[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
REVIEW OF THE RESULTS OF TWO AUDITS
OF THE NATIONAL ECOLOGICAL
OBSERVATORY NETWORK
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
December 3, 2014
__________
Serial No. 113-97
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Printed for the use of the Committee on Science, Space, and Technology
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://science.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
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COMMITTEE ON SCIENCE, SPACE, AND TECHNOLOGY
HON. LAMAR S. SMITH, Texas, Chair
DANA ROHRABACHER, California EDDIE BERNICE JOHNSON, Texas
RALPH M. HALL, Texas ZOE LOFGREN, California
F. JAMES SENSENBRENNER, JR., DANIEL LIPINSKI, Illinois
Wisconsin DONNA F. EDWARDS, Maryland
FRANK D. LUCAS, Oklahoma FREDERICA S. WILSON, Florida
RANDY NEUGEBAUER, Texas SUZANNE BONAMICI, Oregon
MICHAEL T. McCAUL, Texas ERIC SWALWELL, California
PAUL C. BROUN, Georgia DAN MAFFEI, New York
STEVEN M. PALAZZO, Mississippi ALAN GRAYSON, Florida
MO BROOKS, Alabama JOSEPH KENNEDY III, Massachusetts
RANDY HULTGREN, Illinois SCOTT PETERS, California
LARRY BUCSHON, Indiana DEREK KILMER, Washington
STEVE STOCKMAN, Texas AMI BERA, California
BILL POSEY, Florida ELIZABETH ESTY, Connecticut
CYNTHIA LUMMIS, Wyoming MARC VEASEY, Texas
DAVID SCHWEIKERT, Arizona JULIA BROWNLEY, California
THOMAS MASSIE, Kentucky ROBIN KELLY, Illinois
KEVIN CRAMER, North Dakota KATHERINE CLARK, Massachusetts
JIM BRIDENSTINE, Oklahoma
RANDY WEBER, Texas
CHRIS COLLINS, New York
BILL JOHNSON, Ohio
C O N T E N T S
December 3, 2014
Page
Witness List..................................................... 2
Hearing Charter.................................................. 3
Opening Statements
Statement by Representative Lamar S. Smith, Chairman, Committee
on Science, Space, and Technology, U.S. House of
Representatives................................................ 4
Written Statement............................................ 6
Statement by Representative Eddie Bernice Johnson, Ranking
Member, Committee on Science, Space, and Technology, U.S. House
of Representatives............................................. 8
Written Statement............................................ 10
Witnesses:
The Honorable Allison Lerner, Inspector General, National Science
Foundation
Oral Statement............................................... 12
Written Statement............................................ 15
The Honorable Anita Bales, Director, Defense Contract Audit
Agency
Oral Statement............................................... 25
Written Statement............................................ 27
Discussion....................................................... 39
Appendix I: Answers to Post-Hearing Questions
The Honorable Allison Lerner, Inspector General, National Science
Foundation..................................................... 58
The Honorable Anita Bales, Director, Defense Contract Audit
Agency......................................................... 69
Appendix II: Additional Material for the Record
Memorandum submitted by Representative Eddie Bernice Johnson,
Ranking Member, Committee on Science, Space, and Technology,
U.S. House of Representatives.................................. 84
Memorandum submitted by Representative Lamar S. Smith, Chairman,
Committee on Science, Space, and Technology, U.S. House of
Representatives................................................ 100
Memorandum submitted by Representative Lamar S. Smith, Chairman,
Committee on Science, Space, and Technology, U.S. House of
Representatives................................................ 106
REVIEW OF THE RESULTS OF TWO
AUDITS OF THE NATIONAL ECOLOGICAL
OBSERVATORY NETWORK
WEDNESDAY, DECEMBER 3, 2014
House of Representatives,
Committee on Science, Space, and Technology,
Washington, D.C.
The Committee met, pursuant to call, at 10:05 a.m., in Room
2318 of the Rayburn House Office Building, Hon. Lamar Smith
[Chairman of the Committee] presiding.
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Chairman Smith. The Committee on Science, Space, and
Technology will come to order. Good morning to everyone here,
and I appreciate the Member attendance we have this morning as
well.
Welcome to today's hearing entitled the ``Review of the
Results of Two Audits of the National Ecological Observatory
Network.'' I recognize myself for five minutes for an opening
statement and then the Ranking Member.
Today's hearing will focus on one of the National Science
Foundation's most ambitious major research facility projects,
the National Ecological Observatory Network, or NEON.
We are fortunate to have with us the heads of two
government organizations that are responsible for assuring that
taxpayers get their money's worth from the Federal contracts
with private entities like NEON. Our witnesses will discuss two
audits of the NEON project conducted by the Defense Contract
Audit Agency under contract with the National Science
Foundation Office of the Inspector General.
The NSF entered into a long-term agreement with NEON to
develop and operate the project's network of more than 100
fixed and mobile sensors. This audit identified more than $150
million in unsupported or questionable costs in the NEON
proposal. It concluded that there was not a ``fair and
reasonable basis'' for NSF to enter into the contract.
Nevertheless, NSF did not wait for the audit results. It
instead finalized an agreement based on NEON's original cost
proposal.
Audits have raised questions about cost proposals that were
accepted by NSF for several major projects. These includ the
Ocean Observatories Initiative, the Advanced Technology Solar
Telescope, NEON, and currently the Large Synoptic Survey
Telescope.
In response to these audits, NSF has made a number of
adjustments to how the agency evaluates costs of major
projects. The $150 million in unsupported and questionable
costs in the NEON proposal demonstrates that major problems at
NSF continue.
