Improvements Are Needed in the Invoice Review Process for the Business Systems Modernization Contract

 

June 2004

 

Reference Number:  2004-10-117 

 

 

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.

 

June 29, 2004

 

 

MEMORANDUM FOR CHIEF, AGENCY-WIDE SHARED SERVICES

 

FROM:     Gordon C. Milbourn III /s/ Gordon C. Milbourn III

                 Acting Deputy Inspector General for Audit

 

SUBJECT:     Final Audit Report - Improvements Are Needed in the Invoice Review Process for the Business Systems Modernization Contract  (Audit #200310019)

 

This report presents the results of our review of the Business Systems Modernization (BSM) contract.  The overall objective of this review was to determine whether the Internal Revenue Service (IRS) is properly reviewing and certifying invoices for the BSM contract to ensure all charges are accurate and supported. 

Because contract expenditures represent a significant outlay of IRS funds, the Treasury Inspector General for Tax Administration (TIGTA) has made a commitment to perform audits of these expenditures. We initiated this audit to review the process the IRS has in place to certify invoices for the BSM contract and ensure charges on the invoices are accurate and supported. 

In summary, the IRS’ process for reviewing and certifying invoices for this contract does not ensure all charges are accurate and supported.  We found the contractor’s documentation was not adequate to support all the charges invoiced.

According to the IRS Request Tracking System, as of September 2003, the IRS had approved payment of approximately $750 million for the BSM contract.  Using a judgmental sample of 4 invoices from 1 judgmentally selected task order, we requested supporting documentation from the IRS and the contractor to verify approximately $17.6 million in direct charges claimed on the invoices.  As a result of our analysis, we identified approximately $9.5 million (approximately 54 percent) in direct charges for which neither the IRS nor the contractor provided any supporting documentation, the supporting documentation did not adequately support the charge, or the charge was unallowable.  A minimal amount, approximately $1,400, is attributed to unallowable costs.

Because we were unable to verify all the direct charges contained in our sample of four invoices, there is no assurance the contractor billed the IRS accurately.  Additionally, without an effective process to ensure charges included on the invoices are accurate and supported, the IRS is at risk of wasting Federal Government funds.

We recommended the Director, Office of Procurement, seek recovery of the $9.5 million in unsupported charges unless the contractor provides acceptable support for those charges. Additionally, the Director, Office of Procurement, should initiate a program to review a representative sample of invoices submitted since the inception of the contract and ensure charges paid are accurate and supported.  Further, the Director, Office of Procurement, should institute a policy of performing invoice reviews, which includes obtaining supporting documentation from the contractor for the charges included on an invoice, to ensure charges are accurate and supported before payment is made.

Management’s Response:  Office of Procurement management responded that they agree the documentation we reviewed did not, in some cases, adequately justify all charges. However, subsequent to the audit, the IRS did assemble documentation that demonstrates the contractor is accurately billing the IRS.  In view of this, the Office of Procurement believes its review process ensures charges are accurate and supported. 

The Office of Procurement requested and received documentation from the contractor to support the charges questioned.  The Office of Procurement will continue to review supporting documentation and will seek recovery of any unsupported charges, if applicable.  Office of Procurement management does not believe further corrective action is necessary in reviewing the invoice charges.  They believe the standard contract closeout audits, performed for cost-reimbursement contract actions, will accomplish the same objective as the recommendation, without the need for a separate program.  Additionally, the Office of Procurement has an existing policy for performing invoice reviews, which includes obtaining supporting documentation to ensure charges are accurate and supported before payment is made.  While the audit team experienced difficulty in obtaining documentation from the contractor for the review, the contractor has committed to provide any documentation necessary to support the costs referenced in the report, as well as any future requests for supporting documentation.  Management’s complete response to the draft report is included as Appendix V.

