April 9, 2021
Fiscal Year 2016 Evaluation of Incurred Cost Coverage at the Pacific Northwest National Laboratory
In 1994, the Office of Inspector General (OIG), Department of Energy officials, and internal audit officials from selected sites with management and operating contractors implemented the Cooperative Audit Strategy, which allows management and operating contractors to audit their own incurred costs. Based on recent work conducted by the OIG and concerns expressed by external stakeholders, such as the Government Accountability Office, the OIG is evaluating the Cooperative Audit Strategy. As part of that effort, the OIG commenced six audits in fiscal year 2020 to review certain contractors’ incurred cost coverage of selected areas. We initiated this audit to evaluate incurred cost coverage of selected areas during fiscal year 2016 at the Pacific Northwest National Laboratory.
We found that Battelle Memorial Institute’s allowable cost audit at the Pacific Northwest National Laboratory for fiscal year 2016 did not adequately evaluate incurred costs for allowability, allocability, and reasonableness. We noted weaknesses in Battelle Memorial Institute Internal Audit’s design of the audit risk assessment and sampling approach. We also identified issues with Battelle Memorial Institute’s year-end indirect rate variance disposition practice, treatment of unallowable costs, and classification of subcontracts. Further, we determined the Department’s Statement of Costs Incurred and Claimed is an inadequate information submission of the management and operating contractor’s claim and certification of costs incurred during the year.
Given the large amount of taxpayer funding used for Department management and operating contracts, and the reliance on contractor Internal Audit functions to audit such funds, weaknesses in the annual evaluation of incurred costs could result in significant amounts of unallowable costs being charged to the Department and going undetected.
The results of this audit will be used in conjunction with the results of multiple other audits, inspections, and investigations in arriving at conclusions regarding the Cooperative Audit Strategy and providing recommendations to the Department in an upcoming report.