Auditors discovered several highly questionable
expenditures of taxpayer funds by NEON, including hundreds of
thousands of dollars spent on lobbying, lavish parties, liquor
for office happy hours, over $1,000 per month for premium
coffee service, and trips to a high-end resort in France.
These suspicious taxpayer-financed activities were not
detailed in the audit submitted to the NSF Inspector General,
which was limited in scope. But to his credit, the principal
auditor, J. Kirk McGill, invoked the Whistleblower Protection
Act to make sure that the Inspector General, Congress, and
ultimately the public was aware of hundreds of thousands of
taxpayers' dollars being spent on improper activities.
I hope to hear from our witnesses on what basis NEON
concluded, for example, that spending $25,000 for a holiday
party last year was an appropriate use of Federal funds. And
why did NSF allow this to happen? Our Committee may want to
hear directly from the NSF and NEON about these audits at a
hearing next year.
Federal agencies must be held accountable for their waste
and misuse of taxpayer funds. And the NSF needs to be held
accountable for how they spend taxpayers' hard-earned dollars.
The basic responsibility of any government agency is to act in
the national interest. The NSF needs to meet that standard.
That concludes my opening statement.
[The prepared statement of Mr. Smith follows:]
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Chairman Smith. And the gentlewoman from Texas is
recognized for hers, Eddie Bernice Johnson.
Ms. Johnson. Thank you very much, Mr. Chairman.
I have to confess that I am baffled by today's full
Committee hearing. There may be legitimate policy and
management issues for this committee to consider, but this
particular hearing at this time is in my opinion premature,
incomplete, and lacks balance. Therefore, it is impossible to
have a full discussion on any of the legitimate oversight
issues that we could examine.
As I am sure you are aware, Inspector General Lerner and
NSF's Director Dr. Cordova have initiated reviews of NSF's
policies and oversight of management fees and those reviews are
not yet complete. NSF is also investigating spending specific
to NEON and that is also underway.
Today, the most we will hear is some preliminary
observations from IG Lerner and Ms. Bales that NSF should
consider tightening up its policies with respect to management
fees. Perhaps the agency should do just that but the October
2014 DCAA audit report being reviewed today was not made
available to NSF until two weeks ago and it made no mention of
management fees. So while the discussion was had at the staff
level about inviting NSF, there was agreement that it was too
late to reasonably expect the agency to prepare testimony for
this hearing and at the same time premature for the reasons I
have already described. If we had postponed this hearing until
next year, as my staff urged your staff to do, we might have
included NSF on this panel to present their own findings and
plans with respect to the management fees.
We will also hear testimony from the witnesses about
contingency fees. NSF senior management and IG Lerner have been
at an impasse on the use and management of contingency fees for
construction projects for four years. Both had the opportunity
to share their views before this committee at a 2012 hearing.
Since that time, OMB has updated its own guidance on
contingencies. As my staff understands the update of
regulations, some of the specific areas of dispute, such as how
contingency expenditures are tracked, should now be settled.
There are other areas of dispute such as how the
contingency fund is managed that remain open to debate among
reasonable people. That is a key point. For these particular
policy issues there is no clear right or wrong so how do we
expect to have any meaningful discussion about these disputes
today without the agency at the table to represent--to present
and defend its own positions?
Mr. Chairman, I ask unanimous consent to submit for the
record a 2013 memo from NSF's Chief Financial Officer that
provides detailed justifications for the agency's current
policies. However, a document for the record does not make this
a balanced, complete hearing.
Chairman Smith. Okay. Without objection.
[The information appears in Appendix II]
Chairman Smith. And at the same time I would like to ask
unanimous consent to put in the record the following documents
that are in a binder I have here. And the title of the
documents is ``The Results of----
Ms. Johnson. I would like to reclaim my time now.
Chairman Smith. --``Results of the Two Audits of the
National Ecological Observatory Network.'' And without
objection, both your request for documents in the record and
mind will be so ordered.
[The information appears in Appendix II]
Ms. Johnson. Thank you, Mr. Chairman.
And finally, it is with some reluctance that I offer the
following observations. DCAA, the Defense Contract Audit
Agency, was established to audit DOD contracts subject to
defense acquisition regulation. I am concerned that they simply
do not have sufficient staff with expertise or experience to
appropriately audit NSF's grants and cooperative agreements.
My staff has heard from several entities audited by DCAA on
behalf of the IG that the auditors repeatedly asked for the
wrong documentation and made significant errors in their
assessment of information. Further, auditors repeatedly failed
to work with the audited entity in a transparent way that would
have resolved significant costs that were later questioned in
publicly available documents, including the IG's semiannual
reports. Having heard common complaints from several unrelated
entities, I am unwilling to attach too much weight to any
adverse findings by DCAA without further review.
Unfortunately, problems with DCAA's audit have caused
significant and ongoing tension between the IG and NSF
management for several years and have put credible NSF awardees
unnecessarily at risk. These problems also color today's
hearing.
Ms. Bales, please do not take my comments as a personal
criticism; I am just concerned that the auditing organization's
skills fit the job when we are rendering judgments about the
proper use of Federal funds and questioning the performance of
world-class research institutions and organizations. We didn't
even see DCAA testimony for this hearing until 5:00 last night.
Mr. Chairman, I want to join you in conducting legitimate
oversight of the National Science Foundation, but for the
reasons that I have mentioned, I don't think we will--this will
be possible for today's hearing.
Thank you and I yield back.
[The prepared statement of Ms. Johnson follows:]
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Chairman Smith. Thank you, Ms. Johnson.
And I will introduce our witnesses today but I will say
preliminarily that I appreciate all the good work you all have
done. I appreciate the fact that you are individuals of
integrity and have contributed much to help us conduct our
legitimate oversight responsibilities.
