Contractor Business Systems: DOD Needs Better Information to Monitor and Assess Review Process

Contractor business systems produce critical data that contracting officers use to help negotiate and manage defense contracts. These systems and their related internal controls act as important safeguards against fraud, waste, and abuse of federal funding. Federal and defense acquisition regulations and DOD policies require that DOD take steps to review the adequacy of certain business systems, but GAO and other oversight entities have raised questions about the sufficiency and consistency of DOD's review process.

The National Defense Authorization Act for Fiscal Year 2018 contained a provision for GAO to evaluate how DOD implemented legislation intended to improve its business system review process. Among other things, this report examines (1) the changes DOD made to its review process and (2) the extent to which DOD is ensuring timely business system reviews.

GAO analyzed DOD acquisition regulations, policies, and procedures for conducting contractor business system reviews and analyzed data on reviews conducted between fiscal years 2013 and 2018.

Since 2011, the Department of Defense (DOD) has implemented several changes to its processes for reviewing contractor business systems—which include systems such as accounting, estimating, and purchasing. Among other changes, DOD

clarified the roles and responsibilities of the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA)—the two agencies that are responsible for conducting the reviews;

clarified timeframes for business system reviews and established criteria for business systems; and

withheld payments from contractors that were found to have significant deficiencies in their business systems.

DOD does not have a mechanism to monitor and ensure that these reviews are being conducted in a timely manner. For its part, DCAA has conducted few business system audits since 2013, as it focused its efforts on other types of audits. DCAA plans to significantly increase the number of business system audits over the next 4 years, but its success in doing so depends on its ability to shift resources from other audits; to use public accounting firms to conduct other, non-business system audits; and DCAA staff's ability to execute new audit plans in a timely manner.

DCMA relies on the three offices responsible for conducting DCMA-led reviews to manage the reviews, but DCMA does not formally monitor whether these reviews are being conducted consistent with policy nor does it monitor DCAA's efforts to complete the audits for which it is responsible. DCMA is ultimately responsible for approving a contractor's business systems. DCMA currently lacks a mechanism based on relevant and reliable information, such as the number of reviews that are outstanding and the resources available to conduct such reviews, to ensure reviews are being completed in a timely fashion. Such information could help inform more strategic oversight on whether the current review process is achieving its intended results, or whether additional changes to the timing of or criteria for conducting reviews are needed.

GAO recommends that DCMA, in collaboration with DCAA, develop a mechanism to monitor and ensure contractor business system reviews are conducted in a timely fashion. DOD concurred with the recommendation.

Contractor business systems, which include a contractor’s accounting,  estimating, and property management systems, produce critical data that  Department of Defense (DOD) contracting officers use to help negotiate  and manage hundreds of billions of contract dollars each year. These  business systems and their related internal controls act as the first line of  defense against fraud, waste, and abuse of federal funding. For example,  an approved accounting system can help prevent contractors from  overcharging or mischarging federal contracts. Federal and defense  acquisition regulations and DOD policy require DOD to take steps to  review the adequacy of these business systems and to ensure that  contractors correct identified deficiencies. These reviews and audits are  conducted primarily by two defense agencies: the Defense Contract  Management Agency (DCMA) and the Defense Contract Audit Agency  (DCAA). DCMA generally has responsibility for approving contractors’  business systems; DCMA and DCAA have specific responsibilities for  reviewing these systems.

In 2009, the Commission on Wartime Contracting and GAO highlighted  significant concerns about how DOD was conducting CBS reviews at that  time. Congress later enacted Section 893 of the National Defense  Authorization Act (NDAA) for Fiscal Year 2011. This provision mandated  that DOD develop a program to improve contractor business systems.  Subsequently, Section 893 of the NDAA for Fiscal Year 2017 amended  the earlier provision to 1) define “covered” contractors generally as those  with government contracts subject to cost accounting standards that  account for more than 1 percent of the company’s total gross revenue  and 2) allow contractors to use registered public accounting firms to  review their systems in place of DOD’s review.

Section 890 of the NDAA for Fiscal Year 2018 contained a provision for  GAO to evaluate the implementation and effectiveness of these changes  to the contractor business system (CBS) review process. This report (1)  describes the changes DOD made to its CBS review process; (2)  examines the extent to which DOD is ensuring CBS reviews are being  conducted in a timely fashion; and (3) describes the steps DOD has taken  to implement selected provisions of Section 893 of the NDAA for fiscal  year 2017.

To determine what changes DOD made to its CBS review process, we  reviewed Section 893 of the NDAA for Fiscal Year 2011, applicable  Federal Acquisition Regulation (FAR) and Defense Federal Acquisition  Regulation Supplement (DFARS) sections and clauses, and relevant  DCMA and DCAA policies, instructions, and memoranda. We compared  current steps in the CBS review process to those used by DCMA and  DCAA prior to the Fiscal Year 2011 NDAA to gain a better understanding  of the changes made and discussed those changes with DCMA and  DCAA officials. We also analyzed DCMA and DCAA data to determine  the number of business systems reviewed by either agency from fiscal  years 2015 through 2017—the last three fiscal years for which we could  obtain data for all CBS systems. To determine the reliability of these data,  we interviewed appropriate DCMA and DCAA officials and collected  information on the steps taken by their agencies to ensure data reliability.  Based on these steps, we determined the data were sufficiently reliable  for the purposes of reporting the number of systems reviewed and how  many deficiencies were found.

To further our understanding of how changes to the CBS review process  were implemented and to gain insight into the effect they had on  contractors and program offices, we selected a nongeneralizable sample  of six defense contractors based on such factors as the amount of DOD  contract obligations awarded to the contractor in fiscal year 2017; the  contractor’s size (i.e., large or small); and whether one or more of the  contractor’s business systems were disapproved as reported in DOD’s  Contract Business Analysis Repository (CBAR) as of November 2017. To  better understand the process of identifying and resolving system  deficiencies, we selected five contractors that had at least one business  system that had been found to be materially deficient and one contractor  that had not had any material deficiencies identified. We interviewed  representatives from each of the six contractors as well as DCMA officials  responsible for approving the contractor’s business systems. Finally, we  interviewed contracting officers from military department buying  commands to determine how these officials mitigate risk when awarding  contracts or overseeing contractors with business system deficiencies.  When available, we collected and analyzed contract file documentation  describing how business system deficiencies affected contract awards.

To determine the extent to which DCMA and DCAA are ensuring CBS  reviews are being conducted in a timely fashion, we reviewed DCMA and  DCAA policies, instructions, and memoranda to identify the offices and  individuals responsible for providing management oversight, conducting  CBS audits and reviews, and approving contractor business systems. We  interviewed DCMA and DCAA officials and collected relevant data, such  as DCAA’s planned audits for fiscal years 2019 through 2022, to  understand their approach to prioritizing reviews and the challenges, if  any, in completing the reviews in a timely fashion.

To determine the extent to which DOD has implemented changes to its  CBS review process in response to the NDAA for Fiscal Year 2017, we  interviewed DOD Defense Pricing and Contracting (DPC) officials  responsible for drafting the proposed regulations. We also interviewed  DCMA and DCAA policy officials, contractors, and program offices to  obtain their perspectives on the potential benefits and challenges  associated with these changes. We reviewed selected contractors’ annual  U.S. Securities and Exchange Commission filings to gauge what effect, if  any, the amended statutory definition of what is considered a covered  contractor may have on these contractors. The 20 contractors we  reviewed represented 86 percent of obligations in fiscal year 2016 on  contracts that were identified in the Federal Procurement Data System- Next Generation as covered by cost accounting standards.

We conducted this performance audit from September 2017 to February  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Federal acquisition regulations require certain contractors who do  business with the government to maintain acceptable business systems  that reduce risk to the government and taxpayer. Contractors may have  up to six major business systems that require review. DOD’s acquisition  regulation establishes criteria for each of the six types of contractor  business systems, which are implemented by the inclusion of certain  contract clauses. Where a contract includes these clauses, the  contractor’s business systems generally must meet the criteria. Factors  such as the type of contract and the dollar value determine whether the  clauses are included in a contract (see table 1).

In certain cases, the absence of an adequate system may preclude the  government from using a particular contract type or may require  additional oversight or analysis. For example, the FAR states that:

A cost-reimbursement contract may be used only when, among other  things, contractors’ accounting systems are adequate for  determining costs applicable to the contracts or orders; an adequate  accounting system is also required for the use of progress payments.

Without an approved purchasing system, contractors may require  additional oversight of their subcontracting decisions.

Significant deficiencies with contractors’ estimating systems shall be  considered during negotiation. Alternatively, an adequate estimating  system may reduce the scope of reviews to be performed on  individual proposals, expedite the negotiation process, and increase  the reliability of proposals.

DCMA and DCAA are responsible for providing contracting and audit  support to the military departments and are responsible for conducting  business system reviews, along with a host of other responsibilities (see  table 2).

