TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Processes for Determining Whether to Lease or Purchase Computer Equipment Need to Be Improved
August 10, 2007
Reference Number: 2007-20-120
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
August 10, 2007
MEMORANDUM FOR CHIEF, AGENCY-WIDE SHARED SERVICES
CHIEF INFORMATION OFFICER
FROM: Michael R.
Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Processes for Determining Whether to Lease or Purchase Computer Equipment Need to Be Improved (Audit # 200720009)
This report presents
the results of our review of the Internal Revenue Service’s (IRS) decisions to
lease or purchase computer equipment. The
overall objective of this review was to determine whether the IRS had adequate
internal controls in place to decide whether to lease or purchase computer
equipment. This review was part of the Treasury
Inspector General for Tax Administration’s Fiscal Year 2007 Information Systems
Programs audit plan for reviews on using performance
and financial information for program and budget decisions.
Impact on the Taxpayer
Lease contract files did not contain complete information to conduct a
lease versus purchase analysis. When all lease
versus purchase requirements are not considered and documented, it is difficult
for IRS executives to make an informed decision on whether to lease or purchase
computer equipment and taxpayer funds may not be spent wisely.
Synopsis
The IRS has over 100,000 employees, many of whom use computers to perform their jobs. It spends millions of dollars to purchase and lease computer equipment to process tax records and to assist employees in performing their jobs. According to the IRS’ latest financial statements, it has approximately $1.7 billion in computer equipment inventory, consisting of mainframe computers, minicomputers, servers, desktop and laptop computers, and telecommunications equipment.[1] The IRS purchases the majority of its computer equipment; however, it also acquires computer equipment using leases, when appropriate. As of December 2006, the IRS had 4 open computer equipment leases costing approximately $53 million through Fiscal Year 2010.
The Federal Acquisition Regulation[2] requires agencies to consider whether to lease or purchase equipment based on a case-by-case evaluation of comparative costs and other factors. The IRS considered certain Federal Acquisition Regulation requirements when determining whether to lease or purchase computer equipment in each lease we reviewed. For example, purchase options were considered as well as rental and maintenance costs over the life of the lease. However, the lease contract files did not contain a well-documented cost/benefit analysis or complete information to conduct a lease versus purchase analysis. When all requirements are not considered and documented, it is difficult for IRS executives to make an informed decision on whether to lease or purchase computer equipment. For example, one contract file shows the lease payments over the term of one lease exceeded the purchase price at the inception of the lease by about $1.1 million, indicating a purchase would have been more economical to the IRS.
In addition, one lease contract file did not contain sufficient documentation to accurately determine or explain adjustments to lease costs when the IRS processed modifications to the contract. For example, one of the contractor quotes specifically cross-referenced in a contract modification was $315,537 lower than the price shown on the contract modification, indicating the IRS paid more for computer equipment than what was quoted by the contractor.
Recommendations
To ensure IRS management has all required information prior to making a lease versus purchase decision, we recommended the Chief Information Officer and the Chief, Agency-Wide Shared Services, work together to develop and implement a complete process to ensure all factors in the Federal Acquisition Regulation are considered and documented. To ensure the IRS has not overpaid or underpaid the contractor, we recommended the Chief, Agency-Wide Shared Services, perform a quality review of one lease contract.
Response
IRS
management agreed with our recommendations.
To ensure IRS management has all required information prior to making a
lease versus purchase decision, the Office of Procurement will update two Policy and Procedure Memoranda. The updates will include references to the
applicable Federal Acquisition Regulation requirements, such as a cost/benefit
analysis, and a requirement to ensure input, coordination, and consensus is
obtained from the Chief Information Officer regarding the lease/purchase decision
prior to coordination with the Chief Financial Officer. In conjunction with the policy updates, the
Office of Procurement will also conduct training to ensure a complete
understanding of the new requirements.
In addition, the Chief Information Officer will issue a directive
requiring purchasers of IRS computer equipment to fully comply with the
requirements outlined in the two Office of Procurement memoranda.
