Framework for Awarding Audit Contracts by US Government Departments Agencies

¶ … awarding audit contracts by U.S. government departments and agencies

Audit Management

Red

Rationale for and Objectives of the project

main and secondary

Desktop or literature search

Rationale for Search Methodology

LITERATURE/DESKTOP RESEARCH

Authoritative sources

Desktop Findings

Justification for audits

Evolving role of auditors

Types of audit contracts

Understanding the Audit Process

Best practices and benchmarking

Terminology

Case Studies

Audit management is a fundamental element in government accountability, control and performance management. Certainly there is justification within the Federal government to conduct audits of contracts for the procurement of goods and services.

It is imperative that Federal programs and agencies obtain reasonable assurance that the vendors they are dealing with are providing fair and adequate services based on contract specifications and government regulations. Federal agencies need to insure that their basic financial statements are free of material misrepresentation, that their performance is in compliance with certain expressed provisions of laws, regulations, contracts and grants and that non-compliance would have a direct and detrimental effect on the determination of financial statement amounts.

Whether a company is a manufacturer or a service provider, to be successful in working with government agencies, its management should be concerned to ensure that:

products move smoothly and swiftly through the production cycle warranty repairs are kept to a minimum and turned round quickly suppliers' delivery performance is constantly monitored quality standards are continually raised sales orders, shipments and backlog are kept to a minimum there is overall customer satisfaction labour turnover statistics are produced in such a way as to identify managerial weaknesses &D costs do not escalate the accounting and finance departments really understand the business

Looking at each of these areas in turn creates a non-exhaustive list of performance measures. No one indicator should be over emphasized and no one indicator should reign supreme.

Government agencies have a strong commitment to performance measurements and their perceived usefulness appears to meet the needs of different stakeholders in various sectors. The good news is that government agencies in their quest to insure accountability for contract and program audits have applied some modern, private sector management tools to solve some of their existing problems.

Activity-based costing and management, benchmarking, process reengineering, total quality management and balanced scorecard have been implemented with mixed results. (Journal of Government Financial Management, 2002).

Audits are a natural progression when it comes to contract management for the government. Innovation and change are only possible when comprehensive assessments have been done. It is performance audits and measurements that will be the catalyst for executing new initiatives.

Chapter 1 - INTRODUCTION

Overview

The topic for this research paper is to investigate the framework for awarding audit contracts by U.S. government departments and agencies. The purpose is to provide a comprehensive look at the process for audit awards made by the Federal government. For clarification purposes, the audit is the primary mechanism used by the Federal government to insure accountability for Federal contract awards.

To fully understand the impact of the audit management process, it is important to have some brief background information on Federal audit requirements. The first organization-wide Federal audit requirements were documented in 1979. Before that, each organization handled their own audit of awards. Because many of the same companies could receive contracts from different Federal agencies, it became quite cumbersome to submit to often overlapping audits. This resulted in inflated audit costs for the government and countless hours of administrative time for the companies/organizations involved. In 1984, legislation established a uniform approach to the audit process for state and local governments. This act helped product quality audit reports and reduced the cost and time involved in the process.

The purpose of this dissertation is to examine compliance with the process itself and identify the framework used for guidance in awarding audit contracts. I selected this topic because the audit process is an opportunity for an objective, skilled and impartial review of program operations that can be beneficial in assessing performance and recommending improvements. Because this is a Federal process, understanding and evaluating the process can be a learning tool and resource for creating best practices in non-federal environments.

Rationale for and Objectives of the Project

The government enters into contracts with private businesses and other organizations, generally to obtain good and services. In order to understand the enormity of this undertaking, it is important to note here that the federal government alone signs approximately fifty-six thousand contracts each day and spends between $30 to 40 million each working day (Miccioli, 2000).

This type of activity requires that the procurement process is regulated every step of the way. To understand the need and consequences of this endeavor requires research into its origins, its implementation and its level of success through the audit process itself. It is my intent to examine the audit process in depth through my research and reporting to discuss the role it plays in awarding federal contracts.

A also hope to identify common practices in contracts processing that can be accelerated by implementing uniform procedures that respond to the legal requirements of the contracts process but do so in a more efficient manner. By studying the audit and contracting process, advantages and disadvantages will emerge and the processes can be further evaluated for cost savings and efficiency measures.

My research will include:

Studying and understanding how programs, projects and functions are selected for audit

Researching how audits are done

Researching how the audit reporting process works

And finally, identifying areas for improvement and making sound and actionable recommendations

My research will be based on articles, journals, government-produced materials, both hard copy documents and materials found on the Internet. I will review and read these materials and extrapolate the important information to support the objectives of my dissertation.

Research Questions

Through the development of research for completing this paper, I hope to address the following questions:

What is an audit and what is the main purpose of implementing audits for Federal contracts?

What is the background of the audit process and what role does it play?

What are the types of audits that are administered?

What is the selection process for contract audits?

What is the audit reporting process

In conjunction with these questions, I will address the objectives stated in Section 1.2 and conclude by making recommendations for improving the process.

Hypotheses: Main and Subsidiary

The main hypothesis of this paper is to support the need for contract auditing by the Federal government. Obviously, the government needs to procure products and services from reliable and responsible non-government sources at the lowest possible cost to the government. Procurement regulations are necessary for handling this type of contract activity.

The Federal government's audits the financial statements of potential suppliers to insure compliance with contract provisions and regulations in a commercial enterprise. The use of an independent auditor allows for an impartial evaluation.

There is no secondary hypothesis. The main hypothesis encompasses the objectives stated in Section 1.2.

Chapter 2 - RESEARCH METHODLOGY

2.1 Desktop and Literature Search

There is a huge amount of information available both online and in hard copy describing the task facing the government's audit management process for contracts. The most daunting task I faced was the sheer volume of information available. In undertaking this endeavor, I did extensive online research for information that discusses the questions outlined in Section 1.4. My methodology was based on an organized search that would yield information about:

the audit process itself background about the audit process why the audit process is necessary how it works how it can be improved

By gathering articles, journals and government-sponsored information, I was able to gather a large amount of diverse information, representing many viewpoints. Therefore, my research was not one-sided and provided a cross-section of opinions. I tried to structure my research so that I was able to construct a comprehensive view of the audit process and a better understanding of the maze of regulations and procedures that govern Federal contract management through the audit process.

I have listed my information sources in the Bibliography Section of this paper.

2.2 Rationale for Search Methodology

In trying to determine the most comprehensive and time saving method of gathering a large amount of information on the audit management process, I realized I would need to conduct an extensive online and literature search for articles, journals and government documents that discussed the issue from a variety of aspects. The complexity of government contracts research requires familiarity with research methods, particularly being able to ascertain and access online information.

During my research for this paper, I found that the Internet provided the most up-to-date and easily accessible information. The Internet does an excellent job of providing access to many of the processes and procedures.

There was no empirical research methodology used in this paper.

Chapter 3 will address the objectives outlined in Section 2.1 and provide a complete discussion of the subject matter. Following the discussion, I will analyze my findings and finally, present my own view and assessments.

Chapter 3 - LITERATURE/DESKTOP RESEARCH

3.1 Summary

The information available for researching this project was based on a cross-section of materials. Although this was an immense task because of all the government guides available on the subject, not to mention non-government materials, most of it was readily available on the Internet.

Some of the major websites that provided basic information included the following.

Non-Government Sites

American Bar Association Section of Public Contract Law. It is organized into six divisions that have links on the home page.

NASPO-National Association of Procurement Officials. Has a section on contract information and auditing procedures.