Under DCMA’s November 2013 instruction, the final determination of  adequacy for all of the contractor business systems resides with the  DCMA administrative contracting officers (ACO). An ACO may have  responsibility for all or a portion of a single large business or may be  responsible for a number of smaller contractors within a particular region.  To help inform their system determinations, an ACO can request that  either DCMA or DCAA conduct business system reviews or audits when  needed. Among other responsibilities, ACOs are responsible for taking  actions to impose consequences when contractors do not comply with  business system standards.

Prior Reports by GAO, Other Accountability Organizations, and Legislative Actions

Throughout the last 10 years, GAO and other accountability organizations  have reported on challenges DOD faces when conducting CBS reviews  or other critical contracting audits, such as incurred cost audits. Over this  time Congress has also taken actions through various NDAAs to initiate  changes to the CBS review process.

In 2009, the Commission on Wartime Contracting and GAO highlighted  significant concerns about how DOD was conducting CBS reviews at that  time. For example:

The Commission reported that billions of dollars in contingency- contract costs in Iraq and Afghanistan could not be verified by  government auditors and that inadequate internal controls over  contractor business systems hampered the government’s insight into  cost errors and material misstatements. The report highlighted  instances where DCMA and DCAA came to different conclusions  when reviewing the same contracts and had inadequate resources to  complete business system reviews. It also stated that DCMA was not  aggressive in motivating contractors to improve their business  systems because it accepted corrective action plans as sufficient  progress to address deficiencies. The commission made  recommendations to address each of these issues.

We found issues with independence of auditors, sufficiency of  evidence, and incomplete reporting of DCAA’s findings. As result,  we made 17 recommendations to DOD to help improve the quality of  DCAA’s audits, most of which the agency has implemented.

Since then, subsequent GAO and DOD Inspector General (IG) reports  have pointed to other issues with the CBS review process and DCAA’s  incurred cost audit process. Namely,  In November 2011, we found that DCAA could not complete the  number of CBS reviews needed to be consistent with its guidelines  because it was focused on higher priority areas—such as incurred  cost audits—and, as a result, DCMA contracting officers maintained  systems’ determinations as adequate even though the systems had  not been audited by DCAA in a number of years. Among our  recommendations, we proposed that DCMA and DCAA identify  options, such as hiring external auditors, to assist in the conduct of  CBS reviews until DCAA could adequately fulfill those responsibilities  with its own workforce. In July 2014, DOD published a proposal to  change the DFARS to allow public accounting firms to perform  reviews of accounting, estimating, and material management and  accounting systems. According to DPC officials, however, the  department’s IG raised concerns about consistency between the  proposed change and statutory and regulatory requirements for IG  oversight of outside audit services. Further, the private sector  expressed concerns that CBS audit criteria did not align with generally  accepted accounting principles used in the private sector. As result of  these challenges, DOD did not implement the proposed regulation  change.

In December 2012, we found that DCAA’s backlog of incomplete  incurred cost audits was a contributing factor in DOD’s inability to  close out contracts in a timely manner. To address this backlog,  DCAA began implementing a new, risk-based approach that was  expected to shift DCAA’s resources to focus on incurred cost audits  involving high-dollar value and high risk proposals.

In October 2015, the DOD IG found that DCMA contracting officers  did not always comply with requirements to report business system  deficiencies and found instances where CBS determinations based on  DCAA-led reviews were not reported within required timeframes. The  IG concluded that this likely caused delays in correcting significant  business system deficiencies and lengthened the time the  government was unable to rely on data generated by those business  systems.

In September 2017, we found that despite efforts by DCAA to reduce  the backlog of incurred cost proposals awaiting audit, the agency was  not able to meet its goals to eliminate the backlog by fiscal year 2016  and that it was unlikely to meet a revised goal of fiscal year 2018.  We recommended that DCAA assess and implement options for  reducing the length of time to begin incurred cost audits and establish  related performance measures. DCAA concurred with these  recommendations and took actions to reduce the time it takes to begin  audits.

Most recently, in a January 2018 report, the Advisory Panel on  Streamlining and Codifying Acquisition Regulations—commonly referred  to as the Section 809 panel after the legislative provision that created it— reiterated the importance of business system internal controls. Noting  that DOD’s CBS reviews are untimely and inconsistent, the Panel made  several recommendations that seek to complete reviews, especially for  accounting systems, in a more timely way. Among these  recommendations are the use of public accounting firms to supplement  the DOD audit workforce, a change to accounting system review  standards and criteria, and the development of new guidance for the  conduct of business system reviews.

During the past 10 years, Congress also enacted three provisions related  to improving how DOD conducts business system reviews and incurred  cost audits. Specifically,

Section 893 of the NDAA for Fiscal Year 2011 directed the Secretary  of Defense to initiate a program to improve contractor business  systems so that the systems provide timely and reliable information.  The NDAA required that this program, among other things, establish  requirements for each system and a process for identifying significant  deficiencies within systems. It also required that DOD identify those  officials responsible for approval and disapproval of a system, and  that approval or disapproval of a system would be based on whether  the system has a significant deficiency. Further, the law authorized  DOD to withhold up to 10 percent of contract progress payments,  interim payments, and performance-based payments from certain  contracts when systems are disapproved based on a significant  deficiency. Contractors that require review—or “covered  contractors”—were defined as those subject to the cost accounting  standards.

Section 893 of the NDAA for Fiscal Year 2017 amended the fiscal  year 2011 NDAA provisions by (1) revising the definition of a “covered  contractor” to generally mean those with government contracts  subject to the cost accounting standards accounting for more than 1  percent of the contractor’s total gross revenue and (2) allowing public  accounting firms to conduct contractor business system  assessments.

Section 803 of the NDAA for Fiscal Year 2018 required DOD to be  compliant with certain standards of risk and materiality in the  performance of incurred cost audits for its contracts. It also required  that DOD use public accounting firms to, among other things, perform  a sufficient number of incurred cost audits to eliminate the incurred  cost audit backlog by October 1, 2020 and to allow DCAA to allocate  resources to higher-risk and more complicated audits.

Figure 1 below summarizes these reports and congressional actions  related to contractor business system activities over the last decade.

DOD Revised Its Policies and Procedures Related to the Contractor Business System Review Process

Since 2011, DOD has taken actions to (1) clarify the roles and  responsibilities of DCMA and DCAA in conducting CBS reviews and  consolidate the number of reviews to be performed; (2) clarify how often  DOD should conduct CBS reviews; (3) establish what criteria are used to  evaluate a contractor’s business system; (4) establish timeframes by  which ACOs are to make a determination on the adequacy of the  contractors’ business systems; and (5) implement the use of payment  withholds for contractors that are found to have significant deficiencies in  their contractor business systems. DCMA and DCAA officials noted that  these changes were implemented primarily to address the 2011 statutory  provisions. Our review of six selected contractors’ business system  reviews found that the whole process from the review or audit, to the  follow up and resolution, can be lengthy. In three out of six selected cases  we reviewed, it took 4 or more years for a contractor’s system to be  approved.

DOD Clarified DCMA and DCAA’s Roles and Responsibilities and Consolidated the Number of Business System Reviews

Prior to 2011, DCAA conducted a series of 10 internal control audits on a  cyclical basis, while DCMA performed more targeted testing on three  systems. During that time, both DCMA and DCAA could review a  contractor’s purchasing or earned value management (EVM) system but  would evaluate different aspects of each system. As a result, DCMA and  DCAA reviewers could issue deficiency reports based on their separate  reviews of the same contractor business systems for the consideration of  ACOs. As reported in August 2009 by the Commission on Wartime  Contracting, these overlapping reviews led to instances where DCMA and  DCAA came to different conclusions about the adequacy of the same  business system.

To address this issue and clarify roles and responsibilities, in November  2013 DCMA established policies that guide oversight and implementation  of the CBS review process, to include approval responsibilities and  procedures for the conduct and reporting of reviews. DCMA has  separate instructions for each type of contractor business system with the  exception of accounting. These separate instructions provide more details  about appropriate stakeholders for specific reviews, noting particular  functional experts such as offices within DCMA or DCAA that are to lead  the conduct of the reviews. DCAA issued a separate memorandum in  April 2012 that details changes made to accounting system reviews as a  result of changes from the NDAA for fiscal year 2011.

Under these revised processes, DCMA now has responsibility for  reviewing three contractor business systems and DCAA is responsible for  the other three. In all cases, the DCMA ACO makes the final  determination on whether a system is approved or disapproved. Further,  the revised process consolidated the number of audits that DCAA  conducts on the adequacy of the contractor’s accounting system from five  separate audits to one comprehensive system audit. According to DCAA,  this consolidation was based on a comprehensive reassessment of the  processes for assessing accounting systems and combined elements  from previous internal control reviews. Figure 2 shows DCMA and DCAA  responsibilities before and after the changes implemented from the NDAA  for Fiscal Year 2011.