Our first witness, Ms. Allison Lerner, is the Inspector
General for the National Science Foundation and the Chair of
the Council of the Inspectors General on Integrity and
Efficiency. Ms. Lerner previously served in leadership
positions at the Department of Commerce and was selected by the
President to be a member of the Government Accountability
Transparency Board in 2011. Ms. Lerner received her bachelor's
and her law degree from the University of Texas. She is
certainly no stranger to the Committee and we are happy to
welcome her back to the witness table.
Our second witness, Ms. Anita Bales, is the Director of the
Defense Contract Audit Agency. The NSF Office of the Inspector
General relies on the DCAA to perform audits of National
Science Foundation major research facilities like NEON, which
the Inspector General reviews and submits to the National
Science Foundation. Before her work at DCAA, Ms. Bales served
as the Deputy Auditor General for Forces and Financial Audits
of the Army Audit Agency. Ms. Bales received her bachelor's
degree in business administration from Drake University and her
MBA from Syracuse University. She is the recipient of the
President's Council on Integrity and Efficiency Award for
Auditing, and we are happy to have you with us today as well.
And, Ms. Lerner, would you begin?
TESTIMONY OF THE HONORABLE ALLISON LERNER,
INSPECTOR GENERAL,
NATIONAL SCIENCE FOUNDATION
Ms. Lerner. Thank you. Mr. Chairman and Members of the
Committee, I appreciate this opportunity to discuss two audits
of the National Ecological Observatory Network and my office's
efforts to help ensure that NSF spends taxpayer dollars
effectively and for the intended purpose of advancing
scientific research.
We contracted with DCAA in 2011 to perform an audit of
NEON's $433 million proposed budget to determine if it was
prepared in accordance with federal requirements and formed an
acceptable basis for the negotiation of a fair and reasonable
price. From July through September 2011 DCAA issued three
inadequacy memoranda stating that NEON's proposed budget could
not be audited. The final such report found that none of the
proposed cost elements for labor, overhead, equipment, and
other items reconciled to supporting data. DCAA also found the
proposal included more than $74 million in unallowable
contingency costs and more than $1 million in unallowable
honoraria.
In February 2012 NEON submitted a revised budget proposal
which DCAA was able to audit. Despite working with NEON for
several months to clear inadequacies in the proposal, auditors
found a total of $154 million, or nearly 36 percent of the
total budget, in questioned and unsupported costs. The entire
$72.6 million proposed contingency was questioned. In addition,
more than 13 of the $14 million in costs for materials and
nearly $16 million of equipment costs could not be supported.
Other questioned costs included $1.8 million in management fees
for unallowable costs.
As a result, in September 2012 auditors issued an adverse
opinion stating that the proposal did not form an acceptable
basis for the negotiation of a fair and reasonable price. Among
other things, we recommended that NSF require NEON to submit a
revised budget with support for all proposed costs. NSF
disagreed with this recommendation and also stated that it had
provided management fee and awards for the construction or
operation of large facilities for years.
In light of the problems with the NEON budget, we
commissioned DCAA to audit NEON's accounting system. As the
audit was proceeding, DCAA informed us that management fee had
been awarded and used for unallowable costs, including $112,000
for lobbying and $25,000 for a holiday party. We investigated
the allegations and referred them to the Department of Justice,
which declined to accept the case for further investigation or
prosecution. We have added a review of the awarded use of
management fees to our Fiscal Year 2015 audit work plan.
It is essential for cost information for proposed budgets
to be accurate, current, and adequately supported because the
budget is the basis for charging costs in NSF. The problems we
found with the budgets were not limited to the NEON project. In
fact, we found that NSF approved proposed budgets for four
major projects totaling more than $1.4 billion although
significant questions existed as to the adequacy of those
budgets. As a result, while NSF knows what it will spend on
these projects, it is not clear whether it knows what they
should cost.
As we work to resolve recommendations made on audits of
proposed costs for NSF's large facility projects, we identified
broader weaknesses in NSF's pre- and post-work monitoring
processes for high-dollar, high-risk projects and compounded
our concern that unallowable costs could be charged to awards.
We recommended that, at a minimum, NSF increase monitoring for
its largest cooperative agreements valued at $50 million or
more. In our judgment, the actions NSF has proposed to take to
address OIG recommendations in this area fall short of the
standard necessary to adequately safeguard federal funds and
leave millions of dollars at risk.
As a result, in May we escalated the unresolved
recommendations. We took this step in light of the serious risk
to federal funds posed by NSF's current processes and
practices. NSF did not sustain our recommendation to require
awardees to remove contingency from proposed budgets. We are
awaiting NSF's decision on the remaining recommendations.
We target our work to areas that pose the highest risk of
misuse of taxpayer dollars and can lead to funds used
inappropriately being returned to the government. To that end,
our Fiscal Year 2015 audit work plan includes incurred cost
audits and accounting system audits of more than 10 awardees,
as well as the focus on the use of management fees. Incurred
cost audits are critical to proper monitoring and can reveal
costs claimed that are unallowable or unreasonable.
We have been urging NSF for the past four years to
strengthen accountability over its high-dollar, high-risk
agreements for large facility construction projects. NSF
applies its highest level of attention and scrutiny to
determine the scientific merit of the projects it decides to
fund. It is imperative that it applies the same rigorous
attention and scrutiny to its financial management of these
projects. The stakes are too high for the foundation to
continue its current practice of making awards before it
ensures that project costs are reasonable, are supported by
adequate documentation, and will use taxpayer dollars
efficiently. And I would be happy to answer any questions.
[The prepared statement of Ms. Lerner follows:]
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Chairman Smith. Thank you, Ms. Lerner.