Office of Audit Comment:  Subsequent to the issuance of the draft report, we met with the contractor and the IRS.  The contractor agreed to provide us and the IRS with all supporting documentation to verify the $9.5 million in questioned costs.  After our review of the additional documentation, we were able to verify all but approximately $52,200 of the $9.5 million we originally questioned. The $52,200 consists of $27,650 in unsupported charges and $24,515 in unreasonable or unallowable charges. The contractor should continue to work with the IRS to provide additional support for the $27,650 in unsupported charges.  However, if the contractor is unable to provide supporting documentation, the IRS should seek recovery of any outstanding unsupported charges and the $24,515 in unreasonable or unallowable charges.

The contractor initially did not provide sufficient documentation to support the charges on the four invoices we selected for our review.  However, after the draft report was issued to the IRS, the contractor cooperated and provided the appropriate documentation to support the invoices. The contractor’s delays in providing the necessary documentation prevented us from completing this audit timely. To assure that its billings are adequately justified, and to facilitate timely, independent review by TIGTA auditors, we believe the IRS should strengthen its invoice review process by routinely requesting and reviewing a sample of supporting documents.

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 questions or Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations), at (202) 622-8500.

 

Table of Contents

Background

Documentation Was Not Adequate to Support All of the Invoiced Costs

Recommendation 1:

Recommendations 2 and 3:

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Management’s Response to the Draft Report

 

Background

In December 1998, the Internal Revenue Service (IRS) awarded an indefinite-delivery/indefinite-quantity task order contract to provide for the design and development of an information system that allows the IRS to effectively and efficiently process tax return information, provide customer service, and maintain accurate financial records.  This effort, known as Business Systems Modernization (BSM), is a partnership between the contractor and the IRS.  The contract is estimated to span 15 years at a cost of $8 billion.  According to the IRS Request Tracking System, as of September 2003, the IRS had approved payment of approximately $750 million for the BSM contract.

The Federal Acquisition Regulation (FAR) stipulates that 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. 

Because contract expenditures represent a significant outlay of IRS funds, the Treasury Inspector General for Tax Administration (TIGTA) has made a commitment to perform audits of these expenditures.  We initiated this audit to review the process the IRS has in place to certify invoices for the BSM contract and ensure charges on the invoices are accurate and supported.

The timeliness of the audit was impaired due to significant delays in obtaining access to the contractor’s supporting documentation.  Although we eventually received some records from the contractor, the records provided as of January 30, 2004, did not adequately support a significant amount of direct charges as described later in this report.  Accordingly, we provided the IRS with a detailed listing of the unsupported charges in anticipation that the contractor would potentially provide additional documents in support of these charges.

The audit work was performed during the period March 2003 through January 2004 in the BSM Office within the Modernization and Information Technology Services function in New Carrollton, Maryland, and in the Procurement directorate within the Agency-Wide Shared Services office in Oxon Hill, Maryland.  In addition, we interviewed the contractor’s accounting employees and reviewed contractor records in New Carrollton, Maryland. 

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.

Documentation Was Not Adequate to Support All of the Invoiced Costs

The IRS’ process for reviewing and certifying invoices for this contract does not ensure all charges are accurate and supported.  We found the contractor’s documentation was not adequate to support all the charges invoiced.

Because of the size and complexity of the BSM contract, our review focused on the Customer Account Data Engine (CADE) project.  We selected the CADE because of the importance and high visibility of the project to the IRS and tax administration.  We analyzed the invoices submitted from October 2000 through April 2003 and the associated task orders for the CADE project.  Using a judgmental sample of four invoices from one judgmentally selected task order, we requested supporting documentation from the IRS and the contractor to verify all the direct charges included on the invoices, including employee labor hours, travel expenses, subcontractor costs (labor hour and other direct costs (ODC)/travel), and Internal Working Order (IWO) labor and travel expenses.  We identified approximately $9.5 million (approximately 54 percent) of the $17.6 million in direct invoiced charges for which neither the IRS nor the contractor provided any supporting documentation, the documentation provided did not adequately support the charge, or the cost was unallowable.  Nearly all the unsupported charges related to subcontractor labor, subcontractor ODC/travel, and IWO labor and travel expenses.  A minimal amount, approximately $1,400, was attributed to unallowable costs. 