Revised Process Clarified Specific Timeframes for How Often DOD Should Conduct Business System Reviews

The revised DCMA instructions and related DCAA memorandums for the  CBS review process also clarified timeframes for how often a contractor’s  business system must be reviewed. Generally, each system should be  reviewed every 3 years unless the ACO makes a determination that a  review is not necessary based on a risk assessment or other factors (see  table 3).

DFARS Revisions Established Specific Criteria for Business Systems

DOD also revised the DFARS in 2012 to provide definitions for  acceptable contractor business systems and established individual  DFARS clauses that define the criteria for each of the six business  systems. As appropriate, these clauses are included in contracts and  generally require the contractor to maintain adequate business systems,  allow for the government to withhold payments when systems are found  to have significant deficiencies, and list the criteria that the systems must  meet. The number of criteria varies by system. For example, the DFARS  clause for accounting systems includes 18 criteria used to evaluate  system features such as proper segregation of direct and indirect costs,  timekeeping, and exclusion of unallowable costs. For EVM systems, a  contractor’s system must comply with private, institutional standards and  includes procedures that generate timely, reliable, and verifiable reports.

To test how DCAA-led audits were being implemented under these new  criteria, DCAA began a pilot program in 2014 comprised of a team of  dedicated auditors to conduct CBS reviews who, in turn, were to  recommend changes in audit plans and other practices. DCAA initially  focused on material management and accounting systems audits, then  moved to estimating systems, and finally accounting systems. As result of  this pilot, DCAA issued new audit guidance for all three systems in 2018,  with the latest guidance for accounting system audits issued in October  2018. DCAA officials told us that they are implementing lessons learned  from the pilot program and developing training on how to conduct the  revised audit plans.

DCMA Established Timeframes for ACOs to Make Adequacy Determinations

The revised DCMA instructions provide timeframes for ACOs to  communicate their initial and final determinations to contractors (see  textbox) and define the responsibilities of DCMA management and ACOs  for confirming significant deficiencies and resolving disagreements  between functional specialists and the ACO.

Revised Contractor Business System Review Process Timeframes  According to the revised contractor business system review process, when significant  deficiencies are found:  Administrative Contracting Officers (ACO) have 10 days to communicate an initial  determination of business system compliance to the contractor under review.  The contractor is requested to respond to the letter within 30 days after that to  respond to the letter communicating whether or not it concurs with the determination.  The ACO issues a final determination 30 days after receipt of the contractor’s  response.

According to Defense Contract Management Agency (DCMA) officials, data for fiscal year  2017 indicated that 80 percent of final determination letters were issued within this  required timeframes.

In instances where deficiencies are found, these findings are reviewed by  a panel within DCMA to help ensure standards are consistently applied.  When there is disagreement between the ACO and functional specialist  concerning the nature or severity of deficiencies found, a DCMA board of  review may be requested by the ACO to resolve differences and produce  a final determination. According to DCMA officials responsible for  maintaining business system review policies, differences between  functional specialists and contracting officers are generally resolved  without the need for a board discussion. These officials said that only a  few board discussions have been convened since implementation of the  new review structure.

Mandatory Payment Withholds Drive Timely Contractor Response to Significant Deficiencies

Section 893 of the NDAA for Fiscal Year 2011 generally established that  DOD be allowed to withhold payments under certain contracts when DOD  disapproves one or more of a covered contractor’s business systems.  DCMA officials previously had the latitude to withhold a portion of the  payments owed to contractors as result of deficiencies identified in their  reviews, but were not required to do so. From 2011 through 2013, DOD  revised the DFARS and related agency instructions to generally require  that ACOs apply a 2 to 5 percent contract payment withholding for a  single deficient system and a maximum of a 10 percent withhold when  multiple systems are found to have significant deficiencies. ACOs are  authorized to reduce the amount being withheld after the ACO determines  that the contractor has submitted an adequate corrective action plan and  began its implementation.

Our review of DCMA and DCAA information indicates that for all the CBS  reviews conducted between fiscal years 2015 and 2017, DCMA and  DCAA often identified significant deficiencies in three business systems.  These were the cost estimating, material management and accounting,  and purchasing systems. For example, DCAA identified a significant  deficiency in nine of the 12 material management and accounting  systems reviewed, while DCMA identified significant deficiencies in 260 of  the 330 purchasing systems reviewed (see table 4).

Because DCMA and DCAA officials do not maintain historical data on  payment withholdings, it is not possible to determine the number of  payment withholdings that were implemented over these years as a result  of these significant deficiencies. The system used to track the status of  systems and payment withholdings, CBAR, is updated by ACOs as  corrective actions are completed and payment withholdings are removed,  and thus shows only a snapshot in time. Our review of CBAR data from  July 2018 found that DOD was withholding payments from 11 contractors  with a total collective value of approximately $238 million at that time.  One third of these payment withholdings were associated with significant  deficiencies found in contractors’ estimating systems. DCMA and DCAA  officials we spoke with noted that the withhold provision has led to  contractors’ increased response to deficiencies, but they did not have  data to determine the extent to which contractors’ responsiveness has  increased. Some contractors we spoke with stated that because  deficiencies will affect the company’s cash flow, senior management and  board members have become more engaged in matters of business  system compliance.

CBS Review and Corrective Action Process Can Be Lengthy

Our review of six selected contractors’ business system reviews  illustrates the challenges in identifying and resolving deficiencies in a  timely manner. Overall, our review of these six cases found that it took  from 15 months to 5 years or more to resolve deficiencies initially  identified by DCAA or DCMA. Factors contributing to the time it took to  resolve these issues included contractors submitting inadequate  corrective action plans, DCMA or DCAA identifying additional deficiencies  in subsequent reviews or audits, and the use of different auditors to  conduct the reviews.

While the selected cases are not generalizable to all CBS reviews, they  do highlight issues that can arise during the process. For example:  In one case it took almost 4 years to resolve deficiencies identified in  a contractor’s accounting system. In this case, DCAA issued an audit  report in July 2014 that found seven significant deficiencies including  inadequate monitoring and adjusting of rates the contractor was billing  the government. DCMA subsequently issued an initial determination 7  days later disapproving the system, citing three of the seven  deficiencies identified by DCAA. In August 2014, the contractor  responded by providing a corrective action plan for the three  deficiencies DCMA cited. DCMA sent a second determination letter  the next month citing two additional deficiencies identified by DCAA.  In October, the assigned ACO for the contractor left and new staff was  assigned to the review. Ten days later, the contractor submitted a  second corrective action plan to address the two deficiencies  identified. Disagreement between the ACO and DCAA on the  inclusion of the two remaining deficiencies identified by DCAA for the  accounting system resulted in a need to convene a board of review by  DCMA. The board decided that the two deficiencies would be included  in the final determination. This, in turn, delayed issuance of a final  determination until mid-December 2014. According to contractor  representatives, over the next 3 years, they submitted various  corrective action plans that DCMA determined were inadequate to  address the deficiencies. Each time, the ACO requested additional  information and follow-up DCAA audits to help assess the adequacy  of the contractor’s corrective action plans. Eventually the contractor’s  accounting system was approved in June 2018.

In another case, a contractor’s estimating system has been  disapproved for over 5 years. In June 2013, DCAA identified four  significant deficiencies in the contractor’s system, including  inadequate support for commerciality determinations. As a result,  following a final determination of inadequacy, DCMA implemented a  payment withhold of 5 percent. In response, the contractor submitted  a corrective action plan in September 2013 addressing the  deficiencies that was accepted by DCMA and the withhold was  reduced to 2 percent. In a follow-up review in July 2014, DCAA  identified two new deficiencies, which the contractor corrected. In  March 2015 DCAA reviewed the contractor’s forward pricing rate  proposal and identified 11 new deficiencies in the estimating system.  By August 2015, the contractor had corrected the new deficiencies but  the system remained disapproved because the previous four  deficiencies remained uncorrected. Finally, in September 2016, DCAA  canceled its audit of the estimating system because these four  deficiencies remained. According to officials, the contractor was not  ready for re-evaluation. At the time of this review the system remains  disapproved.

In another case, a contractor’s property management system was  disapproved for more than 4 years. In November 2013, DCMA  reviewed the contractor’s property management system and,  according to officials, identified nine significant deficiencies, including  those related to missing records and supporting documentation for all  contracts. DCMA issued an initial determination of disapproval. DCMA  officials stated that they did not receive an adequate response from  the contractor for nearly 7 months, and in June 2014, DCMA issued a  final determination of system disapproval. The contractor  subsequently submitted a corrective action plan in August to address  the deficiencies. A DCMA official stated that they re-analyzed the  system in November 2014 and found one outstanding issue.  According to the official, the DCMA property administrator in charge of  the review elevated the issue to the assigned ACO, but received no  response. According to contractor representatives, they requested a  follow-up review from the DCMA ACO several times from August  2014 to June 2015 but did not receive a response until after June  2015. According to a DCMA official, this was due to resource issues  as the review went dormant because the new ACO assigned to the  contractor went overseas. The system was reviewed again in  November 2017 and the contractor’s system was approved in January  2018.

