September 9, 2015

Audit Coverage of Cost Allowability for Sandia Corporation During Fiscal Year 2013 Under Department of Energy Contract No. DE-AC04-94AL85000

Since October 1993, Sandia Corporation (Sandia), a Lockheed Martin Company, has managed and operated Sandia National Laboratories (SNL) for the Department of Energy (Department) and National Nuclear Security Administration.  SNL is managed under a cost-reimbursement management and operating contract employing performance incentives.  The contract runs from October 1, 1993, through April 30, 2016, with an option to extend the period of performance through April 30, 2017.  Sandia incurred and claimed costs of $2.6 billion in fiscal year (FY) 2013.

Sandia's contract requires it to account for costs incurred annually on its Statement of Costs Incurred and Claimed.  The contract requires Sandia to account for all funds advanced by the Department, to safeguard assets in its care, and to claim only allowable costs.  A Cooperative Audit Strategy (Strategy) makes efficient use of available audit resources while ensuring that the Department's contractors claim only allowable costs.  The Strategy places reliance on the contractors' internal audit functions to provide audit coverage of the allowability of incurred costs claimed by contractors.  Sandia's Internal Audit (Internal Audit) and Contract Audit Departments are part of its Independent Audit, Ethics, and Business Conduct Center.  Consistent with the Strategy, Sandia is required by its contract to maintain an internal audit activity with responsibility for conducting audits, including audits of the allowability of incurred costs.  The Strategy also requires that audits performed internally must, at a minimum, meet the standards prescribed by the Institute of Internal Auditors.  In addition, Sandia is required to conduct or arrange for audits of its subcontractors when costs incurred are a factor in determining the amount payable to a subcontractor. 

Based on our assessment, nothing came to our attention to indicate that the allowable cost audit work performed by Internal Audit for FY 2013 could not be relied on.  We did not identify any material internal control weaknesses with cost allowability audits, which generally met International Standards for the Professional Practice of Internal Auditing.  Further, Sandia Contract Audit had conducted or arranged for audits of subcontractors when costs incurred were a factor in determining the amount payable to the subcontractor.  While we did not identify any material internal control weaknesses with either cost allowability or subcontract audit, we are questioning $212,120 of costs identified and questioned by Internal Audit and Contract Audit that have not been resolved.

Topic: Management & Administration