To ensure the IRS has not overpaid or underpaid a contractor, the Contracting Officer is working closely with the contractor to obtain additional supporting documentation. Upon receipt of the documentation, the Contracting Officer will perform a thorough analysis to determine whether the IRS has underpaid or overpaid the contractor and will initiate appropriate actions as determined necessary. Management’s complete response to the draft report is included as Appendix VI.
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 Margaret
E. Begg, Assistant Inspector General for Audit (Information Systems
Programs), at (202) 622-8510.
Certain Lease Versus
Purchase Factors Were Consistently Considered and Improvements Are Being Made
All Elements of Compliance
With Lease Versus Purchase Requirements Were Not Documented
Accounting for Costs
in One Lease Does Not Appear Accurate
Appendices
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
– Glossary of Terms
Appendix VI –
Management’s Response to the Draft Report
Abbreviations
|
IRS |
Internal Revenue Service |
The Internal Revenue Service (IRS) has over 100,000 employees, many of whom use computers to perform their jobs. It spends millions of dollars to purchase and lease computer equipment to process tax records and to assist employees in performing their jobs. The Chief Information Officer is responsible for ownership, management, and control of all IRS computer equipment.
According to the IRS’ latest financial statements, it has approximately $1.7 billion in computer equipment inventory, consisting of mainframe computers, minicomputers, servers, desktop and laptop computers, and telecommunications equipment.[3] The IRS purchases the majority of its computer equipment; however, it also acquires computer equipment using leases, when appropriate. As of December 2006, the IRS had 4 open computer equipment leases costing approximately $53 million through Fiscal Year 2010.[4] Table 1 provides a list of the open IRS computer equipment leases.
Table 1: Open Computer Equipment Leases
|
Computer Equipment Type |
Lease Agreement Amount |
|
Mid-range Computer Storage Equipment |
$25.6 million |
|
Mainframe Storage Equipment |
$3.1 million |
|
Mainframe Storage Equipment |
$5.2 million |
|
Telecommunications Equipment |
$19.3 million |
|
Total |
$53.2 million |
Source: IRS documents on all four open computer
equipment leases as of December 2006.
The Federal Acquisition Regulation[5] requires that, prior to leasing or purchasing equipment, agencies consider whether to lease or purchase equipment based on a case-by-case evaluation of comparative costs and other factors, such as whether the cumulative leasing costs will exceed the purchase cost and the advantages of using alternative types and makes of equipment.[6] The Office of Management and Budget also provides guidance that agencies must follow in comparing the costs to lease and purchase computer equipment. In addition, best practices suggested by private industry indicate a lease versus purchase analysis provides for more well-informed decision making. The factors often considered by private industry align with those provided for in the Federal Acquisition Regulation.
This review was performed at the Modernization and
Information Technology Services organization facilities in New Carrollton,
Maryland, and the Office of Procurement facilities in
Certain Lease Versus Purchase Factors Were Consistently Considered and Improvements Are Being Made
The IRS considered certain Federal Acquisition Regulation requirements[7]
when determining whether to lease or purchase computer equipment in each of the
four leases we reviewed. For example, purchase
options were considered as well as
rental and maintenance costs over the life of the lease.
The IRS also is
considering whether to lease or purchase desktop and laptop computers in Fiscal
Year 2008. An IRS task force has
developed a draft Statement of Objectives, which will be issued to vendors
seeking their proposals for providing the computer equipment. Task force officials informed us they are
aware of the Federal Acquisition Regulation requirements concerning lease
versus purchase decisions and will consider these requirements as they proceed.