In another case, an audit of a contractor’s estimating system took  DCAA 2 years to complete. The DCAA audit began in November  2014. According to contractor representatives, they were initially told  that the review would take 9 to 12 months, but a number of different  DCAA auditors were assigned to the review over time and each  identified different findings which led to a prolonged process. DCMA  approved the contractor’s estimating system in December 2016.

In another case, a contractor’s estimating system was disapproved for  15 months. In June 2016 DCMA disapproved a contractor’s estimating  system due to three significant deficiencies, including one related to  performing adequate price and cost analysis on subcontractor  proposals. According to contractor representatives, they submitted a  corrective action plan, but after submitting the plan DCAA performed  an audit of the contractor’s forward pricing rates and identified  additional deficiencies. In December 2016 DCMA officials determined  that the corrective action plan the contractor provided was not  sufficient. DCMA subsequently approved the contractor’s estimating  system in September 2017.

DCMA and DCAA officials believe the cases we analyzed were not  representative of the length of time needed to complete the CBS review  process, but could not provide data to support their views because DCMA  and DCAA do not track data on the length of time it takes to complete the  entire CBS review process (i.e., from the start of an audit or review to the  resolution of system deficiencies and final determination). Our review of  selected cases was not intended to be projectable to all reviews and  audits conducted by DCMA and DCAA, but rather to be illustrative of the  challenges that may be encountered during the review process.

From the perspective of program and contracting officers, the status of a  contractor’s business system may have an impact on both contract award  decisions and contract monitoring, but officials stated that they can  mitigate the risks associated with a disapproved system. For example,  Army and Air Force program officials noted that a contractor leading  certain weapon system development and logistics efforts had a deficient  cost estimating system. According to the contracting officials, as the  government could not rely on the contractor’s proposed costs to use a  fixed-price contract, they awarded a fixed-price incentive contract for the  program to better monitor the contractor’s cost reporting compared to  under a fixed-price contract.

DOD Does Not Have a Mechanism to Monitor and Ensure That Contractor Business System Reviews and Audits Are Conducted in a Timely Manner

DCMA and DCAA do not have a mechanism to monitor and ensure that  CBS reviews and audits are conducted in a timely manner. DCAA’s data  show that it conducted few business system audits in the past 6 years,  due, in part, to the need for it to reduce its backlog on completing incurred  cost audits. Looking to the future, DCAA has developed plans for the  number of CBS audits it intends to perform over the next 3 years and  expects that it will be caught up in conducting the audits for which it is  responsible by fiscal year 2022. Successfully executing its plan is  dependent on several factors, including the ability to shift resources from  conducting incurred cost audits to business systems audits, the use of  public accounting firms to perform a portion of the incurred cost audits,  and the ability of DCAA auditors to use new audit plans and complete the  required audits in a timely manner. For its part, DCMA relies on the  offices that perform the reviews of the three systems to maintain the  information on the reviews completed and to plan for future reviews, but  DCMA headquarters does not centrally track its reviews or whether audits  conducted by DCAA are being completed within the timeframes described  in policy.

DCAA Plans to Address Previous Shortfalls in Conducting CBS Audits Are Dependent on Several Factors

DCAA officials acknowledged they have not been able to conduct audits  of contractor business systems within the timeframes outlined in DCMA  instructions. DCAA officials attributed their inability to do so to the need to  conduct higher priority audits—such as incurred cost audits—and staffing  constraints. For example, in fiscal year 2017, DCAA initially proposed to  perform a total of 76 CBS audits for the three business systems in its  purview. However, DCAA completed only nine audits after assessing  available resources. Further, DCAA estimates that in fiscal year 2017 it  spent approximately 44 percent of its resources addressing incurred cost  audits, and 17 percent on other audits such as forward pricing rate  agreements. In contrast, only 6 percent of its resources were devoted to  business system audits and related activities.

Recognizing that it cannot perform all of the required CBS audits in a  timely fashion to meet current DCMA policy requirements, DCAA officials  told us they focus their audits on business systems they identify as high- risk. To do so, DCAA officials consider factors such as the contractor’s  current system status, the contractor size in terms of dollars on contract,  the amount of cost-type contracts, organizational changes, audit requests  by a DOD contracting officer or an ACO, and the types of deficiencies  identified and its impact on cost and schedule. DCAA headquarters  officials assess the candidates at an annual DCAA planning meeting to  determine which audits can be performed given the level of resources  available. DCAA officials told us, however, that the current policy  requirement—which generally requires review of the systems every three  years—would require DCAA to dedicate substantial resources to CBS  audits to maintain currency. As of November 2018, DCAA identified 285  systems that require an audit. DCAA officials stated that a risk based  approach to reviewing these systems would provide more value than a  routine 3 year cycle. DCAA officials stated they are willing to work with  others within DOD to develop risk factors that can be used to determine  when a business system needs a review.

To better assess and plan future workload, DCAA issued a memorandum  in January 2017 to introduce a strategic workload resource initiative that  will project workload and resource availability in the out-years. Under this  process, DCAA field management teams provide information on workload  projections in March, and DCAA executive level officials make workload  planning recommendations in June that result in an agency-wide plan.  DCAA officials noted, however, that the projection for the second year is  less accurate, and as a result, the further out year projections are  reviewed every six months with adjustments made as needed. DCAA  officials also told us that the planning process is currently being expanded  to allow the agency to plan three years out. DCAA officials stated that the  fiscal year 2021 plans will be tentatively approved by the end of January  2019 and fiscal year 2022 plans will be approved by June 2019.

Based on these planning efforts, DCAA plans to conduct a total of 285  CBS audits from fiscal years 2019 through 2022, including 50 audits in  fiscal year 2019 and 104 in fiscal year 2020. It also plans to shift some of  the hours previously devoted to incurred cost audits to CBS audits (see  figure 3).

Our analysis indicates that successfully executing this plan is dependent  on several factors, including the ability to shift resources from conducting  incurred cost audits to business systems audits, the use of public  accounting firms to perform a portion of the incurred cost audits, and the  ability of DCAA auditors to use new audit plans and complete the required  audits in a timely manner.

First, the plan is contingent upon DCAA being able to successfully  shift resources from incurred cost audits to CBS audits. According to  DCAA data, DCAA plans to shift more than 378,000 hours from  incurred cost audits to CBS audits between fiscal years 2018 and  2020. DCAA officials noted, however, that although they have made  significant progress in addressing incurred cost audits, the fiscal year  2018 NDAA requires DCAA to have all incurred cost audits performed  within 12 months. DCAA officials noted that this means it will have to  continue to spend significant resources on incurred cost audits in  fiscal year 2019 to meet this legislative requirement.

Second, DCAA officials stated that these estimates include the  resources that are expected to become available to perform CBS  audits as DCAA starts using public accounting firms to perform  incurred cost audits. In its October 2018 report to Congress on the  progress made to implement Section 803 of the Fiscal Year 2018  NDAA, DCAA estimated that public accounting firms would be able to  perform 100 incurred cost audits per year for 2019 and 2020, which  would then increase to 200 each year for 2021 through 2025. DCAA  further projected, for example, that about 147,500 hours would  become available in 2020 based on the proposed plan to use public  accounting firms. DCAA officials told us they are in the process of  developing a solicitation to contract for these services, which they  anticipate releasing in the spring of 2019.

Lastly, these plans assume that each audit conducted by DCAA can  be completed within an average number of hours based on the  experiences of the team that developed the revised audit plans  released in 2018. DCAA officials noted that these hours assume that  DCAA audit teams will experience some challenges conducting the  initial set of audits, but will be able to conduct them in fewer hours as  they gain more experience in implementing the new audit plans.  DCAA officials told us that, if successful, this plan will enable it to be  caught up on CBS reviews by 2022.

DCMA Headquarters Makes Limited Use of Data Collected by Functional Offices to Assess the CBS Review Process and does not Monitor DCAA’s Progress In Completing Its Audits

For the DCMA-led reviews, DCMA relies on its functional offices that  perform reviews of their respective systems to monitor the status of CBS  reviews, but does not use the information to ensure that all three reviews  are conducted within the timeframes established under DCMA’s  instructions. The three DCMA functional offices use spreadsheets to  manually track reviews their office has completed, and track data on  when the next review should be scheduled. Each functional office plans  and tracks this data individually. For example,

The property management functional office identifies the number of  contractor property systems requiring review on a monthly basis, and  tracks its progress in completing these reviews. In fiscal year 2018,  this functional office completed over 95 percent of the 850 property  system reviews required.