Ms. Bales.
TESTIMONY OF THE HONORABLE ANITA BALES,
DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY
Ms. Bales. Chairman Smith, Representative Johnson, and
Members of the Committee, thank you for the opportunity to
appear before you today. I have submitted written testimony for
the record, and this morning I want to provide you a brief
overview of DCAA and its audit role with the National Science
Foundation and the National Ecological Observatory Network,
which I shall refer to as NEON.
DCAA performs contract audits for DOD components and other
federal agencies to help ensure contractors comply with
government contract regulations. Based on its audit findings,
DCAA makes recommendations to contracting officers who then
make final contract decisions based on their assessment of
those recommendations. The National Science Foundation
requested DCAA's help with NEON, a nonprofit organization
required to follow the cost principles in OMB Circular A-122
for determining costs of grants, contracts, and other
agreements.
DCAA performed two significant audits at NEON. First, at
the request of the NSF Inspector General, in August 2011 DCAA
attempted to perform a proposal evaluation of NEON's
cooperative agreement for major research equipment and
construction of the National Ecological Observatory Network.
Despite significant coordination with NEON, DCAA was not able
to perform an audit because of several inadequacies in this
proposal.
About a year later, DCAA began an audit of a revised
proposal. While there were still major inadequacies associated
with this proposal, DCAA was able to issue an audit report in
September 2012. Of the roughly $434 million proposed by NEON,
DCAA questioned about $102 million and concluded that an
additional $52 million was unsupported. Questioned costs are
costs the auditor considers not acceptable for negotiating a
reasonable contract price or not acceptable for reimbursement.
Unsupported cost denotes instances where the contractor has not
provided specific evidence or documentation to support
assertions.
The inadequacies noted in our audit report were significant
enough for us to recommend that the proposal not be considered
acceptable as a basis for negotiating a fair and reasonable
cooperative agreement price.
It is also important to note that our proposal review of
NEON was different from our normal forward pricing reviews in
two respects. First, we were asked to review the proposal more
than 7 months after the cooperative agreement had been awarded
and a price established. Normally, contracting officers request
a proposal audit before the award so they can make use of the
auditor's recommendations to negotiate a fair and reasonable
price. Second, we were asked to perform for the NSF IG. Audit
requests normally come from the contracting officer who was
responsible for awarding the contract and has the ability to
make changes in response to the recommendations.
In addition to the forward pricing proposal and also at the
request of the NSF IG, we reviewed NEON's accounting system and
issued our report in October 2014. Our audit disclosed a
material noncompliance with NEON's timekeeping system.
Specifically, NEON's actual timekeeping practices did not
comply with its written policies and procedures.
Our audit also disclosed two material noncompliances with
Circular A-122 that were corrected during the course of our
fieldwork. First, NEON failed to comply with the requirement
that organizations receiving more than $10 million in federal
funding of direct cost in a Fiscal Year must break out indirect
costs into two broad categories: facilities and administration.
Prior to our audit, NEON had reported these indirect costs
together. Second, NEON excluded unallowable costs from the
general and administrative overhead base. Unallowable costs
must be included in the G&A allocation base so they absorb
their share of an organization's indirect expenses. Our field
work verified that NEON corrected both of these conditions
after we identified them. We also issued a management letter to
the NSF IG that recommended potential improvements in NSF's
internal controls over contract costs.
In closing, let me assure you that we are committed to
providing NSF and all civilian agencies with high-quality
audits that protect the interests of the American taxpayer.
Moving forward, we would like to work with NSF acquisition or
grants managers and the IG through the normal contracting
process to provide comprehensive contract audit services for
NEON and other NSF contractors.
I appreciate the opportunity to testify before you today
and I will be glad to respond to questions. Thank you.
[The prepared statement of Ms. Bales follows:]
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Chairman Smith. Thank you, Ms. Bales.
Let me recognize myself for five minutes for questions. And
while I will direct my first question to Ms. Lerner, Ms. Bales,
if you will respond as well and we will go back-and-forth.
Ms. Lerner, the question is this: In my opening statement I
cited a number of examples of what I would consider to be a
misuse of management fees. And let me just focus on one. By the
way, the total cost of this misuse of management fees in my
opinion is close to a half a million dollars. I mentioned one.
Let me go back to that. And that was a holiday party last year
that cost $25,000, which amounted to about $140 for every
person who attended. Other agencies have written rules against
using taxpayers' dollars for these types of expenditures. Does
the National Science Foundation have any similar kind of rule,
and if not, why not?
Ms. Lerner. I am not aware of any specific rules that the
Foundation has. Obviously, cost principles that would apply to
the awards that are funded by the Foundation would generally
prohibit expenditures on parties and food.
Chairman Smith. Okay. Thank you. And, Ms. Bales, do you
want to add anything to that? I might add that, for instance,
NASA has a rule that prohibits use of dollars for anything like
this and other agencies have similar types of rules. But do you
have any recommendations for the National Science Foundation?
Ms. Bales. We--in terms of the holiday party, it was
covered by the management fee----
Chairman Smith. Yes.
Ms. Bales. --and because that is not considered a separate
cost, we didn't look at it as a separate cost and looked at it
as the management fee. If the fee had been--if the cost of the
holiday party had been reported separately, we would have
questioned that. Our recommendation would be to look at the use
of management fees and what is covered by management fees.
Chairman Smith. It is my understanding that for the last
several years the National Science Foundation has been on
notice that a lot of its management fees were being used in
ways that would not be considered appropriate and has ignored
past audits at least until a few days ago when I think because
of this hearing they decided to look at some of their
practices. In any case, the fact that they were warned for
several years and did nothing is troublesome to me. Do you see
the National Science Foundation as following best practices
when it comes to the use of management fees, Ms. Lerner?
