Report on Examination of Direct and Indirect Costs and Rates for Fiscal Year Ended March 31, 2001

 

December 2003

 

Reference Number:  2004-1C-022

 

 

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 8, 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, 2001  (Audit #20041C0213)

 

The Defense Contract Audit Agency (DCAA) examined the contractor’s September 27, 2001, certified final indirect cost rate proposal and related books and records for reimbursement of Fiscal Year (FY) 2001 incurred costs.  The purpose of the examination was to determine the allowability and allocability of direct and indirect costs and to establish audit-determined indirect cost rates for April 1, 2000, through March 31, 2001.  The proposed rates apply primarily to flexibly priced contracts.

The DCAA questioned costs of approximately $22.2 million in the contractor’s claimed overhead and general and administrative (G&A) expenses.  The questioned costs include approximately $19.2 million in claimed overhead executive compensation costs for the contractor’s FY 2001.  In addition, this questioned executive compensation resulted in $640,373 of questioned overhead allocation to the G&A pool.  The DCAA indicated that the questioned costs resulted from a comparison of executive compensation to that of comparable positions published in executive market pay surveys.  The DCAA questioned the executive compensation costs based on application of the allowability and reasonableness criteria of the Federal Acquisition Regulation Part 31. 

The questioned costs also include approximately $2.1 million in claimed corporate allocation cost.  This questioned cost is the result of the DCAA’s reconciliation of the claimed corporate allocations to the contractor’s FY 2001 corporate audit report.  The corporate allocations include expressly unallowable costs and are subject to penalties.  The contractor concurred with all the questioned cost except for approximately $18.9 million of questioned executive compensation and related $630,476 of the questioned overhead effect on G&A expenses.

The DCAA opined that the contractor’s indirect rates are not acceptable as proposed.  However, claimed direct costs, subject to the qualifications discussed below, are acceptable and 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 and exclude expressly unallowable costs from its incurred cost submission.  A final determination on this noncompliance may lead to additional questioned costs.  Additionally, the DCAA stated that subsequent audits or reviews of insurance, pension, and other fringe benefits may supplement the findings in this report.

Although this DCAA report is dated November 14, 2002, 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 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.