http://www.tigta.gov
June 8, 2006
MEMORANDUM FOR CHIEF, AGENCY-WIDE SHARED SERVICES
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Invoice Audit of the Microsoft Consulting Services Contract – TIRNO-03-K-00191 (Audit # 200510026)
This report presents the results of our review of the Internal Revenue Service’s (IRS) Microsoft Consulting Services Contract – TIRNO-03-K-00191. The overall objective of this review was to determine whether selected invoices submitted and paid under contract number TIRNO-03-K-00191 were appropriate and in accordance with the contract’s terms and conditions.
Synopsis
Contract expenditures represent a significant outlay of IRS funds. The Treasury Inspector General for Tax Administration has made a commitment to perform audits of these expenditures. We initiated this audit to determine whether the invoices submitted by the contractor and paid by the IRS were accurate, supported, and allowable.
We initially identified $1,821,578.75 in questionable labor costs because the contractor stated it did not have in its possession the necessary documentation to support time charged by subcontractors. We provided both the IRS and contractor personnel a list of these questioned costs in September 2005.
However, it was not until we presented the questioned costs in a discussion draft report issued to the IRS in December 2005 that the contractor obtained the necessary documentation from its subcontractors to support all of the labor costs. During the period when these charges were invoiced by the contractor, the IRS did not review, as part of its invoice verification process, any source documents such as timecards to confirm labor hours charged.
We also initially determined the contractor could not provide résumés for 31 percent (23 of 75) of subcontractor-provided consultants listed on the invoices we tested. Charges associated with these consultants totaled $650,176.37. On April 7, 2006, subsequent to the issuance of our draft report on February 28, 2006, the IRS provided 10 additional résumés, which it considered acceptable. According to the IRS, these résumés reduced the amount related to the remaining 13 consultants to $444,430. As with labor hours, during the period when these charges were invoiced by the contractor, the IRS did not review subcontractor-provided consultant résumés to verify the qualifications of the consultants.
In a related matter that affects the control environment and risk associated with this contract, we determined that neither the contractor nor its subcontractor, which performed 100 percent of the work on this contract, is audited by the Defense Contract Audit Agency.[1] Thus, the Federal Government has not opined on the adequacy of the contractor’s or subcontractor’s financial, billing, and estimating systems of internal control. Because of these conditions on this contract, we believe the IRS was subjected to a higher level of risk for improper contractor payments.
As part of this audit, we also examined contract correspondence files and interviewed the Contracting Officer and the Contracting Officer’s Technical Representative to determine whether the contractor’s performance was satisfactory. Based on these limited auditing procedures, nothing came to our attention that would lead us to believe there were significant problems with the deliverables associated with the tasks included in our tests.
Recommendations
We recommended the Director, Procurement, ensure Contracting Officers and Contracting Officer’s Technical Representatives 1) adhere to Federal Acquisition Regulation 52.232-7(a)(1), Payments Under Time-and-Materials and Labor-Hour Contracts;[2] 2) are cognizant of the importance of requesting and reviewing résumés of contracted consultants; and 3) are cognizant of the extent of audit coverage, if any, by the Defense Contract Audit Agency and adjust invoice verification procedures accordingly.
Response
IRS management disagreed with all of our recommendations and the reported outcome measure. They stated that they believe the invoices submitted and paid under the subject contract were appropriate according to its commercial terms. Management’s complete response to the draft report is included as Appendix V.
Office of Audit Comment
Management asserts the invoices submitted and paid under the subject contract were appropriate according to its commercial terms and therefore disagrees with all of our recommendations. This assertion is based, in part, on our reporting of no identified questioned charges. However, the fact that no charges were found to be questionable should not be the basis to forgo the need to improve the IRS’ overall invoice verification control environment, which is the intent of our recommendations. Further, we initially reported in our discussion draft report $1.8 million in questioned costs, out of $2.8 million reviewed, due to unsupported subcontractor labor charges. If this subcontractor-prepared documentation existed throughout the contract period, we question why it took over 4 months for the IRS to provide us the timecards and labor hour reports, especially since similar documentation was provided promptly for $1 million of the $2.8 million reviewed. Such documentation should be readily identifiable and retrievable from the business accounting and recordkeeping system.