The following are examples of specific invoice charges for which the contractor did not provide support or the support provided was inadequate:

·        One of the invoices included charges of approximately $2.7 million for subcontractor labor. The contractor provided no supporting documentation for these charges.

• One of the invoices included a charge of approximately $2.8 million for subcontractor ODC/travel.  The contractor provided a subcontractor invoice as support for the charge; however, the contractor provided checks payable to the subcontractor totaling only $1.9 million. Additionally, we could not attribute the $1.9 million in checks to the subcontractor invoice (i.e., there were no cross-references linking the checks to the invoice).
• The invoices included charges of approximately $860,000 and $97,000 for IWO labor and IWO travel, respectively. The documentation provided to support these charges was an invoice from the contractor’s IWO group with an attached list of employees, their hours, and associated travel expenses. We did not believe this documentation was adequate to support these charges.  The contractor did not provide any documentation from its timekeeping system to support the labor hours, nor were any receipts provided for the travel expenses.
• Two of the invoices included charges for the fixed fee.  The contractor did not provide any support for the fee.

Table 1 summarizes the questioned charges identified during our review, using the categories as shown on the invoice.

Table 1: Schedule of Questioned Charges

Source: TIGTA analysis of four invoices submitted to the IRS.

The IRS has an agreement in place with the contractor outlining the invoice review process. The agreement provides that the Contracting Officer and Contracting Officer Technical Representative (COTR) will review the invoices and submit any requests for necessary supporting documentation to the contractor within 7 calendar days of receipt of the invoice. The agreement also outlines COTR invoice review responsibilities.  These responsibilities include ensuring all costs are commensurate with the task order, verifying compliance with special contract terms and conditions, verifying indirect billing rates, and verifying mathematical accuracy. 

The IRS does not routinely receive supporting documentation for invoices submitted by the contractor. According to IRS personnel, to verify an invoice, the COTR forwards the invoice to the Acquisition Project Manager (APM) to review the charges on the invoice.  If the APM raises questions regarding any charge, the COTR requests the supporting documentation for the questioned charge and a determination is made as to whether the charge is valid.  If no charges are questioned, the invoice is paid in full. 

The IRS review process identified issues and withheld monies from three of the four invoices included in our sample.  Specifically, the IRS withheld the following amounts:

·        For 1 invoice, $77,000 was withheld because the amount billed exceeded the funds allotted to the contract.  According to the COTR, $77,000 was paid to the contractor over several subsequent invoices.

• For another invoice, $313,000 of the fixed fee was withheld because the amount was billed in error.  This amount has not been paid to the contractor. On the same invoice, $80,000 was withheld because the amount billed exceeded the funds allotted to the contract.  The $80,000 has not been paid.

·        On the third invoice, only $72,000 of the $1.1 million has been paid to the contractor.  The remaining amount is being withheld because this invoice was for change requests and the work has not been completed.

Additionally, the Defense Contract Audit Agency (DCAA) performed various audits of this contractor. Since September 2000, the DCAA has reported deficiencies with the contractor’s budget and planning system, the billing system, and the indirect and ODC system, including related internal control policies and procedures.  Because of the size and complexity of the invoices and the system inadequacies reported by the DCAA, we believe a more thorough review of the invoices needs to be performed to ensure all charges are accurate, supported, and allowable.  These reviews should include obtaining documentation from the contractor to support charges contained on the invoices.

As previously mentioned, the FAR provides that 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.  Because we were unable to verify the above costs, there is no assurance the contractor billed the IRS accurately. Additionally, without an effective process to ensure charges included on invoices are accurate and supported, the IRS is at risk of wasting Federal Government funds.