Fedmarket.com, The Federal Marketplace

Government Sites

Defense Contract Audit Agency. Provides audits, reports and financial advisory services.

CBDnet, which is Commerce Business Daily. Provides information on contracts and allows you to search formidable research that has been done.

Defense Acquisition Deskbook

Defense Procurement Homepage

Defense Contract Audit Agency

US Dept. Of Commerce Office of General Consul, Contract Law Division

General Services Administration

Office of Federal Procurement Policy

Small Business Administration's Procurement and Contracting Page

FebBizOpps

GSA Advantage

Federal Procurement Data System

GSA Acquisition Manual

Federal Acquisition Regulation (FAR)

Guides

Practitioners Research Guide: Researching Government Contracts Law

Government Contracts Research Guide (1999) Burns Law Library

Law about Government Contracts (LII)

Metasites

ARNet: Acquisition Reform Network

Federal Acquisition Jumpstation

Where in Federal Contracting?

NASA Acquisition Internet Service (NAIS)

Courts

US Court of Federal Claims

US Court of Appeals for Federal Circuit

GAO Comptroller General Decisions

Chapter 4 - ANALYSIS AND RESULTS

4.1 Summary

The purpose of an audit according to the Department of Labor is not to rehash past mistakes but to look at past events with a new view toward improving future performance. Findings from an audit can be used as the basis for adjusting policies, priorities, structure or procedures in order to make operations as efficient, economical and effective as possible (U.S. Dept. Of Labor, 2003).

But before discussing the purpose of an audit, let's define what constitutes and audit. The term audit is used in particular by the Federal government to not only examine a supplier's financials but also to determine compliance with applicable laws and regulations, the economy and efficiency of the operation and the effectiveness in achieving results. Therefore, the audit process becomes more of a management process by assessing more than just a company's financial statement.

The two most common types of audits are the financial audit and the performance audit. A performance audit reviews the past performance of an entity, program or function to assess whether funds and property were appropriately administered or if the program or project fell short of expectations and if so, why.

Financial audits include anything that is financially-related to determine whether the financial statements of an audited entity accurately and fairly present audits of contracts, grants, internal controls, computer-based systems, financial systems, indirect costs, pre-awards and program fraud (U.S. Dept. Of Labor, 2003).

At all levels of the government, auditors are becoming more involved in how performance is defined and measured, which is consistent with a trend toward broader scope audits. For example, in 1992, the Austin, Texas City Auditor's Office drafted a performance reporting resolution, which passed the City Council, requiring all city departments to implement performance measurement systems and periodically report on their findings. (Grifel, Morgan & Epstein, 2002)

As we begin to look at the framework and implications of the contracts audit process, we will consider the cost issues and justification for implementing large-scale audits; discuss the evolving role of government auditors; consider an audit contract model and review current best practices.

Justification for Audits

According to Mark Funkhouse in the Journal of Government Financial Management (Winter 2002), the Government Auditing Standards state, "the audit of government reporting is an essential element of public control and accountability. Auditing provides credibility to the information reported by or obtained from management through objectively acquiring and evaluating evidence. The importance and comprehensive mature of auditing place a special responsibility on public officials or others entrusted with public resources who authorize or arrange audits to be done in accordance with these standards."

The Federal government has to implement a system of checks and balances because of the broad range of responsibility that is involved in the contract process. Funkhouse reports on a local government auditing study that was conducted in large U.S. cities. A mail survey was sent to the head of each audit organization, followed be additional mailings and email and phone contact. The main outcome was that the audit directors clearly saw the value of the audit process in identifying problems in their jurisdictions. They were also proactive in initiating audits beyond those that were mandated and believed that in the long run, this would result in cost savings. The article further states that local government auditing will continue to get stronger and will eventually filter down to smaller municipalities.

Justifying the audit process is not as difficult as it might seem. An effective audit process provides a "check and balance" function that limits an abuse of power and prevents potential program problems. From a government perspective, the contract audit is a necessary evil.

Since the government awards over $300 billion in contracts, it is imperative that measures are taken to insure the reputation, reliability and quality of the vendors who are selected to provide goods and services to the government. Audits are an essential part of the contract award process and often result in considerable cost savings for the government.

An audit finding may question associated program costs and disallowed by government regulations. This could result in the auditee having to refund the disallowed amount resulting in a cost savings. The objective of an audit finding is to insure that there is no fraudulent activity or misrepresentation that would end up costing the government money.

The Office of Management and Budgets issued a Circular in June 1997 pursuant to the Single Audit Act Amendments of 1996, which outlines the standards for Federal audits of awards for state and local governments, as well as non-profit organizations. The basic premise is to establish guidelines and consistency in obtaining information. The bottom line is that the Federal government is awarding monies and must protect its investment. So are audits justified? Without a doubt. No taxpayer would want the government to award monies and not insure that these funds were being used by state and local government agencies and non-profit organizations for a greater good.

But not everyone agrees with using external auditors. Independent external auditors can be swayed and attest to management's assertions in accordance with generally accepted auditing standards. Consider what the Standards for the Professional Practice of Internal Auditing (The IIA's Standards) state: "The internal auditing department is an integral part of the organization and functions under the policies established by senior management and the board." The internal auditing function is an inherent part of the internal control system. In fact, in most large organizations, the internal auditing function performs a significant, if not primary, role in providing independent appraisals upon which management's assessment of internal control is based. If external auditors perform internal auditing and attest to management's assertions about the internal control system, they essentially are attesting to an activity in which they have directly supported management's assertions. This is a direct impairment of their independence. (Institute of Internal Auditors 2002)

No matter what, everyone in an organization has some responsibility for internal control and that includes external auditors. However, it is eventually management ultimate responsibility for an entity's internal control system. They must take final ownership. Financial and accounting officers are central in the way management exercises control, though all management play important roles and are accountable for controlling their unit's activities. External auditors often contribute to the achievement of an organization's objectives and provide information useful in managing control. However, they are not responsible for the effectiveness of, nor are they a part of, the organization's internal control system."

Other institutions have published statements supporting this position:

The Securities and Exchange Commission (SEC) Rule 2-01 of Regulation S-X.

The U.S. Government's FDIC Improvement Act of l991

The Office of the Comptroller of the Currency, FDIC, Federal Reserve Board, and Office of Thrift Supervision's Draft Interagei7ey Policy Statement on Internal Audit Outsourcing.

The FDIC Improvement Act of 1991, Section 36, requires management to provide an assessment of the effectiveness of the internal control structure and of compliance with the laws and regulations relating to safety and soundness. A recent survey of the "Group of 25," chief internal auditors from large U.S. financial institutions, indicates that in most cases, management worked closely with the internal auditors to complete the assessment process. Most organizations extended COSO guidelines beyond the financial reporting objective to include operating objectives. The focus was on the overall internal control structure over financial reporting, operations, and regulatory compliance. With regard to FDICIA-required attestations of management's assertions, the independent public accountants either performed the attest function in full or reviewed the work of the internal auditors.

Further, a recent Global Auditing Information Network (GAIN) benchmarking effort pioneered by The Institute of Internal Auditors ("Application of Audit Resources") indicated that internal auditors spent about 14% of their time on financial transaction auditing. In the non-financial areas, they spent 15% of their time on compliance auditing, 15% on operational auditing, 15% on integrated auditing, 13% on electronic data processing (EDP) auditing, and 10% on special internal auditing projects. The remaining time was spent on other internal auditing activities such as self-assessment, environmental, contract, external auditing assistance, and fraud investigations. (The Institute of Internal Auditing, 2002)

No matter what arguments either side supports, auditors play a complementary and supportive role in the audit process and are sometimes necessary in a properly controlled environment.