We will continue to include a review of the IRS’ voucher verification process in future contract invoice audits and, if warranted, recommend improvements to the process.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have any questions or Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.
Questionable
Contract Charges and Invoice Verification Process
Contract Deliverables
Were Acceptable
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix V
– Management’s Response to the Draft Report
In April 2003, the Internal Revenue Service (IRS) awarded task order (contract[3]) number TIRNO-03-K-00191 under General Services Administration (GSA) Contract GS-35F-0273L. The contract allowed various IRS offices to obtain information technology professional services. IRS offices requiring services could submit a work request, with proper approvals, and have the work assigned to the contract as appropriate. The services primarily involved time-and-materials tasks. A small proportion involved fixed-price tasks that provided for technical support for unforeseen incidents that required calling in a software technician.
The contract was initially awarded for 1 year, from April 4, 2003, through April 3, 2004. Three subsequent amendments extended its period of performance to February 28, 2005. According to the IRS Request Tracking System,[4] as of June 15, 2005, the IRS had awarded 33 tasks, with a total value not to exceed approximately $8.3 million, and had recorded approximately $7.7 million in transactions against these tasks. The contractor submitted invoices monthly; the invoices included charges for all tasks that had activity during the month. Subcontractors performed 100 percent of the work on the tasks.
Because contract expenditures represent a significant outlay of IRS funds, the Treasury Inspector General for Tax Administration (TIGTA) made a commitment to perform audits of these expenditures. This audit was designed to determine whether amounts paid by the IRS under this contract were accurate, supported, and allowable through a review of contractor invoices and supporting documentation.
This audit was performed at the Office of Procurement in the Office of Agency-Wide Shared Services in Oxon Hill, Maryland, and the contractor’s facility in Fairfax, Virginia, during the period June 2005 through January 2006. Opinions expressed in this report pertain only to the tasks and invoices included in our judgmental sample.
The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
We examined supporting documentation obtained from the IRS Office of Procurement, as well as documentation received directly from the contractor, for a sample of seven monthly invoices. The invoices were selected using a judgmental sampling method (see Appendix I for details). The sampled invoices included charges related to 23 tasks with award amounts totaling approximately $6.5 million and transactions of approximately $5.8 million. The 7 invoices had performance dates from June 2003 to November 2004 and involved approximately $2.8 million in IRS payments.
The primary expenses claimed by the contractor were subcontractor payments to one very large, well-known software developer. In fact, this subcontractor, including its own subcontractors, provided 100 percent of the labor on this contract. The contractor did not perform any work specifically related to the services delivered under this contract but functioned only to provide contract administrative support. We were informed by the Defense Contract Audit Agency (DCAA)[5] that, according to its records, neither the contractor nor the subcontractor is audited by the DCAA.
Questionable contract charges
The Contracting Officer’s Technical Representative (COTR) did not examine source documents, such as timecards, in his or her review of labor hours. The COTR established various processes in an effort to ensure labor hours were reasonable; however, as described later in this report, we believe those procedures were insufficient. We initially identified $1,821,578.75 in questioned labor costs because the contractor stated it did not have in its possession the necessary documentation to support time charged by subcontractors. We provided both IRS and contractor personnel a list of these questioned costs in September 2005. However, it was not until we presented the questioned costs in a discussion draft report issued to the IRS in December 2005 that the contractor obtained the necessary documentation from its subcontractors to support all of the labor costs, which we were provided on January 30, 2006.