Ms. Lerner. Our office, in an attempt to eliminate a kind
of murky issue, prepared a white paper that looked at the
history of management fees in the Federal Government. They go
back about as long as I do, to 1960s, and because of the lack
of clarity about what management, they are intended essentially
to help entities that primarily do business with the Federal
Government and that in order to maintain financial viability
need to have some ability to be reimbursed for expenses that
would ordinarily be un-reimbursable.
Chairman Smith. Okay.
Ms. Lerner. So they are intended to reimburse un-
reimbursable expenses, but there has been controversy over time
because no one has set limits on what those normal and ordinary
expenses should be and sometimes you find situations----
Chairman Smith. Don't most agencies set limits but the
National Science Foundation has not?
Ms. Lerner. I don't know that anyone has concrete limits. I
know some people--the Department of Defense looks very
carefully at the amounts that are proposed. I don't know that
they set actual limits. We did not identify any concrete limits
on what you could use a management fee for in our effort to
assess----
Chairman Smith. Okay.
Ms. Lerner. --the landscape.
Chairman Smith. Other than an example--in the specific
examples that I gave you, clearly those would be inappropriate
if they had been itemized----
Ms. Lerner. It is hard for me to see that a holiday party
is a normal and ordinary operating expense.
Chairman Smith. Okay. Thank you.
Ms. Bales, let me ask a couple questions and direct them to
you first. Let's go to the subject of construction contingency.
That is normal practice. You set aside a certain percentage for
contingencies, 18, 19 percent, sometimes 20 percent. But what
is different about the National Science Foundation here? And if
you will go into a little bit of detail in regard to NEON,
their contingency I think started at $60 million, went up to
$74 million. To my knowledge those expenses were not justified,
were not itemized, and were not documented, which I think is
fairly highly unusual. But if you will just comment on the
practice of the National Science Foundation when it comes to
the way they handle the construction contingencies.
Ms. Bales. The National Science Foundation has guidance
that allows for the use of contingency in budget, so as part of
their budget process, they will include here is the cost and
then here is an amount for contingency. And when that money has
been awarded--or the cooperative agreement or a grant is
awarded, the money goes to the awardee and then the--there are
practices in place where if there has to be, say, the limit is
over 250,000 and it needs to be reallocated, that then has to
be improved by--approved by NSF management. So----
Chairman Smith. And what about the increase from the 60 to
74 and was that documented or was that--were they sort of
operating without many rules and restrictions?
Ms. Bales. The--we did the proposal audit and looked at
those contingency fees. Part of the issue was the basis for how
much was being included in the contingency was not well
documented.
Chairman Smith. Okay. Thank you, Ms. Bales. That concludes
my time.
The gentlewoman from Texas, Ms. Johnson, is recognized for
her questions.
Ms. Johnson. Thank you, Mr. Chairman.
Ms. Lerner, on August 21, 2014, the Office of the Inspector
General of the Department of Defense released an evaluation of
DCAA's quality control system. The review found numerous
instances where DCAA failed to properly document its audit
conclusions, as required by the generally accepted government
auditing standards and the statements on standards for
attestation engagements of the American Institute of Certified
Public Accountants. This resulted in DCAA receiving a rate of
``pass with deficiencies'' indicating that DCAA still has
serious work to do in order to fully comply with the relevant
professional standards.
On September the 8th, 2014, the DOD IG released a report
that found one or more significant deficiencies in over 81
percent of DCAA's audits from Fiscal Year 2012 and 2013 sampled
as part of the review. On September the 17th, 2014, Kellogg
Brown & Root Services Incorporated, KBR, filed a suit against
the United States Government in federal court seeking to
recover $12.5 million in legal fees incurred by KBR in
defending against findings from a flawed DCAA audit. Were you
aware of these significant adverse findings regarding the
quality of DCAA's audit work and are you at all concerned with
relying on DCAA audit findings in your own work?
Ms. Lerner. I would say a ``pass with deficiencies----
Ms. Johnson. I am sorry?
Ms. Lerner. Sorry about that. A ``pass with deficiencies''
is not the outcome that anyone would seek in a peer-review
process so that is a matter of concern. But when our office has
DCAA do work for us, we have audit monitors that oversee the
work that they do to--and, you know, I feel that if they had
identified issues, we would have followed up with DCAA and
attempted to ensure that those concerns were addressed. So it
is a matter of concern but I do think we have some controls in
place where we attempt to ensure the quality of the work that
is done for us.
Ms. Johnson. Ms. Bales, committee staff have heard from
numerous entities audited by DCAA auditors in the last few
years that there were significant communication problems that
resulted in millions or hundreds of millions in questioned
costs that in some cases have already been resolved down to a
few hundred thousand dollars. We have heard the same type of
complaints from all of these entities, namely that the auditors
were unclear or incompetent in their request and that they
failed to work with an audited entity in a transparent way that
might easily have resolved the misunderstandings that led to
significant questioned costs.
In the meantime, the reputation of world-class research
institutions have been put at risk. Given that there is one
common party here and that is DCAA, I am inclined to attach
significant weight to these complaints and I am concerned that
DCAA does not have the staff expertise or experience with
grants and cooperative agreements or with the science
construction projects. Are you aware of these complaints from
these entities audited by your agency on behalf of NSF IG or
have you taken any steps to address the concerns going forward?