The EVM system functional office identifies the number of reviews  that should be conducted annually. In fiscal year 2018, the office  reported completion of 92 percent of the 125 required EVM system  reviews.

The purchasing functional office uses a rolling process to determine  which systems require a review. To do this, the ACO performs a  required risk assessment every 3 years to identify whether a full  business system review is required and then the purchasing functional  office develops a prioritization plan for the systems flagged for review.  The exact number of reviews conducted in a single year is dependent  upon the risk assessments; however, an official from the purchasing  system functional office estimated that their office is staffed to  complete approximately 125 reviews per year. The official also noted  that they do track to ensure all systems are reviewed in the required  timeframes.

Officials from the functional offices described to us what information they  provide to senior leadership, but DCMA headquarters does not collect or  use this information to oversee the CBS review process. For example, a  supervisor from the property management functional office told us that the  office reports monthly to their supervisors on the status of their reviews  and whether they are on schedule, which also serves as a method for  requesting additional resources if necessary. EVM system functional  officials told us they report the number of planned and completed reviews  to a DCMA internal website for senior leadership to review, but did not  know what senior leadership does with this information. Purchasing  officials said their office provides monthly reports on the status of reviews  for specific large contractors, and weekly reports of the number of reviews  completed to the agency director and component heads. DCMA  headquarters officials stated that they informally share information with  ACOs in a variety of ways, including quarterly meetings, but headquarters  officials could not provide documentation on how this information is used  to monitor and assess whether CBS reviews were being conducted in  accordance with the policy timeframes.

Further, DCMA officials indicated that they do not formally monitor  DCAA’s efforts to complete the audits for which DCAA is responsible.  Despite being the agency responsible for issuing the instructions and  whose ACOs are responsible for making final determinations of business  system compliance, DCMA officials indicated that it is not their  responsibility to monitor or assess DCAA’s efforts to complete the reviews  in DCAA’s area of responsibility. DCMA and DCAA officials stated,  however, that they recently began to hold quarterly meetings, during  which time they can discuss CBS issues, including potential revisions to  the criteria and timeframes for conducting CBS reviews. But it is uncertain  what outcomes will come from this or the extent to which this will  contribute to improved management of CBS reviews.

According to federal standards for internal controls, an agency should use  quality information to help ensure that it achieves its objectives. These  internal controls also state that monitoring activities should be conducted  to ensure that agency objectives are being met. Developing a mechanism  to track and monitor the number of CBS reviews that are outstanding, the  risk level assigned to those systems and the resources available to  conduct such reviews, would help DCMA and DCAA better manage the  CBS review process to ensure that contractor systems that are reviewed  and approved in a timely fashion.

DOD Has Not Yet Implemented Recent Legislative Provisions to Change the Definition of a Covered Contractor or to Enable the Use of Public Accounting Firms

Section 893 of the Fiscal Year 2017 NDAA amended the CBS provisions  of the Fiscal Year 2011 NDAA by revising the statutory definition of a  covered contractor and by allowing contractors to use registered public  accounting firms to review their business systems in place of DOD’s  review. As of November 2018, DOD had not yet proposed regulations to  implement these legislative changes, and therefore we were unable to  fully evaluate the potential effects of these provisions. The Fiscal Year  2017 NDAA did not provide a specific timeframe for DOD to revise its  regulations, but the Director of the Defense Acquisition Regulation  Council—who is responsible for promulgating proposed and final rule  changes to the DFARS— tasked her staff to draft a proposed rule by  March 2017. This deadline was subsequently extended to January 23,  2019. In November 2018, Defense Pricing and Contracting (DPC) officials  told us that they now expect to issue the proposed rule for public  comment in the third or fourth quarter of fiscal year 2019. DPC officials  attributed this delay, in part, to a recent executive order that calls for the  reduction and control of regulatory costs, as well as the complexity of  having public accounting firms perform CBS reviews.

Section 893 of the Fiscal Year 2017 NDAA changed the definition of  covered contractors—those contractors that may require CBS reviews— from contractors subject to cost accounting standards to generally only  those with contracts subject to cost accounting standards that account for  more than 1 percent of their gross revenue. DPC officials stated that DOD  may require contractors to self-report on their revenue levels to determine  whether the contractor’s systems require review. DPC officials told us,  however, that they had not yet considered certain aspects of how  contractors may calculate revenues. For example, DPC officials had not  yet decided whether revenue should be determined based on specific  business segments, or whether it should include international sales  revenue. These officials also had not yet decided how many years of  revenue should be included in the analysis. Further, DPC officials could  not yet estimate the potential effect of implementing this provision on  contractors. Based on our analysis of publicly available contractor  financial data for the 20 contractors that we reviewed, the lowest  percentage of total revenue derived from government contracts was  10 percent.

Section 893 of the 2017 NDAA also authorized the use of registered  public accounting firms to assess compliance with DOD’s CBS  requirements. Under this provision, if a registered public accounting firm  certifies that a contractor’s business system meets DOD’s requirements,  it would eliminate the need for further review by DOD. Some  government acquisition officials we spoke with expressed concerns that  would need to be addressed to effectively implement the legislation,  including:

Ensuring that public accounting firms have sufficient understanding of  the processes or regulations to conduct the audits and provide  conclusions that DOD could rely upon.

Encouraging DCMA and DCAA functional experts and auditors to  accept public accounting firms’ findings rather than conduct additional  reviews and audits on their own, which would undermine the ability to  save both government and contractor resources.

Determining the potential for the cost of public accounting firm reviews  being passed on to the government through the contracts of the  businesses under review.

The DPC official responsible for implementing this provision stated that  they are aware of these concerns. He also stated that, as a first step in  implementation, his office has requested that DCMA and DCAA review  the criteria and audit plans used by their staff and identify areas where  these criteria and plans could be adjusted to make them more consistent  with criteria that public accounting firms use in the private sector.

By clarifying DCMA and DCAA’s roles and responsibilities as well as the  timeframes for conducting the audits, DOD has improved the CBS review  process. But there are still issues that need to be addressed. DCAA  acknowledges it is well behind in its efforts to complete the three CBS  audits for which it is responsible but believes that it can be caught up by  the end of fiscal year 2022 if significantly more resources are available. In  addition, DCMA does not monitor progress of either its functional offices  or of DCAA against the policies that the six systems each be reviewed  generally every 3 years. This is because DOD currently lacks a  mechanism based on relevant and reliable information, such as the  number of CBS reviews that are outstanding, the risk level assigned to  those systems, and the resources available to conduct such reviews, to  ensure CBS reviews are being completed in a timely fashion. Such  information could help inform more strategic oversight to determine  whether the current CBS review process is achieving intended results, or  whether additional changes to the timing of or criteria for conducting CBS  reviews are needed. As the agency that is responsible for issuing the  overarching policies that govern CBS reviews and is ultimately  responsible for approving contractor business systems, DCMA is in the  best position to lead the effort to develop this mechanism. As each  agency is responsible for executing its mission and managing its  resources, however, this effort should be conducted in collaboration with  DCAA.

We recommend that the Director, DCMA, in collaboration with the  Director, DCAA, develop a mechanism to monitor and assess whether  contractor business systems reviews are being completed in a timely  manner. (Recommendation 1)

DOD agreed with the recommendation. In an email, a DPC official stated  that DCMA and DCAA are collaborating to determine the best way to  implement the recommendation. DOD’s comments are reprinted in  Appendix I.

We are sending copies of this report to the appropriate congressional  committees; the Acting Secretary of Defense; the Under Secretary of  Defense for Acquisition and Sustainment; the Under Secretary of Defense  – Comptroller; the Director, DCMA; the Director, DCAA; and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at dinapolit@gao.gov. Contact  points for our Office of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff who made key  contributions to this report were Tatiana Winger (Assistant Director),  Emily Bond, Matthew T. Crosby, Suellen Foth, Sameena Ismailjee, Jean  McSween, Ramzi Nemo, Miranda Riemer, Christy Smith, Roxanna Sun,  Tom Twambly, and Jacqueline Wade.

Appendix I: Comments from the Department of Defense

The Department of Defense uses data from contractors' business systems—e.g., accounting or purchasing systems—to guard against fraud, waste, and abuse in DOD contracts. For example, reviewing data from a contractor's accounting system can help keep the contractor from overcharging.

DOD must review contractors' business systems to ensure that the data from them can be used. We've previously found that it was years behind on some of these reviews.

DOD has an ambitious plan to catch up on these reviews in 3 years, but has no way to measure its progress. We recommended that DOD monitor and assess whether it's completing these reviews as planned.


Treasury Judgment Fund: Transparency and Reliability Needed in Reporting Fund Balances and Activities

The Treasury Judgment Fund, managed by Fiscal Service, annually pays billions of dollars of claims on behalf of federal agencies. Transparent and reliable information is important for Congress to provide effective oversight of the Judgment Fund. In May 2017, the Committee requested that Treasury provide (1) Schedules of the Judgment Fund for fiscal years 2010 to 2016 prepared in accordance with U.S. GAAP, including appropriate disclosures to answer nine questions, and (2) information on processes and procedures used when paying claims.