We also initially determined the contractor could not provide résumés for 31 percent (23 of 75) of subcontractor-provided consultants listed on the invoices we tested. Charges associated with these consultants totaled $650,176.37. On April 7, 2006, subsequent to the issuance of our draft report on February 28, 2006, the IRS provided 10 additional résumés, which it considered acceptable. According to the IRS, these résumés reduced the amount related to the remaining 13 consultants to $444,430. Résumés or similar documentation are essential in ensuring individuals are technically qualified to be reimbursed at the stated labor category or rate.
Unsupported charges and unverified consultant qualifications, especially associated with this contract, are significant because neither the contractor nor the subcontractor is audited by the DCAA and because of what we believe to be insufficient invoice verification by the IRS, as discussed below. Unless adequate supporting documentation for invoiced charges and consultant qualifications is obtained, the IRS cannot assure the allowability of the charges or for services provided. This puts the IRS at risk of making improper contractor payments.
The Federal Acquisition Regulation (FAR)[6] stipulates a contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred. The FAR also provides that costs shall be allowed to the extent they are reasonable, allocable, and allowable under the FAR.
Invoice verification process
Contracts may be entered into and signed on behalf of the Federal Government only by Contracting Officers (CO). COs have the authority to administer or terminate contracts and make related determinations and findings. COs are responsible for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationships.
The requesting program
office nominates a COTR, who is the CO’s technical expert and representative in
the administration of a contract or task order.
Usually, the CO will appoint a COTR by issuing a signed letter of
appointment tailored to meet the needs of each contract. The CO and the COTR are required to jointly
review all appointed duties.
Prior to April 28,
2004, the Department of the Treasury Contracting
Officer’s Technical Representatives Handbook (the Handbook) was the primary guidance for COTRs.[7] Part
IV of the Handbook stated, in part, COTRs
are responsible for reviewing and approving invoices and vouchers on
contracts. It also stated the COTR would
receive instructions regarding involvement in the review and approval of
invoices and vouchers from the CO.
Attachment E of the Handbook offered,
as a sample responsibility for time-and-materials contracts, that COTRs are
responsible for reviewing and signing off on the invoices, attesting to their accuracy. Two of the seven invoices we reviewed during this audit were subject
to this guidance.
On April 28, 2004,
the IRS replaced the Handbook guidance,
in part, with a reference to the Office of Federal Procurement Policy document A Guide to Best Practices for Contract
Administration (the Guide). The Guide
offers, as a practical technique, that COTRs reviewing vouchers under cost-reimbursement
contracts should review the contractor’s timecards, sign-in sheets, and
overtime records to help assess the reasonableness of direct labor costs. The Guide
also contains direction to review major cost categories such as travel,
supplies, other direct costs, and subcontractor costs to again determine the reasonableness of the claimed costs. Although the Guide, which was published in October 1994, does not include a
specific reference to time-and-materials contracts, we believe it is reasonable
to infer that administration requirements for cost-reimbursement contracts
would also apply to time-and-materials contracts.
FAR 52.232-7(a)(1),
Payments Under Time-and-Materials and Labor-Hour Contracts, states, in part, “The
Contractor shall substantiate vouchers by evidence of actual payment and
by individual daily job timecards, or other substantiation approved by the
Contracting Officer.”
The COTR stated that he or she had no written procedures for reviewing invoices and was not familiar with the Guide. He or she receives monthly invoices and status reports directly from the contractor and then performs a detailed review of hours and labor rates. The contractor creates weekly status reports that include operational information and comparisons of funds expended to total funds available for each task. These status reports are reviewed during weekly teleconferences involving the COTR, IRS task managers, and contractor personnel.
The COTR stated that he or she relies on feedback obtained from task managers during the weekly teleconferences to determine whether hours charged for labor are reasonable. He or she stated that the Government task managers closely monitor hours worked and provide feedback to verify their accuracy. The COTR does not perform a detailed verification of actual hours worked, such as a review of contractor-provided payroll or related payment records. The COTR also stated that he or she does perform a thorough detailed review of travel charges.