Evolving Role of Auditors

In recent years, auditors have been increasingly involved in the government's performance measurement activities in both traditional and non-traditional roles (Grifel, Morgan & Epstein, Winter 2002). Traditionally, auditors' main function was to verify the reliability and validity of performance data by measuring performance during an audit. Recently, that role has been expanded to include taking an active part in assisting management in establishing and using performance management systems and issuing performance reports outside the auditing process.

Today, there has been a trend towards adding some non-traditional responsibilities to the auditor's role. Some of these include:

Conducting focus groups and citizen surveys to identify or measure community indicators that are meaningful to citizens

Interpreting measures and conducting evaluation studies of benchmarks

In addition, a future potential role could be as an independent reviewer of citizen participation processes (Journal of Government Financial Management, 2002).

Reliability of data and credibility of reports has become increasingly important in the performance management process and auditors play a key part in verifying the reliability and validity of the information contained in these reports. Auditors traditionally have experience in this area and provide opinions on whether financial statements are indeed fairly presented.

Over the past few years, the GAO "has identified limitations in federal agencies abilities to produce credible data and identify performance improvements (Journal of Government Financial Management, 2002). The Federal government needs credible data to evaluate progress in achieving goals and insuring compliance. Citizens are reluctant to accept the government information and prefer that an "outsider" fairly assess an agency's progress. Enter the auditor.

Auditors offer the alternative and can implement methods and systems that will accurately assess accountability and verify information and data. Let's consider the states of Texas and Florida, both of which has State Auditor's Offices (SAO) that perform audits to provide information for legislature decision-making.

The SAO has a performance measurement process to identify which agencies and measures to audit. The role of the auditor is to implement a series of verification steps that include:

Determining agency methods for collecting and calculating data, and whether the agency followed definitions of measures

Determining whether agency controls over performance data and systems are adequate to ensure consistent, accurate reporting

Sampling and testing source documentation for accuracy

The auditor then assigns each performance measure one of the four main certification ratings: certified, certified with qualification, factors prevented certification and inaccurate (Journal of Government Financial Management, 2002).

Auditors analyze each agency program under a performance assessment and not only review the credibility and accuracy of the information but also look for actionable ways to improve program performance and reduce costs.

Auditors have always played a role in contracts audit management but now are stepping into new areas in providing contract-auditing services. A less traditional role for government auditors is to assist management in establishing and using a performance measurement system. Often, government agencies need to develop a more versatile performance management system for assessing and managing program results. For example, the Austin, Texas City Auditor's Office, through an intensive business planning process, had city departments define their programs to align their activities with the city's vision, and define measures and program budgets accordingly (Journal of Government Financial Management, 2002).

Auditors acted as consultants and worked closely with city management to develop planning guidelines. Business plans were first reviewed to insure alignment with city goals and measures. Measures were then separately evaluated and recommendations made for deleting, revising or adding them to the program.

In February 2000, Austin received an outstanding A- in management performance ratings in Government magazine. This was in large part due to the proactive consulting role that the auditors played in creating a performance measurement system (Journal of Government Financial Management, 2002).

In any Federal or non-government agency it is extremely difficult for a central function to maintain intelligence up-to-date on all departments, with the result that either the learning curve would consume more time on each audit, or alternatively the coverage and/or depth would be curtailed. The issue of the timeliness of and approach to communication of audit results is also an issue where auditors can provide an integral service. Another issue that auditors are now addressing and discussing with management is that trying to internally centralize audit resources would invariably lead to deterioration in the quality and timeliness of audit results.

Auditors now provide an added resource in terms of the range of what they can do. By extending the use of their services, Federal agencies have access to unlimited expertise that might not be housed internally. The cost savings alone can be substantial. Using auditors can further simplify and accelerate the contracting process and speed along the evaluation process for potential contractors.

The future holds new promise for the role of auditors, one in which they will play a more active role in evaluating the more significant programs that are of interest to the government and the populace. Without a doubt, program evaluators play an important role in assisting management with the analysis and reporting on the performance of programs. After all, this is the very essence of that discipline.

A study by the Minnesota Citizens League entitled Engaging Citizens in Achieving Results Matter: A Model for Effective 21st Century Governance found that a government could achieve the greatest value from its measurement and improvement efforts when it aligns citizen engagement, performance measurement and policy and implementation (Epstein, Wray, Marshall and Grifel, 2002).

Interaction with citizens will be another new area where auditors will have an impact. By conducting citizen surveys and focus groups, auditors can key into issues that are of concern and help develop community indicators. These indicators might be the catalysts for establishing and supporting a multi-government public-private leadership group that will conduct other public surveys and focus groups. Given this progression, local government auditors may one day find them selves serving as independent reviewers of citizen participation processes.

It will also be increasingly important for auditors to implement tighter standards particularly in regard to carefully communicating the scope, criteria and level of assurance of engagements to stakeholders. Enhancements to and clarifications of the standards regarding independence may also be warranted to address any residual concerns about the value of external audits.

As performance measurement continues to evolve so will the role of auditors. There will certainly be more opportunity for these professionals to be valued resources and play critical roles in assuming responsibility for government performance management systems that will result in accurate accountability and provide the community at large with a better understanding of benchmarking and best practices.

4.4 Types of Audit Contracts

Contractors who provide auditing services for the Federal government generally fall under the auspices of the Armed Services Procurement Regulations (ASPR), the Atomic Energy Commission Procurement Regulations, the National Aeronautic and Space Administration Procurement or the Federal Procurement Regulations (FPR). These regulations provide uniform guidelines and policies regarding the procurement of supplies and services for contractors interested in doing business with the Federal government.

The government has an obligation to obtain the best services and products at prices that represent the lowest cost possible. The Federal government also implements incentive programs to create efficient contract performance.

Procurement regulations caution contracting officers that negotiation of arbitrarily low profits, the use of historical averages or the automatic application of predetermined profit percentages to the total estimated cost of a product does not provide the motivation to accomplish effective and economical contractor performance. Furthermore, regulations state that unreasonably low average profit rates on government contracts overall are detrimental to the public interest. The government recognizes that effective procurement in a free enterprise economy requires that the best available talents and resources be attracted to government contracting. Contracts are generally awarded in the following categories:

Contracts for items to be delivered or services to be performed

Research and development contracts

Construction contracts

Facilities contracts for the acquisition, construction or operation of plant and production equipment (American Institute of Certified Public Accountants, 1975)

There are generally two main categories contracts: fixed-price and cost. Fixed price contracts have a set fee and a set scope of work, along with a schedule for performance measurement. Cost contracts allow for reimbursement of allowable or defined costs. The main difference between these two types of contracts is that the fixed-price contract adheres to best performance whereas, the cost contract adheres to best effort.

In conjunction with the above stated contract types, there are also auditing procedures that are particular to government contracts. Some of the reasons for these special types of audits are because:

Contract provisions and regulations have significant impact on the rights of the contracting parties

Substantial estimating is generally required as a result of the long duration of many contracts

The procedures and type of audit selected by the auditor really depends on the contracting environment (American Institute of Certified Public Accountants, 1975).

There are many factors that impact an auditor's decision regarding the type of audit that will be conducted. An independent auditor may conclude that a particular procedure may not be appropriate for a matter at hand or that the audit can be accomplished by using another procedure that would be more appropriate. It is often left to the discretion of the auditor's expertise.

Whatever, type of audit is used, the auditor must be aware of the regulation differences that guide contract pricing and financial reporting. In order to effectively examine financial statements, the auditor will need to fully understand the implications of these regulations.