GAO was asked to review the information that Treasury provided to the Committee. This report (1) evaluates the extent to which the Treasury-prepared information responds to the Committee's request and reconciles to financial information included in annual, audited financial reports and other reports and (2) describes Fiscal Service's documented procedures and related control activities for processing agency claims. To address these objectives, GAO compared the information provided by Treasury to other Treasury reports, conducted interviews with agency officials, and reviewed documented procedures for processing claims.

The Department of the Treasury (Treasury) did not provide the House Committee on the Judiciary (Committee) with the information the Committee requested on the Treasury Judgment Fund. Specifically, Treasury did not provide the Committee the Schedules of the Judgment Fund Non-Entity Assets, Non-Entity Costs, and Custodial Revenues that were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). Treasury also did not include appropriate note disclosures or Management's Discussion and Analysis, as requested by the Committee. Rather, Treasury provided nine exhibits containing selected Judgment Fund information to answer nine questions included in the Committee's request.

In addition, GAO identified numerous differences between amounts included in Treasury's exhibits and its annual Judgment Fund transparency reports to Congress and certain audited financial reports. GAO requested explanations for these differences, and Treasury provided explanations for some of them. Subsequently, Treasury officials discovered and explained that the exhibits were created in a faulty manner, resulting in an increased risk that they may contain unreliable information. Treasury officials stated that rather than expending resources to further explain differences and reconcile the exhibits with the other information, Bureau of the Fiscal Service (Fiscal Service) staff planned to submit new exhibits to the Committee; however, they did not provide a date by which they would do so.

GAO found that Treasury did not take appropriate steps consistent with its existing guidance for disseminating information to the public, such as performing appropriate reviews of information in the exhibits prior to providing them to the Committee, to ensure the quality and responsiveness of the information provided. The lack of reliable information on the Judgment Fund impairs the Committee's ability to provide effective oversight, including considering whether enacting new legislation would benefit the American people by ensuring better management of the Judgment Fund.

Fiscal Service has policies and procedures to help ensure that it only certifies payments for awards, judgments, and compromise settlements (claims) from the Judgment Fund that meet the following four tests: (1) claims are final, (2) claims are monetary, (3) one of the authorities specified in the Judgment Fund statute permits payment, and (4) payment is not legally available from any other source of funds (e.g., claims are only paid from the Judgment Fund when payment is not otherwise provided for in a specific appropriation or by another statutory provision).

GAO recommends that Fiscal Service take steps to ensure that information provided to Congress undergoes a documented review to ensure the quality and responsiveness of the information provided. Fiscal Service did not concur or nonconcur with the recommendation but agreed with GAO concerns regarding the reliability of information provided to the Committee.

The Treasury Judgment Fund, managed by the U.S. Department of the  Treasury’s (Treasury) Bureau of the Fiscal Service (Fiscal Service),  annually pays billions of dollars for eligible judicially or administratively  ordered monetary awards, judgments, and compromise settlements  against the U.S. government (collectively referred to in this report as  claims) on behalf of federal agencies. Transparent and reliable  information concerning these payments and other financial activities is  important in order for Congress to provide effective oversight of the  Judgment Fund. The Schedules of Non-Entity Assets, Non-Entity Costs,  and Custodial Revenues, which were prepared and audited until fiscal  year 2013, included Judgment Fund balances and activities along with  other Treasury-managed accounts. Subsequently, the Judgment Fund  balances and activities have been subjected to audit through the annual  audit of Treasury’s department-wide financial statements.

In May 2017, the House Committee on the Judiciary (Committee)  requested that Treasury provide the Committee with (1) Schedules of the  Judgment Fund Non-Entity Assets, Non-Entity Costs, and Custodial  Revenues, prepared in accordance with U.S. generally accepted  accounting principles (U.S. GAAP), for fiscal years 2010 through 2016;  (2) appropriate disclosures in the notes to the Schedules or Management’s Discussion and Analysis (MD&A) of sufficient detail to  answer nine specific questions regarding annual payments made by the  Judgment Fund and related costs and other information; and   (3) information about the processes and procedures used when paying  Judgment Fund claims. Upon receipt of Treasury’s response to this  request, you asked GAO to review the information Treasury provided to  the Committee and to describe the procedures and controls that Fiscal  Service follows when processing agency requests for payments from the  Judgment Fund. This report (1) evaluates the extent to which the  Treasury-prepared information responds to the Committee’s request for  information about the Judgment Fund balances and activities and  reconciles to financial information included in annual, audited financial  reports and other selected reports and (2) describes Fiscal Service’s  documented procedures and related control activities for processing  agency requests for payments from the Judgment Fund, including how  Fiscal Service ensures that appropriate agency officials approve claims,  and what reviews are required, if any, to ensure receipt of required  documentation.

To determine the extent to which the Treasury-prepared information  responded to the Committee’s request for information about the  Judgment Fund balances and activities, we compared the information that  Treasury provided to the Committee with the Committee’s request to  Treasury. For each item requested by the Committee, we reviewed the  information provided by Treasury and determined the extent to which it  was responsive to the request.

To determine the extent to which the Treasury-prepared exhibits  reconciled to information included in annual, audited financial reports and  other selected reports, we compared, and identified any differences  between, the Treasury-prepared exhibits with information included in  Treasury’s (1) unaudited Judgment Fund transparency reports to  Congress (transparency reports) for fiscal years 2010 through 2016;   (2) audited Schedules of Non-Entity Assets, Non-Entity Costs, and  Custodial Revenues (Schedules) for fiscal years 2010 through 2013; and  (3) audited department-wide financial statements (Financial Statements)  for fiscal years 2010 through 2016. We determined the information  contained in these reports to be sufficiently reliable for the purpose of our  reporting objective. In addition, we interviewed Fiscal Service staff to  obtain explanations for and reconcile differences that we identified.

To describe Fiscal Service’s documented procedures and related control  activities for processing agency requests for payments from the Judgment  Fund, we reviewed Treasury’s standard operating procedures and  external user manuals for the Judgment Fund Internet Claims System  (JFICS), the application Fiscal Service uses to process claims, and  observed Fiscal Service staff entering and reviewing Judgment Fund  claims in JFICS. In addition, we obtained and reviewed selected  independent public accountant (IPA) audit documentation related to the  Judgment Fund supporting the IPA’s fiscal year 2017 audit of Treasury’s  Financial Statements. Additional details about our scope and  methodology are discussed in appendix I.

We conducted this performance audit from February 2018 to December  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

The Judgment Fund is a permanent, indefinite appropriation, statutorily  created in 1956, available to pay many types of eligible monetary claims  that may be judicially or administratively ordered against the U.S.  government. The Judgment Fund is also available to pay interest and  costs on claims in certain circumstances. Administration of the Judgment  Fund has changed substantially since its inception, with varying degrees  of control and oversight by Congress, GAO, and Treasury. Originally, the  Judgment Fund was limited to paying judgments of less than $100,000,  as certified by the Comptroller General and entered by the U.S. Court of  Claims (the predecessor to the current U.S. Court of Federal Claims) or a  U.S. District Court, as well as authorized interest and costs. In the 1960s,  new laws extended the Judgment Fund’s availability to awards and  compromise settlements. In the next decade, the Supplemental  Appropriations Act, 1977, eliminated the Judgment Fund’s $100,000  payment ceiling, resulting in no upper limit on the amount that could be  paid from the Judgment Fund on any particular claim. The General  Accounting Office Act of 1996 transferred certification of payments from  the Judgment Fund from GAO to Treasury. Since 1996, Treasury has  managed the Judgment Fund, including certifying payments. Treasury  established Fiscal Service in October 2012, and delegated key Judgment  Fund functions to that bureau.

Fiscal Service is responsible for, among other things, providing central  payment services to federal agencies. Fiscal Service is the primary  disburser of payments to individuals and businesses on behalf of federal  agencies, including benefit payments made by the U.S. Social Security  Administration and the U.S. Department of Veterans Affairs, federal  income tax refund payments, and payments to businesses for goods and  services provided to the federal government. Annually, Fiscal Service  disburses more than a billion payments, with an associated total dollar  value of more than $2.4 trillion.

Administering the Judgment Fund is among the services that Fiscal  Service provides. A federal agency may request payment of a claim from  the Fund on its behalf only in instances where funds are not legally  available to pay the claim from the agency’s own appropriations or other  funding source. Amounts paid from the Fund vary from year to year.  Treasury reported that the Fund paid about $3 billion and $4 billion for  administrative and litigative claims in fiscal years 2015 and 2016,  respectively.