Although we acknowledge that the COTR established procedures to determine whether hours charged for labor are reasonable, in our opinion and based on the guidance provided in FAR 52.232-7(a)(1), IRS officials should have reviewed original subcontractor-prepared supporting documentation, on at least a sample basis, to verify labor hours charged. This type of verification would be especially important because neither the contractor nor the subcontractor is audited by the DCAA. Thus, the Federal Government has not opined on the adequacy of the contractor’s or subcontractor’s financial, billing, and estimating systems of internal controls used to produce payroll and labor charges in support of Federal Government contracts and invoices. Further, we believe relying on contractor-prepared reports on subcontractor charges is inadequate because the report information is not generated directly from the subcontractor’s accounting records.
In addition, the COTR did not review subcontractor-provided consultant résumés to verify the qualifications of the consultants. The COTR stated that he or she relied on the subcontractor to check the qualifications of the consultants it provided to the contractor. We requested résumés from the contractor; however, the contractor could not provide résumés for 23 of 75, or 31 percent, of the consultants listed on the invoices we tested.
The COTR stated that IRS personnel work closely with the subcontractor-provided consultants and would know if they were qualified to perform contract-related tasks. The COTR also stated that he or she had no concerns with this contractor, and his or her weekly discussions with end users revealed they were generally satisfied with the contractor’s performance. Further, the CO stated that he or she considered this contractor very qualified.
The GSA Federal Supply Schedule Contract item 16, entitled “Description of Services and Pricing,” provides specific educational and general experience qualifications that must be met to be eligible for the various labor categories included in the contract and establishes pricing for each labor category. Further, item 13, entitled “Résumés,” states that résumés shall be provided to the user ordering activity upon request.
In our opinion, relying solely on testimonial assertions to validate contract consultants’ technical qualifications is insufficient; résumés or similar documentation should be provided and reviewed to ensure proper labor rates are being used.
Recommendations
Recommendation 1: The Director, Procurement, should ensure COs
and COTRs adhere to the requirements of FAR 52.232-7(a)(1), Payments Under Time-and-Materials and Labor-Hour
Contracts, when appropriate.
Management’s
Response:
IRS management disagreed with our recommendation. The
IRS believes it complied with FAR 52.232-7 (which states, “other
substantiation” besides timecards is
acceptable) because the CO approved the subcontractor providing weekly status
reports generated directly from its accounting records, which listed daily hours and labor rates
charged. These reports were reviewed in
weekly meetings with the subcontractor.
Both the contractor and the COTR then confirmed that the subsequent
monthly subcontractor invoices traced to the weekly reports.
In addition, the IRS rejected our suggestion that it follow guidance in A Guide to Best Practices for Contract Administration to review the
contractor’s timecards and sign-in sheets because this is a commercial time-and-materials
contract awarded by the GSA. The IRS
further offered that the Cost Accounting Standards Board affirmed that, for
these types of contracts, “the application of Cost Accounting Standards from a
pricing standpoint, is similar to a firm-fixed-price contract.”
Finally, the IRS believes the audit findings validated its approach, in that all hours charged traced to the monthly invoices and timecards.
Office
of Audit Comment: We
did not identify any documentation within the IRS contract files to support that
the IRS verified the contractor’s system contained reliable information
(analogous with a DCAA review). In
addition, contrary to the IRS’ response, the lists of labor hours attached to
the contractor’s invoices that we reviewed were prepared by the contractor, not
the subcontractor. We were provided only
subcontractor-prepared documentation (timecards and labor hour reports)
subsequent to our opening with the contractor.
Further, we were not provided all the supporting documentation until we
issued our discussion draft report at the conclusion of our fieldwork, which reported
$1.8 million in questioned costs, out of $2.8 million reviewed, due to
unsupported subcontractor labor charges.