Unallowable charges

We identified approximately $1,400 of unallowable expenses in our judgmental sample of 4 invoices. These charges were for meals provided at meetings or conferences to contractor, subcontractor, and/or IRS employees.  Additionally, $671 of the $1,400 was billed and paid for on 2 separate invoices included in our review. Therefore, the IRS paid for the expense twice.  IRS personnel explained they approved these charges because the contractor believed that, by allowing attendees to leave the meeting or conference for lunch, key points in the presentations would be missed.

According to the Principles of Federal Appropriations Law, appropriated funds are not available to pay subsistence or to provide free food to Federal Government employees at their official duty stations.  Appropriation law extends the prohibition to non-Government personnel.  The Principles of Federal Appropriations Law further state,

Just as the entertainment of government personnel is generally unauthorized, the entertainment of non-government personnel is equally impermissible.  The basic rule is the same regardless [of] who is being fed or entertained; appropriated funds are not available for entertainment, including free food except under specific authority. 

Additionally, the FAR provides that the costs of amusement, diversions, social activities, and any directly associated costs, such as tickets to shows or sporting events, meals, lodging, rentals, transportation, and gratuities, are unallowable. 

In August 2003, the Office of Procurement issued an Office of Modernization Acquisition Directive that stipulates payment to contractors for free food/entertainment or refreshments for Federal Government, contractor, and/or subcontractor employees would be unallowable unless the reimbursement meets an exception authorized under law. We believe the charges discussed above should not have been allowed; however, the IRS took the appropriate steps in issuing a directive that prohibits the allowance of these charges in the future.  Notwithstanding the directive and the earlier decision to allow these prior charges, the IRS at a minimum should recover the $671 in duplicate charges.

Recommendations

The Director, Office of Procurement, should:

1.      Seek recovery of the $9.5 million unless the contractor provides acceptable support for those charges.

Management’s Response:  The Office of Procurement requested and received documentation from the contractor to support the costs questioned.  The Office of Procurement will continue to review the supporting documentation and will seek recovery of any unsupported charges, if applicable.

Office of Audit Comment:  Subsequent to the issuance of the draft report, we met with the contractor and the IRS.  The contractor agreed to provide us and the IRS with all supporting documentation to verify the $9.5 million in questioned charges.  After our review of the additional documentation, we were able to verify all but approximately $52,200 of the $9.5 million we originally questioned. 

For the $52,200 still questioned, the contractor either did not provide documentation to support the charge, the charge was unallowable, or the charge seemed unreasonable.  We identified additional unallowable costs of $1,465 in other ODCs.  These charges were for meals provided at meetings.  Additionally, we identified approximately $21,700 in travel charges that we consider unreasonable.  These include overcharges of meals and incidental expenses, corporate apartments for employees where an employee was at the temporary duty station for only 10 days during the month, and charges for incidental expenses, which included food.

Table 2 summarizes the questioned charges still outstanding using the categories as shown on the invoice.

Table 2: Schedule of Questioned Charges Outstanding

Source:  TIGTA analysis of supporting documentation for four invoices submitted to the IRS.

The contractor should continue to work with the IRS to provide additional support for the outstanding unsupported charges of $27,650.  However, if the contractor is unable to provide sufficient documentation, the IRS should seek recovery of the outstanding unsupported charges and the $24,515 in unreasonable or unallowable charges.

2.      Initiate a program to review a representative sample of invoices submitted since the inception of the contract and ensure charges paid are accurate and supported.  This may include requesting DCAA audit assistance.

Management’s Response:  The Office of Procurement believes standard contract closeout audits, performed for cost-reimbursement contract actions, will accomplish the same objective as the recommendation, without the need for a separate program.

3.   Institute a policy of performing invoice reviews, which includes obtaining supporting documentation from the contractor for the charges included on an invoice, to ensure charges are accurate and supported before payment is made. 

Management’s Response:  The Office of Procurement has an existing policy for performing invoice reviews, which includes obtaining supporting documentation to ensure charges are accurate and supported before payment is made.  While the audit team experienced difficulty obtaining documentation from the contractor for the review, the contractor has committed to provide any documentation necessary to support the charges referenced in the report, as well as any future requests for supporting documentation.

