Assessment Report: DOE-OIG-18-03

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October 19, 2017

Audit Coverage of Cost Allowability for UT-Battelle, LLC During Fiscal Year 2015 Under Department of Energy Contract No. DE-AC05-00OR22725

Since 2000, UT-Battelle, LLC (UT-Battelle) has managed and operated the Oak Ridge National Laboratory under contract with the Department of Energy.  Oak Ridge National Laboratory is the Department’s largest science and energy laboratory and through its activities in neutron science, high-performance computing, materials research, and nuclear technology, Oak Ridge National Laboratory supports the Department’s national missions of scientific discovery, clean energy, and security.  During fiscal year (FY) 2015, UT-Battelle incurred and claimed costs totaling $1,415,425,695.

As an integrated management and operating contractor, UT-Battelle’s financial accounts are integrated with those of the Department, and the results of transactions are reported monthly according to a uniform set of accounts.  UT-Battelle is required by its contract to account for all funds advanced by the Department annually on its Statement of Costs Incurred and Claimed, to safeguard assets in its care, and to claim only allowable costs. Allowable costs are incurred costs that are reasonable, allocable, and allowable in accordance with the terms of the contract, applicable cost principles, laws, and regulations.

The Department’s Office of Inspector General, Office of Acquisition Management, integrated management and operating contractors, and other select contractors have implemented a Cooperative Audit Strategy to make efficient use of available audit resources while ensuring that the Department’s contractors claim only allowable costs.  This strategy places reliance on the contractors’ internal audit function (Internal Audit) to provide audit coverage of the allowability of incurred costs claimed by contractors.  Consistent with the Cooperative Audit Strategy, UT-Battelle is required by its contract to maintain an Internal Audit activity with the responsibility for conducting audits, including audits of the allowability of incurred costs.  In addition, UT-Battelle 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.

To help ensure that audit coverage of cost allowability was adequate for FY 2015, the objectives of our assessment were to determine whether:

• UT-Battelle Internal Audit conducted cost allowability audits that complied with professional standards and could be relied upon;

• UT-Battelle conducted or arranged for audits of its subcontractors when costs incurred were a factor in determining the amount payable to a subcontractor; and,

• Questioned costs and internal control weaknesses impacting allowable costs

Based on our assessment, nothing came to our attention to indicate that the allowable cost-related audit work performed by UT-Battelle’s Internal Audit could not be relied upon.  We did not identify any material internal control weaknesses with the allowable cost reviews Internal Audit conducted, which generally met the Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing.  In audits performed since our last assessment, Internal Audit questioned $44,171 in costs, which had all been resolved.  Additionally, we found that UT-Battelle conducted or arranged for audits of subcontractors when costs incurred were a factor in determining the amount payable to a subcontractor, and had resolved all costs questioned in those audits.

While it did not impact our reliance on its work, we noted that as part of Internal Audit’s risk-based planning approach, as approved by the Contracting Officer, Internal Audit did not review FY 2015 costs in each of UT-Battelle’s four major disbursement categories. Beginning with its FY 2013 allowable cost reviews, Internal Audit had determined that the risk of unallowable costs only warranted testing on a rotational basis and alternated auditing UT-Battelle’s major disbursement categories, auditing procurement and travel costs one year, and then non‐procurement and payroll costs the next.  Accordingly, Internal Audit conducted allowable cost audits on FY 2015 procurement and travel costs, but did not conduct audits on payroll and non-procurement costs.  Despite this change in approach, we noted that Internal Audit had relied on the same sampling approach it had used when it was performing annual audits of major disbursement categories.  In particular, for FY 2015 costs, Internal Audit had selected and tested approximately 50 transactions in each disbursement category, as it had done with costs incurred since FY 2007 when it was performing annual audits in each category.  As the risk of unallowable costs may change from year to year, we suggest that Internal Audit, in coordination with the Contracting Officer, continue to assess and validate whether the rotational transaction testing strategy provides for adequate audit coverage of incurred costs.

Topic: Management & Administration