In addition, the IRS
corrected the Information Technology Assets Management System, an inventory
system used to account for computer equipment, to identify its leased computer
storage equipment. When we initially
received an inventory report from the IRS, the report did not show all leased
computer storage equipment. The IRS subsequently
determined the storage equipment and costs had been misclassified as purchased
equipment in the Information Technology Assets Management System. The IRS stated the approximate cost of the
misclassified storage equipment was $33.9 million.[8]
All Elements of Compliance With Lease Versus Purchase Requirements Were Not Documented
As discussed previously, the Federal Acquisition Regulation requires agencies to consider
whether to lease or purchase equipment based on a cost/benefit analysis and an
analysis of other factors. The four open
lease contract files we reviewed did not contain a well-documented cost/benefit
analysis or
complete information to conduct a lease versus purchase analysis as required. Specifically, the following Federal
Acquisition Regulation requirements were not consistently documented in the
contract files:
·
The end-of-lease
purchase price or a formula to calculate the purchase price was documented
in only one of the four leases. The
lease agreement should contain the purchase price of the equipment or provide a
formula that could be used to calculate the purchase price at the end of the
lease. If an organization wishes to keep
equipment beyond the lease term, the overall cost of the equipment would be
increased by the purchase price at the end of the lease term.
·
Consideration of the potential the equipment may
become out of date because of imminent technological improvements was documented in only one of the four contract
files. Market research can reveal
technological advances for the computer equipment. If equipment will become obsolete in the very
near future, it may need to be replaced quickly. Therefore, a lease may be more advantageous
than a purchase of the same equipment.
·
Analysis of the financial and operating
advantages of alternative types and makes of equipment was documented in only two of the four contract
files. Market research can provide data
showing the advantages of different computer equipment. This provides another factor for management to
use in deciding whether leasing or purchasing the computer equipment is more advantageous.
·
Contractor price quotes were either missing or incomplete in two of
the four contract files. Price quotes
from contractors are needed to independently determine the lease costs and purchase
prices of the equipment.
When all requirements are not considered and documented, it is difficult for IRS executives to make an informed decision on whether to lease or purchase computer equipment and taxpayer funds may not be spent wisely. Although missing elements of the lease versus purchase analysis and lack of supporting documentation make reaching conclusions difficult, one contract file shows the lease payments over the term of one lease exceeded the purchase price at the inception of the lease by about $1.1 million, indicating a purchase would have been more economical to the IRS.[9]
We believe all the requirements were not considered and documented because the IRS does not have a defined process for gathering and analyzing information to make a well-informed lease versus purchase decision. For example, there were no Internal Revenue Manual guidelines or other procedures that provide detailed requirements for determining whether to lease or purchase computer equipment.
Management Action: On January 1, 2007, the Office of Procurement issued to procurement personnel a revised memorandum that addresses part of the Federal Acquisition Regulation requirements for making a lease versus purchase decision; however, the memorandum does not address all of the Federal Acquisition Regulation requirements.
Recommendation
Improving
lease versus purchase controls to assist in making well-informed decisions will
be especially timely. According to
recent testimony by the IRS Commissioner, “The FY [Fiscal Year] 2008 Budget
requests $81 million to improve the IRS’ information technology
infrastructure.”
Recommendation 1: To ensure IRS management has all required information prior to making a lease versus purchase decision, the Chief Information Officer and the Chief, Agency-Wide Shared Services, should work together to develop and implement a complete process to ensure all factors in the Federal Acquisition Regulation are considered and documented in the contract file when making a lease versus purchase decision.
Management’s Response: IRS management
agreed with the recommendation. To
ensure IRS management has all required information prior to making a lease
versus purchase decision, the Office of Procurement will update two Policy and Procedure Memoranda. Policy and Procedure Memorandum 7.1,
Acquisition Planning, will be updated to include a requirement to address
lease/purchase decisions in the acquisition plan and to reference the
applicable Federal Acquisition Regulation requirements, such as a cost/benefit
analysis. Policy and Procedure Memorandum
7.4, Planning, Acquiring and Managing Equipment and Software, will be revised
to ensure input, coordination, and consensus is obtained from the Chief
Information Officer regarding the lease/purchase decision prior to coordination
with the Chief Financial Officer. In
conjunction with the policy updates, the Office of Procurement will conduct training
to ensure a complete understanding of the new requirements.