If this documentation, prepared by the subcontractor, existed throughout
the contract period, we question why it took over 4 months to provide us the
timecards and labor hour reports, especially since similar documentation was
provided promptly for $1 million of the $2.8 million reviewed. Sound business practices dictate that such
documentation should be readily identifiable and retrievable from the business
accounting and recordkeeping system.
As mentioned in our report and highlighted in the IRS response, the IRS
did develop a process to verify hours worked.
However, we believe the process resulted only in the verification of
hours listed on the summary sheets to the invoices, not in verification that
the summary sheets were accurate. Since
subcontractor timecards and labor hour reports did exist, we believe such
documentation, instead of summary sheets, should have been used to verify
subcontractor labor hour charges. Further,
if reviewing all timecards and labor hour reports would be too cumbersome and time
consuming, we believe the IRS should have reviewed, at a minimum, a sample of such
documentation to verify the accuracy of the summary sheets.
We agree with the IRS’ conclusion that
the application of Cost Accounting Standards to time-and-materials contracts,
from a pricing standpoint, is similar to a firm fixed-price contract. However, pricing is not relevant to our
issue. We continue to believe the CO should
confirm that contracted employees were performing their assigned duties. Our
primary criteria for this condition are in FAR 52.232-7, which states, “The Contractor
shall substantiate vouchers by evidence of actual payment and by individual
daily job timecards.” We agree that it
also goes on to state “or other substantiation approved by the Contracting
Officer.” However, for time-and-materials
contracts, we would expect the CO to verify, on at least a sample basis, that
the labor hours charged were supported by timecards or other documentation such
as sign-in sheets, payroll records, etc., to ensure the accuracy of invoices
and contract compliance. Depending on
the verification results, the CO could then adjust the verification process and
rely on other substantiation.
Finally, the fact that no charges were ultimately found to be
questionable should not be the basis to forgo the need to improve the IRS’
overall invoice verification control environment, which is the intent of our
recommendations. Our position is
bolstered by the fact that it took the contractor and subcontractor an
inordinately long time to produce documentation that should have been readily
available.
Recommendation 2: The Director, Procurement, should ensure COs and COTRs are cognizant of the importance of requesting and reviewing résumés of contracted consultants.
Management’s
Response:
IRS management disagreed with our recommendation. The
IRS believes it did verify the
consultants’ qualifications by having the Government task manager directly
interview, either over the telephone or in person, the subcontractor’s proposed
team members to determine if they were qualified to perform the task. Accordingly, the IRS believes oral interviews,
where specific questions can be asked about experience and qualifications, are
preferred to reviewing written résumés because individuals may misstate their
experience in a résumé. Hence, the
interviews appropriately reduced and managed risk while verifying whether the
customer’s requirements can be satisfied.
An example was provided that, during one of the weekly status report reviews, errors were found in the
subcontractor invoices where an incorrect rate was charged. This occurred in two of the invoices selected
for the audit. The IRS reviewer
determined an employee charged hours under the Senior Software Consultant rate
that should have been charged at the lower Software Consultant rate. Accordingly, a subsequent voucher was reduced
by those hours.
The IRS believes that, since no miscalculations were identified during the audit, it is reasonable to assume the résumés not reviewed are also appropriate. Consequently, the IRS believes the audit results substantiated its procedures, which included verbal interviews, verifying rates to weekly reports, obtaining proposals with hours and rates, and including employee names in contract modifications.
IRS management also disagreed with our reporting of a “Reliability of Information” outcome measure related to subcontractor employees for whom résumés were not provided. They stated the outcome significantly overstates the impact of the “alleged potential labor rate misclassification” and they believe there are no potential savings or measurable impact from the audit recommendations. Our originally reported outcome measure was $650,176.37, which related to the total hours charged by 23 subcontractor employees for whom résumés were not provided.[8] After obtaining a list from us in early April 2006, the IRS provided résumés for 10 of the original 23 employees, then advised us the charges associated with the remaining 13 employees totaled $444,430. In its official response to the draft report, the IRS stated that it is realistic to project and assume the remaining 13 résumés would also be found compliant, especially in light of its interviews and weekly and monthly reviews verifying who was working on this contract. The IRS stated that, to assume otherwise (i.e., these 13 résumés are incorrect contrary to the findings for the other 62), is not reasonable.