Fiscal Service carries out its mission through direct support from its three  divisions. The primary focus of the Judgment Fund Branch is to receive  and process claims for Judgment Fund payments. As shown in figure 1,  the Judgment Fund Branch operates within Fiscal Service’s Financial  Services and Operations Division.

Fiscal Service only certifies payments of claims from the Judgment Fund  when the following four tests have been met: (1) claims are final,   (2) claims are monetary, (3) one of the authorities specified in the  Judgment Fund statute permits payment, and (4) payment is not legally  available from any other source of funds (e.g., claims are only paid from  the Judgment Fund when payment is not otherwise provided for in a  specific appropriation or by another statutory provision). Generally,  federal agencies are not required to reimburse the Judgment Fund. Two  exceptions are Judgment Fund payments made pursuant to (1) the  Contract Disputes Act of 1978 (CDA) and (2) the Notification and Federal  Employee Antidiscrimination and Retaliation Act of 2002 (No FEAR Act).

Currently, Treasury produces, and posts on its website, a voluminous  spreadsheet—referred to as the Judgment Fund Transparency Report to  Congress—when Congress requests it, but is not otherwise required to  do so. The spreadsheets are data extracts from JFICS that provide  information on the types and amounts of claims and the agencies for  which the payments were made. Members of Congress introduced  legislative proposals in the recent past related to the Judgment Fund. For  example, in the 115th Congress, a bill entitled the Judgment Fund  Transparency Act of 2017 (H.R. 1096), as reported (amended) by the  Committee on the Judiciary on October 16, 2017, would amend the  Judgment Fund statute to require Treasury to post on its website  information related to claims on the Judgment Fund.

Treasury-Provided Information Was Not Fully Responsive and Not Fully Reconciled

In response to the Committee’s request for Schedules of the Judgment  Fund Non-Entity Assets, Non-Entity Costs, and Custodial Revenues  prepared in accordance with U.S. GAAP and related information,  Treasury provided to the Committee nine “exhibits” that contained  selected information on Judgment Fund payments and other related  information to answer nine questions in the Committee’s request. We  reviewed the Treasury-provided information and found that it did not  provide the Schedules of Judgment Fund Non-Entity Assets, Non-Entity  Costs, and Custodial Revenues for fiscal years 2010 through 2016,  prepared in accordance with U.S. GAAP, and appropriate note  disclosures or MD&A to the Committee, as requested.

In addition, we identified numerous differences between amounts  included in the exhibits provided to the Committee and those reported in  Treasury’s (1) unaudited transparency reports, (2) audited Schedules, or  (3) audited Financial Statements. For example, we identified differences  between administrative and litigative payments for fiscal years 2010  through 2016 reported on Exhibits 1 and 2 - Judgment Fund  Administrative and Litigative Payments by Defendant Agency and Fiscal  Year and those reported in Treasury’s (1) unaudited transparency reports,  (2) audited Schedules, and (3) audited Financial Statements, for all years  presented (as shown in tables 1, 2, and 3).

Further, we identified numerous differences between financial and  nonfinancial information in Treasury’s exhibits and comparable  information contained only in the transparency reports. For example, the  Committee asked Treasury to disclose the amount of Judgment Fund  payments for attorneys’ fees pursuant to the Equal Access to Justice Act  (EAJA) for fiscal years 2010 through 2016. In response, Treasury  provided Exhibit 8 - Amounts Paid from the Judgment Fund for EAJA  Claims by Fiscal Year. We compared total payments for each fiscal year  reported in Exhibit 8 with those reported in the transparency reports for  the same years and identified differences in payments for principal,  attorneys’ fees, and costs, as shown in table 4.

We provided Treasury the results of our comparisons and requested  explanations for the differences we identified, and Treasury provided  explanations for some of them. Subsequently, Treasury officials informed  us that they discovered that the exhibits were created in a faulty manner,  and rather than expending resources to reconcile and explain the  numerous differences we identified, they indicated that Fiscal Service  staff would submit new exhibits to the Committee; however, they did not  provide a date by which they would do so.

Judgment Fund Branch staff further explained that the Committee’s  request was a unique request for information that could not be fulfilled  with existing standard reports and queries. To respond to the request,  Fiscal Service created ad hoc queries of the JFICS database using  different instructions for extracting data for the exhibits than those used  for creating the transparency reports. The Judgment Fund Branch relied  on these ad hoc queries, primarily from JFICS, to prepare the exhibits  answering the nine questions included in the Committee’s request.  However, according to Judgment Fund Branch officials, the Judgment  Fund Branch does not prepare financial statements, such as the  Schedules of Non-Entity Assets, Non-Entity Costs, and Custodial  Revenues. Rather, its primary focus is receiving and processing claims  for Judgment Fund payments. In addition, these officials told us that they  could not confirm whether the Judgment Fund Branch worked with the  Fiscal Accounting Branch to respond to the Committee’s request or  prepare the exhibits provided to the Committee.

Treasury’s policy is to ensure and maximize the quality, objectivity, utility,  and integrity of the information that it disseminates to the public. This  policy directs Treasury bureaus and departmental offices to develop  standards for information quality and ensure that the standards are used  when disseminating information. The policy also directs that such  information be accurate, clear, complete, and unbiased. In addition, policy  guidelines specifically state that in situations where public access to data  and methods will not occur, especially rigorous checks to analytic results  should be applied and documented. According to Fiscal Service officials,  this policy applies strictly to information disseminated to the public, and  the related procedures in the policy do not apply to information  transmitted to federal entities, including Congress. Fiscal Service officials  did not provide evidence of a similar policy or procedures for ensuring the  quality of the information disseminated to Congress and other federal  entities. Fiscal Service officials also did not provide us with  documentation indicating that any checks or reviews were performed on  the exhibits—in a manner consistent with Treasury’s written policy and  review procedures for disseminating information to the public—before  Treasury provided them to the Committee.

As a result, the exhibits that Treasury provided to the Committee were not  responsive to the Committee’s request and are at increased risk that they  may contain unreliable information. Accordingly, the Committee lacks  important, reliable information needed to effectively oversee Judgment  Fund activities, including considering whether enacting new legislation  would benefit the American people by ensuring better management of the  Judgment Fund.

Treasury Has Documented Procedures and Control Activities for Processing Payments

According to Fiscal Service’s documented policies and procedures,  payments from the Judgment Fund may be made only upon certification  by Fiscal Service. An important step in the claims payment certification  process is for the Fiscal Service claims analyst and claims reviewer to  confirm that an agency’s claim for payment from the Judgment Fund is  not otherwise provided for by another source of funds. This confirmation  is necessary to make sure that the Judgment Fund is not used for  payments that should be paid directly by the involved agency or another  funding source. Another important step in the claims payment certification  process is to confirm that the claim is final, meaning that the applicable  federal officials have fully resolved the claim’s underlying dispute and the  only outstanding issue is payment of the claim. Additionally, Fiscal  Service calculates the amount of any interest that may be authorized and  initiates action under federal debt collection law to offset any known  indebtedness to the United States by the claimant. In the actual  “certification” step, Fiscal Service does not review or evaluate the merits  of the underlying claim.

Payments made by the Treasury Judgment Fund on behalf of agencies  are initiated upon the receipt of claim requests that agencies submit to  Fiscal Service. These requests must be submitted online through JFICS  or by sending completed payment request forms to the Judgment Fund  Branch via fax or mail.

Claims submitted through JFICS must be accompanied by a FS Form  197, Voucher for Payment, page 2, signed by the claimant, and either a  (1) settlement agreement or (2) court order. Claims submitted via fax or  mail must contain a (1) FS Form 194, Judgment Fund Transmittal Form;  (2) FS Form 196, Judgment Fund Award Data Sheet; and (3) FS Form  197, Voucher for Payment, page 1, and a document that authorizes  payment.

Upon receipt of mailed or faxed forms, Fiscal Service staff manually enter  the data from the submitted forms into JFICS. Fiscal Service staff review  the forms for completeness and ensure that each FS Form 194 has been  signed by the agency authorizing official. Fiscal Service relies on this  signature and the presence of a U.S. government email address on the  FS Form 194 as its primary controls for ensuring that a mailed or faxed  claim has been authorized by the agency. Fiscal Service also relies on  this signature to confirm that the claim is appropriate and is eligible to be  paid from the Judgment Fund. For claims entered directly in JFICS by  an agency, the agency authorizing official must click on “I agree” on the  JFICS certification page to affirm that the claim is authorized by the  agency and appropriate for payment from the Judgment Fund. (See fig. 2  for a depiction of the Judgment Fund claims process.)

