Assessment Report: OAI-V-17-04

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May 17, 2017

Audit Coverage of Cost Allowability for Battelle Memorial Institute Under its Contract to Manage the Pacific Northwest National Laboratory During Fiscal Years 2013 and 2014 Under Department of Energy Contract No. DE-AC05-76RL01830

Since 1965, Battelle Memorial Institute (Battelle) has operated the Pacific Northwest National Laboratory under contract with the Department of Energy. This Laboratory, in the Department’s Office of Science, performs research and innovations in the areas of environmental protection and clean up, energy resources, and national security. The Laboratory is managed under a performance-based management contract, through September 30, 2022. During Fiscal Years (FYs) 2013 through 2014, Battelle expended and claimed costs totaling approximately $1.8 billion.

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.  To help ensure only allowable costs are claimed by the Department’s integrated contractors and to make efficient use of available audit resources, the Office of Inspector General, the Department’s Office of Acquisition Management, and the integrated management and operating contractors and other select contractors have implemented a Cooperative Audit Strategy.

To help ensure that audit coverage of cost allowability was adequate during FYs 2013 through 2014, the objectives of our assessment were to determine whether:
• Internal Audit conducted cost allowability audits that complied with professional standards and could be relied upon;
• 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 identified in audits and reviews and affecting allowable costs have been adequately resolved.

Based on our assessment, nothing came to our attention to indicate that the allowable cost related audit work performed by Battelle’s Internal Audit for FYs 2013 through 2014 could not be relied upon. We did not identify any material internal control weaknesses with cost allowability audits, which generally met the Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing (IIA Standards). During its FYs 2013 and 2014 audits of cost allowability, Internal Audit identified $375,983 in questioned costs, all of which had been resolved. However, we identified the following issues that need to be addressed to ensure that only allowable costs are claimed by and reimbursed to the contractor. Specifically:

• Although we ultimately determined that we could rely on Battelle’s Internal Audit work, we noted that work papers did not always include sufficient documentation.

• Battelle did not always conduct periodic post-award or interim audits of subcontracts. We noted that Battelle did not have a documented risk-based approach for conducting periodic post-award or interim audits of cost reimbursement subcontractors in effect during FY 2013 and most of FY 2014.
We made recommendations to the Manager, Pacific Northwest Site Office, and Management agreed with the findings, concurred with the recommendations, and proposed planned corrective actions that were responsive to our recommendations.

Topic: Management & Administration