No matter what type of audit is implemented, the auditor should review the contractor's prime contracts, subcontracts and any special terms or provisions. The auditor needs to be aware of this information and should retain pertinent details for possible future use.

The main thrust of any audit is to retain control of performance and insure that stated objectives are met. The auditor needs to determine the extent and times that he will need to review and evaluate the effectiveness of the contract.

When considering the types of contract audits, auditors need to be aware and take into account the fact that the accounting system should provide for the classification and identification of costs as defined by regulations.

There are several types of auditing procedures including accounts receivables, retained accounts, claims receivables, liabilities, evaluation of contracts in process, change orders, contingent liabilities and other contract considerations all come into play. And there are other issues beyond that.

Accounts Receivables - Billed receivables under government contracts can differ from those in commercial trade enterprises. The auditor will need to implement procedures that determine if the amount included in the contractor's records represents the amount billed to the procurement office for what is stated in the contract.

Retained Amounts - Retained amounts may be part of the contract specifications, in which the customer may hold back a defined amount until certain contract conditions are met. Depending on the contract, the timeframe can be lengthy. The auditor will need to track the progress to insure that the final result will be met.

Claims Receivable - These usually arise as a result of contract changes or disputes. Auditors review the contract terms and documentation of the claim for settlement.

Liabilities - Basically, these represent payables to subcontractors, advance payments and guaranteed loans. The auditor will need to confirm these amounts and their specification in the contract.

Evaluation of Contracts in Process - It is very important that financial statement amounts are reviewed to make sure incurred costs have been properly classified, review estimates of costs to complete performance and compare total contract costs with the contract price. Auditors evaluate income recognition to date under the contract requirements. They will also need to test the accuracy of the contractor's detailed cost records vs. actual costs incurred. Based on the findings, if any contract discloses an indicated loss or a deterioration of the profit rate, the auditor may want to deploy additional procedures or obtain written representation from the company's financial management.

Change Orders - The auditor is concerned with change orders directed by the customer to the contract and which require adjustments to the contract price. If the adjustment hasn't been negotiated, the auditor may review to determine if there should be an increase or decrease in the contract price.

Contingent Liabilities - The auditor's role is to determine if consideration has been given to potential liabilities that may result from special clauses contained within a government contract. He may also at a future date, inquire about the possibility of contingent liabilities being added to a contract.

Other Contract Audit Considerations - Auditors also need to review and assess a contractor's inventory to establish a benchmark for each completion stage of the contract. These can even be applied to research and development contracts to determine if work is really being completed. Like assessing inventory, for R&D efforts, the auditor may actually examine data.

Contract Termination - When a contract is terminated, the auditor needs to examine the termination notice, contract terms, and assess procurement costs and proposal claims that need to be settled. The chief objective for the auditor in this scenario is to insure that the claims are recorded in amounts that are estimated to be realizable. The claims must also meet the appropriate termination regulations and the auditor needs to further determine if there were any excess procurement costs. In some cases, the auditor may want other outside opinions to determine the contractor's rights and obligations in the related termination.

Auditors are involved in every phase and aspect of government contracting. The above listed circumstances and types are representative of the type of work auditors handle. It does not by any means encompass all of the services that they render to the federal government for auditing practices.

Understanding the Audit Process

The key to understanding the audit process is to first understand that audits are the catalyst for change and improvement. A good audit program promotes effective program, administrative and financial management and is critical to insuring the integrity of programs for the Federal government. The real end product is the audit report that provides the documentation on a program's results.

Most audits are determined by a combination of factors including a program's dollar value, vulnerability to possible fraud, waste or abuse and previous audits and recommendations. Audits take into consideration:

regulatory requirements sensitivity of the organization and/or the program any conditions that have changed dollar value, duration of the program and the resources involved results of prior audits, reviews or evaluations

As defined above, audits go beyond just examinations of financial operations and take into account other factors that influence and affect the outcome of a contract. Essentially, all audits begin with pre-defined objectives that really are the deciding factor as to the type of audit that will be conducted.

The generic process begins with written notification, prior to the scheduled start date of an audit. There are however, some cases where no advance notification is provided. Generally, before an audit begins, the auditors meet with the involved parties to provide an overview of the audit and define the audit objectives. Other information is also discussed, such as the proposed timeframe, the need for easy access to information and people in the process and an introduction of the key members of the audit team and their roles. The auditors also accept recommendations from management for additional proposed areas to audit.

Prior to implementing the audit process, the auditors survey program activities and gather information about the enterprise's functions, mission, resources, responsibilities and further identify key accounting and programmatic systems of operation and control. Once they have completed this detailed examination or what is commonly known as the audit verification, they can move on to more comprehensive reviews of selected areas of a program. During these initial phases, the auditors employ specifically developed programs. Auditors can also implement field work, which consists of interviewing auditee staff and reviewing and documenting any important information.

Throughout the audit process, the auditor has an obligation to keep the management advised as to their procedures and findings. Generally, informal meetings, discussions and briefings are used to keep all involved parties informed. Meetings and discussions are routine with briefings being held when important issues arise that need input from certain levels of management.

Audit reports also play an integral part in the audit process. A draft report will normally be completed after field work is finished and management's comments have been considered. The request is that the report be reviewed and any comments provided in writing within 30 days regarding the facts and the conclusions of each finding and recommendation that is contained in the report. It is not considered a final report but rather a work in progress and is not a public document.

The final report is produced at the end of the response period, after reviewing and assessing the auditee's response to the draft report. The objective of the final report is to provide a fair, comprehensive and accurate picture of what took place during the audit and what the outcome was.

The comprehensive report includes information on the scope of the audit, the objectives and the methodology that was employed; plus a statement that indicates that the audit was conducted in accordance with government auditing standards and a description of the findings and recommendations for improvement.

But the report is really just the beginning of the audit. The real work begins with determining what the response will be to the audit findings. The report will outline suggested action that need to be taken to correct issues that arose during the audit. An audit recommendation is considered resolved when the suggested action that will correct the problem is initiated and produces the desired result. The corrective actions could be linked to monetary or non-monetary issues and the resulting outcome must be in accordance with the accepted standards of the law, regulations and administrative policy. If a case arises where recommendations cannot be resolved because of disagreement, the matter must be referred for follow-up so that the appropriate corrective measures can be initiated.

The audit process should be viewed as an opportunity for an objective, and impartial review of program operations, what's working and what's not and be the catalyst for improvement recommendations that can be acted upon, resulting in better program operations and cost and resource efficiencies.

One essential process that is key to any audit is the selection of the auditor who will conduct the audit. For some government auditees, state or local law places the authority and responsibility to conduct or arrange for an audit with an independent government auditor. Other government auditees may have the option to engage an independent government auditor or a public accounting firm. Non-governmental auditees normally must engage a public accounting firm to conduct the audit (U.S. Department of Labor, 2001).

There are defined requirements for the auditor including:

perform the audit in accordance with government audit standards apply risk assessment procedures to determine which programs will be audited; a program that is audited is called a major program determine whether the financial statements and schedule of expenditures of Federal awards are presented fairly gain an understanding of internal control over Federal programs and test internal control over major programs determine whether the auditee has complied with the compliance requirements which may have a direct and material effect on each of its major programs; and follow up on prior audit findings (U.S. Department of Labor, 2001).

The objective of any audit is to find better ways to insure that steps are taken to improve the internal controls over the negotiation, award and administration of service contracts. Audits gauge the level of satisfaction with services contracts by the procurement dollars spent on individual programs. More often than not, government agencies select the vendor that provides the best value and the attempt is made to obtain better than negotiated pricing but the guidelines encourage but do not require the agency request better pricing than that specified by the GSA pricing schedule.