The Chief
Information Officer will issue a directive requiring purchasers of IRS computer
equipment to fully comply with the requirements outlined in Office of Procurement
Policy and Procedure Memoranda 7.1 and 7.4.
This directive will also include references to the applicable Federal
Acquisition Regulation requirements, such as a cost/benefit analysis.
Accounting for Costs in One Lease Does Not Appear Accurate
Office of Management and Budget Circular A-123, Management Accountability and Controls, states agencies should establish and maintain adequate systems of internal controls to provide reasonable assurance that Federal Government resources are protected from fraud, waste, mismanagement, or misappropriation. Thus, a good system of internal control requires the Office of Procurement to maintain contract files that are complete and accurately identify the cost of leased computer equipment.
A contract modification may be processed after the initial contract is signed. The modification may adjust the cost of the lease, add or remove leased equipment from the lease, or be just an administrative change that does not affect either the equipment or the costs. In one lease, the contract file did not contain sufficient documentation to accurately determine or explain adjustments to lease costs when the IRS processed modifications to the contract. For example, the ending cost on one contract modification was $389,368 more than the beginning cost on the next contract modification. Within the same lease, one of the contractor quotes specifically cross-referenced in a contract modification was $315,537 lower than the price shown on the contract modification.[10] Therefore, Office of Procurement internal controls did not ensure accurate contract lease cost information was maintained in the contract file and, as a result, the IRS may have overpaid or underpaid the contractor.
Recommendation
Recommendation 2: To ensure the IRS has not overpaid or underpaid the contractor, the Chief, Agency-Wide Shared Services, should perform a quality review of lease contract number TIRNO-00Z-00008 (delivery orders 0329, 0538, and 0573).
Management’s Response: IRS management agreed with the recommendation. To ensure the IRS has not overpaid or underpaid the contractor, the Contracting Officer is working closely with the contractor to obtain additional supporting documentation. Upon receipt of the documentation, the Contracting Officer will perform a thorough analysis to determine whether the IRS has underpaid or overpaid the contractor and will initiate appropriate actions as determined necessary.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the IRS had adequate internal controls in place to decide whether to lease or purchase computer equipment. To accomplish the audit objective, we:
I. Reviewed all four open computer equipment leases to determine whether computer equipment was leased or purchased economically, in accordance with the Federal Acquisition Regulation.[11]
A. Determined whether a cost/benefit analysis was performed.
B. Reviewed Office of Procurement contract files to determine whether lease documentation was maintained as required.
II. Determined whether the Information Technology Assets Management System had been updated to ensure leased computer equipment was accurately recorded as leased equipment rather than purchased equipment.
A. Obtained the Information Technology Assets Management System report containing the inventory of leased computer equipment.[12]
B. Discussed the process of updating the System to identify the leased computer equipment with IRS personnel.
III. Determined the status of the new process for leasing desktop and laptop computer equipment being developed by the Deputy Chief Information Officer.
A. Obtained the current Statement of Objectives.
B. Discussed the status of development of the new process with IRS personnel.
Appendix II
Major Contributors to This Report
Margaret
E. Begg, Assistant Inspector General for Audit (Information Systems Programs)
Gary
V. Hinkle, Director
Troy
D. Paterson, Audit Manager
James
A. Douglas, Acting Audit Manager
Phung-Son
Nguyen, Acting Audit Manager
Wallace
C. Sims, Lead Auditor
Olivia H. DeBerry, Auditor
Appendix III
Acting Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Operations Support OS
Associate Chief Information
Officer, End User Equipment and Services
OS:CIO:EU
Associate Chief Information
Officer,
Associate Chief Information
Officer,
Director, Procurement OS:A:P
Director, Stakeholder Management
OS:CIO:SM
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 Internal
Control OS:CFO:CPIC:IC
Audit Liaisons:
Associate Chief Information Officer, End User
Equipment and Services OS:CIO:EU
Associate Chief Information Officer,
Associate Chief Information Officer,
Director, Procurement OS:A:P
Director,
Program Oversight Office OS:CIO:SM:
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Reliability of Information – Actual; $33.9 million (see page 3).