Ms. Bales. I am not aware of the specific complaints that
you are referring to from the NSF entities that we have
audited. No one has raised those to me. However, over the time
frame we have entered and issued what we call rules of
engagement to our audit staff that does encourage them to
communicate with both the contractors or grantees that we
audit, as well as the contracting officers to make sure that as
we go through our audits, everyone is aware of what we are
doing, that we issue draft reports and findings and have those
discussions as we go along so that if there are issues, that
maybe misunderstandings, that we have those discussions as we
go through.
If specific complaints do come to my attention, we respond
to those and look through them and see is there really a valid
complaint there and how do we work through that?
Ms. Johnson. So you have not heard of any of these
complaints?
Ms. Bales. Not the specific--I mean you are talking
complaints specific to NSF, correct?
Ms. Johnson. Yes.
Ms. Bales. Yes. No----
Ms. Johnson. And you haven't heard about any of them?
Ms. Bales. None of the NSF awardees have come to me to say
that my auditors are not working with them and that they are
not understanding what we are saying.
Ms. Johnson. Thank you. I yield back.
Chairman Smith. Thank you, Ms. Johnson.
The gentleman from California, Mr. Rohrabacher, is
recognized for his questions.
Mr. Rohrabacher. Thank you very much, Mr. Chairman.
And, Mr. Chairman, I would like to thank you for holding
this hearing. I think that our oversight responsibility is of
tremendous importance to the people of the United States. If
they are to have faith in their government and faith in this
Congress, they have to know that we are doing our job and this
oversight hearing is part of the job and the task of these
witnesses today is to ensure that the American people know that
their hard-earned money is not being wasted.
And quite frankly, attacking the people who are doing an
investigation is not a refutation of the findings of an
investigation or does it justify any type of, let's say,
holding back on the part of investigators. In fact, we should
be encouraging our investigators rather than try to find fault
with them. Let's find out whether or not what they have to say
is something that is going to be significant to the taxpayers
or not.
In this case, what we have here is 36 percent of a budget
was found to be--have an unacceptable level of accounting. This
budget was 435--$434 million and that is a very significant sum
for American people who are struggling to make--to pay their
own bills at home. So we--no one should be making light of this
or trying to focus their efforts on undercutting the people who
are trying to see if we are spending our money correctly or not
for our taxpayers' money correctly or not.
Now, it seems to me that what we have here--this is not--a
complaint over on the other side of the aisle seems to be that
this was too late and it was premature at the same time, this
investigation. Well, I guess too late and premature means it
was just about right.
So let's get down to some of the details here. Let's make
it very clear, the money that we are talking about here, this
36 percent of the budget, that money, out of a $434 million
budget, that reflects money that comes directly from National
Science Foundation research funds, does it not?
Ms. Lerner. It does.
Mr. Rohrabacher. Okay. So what we are talking about here--
--
Ms. Lerner. Well, MREFC funds.
Mr. Rohrabacher. Okay. Well, so what we are talking about
is important research funds that have been allocated for
research that may have been going to lavish parties, to trips
to various places, lobbying--as well as lobbying efforts, that
we are using taxpayers' funds for lobbying efforts and lavish
Christmas parties. This is very much important for us to look
into--because it sends a message to other government agencies
that we don't want--not only do we not want our research funds
misused but we don't want any government funds to be misused
simply because we are going through contractors here.
Let me ask Ms. Lerner. When your office raised this--these
issues with the National Science Foundation about the concerns
about this major research facility costs and the costs
described in your testimony, has the National Science
Foundation done anything in response to your findings rather
than trying to attack you as the investigator?
Ms. Lerner. They have made changes. They--when we started
looking at contingency amounts, initially the threshold for
which NSF approval had to be sought was $250-$200,000 for many
awardees, so, you know, most amounts were under that. When we
surfaced this issue, NSF did lower the amount that----
Mr. Rohrabacher. Okay. So now people don't have as much----
Ms. Lerner. --required approval.
Mr. Rohrabacher. People don't have as much discretion----
Ms. Lerner. Exactly.
Mr. Rohrabacher. Okay. That is fine.
Ms. Lerner. So they did do that.
Mr. Rohrabacher. Well, did you find that the National
Science Foundation either explicitly or implicitly allowed
NEON, the group that we are talking about now, this contractor
that we are talking about, to use these management fees for
lobbying and--or liquor or lavish Christmas parties or any of
the other expenditures that are very questionable?
Ms. Lerner. The record seems to--you know, the record
reflects that NSF approved a management fee for NEON and NEON
used that management fee for----
Mr. Rohrabacher. Did they know when they approved it that
there--that it was going for questionable purposes or is this--
or they didn't know?
Ms. Lerner. I believe the first tranche of management fees,
the first year's worth were paid after the fact and there was--
so in--there was some awareness on NSF's part for what those
expenditures were for. In subsequent years, they were provided
a percentage and I don't know that the agency had clarity as to
how the management fees were used in those years.
Mr. Rohrabacher. Yes, sometimes there is a willful amount
of knowing certain wrongdoing is going on.
And, Ms. Bales, the--has the DCAA ever identified the use
of management fees for lobbying?
Ms. Bales. No, we haven't.
Mr. Rohrabacher. Okay. Well, thank you very much. Thank
you, Mr. Chairman, again, for holding this hearing.
Chairman Smith. Okay. If the gentleman will yield, and I
know his time is up, that is a subject for us to revisit
because about a quarter of a million dollars was spent in
lobbying fees, and had it been itemized, I think it would have
been very, very improper. But we will get to those distinctions
in a minute.
The gentleman from Massachusetts, Mr. Kennedy, is
recognized for his questions.
Mr. Kennedy. Thank you, Mr. Chairman, thank you to the
witnesses for appearing today.