The chief benefit realized from an audit by user agencies includes a streamlined procurement process, which generally means faster delivery of the procured goods and services. Very often, the audit indicates the need for additional training for procurement personnel.

The rationale for the audit process is clear. It is a means to an end and a way for internal control to be maintained in the procurement of goods and services. The changes that come form an audit will eventually strengthen not only program and result in a better outcome but will also establish the audit process as a needed and viable way to enact the right changes.

In planning and performing an audit, one must first consider the existing internal control infrastructure before determining the audit procedures. The objective is to identify what is often referred to as a material weakness, which is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions (Independent Auditor's Report, 2002).

Best Practices and Benchmarking

Like every process or procedure, audits need to work through the guidelines of "best practices." Surveys are generally used as a benchmark for understanding the performance management system and the application of audits, particular in the municipal government.

The objective is to determine how successful measuring performance is in program management. Rules and regulations that are consistent must be implemented to insure there is consistency across the board within the audit process.

Some agency best practices include:

Computer System Auditing Standards -These Information Systems Auditing Standards have been adopted by the DISC Bureau of Information Resource Management, and apply to all State agencies effective June 30, 2000. Agencies should recognize that Legislative Post Audit and federal auditors will most likely pattern their audit activities around these standards, so agencies should structure their information systems development and management activities in concert with them.

Systems Development - Our computer-related audits over the past few years have turned up a number of common mistakes that agencies make when developing new computer systems. These mistakes contribute to projects taking longer to complete, costing more than originally anticipated, or not working as intended. In June 1995, the Legislative Post Audit Committee directed the Division to summarize the problems we had uncovered, and to share that information with State agencies in the hope that we can help head off similar situations with future major computer projects. This document went to every State agency.

Obtaining an External Audit - The benefits of having a high-quality audit of a government's financial statements are both immediate and long-term. For example, high quality audits can result in recommendations for immediate improvements in management operations. Furthermore, high quality audits can result in increased accountability over government programs and long-term improvements in public confidence in government. As a government official responsible for hiring an independent auditor, this guide will help you obtain the benefits of an audit that complies with all relevant professional auditing standards. It offers a five-step process to help guide you to a quality audit.

Recommended Practices from GFOA - The Government Finance Officers Association has developed a body of recommended practices in the functional areas of public finance to give GFOA members and other state and local governments more guidance on sound financial management practices.

Most government agencies have best practices and procedures for achieving excellence for supporting internal audits. Some of the more common procedures are:

implementation of the policy, development of departmental internal audit policies and annual audit plans, and application of professional standards;

establishing an active monitoring process that provides timely information to Treasury Board on significant issues of risk, control, or other problems with management practices in departments; developing a human resource strategy for the internal audit community to support departments in implementing the policy; establishing a framework to guide a formal evaluation of the effectiveness of this policy, within two years and again at five years; and providing assistance to departments in evaluating the performance of their internal audit functions.

Another common practice in many agencies is to monitor the audit process by:

Identifying government-wide internal audit priorities for consideration.

Providing early warning and advice on emerging issues and potential vulnerabilities.

Providing feedback on departmental internal audit plans.

Assessing quality of internal audit reporting across government.

Tracking internal audit activity across departments.

Reviewing audit frameworks for key policies as determined through risk assessment

Reviewing plans, reports, and recommendations on government-wide audit activity.

Briefs senior management on and co-ordinates departmental responses to reportsThere are also several groups that offer training and education on standards for audit management. The following collection of selected web sites offers a variety of sources of information and training:

Association of Government Accountants (AGA) - The AGA serves the professional interests of financial managers, from local, state and federal governments, as well as public accounting firms, responsible for effectively using billions of dollars and other monetary resources every day. The AGA provides education, training and tools to enable government financial managers to operate more efficiently and be more accountable to the public.Government Accounting Standards Board (GASB) - Performance Measurement for Government - This web GASB site "concerns the use and reporting of performance measures for government services. Performance measures are meant to provide more complete information about a governmental entity's performance than traditional budgets or financial statements and schedules can provide. Performance measures are concerned with the results of the services governments deliver, and help provide a basis for assessing the economy, efficiency, and effectiveness of those services."

Government Auditing Standards (Yellow Book) - The "Yellow Book" contains standards for audits of government organizations, programs, activities, and functions, and of government assistance received by contractors, nonprofit organizations, and other non-government organizations. These standards, often referred to as generally accepted government auditing standards (GAGAS), are to be followed by auditors and audit organizations when required by law, regulation, agreement, contract, or policy. These standards pertain to auditors' professional qualifications, the quality of audit effort, and the characteristics of professional and meaningful audit reports.

The Institute of Internal Auditors (IIA) - The IIA serves over 80,000 members in internal auditing, governance and internal control, Information Technology (IT) audit, education, and security from more than 120 countries. The IIA also provides internal audit practitioners, executive management, board of directors and audit committees with standards, guidance, and information on best practices in internal auditing. National Association of State Auditors, Comptrollers and Treasurers (NASACT) - NASACT is an organization for state officials who deal with the financial management of state government. Membership is comprised of officials who have been elected or appointed to the office of state auditor, state comptroller or state treasurer in the fifty states, the District of Columbia, and U.S. territories.

National Association of Certified Fraud Examiners - The Association of Certified Fraud Examiners is a 27,000-member professional organization dedicated to educating in fighting fraud. Each member of the Association designated a Certified Fraud Examiner (CFE) has earned certification after a rigorous qualification process. General informationThe last several years have seen federal departments, and agencies embark on many initiatives to promote quality services. Organizations are consolidating the changes made, sharing best practices internally to promote and accelerate change, and looking for ways to use the best practices as part of systematic, planned approaches to managing change and providing quality services.

Sharing benchmarking information and best practices is one way to recognize the efforts of innovative, creative employees and others who are improving client satisfaction, improving management practices, and ensuring the quality of services.

The process of benchmarking and the sharing of best practices are a way of learning from the experience of others, adapting the knowledge gained and significantly improving operational performance. Benchmarking saves time, and time is quickly becoming a very precious resource. Benchmarking and the sharing of best practices are effective organizational change tools when used as part of a planned approach to improving service quality.

The best way to begin to understand best practices and benchmarking is to start with the definitions of both. Benchmarking is defined as the continuous, systematic process of measuring and assessing products, services and practices of recognized leaders in the field to determine the extent to which they might be adapted to achieve superior performance. Sharing best practices refers to capturing and sharing a work method, process or initiative to improve organizational effectiveness, service delivery and employee satisfaction.

For best practices to be successful, there needs to be a strategy in place for agencies to implement. To begin with, there needs to be an established and sustained environment, across government agencies and within organizations, that embraces the process of benchmarking and the sharing of best practices. Next, all involved parties need to endorse resource commitments, from all levels of management in each department for a quality service strategy incorporating benchmarking and best practices.

Then, performance indicators need to be defined for:

the quality and scope of benchmarking and best practice initiatives embedded in organizational business plans the degree to which performance review and recognition systems support the use of benchmarking and the sharing of best practices the number of incentives and amount of recognition provided by departments to employees who have made major contributions using benchmarking and best practicesA work plan then needs to be implemented to promote government-wide and departmental sharing of benchmarking and best practice experience and information including access to national and international databases.

A creation of government-wide, easily accessible benchmarking and best practice databases.

A significant contributions of benchmarking information and best practices by departments, and agencies to a government-wide knowledge base.