Methodology Used to Measure the Reported Benefit:
During the audit, we requested that the IRS identify all types of computer equipment leased by the Modernization and Information Technology Services organization. When we received an inventory report from the IRS, the report did not show any leased computer storage equipment. The IRS subsequently determined the storage equipment and costs had been misclassified as purchased equipment in the Information Technology Assets Management System.[13] It stated the approximate cost of the misclassified storage equipment was $33.9 million.[14] Subsequently, the IRS corrected the Information Technology Assets Management System to show the storage equipment was leased and not purchased.
Type and Value of Outcome Measure:
· Inefficient Use of Resources – Actual; $1.1 million (see page 3).
Methodology Used to Measure the Reported Benefit:
We reviewed all four open
leases for computer equipment leased by the Modernization and Information Technology
Services organization. According to
contract file documentation, the lease payments over the term of one lease
exceeded the purchase price at the inception of the lease by about $1.1
million,[15]
indicating a purchase would have been more economical to the IRS.
Type and Value of Outcome Measure:
· Cost Savings, Questioned Costs – Actual; $315,537 (see page 6).
Methodology Used to Measure the Reported Benefit:
After we advised the Office of Procurement that some
contract modifications were not supported by contractor price quotes, it provided
several contractor price quotes to support the modifications. However, one of the contractor quotes specifically cross-referenced in a
contract modification was $315,537
lower than the price shown on the contract modification, indicating the IRS paid
more for computer equipment than what was quoted by the contractor.
Type and Value of Outcome Measure:
· Reliability of Information – Actual; $389,368 (see page 6).
Methodology Used to Measure the Reported Benefit:
In one lease, the contract file did not contain sufficient documentation to accurately determine or explain adjustments to lease costs when the IRS processed modifications to the contract. For example, the ending cost on one contract modification was $389,368 more than the beginning cost on the next contract modification.
Appendix V
|
Term |
Definition |
|
Best Practice |
A best practice is a technique or methodology that, through experience and research, has proven to reliably lead to a desired result. |
|
Federal Acquisition
Regulation |
The Federal
Acquisition Regulation is established for the codification and publication of
uniform policies and procedures for acquisitions by all executive branch
agencies. |
|
Information
Technology Assets Management System |
The Information Technology Assets Management System is an inventory system used to account for computer equipment. |
|
Infrastructure |
Infrastructure is the fundamental structure of a system or organization. The basic, fundamental architecture of any system (electronic, mechanical, social, political, etc.) determines how it functions and how flexible it is to meet future requirements. |
|
Statement of
Objectives |
A Statement of
Objectives is a Federal Government-prepared document incorporated into a
request for offers
(i.e., a solicitation) that states the overall performance objectives. It is used in solicitations when the Federal
Government intends to provide the maximum flexibility to each offeror to
propose an innovative approach. |
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] Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements (GAO-07-136, dated November 2006).
[2] 48 C.F.R. Section 7.4 (Amended March 2007). See Appendix V for a glossary of terms.
[3] Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements (GAO-07-136, dated November 2006).
[4] Information obtained from IRS lease information on all four open computer equipment lease contracts as of December 2006. We did not verify the accuracy of this information.
[5] See Appendix V for a glossary of terms.
[6] 48 C.F.R. Section 7.4 (Amended March 2007).
[7] 48 C.F.R. Section 7.4 (Amended March 2007).
[8] See Appendix IV for details.
[9] See Appendix IV for details.
[10] See Appendix IV for details.
[11] See Appendix V for a glossary of terms.
[12] We ensured the types of equipment the IRS stated it leased were represented on the report. Otherwise, we did not verify the accuracy of this information.
[13] See Appendix V for a glossary of terms.
[14] Information obtained from the Modernization and Information Technology Services organization. We did not verify the accuracy of this information.
[15] Information obtained from an IRS Office of Procurement contract file. We did not verify the accuracy of this information.