And I want to echo the comments of the Ranking Member in
her opening statement indicating that there are some very much
legitimate oversight issues that the Committee can be pursuing
with regard to the management and cooperative agreements for
large facilities at NSF. I do wish that NSF was a--had been--
was here today and that I understand that some of the reports
that we are discussing are preliminary. And so I hope that
there will be another opportunity to dive into this in a more
comprehensive way rather than just being able to touch on the
initial findings at this point and making sure that there is a
balance to the hearing.
Ms. Lerner, if I can direct the first question at you. You
had mentioned in your testimony the need for projects such as
NEON to obtain updated cost estimates before being approved for
funding by the agency. The design and development of any large
facility accounts for roughly ten percent or more of the total
project costs I believe. At NSF these costs are deducted by--
from the research account, I think as one of my colleagues
pointed out, which means that there are in fact fewer research
grants. Some significant fraction of that cost is developing
rigorous cost estimates, so estimates in order to make those--
for those studies.
Even if we use a conservative estimate, about 10 to 20
percent of those design costs, you are still talking about
millions of dollars a year. Updating those estimates takes a
significant amount of time, effort, energy, financial
resources, money, perhaps sometimes months because it requires
project management to go back again into each and every one of
the vendors and continue to redo these estimates.
So when it comes to managing project risk, isn't there a
trade-off between approving potentially outdated cost estimates
and the increased cost and time required to update those
estimates over and over and over again, particularly for a
major project for final design review? There is also analytical
tools available to develop reasonable costs and models for
escalation for final proposal, and NSF I believe makes use of
those tools, so any estimates that are--it is still just an
estimate when there is obviously some risk involved.
In the final analysis NSF has concluded that the trade-off
that I have mentioned favors moving forward with the project
even with price quotes that might be a bit outdated. Have you
come to the--you have seem to have come to the opposite
conclusion and I would just like to understand how you arrived
at that conclusion. Is there any OMB guidance on a date of
expiration for those cost estimates for construction projects?
It says after 6 months, a year, 18 months that it should be
reevaluated?
Ms. Lerner. I am not aware of any specific hard and fast
time frame but I do think that some of the concerns that we--
that were found in the audits that were conducted for us were
when estimates were used that were 4 and 6 and eight years old
and----
Mr. Kennedy. What--if I can ask----
Ms. Lerner. Um-hum.
Mr. Kennedy. --what do you think would be a reasonable time
frame in order to reevaluate those costs? Would it be 6 months,
a year, two years. Do you have some basis in there to say--or
are there external factors that you look at----
Ms. Lerner. You know, I----
Mr. Kennedy. --the economy, inflation? What triggers that
reanalysis?
Ms. Lerner. I think it is probably not a one-size-fits-all
because different costs you have to look at differently, but I
would say, you know, you wouldn't want to go--I think you could
definitely go back a year and potentially even two years, but
when you are back much beyond that, then the quality of the
estimate is weakened. And I think the important thing is when a
final decision is made to fund a project that you have a really
good sense of what that project is going to cost. And what we
have seen is, because of the risks, one of the reasons that we
have large amounts of contingencies is to address uncertainties
with respect, you know, to costs over time. And so----
Mr. Kennedy. So I understand you correctly just so that I
do, you are saying that there is essentially no one size fits
all, that it is a--and no particular factor that you can point
to to say this should trigger a reevaluation or not but kind of
a totality of the circumstances, evaluation of it. Do you
have--can you point to any particular factors that would go
into that analysis to provide some guidance to NSF or anybody
to say these are the factors that we should be looking for
before we make this reevaluation?
Ms. Lerner. Certainly. I think you want to look at the age
of the estimates, you want to look at the quality of the
estimates. Sometimes there were costs that were questioned
because there was--the cost was--a portion of it was supported
by an estimate but a portion of it was just kind of someone's
best guess as to what things would cost. And so the more you
are relying on concrete cost-related data to support your
costs, the more--the greater the likelihood is that you will
have a good idea of what those costs should be.
Mr. Kennedy. So you are calling into question the
underlying--the initial estimate because you are saying that
wasn't done properly?
Ms. Lerner. In some instances.
Mr. Kennedy. Okay. Chairman, I yield back.
Chairman Smith. Thank you, Mr. Kennedy.
The gentleman from Indiana, Mr. Bucshon, is recognized.
Mr. Bucshon. Thank you, Mr. Chairman.
Ms. Lerner, were the--these reports preliminary, as has
been described, the reports that you have done?
Ms. Lerner. The audits that were issued by DCAA were not
preliminary. There were some initial inadequacy memos but then
the final 2012 audit was final and the accounting system audit
is final as well.
Mr. Bucshon. Okay. So to clarify again the reports are
final reports, not preliminary----
Ms. Lerner. Correct.
Mr. Bucshon. --evaluations. And as far as that goes, does--
do--whoever wants to take this, did the NSF know that money was
being spent for lobbying services?
Ms. Bales. I believe that there was--in the first year of
the management fee in the NEON project there was a statement
that certain funds would be used for government outreach I
think was how it was characterized. I don't know if that--if
NSF read that and understood that to mean lobbying. I am not
sure that they saw more than that particular document.
Mr. Bucshon. Okay. So that information was available
about--I mean I have the breakdown here in front of me.
Ms. Bales. Right. That is from the accounting records of
NEON.
Mr. Bucshon. That is available.
Ms. Bales. Yes.
Mr. Bucshon. I don't have any other questions but I will
make a brief comment.
I am looking forward to the next Congress and the testimony
that will be provided to the Committee by NSF. As most of you
know, I was the Chairman of the Research and Technology
Subcommittee, and on that subcommittee there has been some
resistance from National Science Foundation as it relates to
transparency and I hope that that does not continue. For
example, in some instances we have been asked to come to
National Science Foundation to review documents rather than
have them released, and at that time much of what is in the
documents has been redacted.