A availability of different means of sharing benchmarking and best practice experiences and information such as electronic media, newsletters and town hall meetings results of a survey of benchmarking and best practice practitioners regarding their satisfaction with benchmarking and best practice services providedOne of the key factors in the best practices arsenal is to implement a strategy for disseminating and sharing best practice and benchmarking information and results in a timely, accessible, user-friendly, and efficient manner. Based on this, performance indicators should be established:percentage of departmental strategic and annual business plans that show best practice and benchmarking initiatives various means for sharing benchmarking and best practices, such as electronic media, newsletters, town hall meetings and conferences percentage of government departments, agencies and Crown corporations that share benchmarking and best practice initiatives on government-wide knowledge bases level of access by government employees to government-wide knowledge basesBest practices and benchmarking needs to be built into management training and the follow-up should be to assess the relevance of the training and services provided. The next layer of implementing a best practice strategy is to assess the progress in implementing benchmarking and best practice sharing and continuously improve benchmarking and best practice processes. There is a need to determine the effectiveness and efficiency of the different means for benchmarking and best practice sharing, and of improvements to operational results. The following are possible performance indicators:

service delivery improvements, such as reduced costs, shorter cycle times and resources savings that result from applying best practices and benchmarking processes number and scope of successful benchmarking and best practice projects implemented by each organization

Without a doubt, continuously improve ways to capture, disseminate and share benchmarking information and best practices to improve results and to sustain their use. User satisfaction levels and the quality of suggestions are all necessary to improving benchmarking and best practices.

Chapter 5 - CONCLUSIONS

The actual objective of an audit is to achieve prudent contracting. Evaluation of policies, procedures, controls and actual performance is also assessed and finally, identifying and evaluating all activities that impact proposed or incurred cost. In the end, the audit is about cost and results.

In any program or contract, all involved parties have expectations. In the case of the Federal government, expectations impact strategic planning and resource allocation and impact entire programs, non-profit organizations, and possibly state and local governments.

The stakeholders are many and there is marginal room for error or slipups. Many people assume that all contracts are subject to audit. In reality, less than 10% of all contract awards will be subjected to an audit in their lives. The most essential aspect of dealing with the Federal government is to understand the rules and regulations. A true understanding will help contractors avoid pitfalls in the end. Following some well outlined and simple rules can insure the ability to successfully deal with the agencies of the government.

Let's remember that procurement personnel have one goal - to obtain quality products and services at a fair and reasonable price. The procurement goal is the same as any goal that we might face in our daily lives as well. For example, what is your goal when you decide to buy a new car or go out to lunch. I would bet that the same concepts play in your daily actions. A price is fair and reasonable if it is fair to both the buyer and the seller. The price must also be fair under the current market conditions.

The method of procurement will have a significant impact on the level and types of audits that you may see over the life of a contract. Competitive pressures focus the determination of price to factors other than cost. Therefore, there is minimal need to audit cost. Under a sealed bid, this is full and open competition so no audits will be performed on the award. Under a negotiated procurement, there may or may not be competition. Absent competition, there is a high degree of reliance on cost to support the price. Therefore, negotiated procurements may be subject to audits before, during and after award. Commercial contracts have truly hit the contracting scene after FASA. A commercial buy relies on the marketplace for a price - not cost data. All commercial contracts are fixed price. Therefore, the level of auditing that a commercial contract may be subjected to is minimal. Sole source fixed price awards are also subject to a wide range of audits, several of which can reduce the contract price, making the contract "Almost fixed price."

Almost 90% of contract awards will be based on sealed bids, commercial items or adequate price competition. That means there is a handful of contracts subject to audit. Once the contract is awarded, all competition is gone. Therefore, any changes will be sole source. Sole source contracts need a pricing mechanism. If commercial prices are not available, the contracting officer will rely on the contractors cost, plus a profit, to determine the price. Finally, the Government has some unique privileges for agreeing to a contract. First, the Government can change the contract requirements at almost any time and the contractor must continue to perform. The contractor is entitled to an equitable adjustment to the price and schedule of the contract - generally determined by cost. In addition, the Government can decide at any time that they no longer need our goods or services. Termination for convenience settlements are generally based on cost as well.

It is paramount to remember that in the Federal world, taxpayer dollars are spent. When spending taxpayer dollars, oversight is used to help ensure that public monies are spent under the guidelines established. Auditors are critical to this process. Auditors take many forms with many agencies. Inspectors General are the "Internal Audit" group of each agency. These individuals are tasked with ensuring that the agency follows its own guidelines and can examine a transaction from both sides. Agency auditors are also generally internal to the agency and help with fund and accounting issues within the agency. Outside of the Department of Defense, these auditors may perform contract related audits at a contractor location. Criminal Investigators focus on criminal and civil violations of the law. Although not always as exciting as "NYPD Blue" these individuals often do there work when internal controls either do not exist or have broken down. GSA Auditors are relatively new to the scene. Although GSA Auditors have been around for a long time, the focus of the GSA has changed as the Agency is now required to be self-funding through the Industrial Funding Fee on Federal Supply Schedule contracts. It is easy to understand that one of their primary focuses is on the IFF submission and reporting requirement. Other audits may occur with price reduction clauses on FSS contract. Contract auditors are the ones in the forefront.

No matter what type of audit is conducted, auditing is part of the Federal infrastructure for achieving set objectives. It's that simple and that difficult. Throw in the government agencies that are involved and you can understand the need for consistent best practices across the board. These players are the Procuring Contracting Officer or PCO. This individual is the only person that can sign a contract. The PCO is generally located at the agency's facility. The Administrative Contracting Officer or ACO is in place for just this reason. The ACO is geographically located near the contractor. For DoD contracts, the ACO is generally the Defense Contract Management Command [DCMC]. If a contract is terminated, the individual tasked with closing the program doors is called the Termination Contracting Officer or TCO. Generally the agency wants their PCOs to remain focused on the work of the agency. Once a contract is terminated, it becomes an administrative issue. Often, PCOs will delegate their authority to the ACO to perform these functions. The Contracting Officers Technical Representative is the primary contact between the contractor and the customer.

Many auditors have a significant independence requirement that places a big challenge on trying to find and track fraud, waste and abuse. Inspectors General do not approach their tasks with traditional auditor independence. This is because the IG is chartered to ferret out fraud, waste and abuse in contracts and at agencies. The IG has very broad authorities including subpoena power. The IG works with law enforcement agencies throughout the U.S. To help catch the bad apple that ends up spoiling the whole bushel. The IG can review a PCO during fact finding and negotiations. Then the IG can review the contractors work on the other side of the transaction.

Congress has a tremendous impact on the procurement process. Congress passes Public Laws that are incorporated into regulation. The Cost Accounting Standards and the Truth in Negotiations Act are two such laws that are incorporated into the FAR. At the same time, it is commonplace on CSPAN to see members of some congressional committee bashing one side or the other.

The procurement process is constantly under attack for such things as $500 hammers and expensive toilet seats. It is good to know that these instances are often few and far between. The Federal Government awards thousands of contracts each day and still we have the same few instances of procurement stuff on the headlines. Something in the system must be working.

Congress also has a tremendous impact since they alone can be responsible for the life or death of a program. In addition, Congress is responsible for all of the laws that eventually get incorporated into the FAR.

The real responsibility falls on the contractor:

The contractor must perform the statement of work specified in the contract

The contractor must satisfy the Government's oversight functions and activities. In many cases, this means entire departments or groups just to satisfy the reporting and information wants and desires of people outside of the contract.

The contractor is required to find and maintain adequate people, plant and equipment to perform this statement of work and that statement of work. If there is a performance problem, the contractor is required to fix problems and keep the customer satisfied.

