Report on Examination of Direct
and Indirect Costs and Rates for Fiscal Year Ended March 31,1999
December 2003
Reference
Number: 2004-1C-020
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.
December 3, 2003
MEMORANDUM FOR DAVID A. GRANT
DIRECTOR OF PROCUREMENT
INTERNAL REVENUE SERVICE
FROM: Daniel R. Devlin /s/ Daniel R. Devlin
Assistant Inspector General
for Audit (Headquarters Operations and
Exempt Organizations
Programs)
SUBJECT: Report on Examination of Direct and
Indirect Costs and Rates for Fiscal Year Ended March 31, 1999 (Audit
#20041C0211)
The
Defense Contract Audit Agency (DCAA) examined the contractor’s July 23, 1999,
certified final indirect cost rate proposal and related books and records for
reimbursement of Fiscal Year (FY) 1999 incurred costs. The purpose of the examination was to
determine the allowability of direct costs and indirect cost rates and to
establish audit-determined indirect cost rates for April 1, 1998, through March
31, 1999. The proposed rates apply
primarily to flexibly priced contracts.
The
DCAA questioned costs of approximately $11.1 million in the contractor’s
claimed labor overhead and general and administrative expenses. The questioned costs include approximately
$10.5 million in claimed executive compensation costs for the contractor’s FY
1999. Of this amount, approximately
$1.6 million is expressly unallowable based on the executive limitation of the
Federal Acquisition Regulation (FAR) Part 31, and approximately $8.9 million is
considered unreasonable based on the criteria of FAR Part 31. The DCAA indicated the questioned costs
resulted from a comparison of the contractor’s executives’ compensation to
comparable executive positions published in executive market pay surveys. The contractor did not concur with the
DCAA’s position on executive compensation.
The
DCAA stated that the contractor’s proposed indirect rates, subject to the
qualifications discussed below, are not acceptable as proposed. However, claimed direct costs, subject to
the qualifications discussed below, are provisionally approved pending final
acceptance.
The
DCAA qualified its audit report because results of the assist audits for the
subcontract costs had not been received.
The results of the assist audits may disclose additional questioned
costs. Also, the DCAA indicated that
the contractor’s home office has been cited as being in noncompliance with Cost
Accounting Standard 405 for failing to identify expressly unallowable costs
from its incurred cost submission. A
final determination on this noncompliance may lead to additional questioned
costs. Additionally, the DCAA noted
that subsequent audits or reviews on insurance, pension, and other fringe
benefits may supplement the findings in this report.
Although
this DCAA report is dated December 20, 2001, we did not receive a copy of the
report until November 2003. Neither the
Internal Revenue Service (IRS) nor the Treasury Inspector General for Tax
Administration (TIGTA) are shown on the DCAA report distribution list, even
though two IRS-administered contracts were included in the scope of the DCAA
report.
The
information in this report should not be used for purposes other than those
intended without prior consultation with the TIGTA regarding their
applicability.
If you have any questions, please
contact me at (202) 622-8500 or John R. Wright, Director, at (202) 927-7077.
Attachment
NOTICE:
The Office of Inspector General for Tax Administration has
no objection to the release of this report, at the discretion of the
contracting officer, to duly authorized representatives of the contractor.
The contractor information contained in this report is
proprietary information. The
restrictions of 18 U.S.C. § 1905 must be followed in
releasing any information to the public.
This report may not be released without the approval of
this office, except to an agency requesting the report for use in negotiating
or administering a contract with the contractor.
The TIGTA seal was removed due
to its size.