Office of Audit Comment:  The contractor initially did not provide sufficient documentation to support the charges on the four invoices we selected for our review. However, after the draft report was issued to the IRS, the contractor cooperated and provided the appropriate documentation to support the invoices.  The contractor’s delay in providing the necessary documentation prevented us from completing the audit timely.  To assure that its billings are adequately justified, and to facilitate timely, independent review by TIGTA auditors, we continue to believe the IRS should strengthen its invoice review process by routinely requesting and reviewing a sample of supporting documents.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this audit was to determine whether the Internal Revenue Service (IRS) is properly reviewing and certifying invoices for the Business Systems Modernization (BSM) contract to ensure all charges are accurate and supported.  To accomplish our objective, we:

I.                    Determined the methodology the IRS has in place to verify invoices before certifying payment to the contractor. 

II.                 Determined whether the charges included on the invoices submitted by the contractor were supported and allowable.

A.  Prepared a sampling plan and judgmentally selected a sample of invoices.  A judgmental sample was used because we did not plan to project the results to the universe.  Because of the size and complexity of the BSM contract, our review focused on the Customer Account Data Engine (CADE) project.  We selected the CADE because of the importance and high visibility of the project. We analyzed the invoices submitted from October 2000 through April 2003 and the associated task orders for the CADE project.  Three cost-reimbursable task orders were issued, with 27 invoices, totaling approximately $36 million, submitted as of April 2003.  We judgmentally selected one task order, task order 73, from which to select our judgmental sample of invoices.  We selected a sample of 4 of the 12 invoices for task order 73 to verify all the direct costs, including labor hours, travel expenses (e.g., airfare, hotel, mileage) and subcontractor charges, and reviewed the contractor’s supporting documentation.  Our sample covered approximately $15.7 million (56 percent) of the total amount invoiced for the task order selected (approximately $28 million).

B.   For the invoices included in our sample, obtained supporting documentation from the contractor and verified all direct charges on the invoices.

1.   Verified the mathematical accuracy of each invoice and any supporting documentation provided.

2.   Prepared a schedule of charges, including the labor category, labor rate, and hours charged; traced the charges to supporting documentation; and determined whether the charges were appropriate.

3.   Traced travel costs included on the invoices to supporting documentation (e.g., airline/hotel receipts) and determined whether the charges were appropriate.

C.  Determined whether unsupported, questioned, or disallowed charges were re-billed on a subsequent invoice and whether the IRS certified these charges for payment. 

 

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

Debra Gregory, Audit Manager

Terrey Haley, Senior Auditor

Rosemarie Maribello, Senior Auditor

Rita Woody, Senior Auditor

Niurka Thomas, Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Deputy Commissioner for Operations Support  OS

Associate Chief Information Officer, Business Systems Modernization  OS:CIO:B

Director, Office of 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 Control  OS:CFO:AR:M

Audit Liaisons:

            Chief, Agency-Wide Shared Services  A

            Associate Chief Information Officer, Business Systems Modernization  OS:CIO:B

            Director, Office of Procurement  OS:A:P

 

Appendix IV

 

Outcome Measures

 

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 the Congress.

Type and Value of Outcome Measure:

·        Cost Savings, Questioned Costs – Potential; $52,165.34 (see page 2).

·        Cost Savings, Questioned Costs (Unsupported portion of the questioned costs) – Potential; $27,650.17 (see page 2).

Methodology Used to Measure the Reported Benefit:

To determine the outstanding questioned costs, we reviewed the additional documentation provided by the contractor to support the $9.5 million in costs originally questioned. We identified $27,650.17 in costs for which the contractor did not provide support.  Additionally, we identified $21,707.94 in what we consider to be unreasonable and therefore unallowable costs and $2,807.23 in unallowable costs.

 

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.