Office
of Audit Comment: We did
not identify any documentation within the contract files to substantiate that discussions
were held with subcontractor employees to verify their qualifications. Further, we disagree with the IRS’ contention
that, in this situation, oral testimony is preferable to documentary evidence
because individuals may misstate their experience in a résumé. While we acknowledge that individuals may
misrepresent their qualifications on a résumé, certain technical requirements,
such as college degrees or years of specific technical job experience, to meet
specific positions are best identified through written documents such as résumés. If the veracity of the résumé is questioned,
one can always confirm items in question with the listed source entities. Interviews with individuals to ascertain
their level of competency, while beneficial, cannot substitute for ensuring
specific technical requirements of the position have been met, unless the
interviews specifically cover such technical requirements and the discussions
are documented with the information that otherwise would be contained in the résumé.
We agree that labor hour verifications were conducted during the weekly
status report reviews and errors were identified. We
applaud the IRS’ efforts to ensure correct rates were being used; however, these efforts had no bearing on the
verification of the qualifications of the subcontractor employees to ensure the
employees met the requirements for the positions in which they were classified.
Concerning the IRS’ disagreement with the outcome measure, we have the following comments. The outcome measure does not concern questionable charges (questioned costs) because we were able to confirm through timecards and other supporting documentation that the labor hours were supported and accurately calculated based on the cited labor category. At issue is whether the employees met the requirements for their respective cited labor categories. Without résumés or other supporting documentation, we could not determine if such requirements were met. Accordingly, we measure the total value of labor charges on the affected employees under Reliability of Information, which we define as ensuring the accuracy, validity, relevance, and integrity of data, including the sources of data, used by the IRS to plan, monitor, and report on its financial and operational activities. As mentioned, subsequent to the draft report issuance in February 2006, the IRS in April 2006 provided us an additional 10 résumés from the original list of 23 employees we had provided to the IRS at the conclusion of our fieldwork on this issue in September 2005. Thus, we reduced the outcome measure to the total value of the hours charged by the remaining 13 employees, which was $444,430.
Also, we understand the IRS’
rationale for further reducing the value of this issue to the difference
between the cited labor category and the lowest labor category for the
respective positions. This would be
acceptable if documentation existed to support the lowest labor category. However, since the IRS did not have any
support in the contract files that these 13 contractor employees met even the
minimum technical requirements specified for any labor category in those
positions, we cannot be assured the employees should have been assigned to this
contract. We thus calculated the value
of this outcome measure at the total labor hour charges associated with these
13 employees.
Recommendation 3: The Director, Procurement, should ensure COs and COTRs are cognizant of the extent of audit coverage, if any, by the DCAA and adjust invoice verification procedures accordingly.
Management’s Response: IRS management disagreed with our recommendation. The IRS contends that, prior to award, the GSA made a determination of responsibility, which requires that contracts be awarded to responsible prospective contractors only. To be determined responsible, contractors are required to have satisfactory records of performance, integrity, and business ethics and to possess the necessary organization, experience, and accounting and operational controls. Accordingly, the IRS relies on the GSA’s determination of responsibility and reviews of the contractor’s systems.
In addition, the GSA performs a postaward review of its contractors. Specifically, in September 2005, the GSA performed a postaward review of the contractor covering 4 main areas and over 25 subelements. The areas reviewed included ordering procedures and administrative, contract pricing, and financial concerns. Based upon its review, the GSA rated the contractor outstanding. The contractor is also audited yearly by an independent certified public accounting firm, which audits its financial statements, policies and procedures, and related internal controls (in addition to other audits by State and local agencies). During contract performance, in both 2003 and 2004, the independent auditors provided an unqualified opinion.