Finally, and of the most profound importance, the contractor is responsible for providing a return to its owners. The return is provided through profits.

As we consider audits, they are governed by very rigid set of standards. Trained, independent auditors exercising due professional care perform audits and they are planned and supervised. The auditors write their audit report using a set of reporting standards as well. These standards are known to the traditional CPA as Generally Accepted Auditing Standards or GAAS. The General Accounting Office has incorporated these audit standards into the Generally Accepted Governmental Auditing Standards or GAGAS. In recent years, DCAA and other audit agencies have issued many reports that are not audits. These reports are "Agreed Upon Procedures" and are far from a GAGAS audit. A GAGAS audit would include an audit plan, independence, and a statement regarding the applicability of the data for the intended use.

The bottom line is that government audits are professionally and ethically necessary. Government monies are out monies and in view of that fact, quality and measurement become key predictors of a program or contract's success. Please refer to the case studies found in Appendix II.

Chapter 6 - RECOMMENDATIONS believe that the government's audit process is fair and equitable by design and is employed only when necessary. It is a vehicle for improving the contract process and in effect producing efficient and effective results for purchasing goods and services and supporting non-profit and public programs.

Certainly, there is always room for improvement in a process and that is the main reason that auditing is employed. I would recommend that the government agencies continue this process. In all due diligence, they may wish to educate their internal personnel on the functions of the audit process and how to participate effectively.

My recommendation would be to use the audit process as a management tool and then to take ownership for producing actionable items that can resolve any pending issues. This process isn't brain surgery. It's atoll designed to make things work properly and to insure there is no fraud, deception or abuse.

Given the increased attention that measurement performance is receiving in the government sector, it would be highly advantageous for agencies to deploy measures to assess and compare their organization's performance. Each agency or department needs to establish benchmarks and be committed to proactively responding to the findings.

Some of the recommendations I would make are:

department commitment and leadership buy-in

Departmental, middle manager and employee buy-in

Establish a culture of performance excellence

Training and education

Clarity of vision, strategy and outcome across the board

Keep it simple because it is Resources to implement

Clear link between strategy, measures, outcome and resolution

Budget tied to strategy

Audits can be a powerful tool if tied to all of the above. My recommendation is to incorporate it into the strategy from the top down. Ownership then becomes everyone's responsibility.

APPENDIX I - GLOSSARY OF AUDIT PROCESS TERMINOLOGY

Auditee A non-Federal entity that expends Federal awards that must be audited pursuant to government provisions.

Audit Finding A deficiency that the auditor is required to report in the schedule of findings and questioned costs.

Auditor A public accountant or a Federal, state or local government, audit organization which meets the Government Auditing Standards.

Award Federal financial assistance and Federal cost reimbursement contracts, including awards received from pass-through entities.

CFDA Catalog of Federal Domestic Assistance, a government wide compendium of all Federal programs, grants and other activities that provide assistance to the American public.

Compliance Requirement A requirement, which is applicable to a program and may be included in the compliance supplement requirements.

Financial Statements Reflect the auditee's financial, results of operations or changes in net assets.

Government Auditing Standards for auditing government organizations and programs issued by the U.S. General Accounting Office.

Management Decision An evaluation made by the Federal awarding agency or pass-through entity of the audit findings and corrective action plan, and the issuance of a written decision as to what corrective action is needed.

Pass-Through Entity A non-Federal entity that provides a Federal award to a subrecipient to carry out a Federal program.

Single Audit An audit of a non-Federal entity's financial statements and Federal awards, which meets government requirements.

APPENDIX II - CASE STUDIES

The following agency case studies present instances where audits proved to be beneficial and the resulting lessons learned and recommendations resulted in successful outcomes.

Highlights in the History of U.S. Army Audit Agency - Major External Studies of USAAA Organization and Operations

The Blue Ribbon Defense Panel, appointed by the Secretary of Defense, was given a charter to study the entire organization, structure and operation of the Department of Defense. The AICPA Advisory Committee to the Panel issued a report entitled "Contract and Internal Auditing Within the Department of Defense"(July 1970).

The AICPA Committee reviewed the organization of seven audit organizations (Army, Navy, Air Force, Defense Logistics Agency, Office of the Secretary of Defense (two activities), and Defense Contract Audit Agency.) Major recommendations were:

The head of each organization should be a civilian, and report directly to the Secretariat of his respective department. Audit coverage should be expanded to include activities of a major headquarters staff at the departmental level. A single formal internal audit education and training program should be established at the DOD level.

The General Accounting Office reviewed Army Audit's operations and issued a report entitled "Why the Army should Strengthen its Internal Audit Function," (July 1977). The report emphasized:

lack of freedom to select areas for audit.

The restriction on auditing combat readiness and tactical activities.

That the internal audit function was not placed high enough in the Army organization.

Contrary to DOD policy, the Agency was headed by a Military Officer

The House of Representatives' Committee on Government Operations issued a report in November 1977 that was entitled "Improving Internal Auditing in the Department of the Army." Recommendations were made that the Secretary of the Army: (I) review audit needs to ensure adequate resources, (II) review the Agency to ensure that no undue limitations are imposed on scope of activities, and (III) review follow-up procedures on recommendations made. (Subsequently, the civilian position of The Auditor General was created as part of the Office of the Chief of Staff.) report entitled "The Department of Defense and Inspector General Act of 1978" prepared by the Task Force on Evaluation of Audit, Inspection, and Investigative Components of DOD was issued in May 1980. The report covered background and data on the audit, inspection and investigative agencies of DOD; principal recommendations were:

To maintain the separate components.

Relieving assistant secretaries for financial management of supervising internal audit organizations.

Not to attempt dividing or limiting review jurisdiction of audit and inspection components.

Hill Air Force Base, Utah

Overview

Energy savings performance contracting at Hill Air Force Base generated much interest during a recent training session on energy management that downlinked 12 Department of Defense sites. Energy systems in 940 buildings on the Base will be upgraded under an 18-year ESPC between the Government and the energy service company, CES/Way. Improvements are distributed over five task orders that will be completed in five years, with CES/Way providing $2.5 million in up-front costs for the first two task orders. Utah Power & Light will provide $8 million in rebates to help cover the contractor's initial investment, maintenance services, and interest costs. The remainder of the costs will be reimbursed from the Government's share of energy savings.

The potential annual energy savings at Hill AFB are estimated between $250,000 and $350,000 for task orders 1 and 2. Implementation of an initiative to replace faulty steam traps throughout the Base will result in annual savings of about $1 million. There may be six or more additional task orders under this contract, worth a total of $1 million in potential energy savings. Actions taken under the first task order are already accruing savings; in the first six months after electrical improvements were made in 25 buildings, use of electricity fell 25% in those facilities.

Background

There was a need to reduce energy and water use at Hill Air Force Base, which is subjected to extreme temperatures during summer and winter in its desert location north of Salt Lake City. Projects to improve the energy efficiency of lighting and HVAC systems are expected to generate significant savings for the Base over the life of the energy savings performance contract.

The Base has some unique features that are suited to other efficiency projects, including industrial operations at its Air Logistics Center and a steam distribution system that could be improved. Water conservation and other projects are expected to generate additional energy savings at Hill AFB.

Project Summary

The first two tasks of this contract focused on lighting and HVAC systems, which are responsible for about 30% of the energy demand at Hill Air Force Base. Hill AFB retained the energy cost savings realized from early lighting retrofits and invested these savings in HVAC upgrades throughout the Base at no additional cost to taxpayers. Although new HVAC systems produce lower overall energy savings than energy-efficient lighting, the older HVAC systems were in such poor repair that the savings will be significant.