Depending on the claim amount, Fiscal Service staff perform a minimum  of two levels of review on Judgment Fund claims, whether the claims are  received by fax or mail or directly entered into the JFICS system by  agencies. First, the claims analyst reviews the claim to ensure that the  agency has provided all of the information necessary to process it. Once  the claims analyst determines that all of the information has been  provided, the claim is forwarded electronically to the claims reviewer. The claims reviewer performs a secondary review to determine if all the  information required has been provided, as well as to ensure that the  claims analyst entered the mailed or faxed information into JFICS  correctly. Claims for less than $1 million do not require further review and  are submitted to the Treasury Disbursing Office for payment. Claims for  $1 million or more are subject to management review, and claims for $50  million or more are sent to the Fiscal Service Office of Chief Counsel for  review.

In connection with its oversight efforts, the Committee requested certain  information from Treasury about Judgment Fund financial balances,  activities, and other information. However, the information that Treasury  provided to the Committee in response to this request did not include  Judgment Fund Schedules of Non-Entity Assets, Non-Entity Costs, and  Custodial Revenues prepared in accordance with U.S. GAAP, including  appropriate note disclosures and MD&A, as requested. Further, Treasury  officials stated that the exhibits provided to the Committee were created  in a faulty manner, resulting in an increased risk that they may contain  unreliable information. Although Treasury directs its bureaus and offices  to take steps to ensure the quality of information disseminated to the  public, Fiscal Service did not take appropriate steps to ensure that the  information it provided to the Committee was responsive and complete.  Without sufficient financial and other information, the Committee’s ability  to effectively oversee Judgment Fund activities, including considering  whether enacting new legislation would benefit the American people by  ensuring better management of the Judgment Fund, may be hampered.

We are making the following recommendation to Treasury:  The Commissioner of the Bureau of the Fiscal Service should take steps  to ensure that information provided to Congress undergoes a  documented review to ensure the quality and responsiveness of the  information provided. (Recommendation 1)

We provided a draft of this report to Treasury for review and comment. In  written comments, reproduced in appendix IV, Fiscal Service did not  concur or nonconcur with our recommendation, but stated that it agreed  with our concerns regarding the reliability of information contained in the  exhibits provided to the Committee and that a new set of data has been  compiled and undergone a documented review to ensure its reliability.  We are encouraged by the steps being taken to ensure the reliability of  this information, but it is unclear to what extent steps have been, or will  be, taken to ensure the quality and responsiveness of other information  that may be provided to Congress in the future. We believe that such  steps are necessary to help ensure that the Committee has sufficient  financial and other information to effectively oversee Judgment Fund  activities.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Treasury, the Inspector General of the  Department of the Treasury, and other interested parties. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-9816 or rasconap@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

The objectives of our audit were to (1) evaluate the extent to which the  information the U.S. Department of the Treasury (Treasury) provided to  the House Committee on the Judiciary (Committee) responds to the  Committee’s May 2017 request for information about Judgment Fund  balances and activities and reconciles to financial information included in  annual, audited financial reports and other selected reports and   (2) describe the Bureau of the Fiscal Service’s (Fiscal Service)  documented procedures and related control activities for processing  agency requests for payments from the Judgment Fund, including how  Fiscal Service ensures that appropriate agency official approve claims  and what reviews are required, if any, to ensure receipt of required  documentation.

To determine the extent to which the Treasury-prepared information  responds to the Committee’s request for information about the Judgment  Fund balances and activities, we compared the information provided by  Treasury to the Committee with the Committee’s request letter to  Treasury. For each item requested by the Committee, we reviewed the  information provided by Treasury and determined whether it was  responsive to the request.

To determine the extent to which the Treasury-prepared exhibits reconcile  to information included in annual, audited financial statements and other  reports, we compared, and identified any differences between, the  Treasury-prepared exhibits and certain information included in the  following Treasury reports: unaudited Judgment Fund transparency reports to Congress for fiscal  years 2010 through 2016; audited Schedules of Non-Entity Assets, Non-Entity Costs, and  Custodial Revenues for fiscal years 2010 through 2013; and audited department-wide Financial Statements for fiscal years 2010  through 2016.

To determine the reliability of the financial information contained in the  unaudited transparency reports, we reviewed relevant documentation,  interviewed knowledgeable agency officials, and conducted basic testing  of the data. Based on these efforts, we concluded that the data were  sufficiently reliable for the purpose of our reporting objective. In addition,  we interviewed Fiscal Service staff to obtain (1) explanations for and  reconcile differences we identified based on our comparisons and   (2) Treasury’s related policies for reviewing information provided to  Congress to ensure its quality and responsiveness. Further, because the  Treasury Office of Inspector General (OIG) is currently conducting an  audit that includes the Treasury Judgment Fund, we communicated with  the OIG staff regarding the OIG’s current audit to ensure no duplication in  our audit work.

To describe Fiscal Service’s documented procedures and related control  activities for processing agency requests for payments from the Judgment  Fund, we reviewed Treasury’s standard operating procedures and  external user manuals for the application Fiscal Service uses to process  claims (the Judgment Fund Internet Claims System (JFICS)). We also  observed Fiscal Service staff entering and reviewing Judgment Fund  claims in JFICS. In addition, we obtained and reviewed selected  independent public accountant (IPA) audit documentation related to  processing Judgment Fund claims supporting the IPA’s fiscal year 2017  audit of Treasury’s department-wide financial statements.

Appendix II: Differences GAO Identified between Treasury-Prepared Exhibits and Other Treasury-Issued Reports

The U.S. Department of the Treasury (Treasury) provided the House  Committee on the Judiciary (Committee) nine exhibits in response to nine  questions included in the Committee’s request. Information included in  these exhibits and differences we identified based on comparisons of this  information with information included in certain Treasury annual audited  financial reports and other reports is summarized below.

Exhibits 1 and 2 - Judgment Fund Administrative and Litigative Payments  by Defendant Agency and Fiscal Year shows, by agency and type of  payment, the amounts paid from the Judgment Fund on behalf of federal  agencies. We compared information in these exhibits with Treasury’s   (1) unaudited Judgment Fund transparency reports to Congress for fiscal  years 2010 through 2016; (2) audited Schedules of Non-Entity Assets,  Non-Entity Costs, and Custodial Revenues (Schedules) for fiscal years  2010 through 2013; and (3) audited department-wide financial statements  (Financial Statements) for fiscal years 2010 through 2016 (see tables 5,  6, and 7).

Exhibit 3 - Judgment Fund Collections from Federal Agencies by Fiscal  Year presents, by Treasury account symbol, recoveries and  reimbursements from federal agencies. Exhibit 4 - Judgment Fund  Accounts Receivable from Federal Agencies by Fiscal Year presents, by  Treasury account symbol, amounts due from federal agencies for  payments made on their behalf. We compared information in Exhibit 3  with the Schedules and information in Exhibit 4 with the Schedules and  the Financial Statements for all available fiscal years. Information  contained in Exhibits 3 and 4 were not payment related (these exhibits  were receipts from agencies and accounts receivable owed by agencies)  and therefore could not be traced to the transparency reports. The  differences identified based on our comparisons of Exhibit 3 to the  Schedules and Exhibit 4 to the Financial Statements are shown in tables  8 and 9, respectively.

Exhibit 5 - Judgment Fund Costs Paid by Citation Code and Fiscal Year  shows, by fiscal year, amounts paid for each type of citation code. We  identified differences in each fiscal year between the total amounts paid  as presented in Exhibit 5 and the total amounts contained in the  transparency reports (see table 10).

Exhibit 6 - Top 25 Attorney Law Firms that Received Payments from the  Judgment Fund by Fiscal Year presents, by attorney and law firm,  amounts paid for each of the 7 years. Because Treasury has identified  this exhibit as containing personally identifiable information protected by  the Privacy Act of 1974, we do not present information from Exhibit 6.

Exhibit 7 - EAJA Payments to Plaintiffs’ Counsel in Decending  Order  shows, by attorney and law firm, amounts paid to each related to Equal  Access to Justice Act (EAJA) claims. When we compared the exhibit to  the transparency reports, we identified differences in the total amounts for  all fiscal years (see table 11).

Exhibit 8 - Amounts Paid from the Judgment Fund for EAJA Claims by  Fiscal Year shows, by cost citation code, amounts paid for principal,  attorneys’ fees, costs, and interest for each fiscal year. When we  compared Exhibit 8 to the transparency reports, we identified differences  in the amounts reported for principal, attorney’s fees, and costs for most  fiscal years (see table 12).

Exhibit 9 - Major Recipients of Judgment Fund Payments by Fiscal Year  presents amounts paid to major recipients (top 25) of payments from the  Judgment Fund. Because Treasury has identified this exhibit as  containing personally identifiable information protected by the Privacy Act  of 1974, information about Exhibit 9 is not presented.

Appendix III: Comments from the Department of the Treasury

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Heather I. Keister (Assistant  Director), Anthony Clark, Patrick Frey, Lauren S. Fassler, Nadine  Ferreira, Valerie Freeman, James Kernen, Ned Malone, Lisa Motley, and  Taya R. Tasse made key contributions to this report.