The IRS believes its review process was validated by the audit because, after all labor hours and over 60 percent of all résumés were audited, no questioned costs or rates were found.
Office of Audit Comment: We believe the IRS’ position (i.e., the contractor was selected for a Federal Government contract, reviewed by the GSA, and audited by a certified public accounting firm, thus eliminating the risk of not being audited by the DCAA) is not reasonable. Using this argument would suggest the Federal Government’s risk on a time-and-materials contract was so reduced by these activities that there was no need for Federal Government audit coverage or contract administration verification of invoices prior to payment.
Our recommendation is for the CO to be cognizant of the billing risk that could exist when neither the contractor nor the subcontractor is audited by the DCAA and to adjust invoice verification procedures accordingly. The Federal Government relies heavily on the DCAA in determining whether a business has adequate controls in place to ensure billing and estimating systems can be trusted to produce accurate invoices, in accordance with Federal regulations and standards and with contract terms and conditions. The aforementioned activities of the GSA and certified public accounting firm do not necessarily provide the same level of assurance that a DCAA audit would provide, given the differences in scope of such activities and audits.
Again, the fact that no charges were ultimately found to be questionable
should not be the basis to forgo the need to improve the IRS’ overall invoice
verification control environment, which is the intent of our recommendations.
We examined contract correspondence files and interviewed the CO and COTR to determine whether the contractor’s deliverables were acceptable. The contract involved performing information technology professional services for four primary tasks:
The contractor provided services for the following IRS projects and offices:
·
Large
and Mid-Size Business Management System.
·
Web
Services, Web Development, and Hosting.
·
Internal
Revenue Manual E-Clearance Application.
·
Servicewide[9] Policy, Directives, and Electronic Research.
·
Criminal Investigation Electronic Records
Management System.
· Tax Exempt and Government Entities Division.
Based on our limited auditing procedures, nothing came to
our attention that would lead us to believe there were significant problems
with the deliverables associated with the tasks included in our tests.
Appendix I
Detailed Objective,
Scope, and Methodology
The overall objective of this review was to determine whether selected invoices submitted and paid under contract number TIRNO-03-K-00191 were appropriate and in accordance with the contract’s terms and conditions. To accomplish our objective, we:
I.
Analyzed the Internal
Revenue Service’s (IRS) invoice verification
process prior to certifying payment to the contractor.
A.
Interviewed the
Contracting Officer and the Contracting Officer’s Technical Representative to
confirm our understanding of the invoice
verification process.
B.
Documented invoice processing risks including accuracy, supportability, and
allowability of invoice charges and concluded
as to the overall control environment.
C.
Interviewed IRS
personnel involved in the administration of the contract to identify any
concerns that existed regarding the contractor, its billing practices, or any
specific invoices.
II.
Verified whether invoice charges submitted by the contractor and paid by the IRS
were accurate, supported, and allowable.
A. Researched the IRS Request Tracking System (RTS)[10] and prepared a list of transactions processed during the life of the contract (April 4, 2003, through June 15, 2005). The RTS listed 29 invoices submitted by the contractor. The 29 invoices included 184 charges against 33 tasks (equivalent to IRS work requests) and totaled $7,673,842. Total task awards equaled $8,348,704.
We judgmentally selected seven invoices for review. First, we selected the three invoices with the highest dollar amounts; then we selected four more invoices that would give us coverage of the most tasks. This sampling method resulted in the selection of 49 charges against 23 tasks that totaled $2,806,086 in IRS payments. We believed this sampling method would provide sufficient evidence to accomplish our audit objective and would result in acceptable management corrective action without the need for a precise projection of sample results.
This audit did not include audit procedures to obtain evidence that computer-processed data, within the IRS RTS, were valid and reliable. Although used during this audit, the data in general were not considered significant to the audit’s objective or resultant findings. We used the data within the RTS only to reasonably identify the universe from which we selected our sample of transactions for substantive testing of their accuracy, supportability, and allowability. We concluded and reported only on those substantive tests. Therefore, there was no adverse effect on the audit as a result of not including reliability of computer-processed data audit procedures.