Approximately two-thirds of the energy used at Hill AFB is for production of steam heat, and 26% of that energy is lost because of poorly functioning steam traps. A "Steam Initiative" is underway to audit and replace all the steam traps.

Hill AFB is one of five Air Force Bases with an Air Logistics Center, with three industry-like "directorates" where aircraft components are rebuilt. Industrial equipment operated by the Center are intensive users of energy (e.g., electroplating vats, parts washers, and paint booth technologies), and the potential for energy savings from this equipment is being studied. The Air Force Materiel Command is in favor of using ESPC and private-sector utility funding to pay for industrial retrofit projects up front, and is also looking into the potential use of ESPC at other Bases.

Contracts at Hill AFB are prepared to cover four phases of a project: (1) an energy survey and audit of the facility(s); (2) a report to the U.S. Government that evaluates the contractor s proposal, showing the potential energy savings; (3) implementation of the project; and (4) maintenance of HVAC equipment (where appropriate)

Benefits of Using an ESPC

By using an ESPC, Hill AFB replaces aging and energy-wasting equipment without incurring up-front capital costs, reduces its utility bill, reduces operation and maintenance costs, and meets its energy-reduction goals.

Lessons Learned

In the course of its ESPC experiences, Hill Air Force Base identified opportunities to overcome institutional and financial barriers: Scope of the Contract Expanded: In February 1995, the energy manager identified faulty steam traps as being responsible for a significant loss of energy at Hill AFB. However, the "intent of the contract" was to achieve electricity savings only, and upgrades to steam traps could not be included in the contract. The utility, Utah Power & Light, finally agreed to offer rebates on a "blended" project (of lighting and steam traps), and a new task order was prepared to include all steam traps.

Competition for Department of Defense (DOD) Project Funds Overcome: In recent years, Hill AFB has found it easier to produce energy savings through the use of utility rebates and ESPC than to compete for scarce project funds from DOD. Utility rebates fund 50% of the lighting retrofits, and contracts are written that incorporate these rebates into their scope. Offerors pay for up-front HVAC work, and their investment is returned according to the energy savings realized each month.

Length of Contracting Process Shortened: The use of energy savings performance contracting helped shorten the ordinary contracting process significantly. By gaining approval for performance of the "Steam Trap Initiative" through ESPC, Hill AFB shortened the DOD contracting process from 18 to 7 months. Further analysis showed that reducing the approval process by eleven months saved more than $700,000 in energy costs.

Maintenance Personnel Reductions Offset: There has been a reduction in the size of the maintenance staff at Hill AFB because of DOD downsizing, and it was therefore deemed crucial that the contractor be required to maintain the equipment installed under ESPC. All major installation of equipment (lighting and HVAC retrofits, steam-trap replacements, and water conservation steps) will be completed by the contractor within five years. Because the contractor "owns the equipment" during the 18 years he is collecting a portion of the energy savings, the contract states that the equipment will be maintained by the contractor during that period.

Looking Ahead

Energy managers at Hill AFB believe the procedures they have developed in conjunction with ESPC should be used more widely at Federal facilities because of their obvious money and energy-saving benefits. With further innovative projects scheduled in energy efficiency and water conservation, the ESPC program at Hill AFB is expected to be a model for future agreements.

Additional Case Studies from the Federal Office of Accountability and Performance

Applying the Principles of the GPRA and Strategic Planning to the Inspector General/Audit Function U.S. Army Audit Agency

The Army Audit Agency (AAA) conducts independent audits for the Secretary of the Army and assists Army managers in making informed decisions, resolving issues, and using resources effectively. This case study describes the process of using performance information in program management and budget justification and would be particularly useful to service sector agencies, especially those performing audit activities.

As a result of a survey of Army managers, AAA discovered that the agency was viewed by its customers as having an adversarial role. This finding led to a major restructuring within the organization and a shift in focus toward the agency's customers. AAA stresses top management support and employee input in the strategic planning process as essential to its success. Both long-term and annual program goals including improvements in customer satisfaction, productivity, and dollar savings to the Army are presented.

Applying the Principles of the GPRA to the Research and Development Function Army Research Laboratory

The Army Research Laboratory (ARL) provides the fundamental and applied research for future weapons and other material for the nation's land warfare forces. This study focuses on the development of performance indicators for one of the hard-to-measure programs: research and development.

Performance planning is divided into three sections: management initiatives and goals; technical objectives; and annual goals for measures or projects as determined by the ARL Director. ARL measures three dimensions of research program performance (quality, productivity, and relevance) based on three "pillars": peer review, operational indicators (metrics), and customer feedback. These factors are integrated and used by the Director in assessing performance at ARL. An example of the implementation of each of these pillars is provided in the case study.

To implement strategic planning and performance measurement, ARL stresses that a new way of thinking, accompanied by total commitment by senior management, is required. This commitment can require a significant investment in personnel, funds, and time.

Using Outcome Information to Redirect Programs: A Case Study of the Coast Guard's Pilot Project Under the Government Performance and Results Act

Implementing GPRA can easily get bogged down by uncertainties and distractions. Managers may be ambivalent about setting goals, more comfortable with immediate problem-solving, reluctant to risk accountability for things (like outcomes) which are outside their control. Organizations, which were set up to optimize activities, may be poorly aligned for addressing outcomes. The budget linkage is unclear. Data collection may be misdirected or incomplete, and evaluators can get mired in the pursuit of unattainable precision.

The Coast Guard's GPRA pilot has worked through several different models for planning, focused its management on a few key program goals, reduced the constraints of its own internal directives/standards for activities, and developed a range of performance indicators which give some new perspectives on its programs. Managers are setting goals that are clearly a reach, and changing the way they do business. All except one of the goals were met or exceeded in the first year of the pilot.

This case study describes the Coast Guard's effort to sort through the many issues that confront managers in the process. It outlines how the Coast Guard resolved problems along the way, and identifies several continuing challenges.

Case Study on the Strategic Management Process at the IRS

Strategic management has been used in the IRS management and planning process for the last 12 years. The IRS case study stresses the integration of performance planning and the budget process. IRS incorporates the agency's vision for future operations; links long-range objectives with short-term action plans; identifies responsible organizational segments for action; includes performance measures for each action item; and targets IRS managers as its primary audience in its Strategic Business Plan.

The IRS case study emphasizes the importance of receiving input from both internal and external stakeholders. The factors influencing change in the strategic planning process, as well as IRS's adaptation to the changes, is discussed.

GPRA Case Study: Department of Veterans Affairs, National Cemetery System

The National Cemetery System (NCS) offers several "lessons" to other agencies as they face implementation of the GPRA. Throughout the strategic planning process, NCS used both internal and external input to develop their performance plan. Internal input was gathered extensively through the use of teams.

This case study stresses the need for ongoing evaluation and revision of the planning process. NCS repeatedly worked to "rethink" and "reengineer" its processes to include additional stakeholder input and to reflect more accurately its goals, objectives, and strategies for attaining those aims.

Use of Strategic Planning and Reinvention and the Implementation of the GPRA

The Denver Service Center (DSC) is the primary planning, design, and construction office for the National Park Service (NPS). The DSC case study describes the strategic planning process. DSC strategic objectives include: natural resource stewardship and protection; access and enjoyment of sites; education and interpretation; proactive leadership; science and research; and professionalism. To evaluate alternative approaches for achieving the goals, the task group used the following criteria: timeliness; cost; responsiveness to customer needs; increased product quality; communication and teamwork components; and benefit to the customer and the parks.