B.
Obtained supporting documentation
for the invoices in the sample from the IRS
and contractor and performed the following tests:
1.
Verified the
mathematical accuracy of the invoices and
supporting documentation.
2.
Traced invoice charges to supporting documentation.
3.
Verified whether invoice charges were actually paid by the contractor through
examination of payroll records and extracts from the contractor’s financial
records.
4.
Verified whether invoice charges were allowable under the terms and conditions of
the contract.
III. Verified through interviews with responsible officials and reviews of project files whether there was acceptable existence of deliverables, as stipulated in the contract, for all tasks.
Appendix II
Major Contributors
to This Report
Daniel
R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and
Exempt Organizations Programs)
John
R. Wright, Director
Thomas
J. Brunetto, Audit Manager
Robert
W. Beel, Lead Auditor
Thomas
Dori, Senior Auditor
Jeff
K. Jones, Senior Auditor
Melvin
Lindsey, Auditor
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy
Commissioner for Operations Support OS
Director, Procurement OS:A:P
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of
Management Controls OS:CFO:AR:M
Audit Liaisons:
Chief, Agency-Wide Shared Services OS:A
Director, Procurement OS:A:P
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome
Measure:
· Reliability of Information – Potential; $444,430 (reduced from $650,176.37 as originally cited in the draft report; see page 2).
Methodology Used to
Measure the Reported Benefit:
We examined invoices and supporting documentation obtained
from the Internal Revenue Service (IRS) Office of Procurement, as well as
documentation received directly from the contractor, to verify charges for a judgmental
sample of seven invoices. We selected our sample from a total
population of approximately $7.7 million in transactions processed by the IRS. The 7
invoices involved approximately
$2.8 million in IRS payments.
We identified $650,176.37 (approximately 23 percent of the amount audited) in charges for which qualification résumés could not be provided by the contractor. On April 7, 2006, subsequent to the issuance of our draft report on February 28, 2006, the IRS provided 10 additional résumés, which it considered acceptable. According to the IRS, these résumés reduced the amount related to the remaining 13 consultants to $444,430.
Appendix V
Management’s Response to the Draft Report
The response was
removed due to its size. To see the
response, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
[1] The Defense Contract Audit Agency, under the authority, direction, and control of the Under Secretary of Defense (Comptroller), is responsible for performing all contract audits for the Department of Defense. It also provides contract audit services to some other Federal Government agencies.
[2] 48 C.F.R. ch. 1 (2005).
[3] For simplicity of presentation, we will refer to this task order as a contract throughout this report.
[4] The Request Tracking System is a web-based application that allows IRS personnel to prepare, approve, fund, and track requests for the delivery of goods and services. The System also allows for electronic acceptance of items delivered and provides an electronic interface with the Integrated Financial System (the IRS’ administrative financial accounting system) for payment processing.
[5] The DCAA, under the authority, direction, and control of the Under Secretary of Defense (Comptroller), is responsible for performing all contract audits for the Department of Defense. It also provides contract audit services to some other Federal Government agencies.
[6] 48 C.F.R. ch. 1 (2005).
[7] Department of the Treasury Acquisition Circular No. 02-01, dated April 28, 2004, deleted references to the Handbook. The Circular also stated the Department of the Treasury would no longer maintain the Handbook.
[8] See Appendix IV for details. The 23 subcontractor employees were from a total of 75 employees reviewed.
[9] “Servicewide” indicates IRS-wide.
[10] The RTS is a web-based application that allows IRS personnel to prepare, approve, fund, and track requests for the delivery of goods and services. The System also allows for electronic acceptance of items delivered and provides an electronic interface with the Integrated Financial System (the IRS’ administrative financial accounting system) for payment processing.