And so I do think that Congress has a very important
oversight role and I fully support the National Science
Foundation's ability to make judgments on which scientific
studies should be funded. All I think we are asking for is the
justification and that is part of our oversight, which is
extremely important.
With that, Mr. Chairman, I yield back.
Chairman Smith. Okay. Thank you, Dr. Bucshon.
The gentlewoman from Oregon, Ms. Bonamici, is recognized
for her questions.
Ms. Bonamici. Thank you very much, Mr. Chairman. And thank
you to both of our witnesses for being here at the committee
today.
There are few issues that spark the ire of our constituents
more than the potential misuse of their hard-earned tax
dollars, and we hear about that, so I hope at least we can
clear up some of those concerns today. I do want to start by
aligning myself with Ranking Member Johnson's comments and Mr.
Kennedy's comments about the need to have a more balanced
hearing to hear from the NSF, so I want to say that I hope we
can really have a more balanced look at this situation.
I want to say that the National Ecological Observatory
Network, NEON, is an ambitious project, we know, with the
potential to yield significant advancements in our
understandings about how humans interact with the planet,
including the potential threat posed by invasive species. This
includes collaborations with academic researchers across the
country like at Oregon State University in my home State where
they have looked at the impact of temperature variability on
the release of carbon from soils. Deepening our understanding
of the Earth's natural processes and the impacts that human
beings can have on those processes is essential and I hope that
this hearing will yield some constructive solutions to assist
the NSF in developing NEON. So I don't want us to lose sight of
the importance of NEON.
I want to start with Ms. Lerner. In your testimony you
stated that when DCAA notified you about the use of a
management fee for unallowable services, you referred the
matter to the United States Department of Justice but they
declined to accept the case. Were you given any reason from the
DOJ to explain why the case was not accepted?
Ms. Lerner. I don't believe that we were. I mean sometimes,
you know, there are any number of reasons that the Department
of Justice chooses not to proceed with an investigation. And I
don't recall that we received express--explicit feedback on
that point.
Ms. Bonamici. And I want to follow up on Ms. Johnson's line
of questioning a bit earlier. In preparing for the hearing, I
heard concerns from various entities that DCAA may not have the
technical competency to accurately assess a major science
construction project like NEON. And as--you know, and with due
respect to Ms. Bales, DCAA was established to audit DOD
contracts. And in fact when I was reading Ms. Bales' bio, it
really talks about the Department of Defense. So did you ever
consider having a different auditor look at--into this
particular project? Can you follow up on that a bit and discuss
that?
Ms. Lerner. At the point at which we were doing these
audits, we were primarily using DCAA for that type of audit
support. We have other options now. But I would say I have
heard many concerns, some raised in this hearing, about the
approachability and the interactions that DCAA auditors had
with NEON and with other auditees, and I went back and spoke to
our monitors and I just want to clarify that there was a great
deal of conversation and back and forth between my staff, the
Foundation's staff both from the program and from the Budget,
Finance, and Accounting Division, NEON, and DCAA about what the
purpose of the audits were, what the findings were.
When we had these series of proposal audits done, that all
came to a conclusion with a lack of--with real concerns raised
about contingencies. In particular, we heard back from the
auditees. We have the information. DCAA didn't ask the right
questions or talk to the right people, and so we said all
right. If there was--a process fail, we will go back. So, we
sat down, all of us, and talked about those three awards and we
went back to each of the entities to do a deeper dive. And we
had a great, you know, people from all the concerned parties
around the table at the initial deeper dive. We sent audit
folks to Denver to meet with the NEON staff, DCAA
representatives were there, NSF folks and additional people
from our office filed in from Boston and I believe even the
financial statement----
Ms. Bonamici. Ms. Lerner, I don't mean to cut you off but I
want to----
Ms. Lerner. Right.
Ms. Bonamici. --I just have a few seconds left----
Ms. Lerner. Sure. Sorry.
Ms. Bonamici. --and I want to ask----
Ms. Lerner. There was a lot of communication.
Ms. Bonamici. I understand. Ms. Bales, during the initial
audit of NEON's accounting systems, DCAA found eight instances
of noncompliance with federal requirements, including the use
of management fees for some unallowable costs. But in the final
2014 audit only one instance was included and that focuses on
timekeeping and did not mention management fees. Can you
explain why the initial findings did not make it into the final
report?
Ms. Bales. Specifically to the management fee, that was
really not with--totally within the scope of an accounting
system, but once we saw that the management fee was being used
for those type of expenses, we can't not report that. So we
reported that in a separate memorandum and--rather than
including it in the report related to the accounting system
because of the scope of what an accounting system audit is. And
the other findings--we identified two findings that had been
corrected by NEON during our fieldwork and there were other
findings that, as we looked through the supervisor review
process, that there needed to be additional work and that work
was done and they were not continued to be supported.
Ms. Bonamici. Thank you. And my time is expired. I yield
back.
Thank you, Mr. Chairman.
Chairman Smith. Thank you, Ms. Bonamici.
The gentleman from Kentucky, Mr. Massie, is recognized for
his questions.
Mr. Massie. Thank you, Mr. Chairman.
This question is for Ms. Bales. Given the number of issues
that were discovered in the NSF audits, how does that compare
with other audits that have been done by DCAA?
Ms. Bales. Other audits just in general or----
Mr. Massie. Like other agencies, do they have a similar
number of issues that are significant or questionable with
unsupported costs?
Ms. Bales. It is really very different based on----
Mr. Massie. I mean----
Ms. Bales. --contract to contract, organization to
organization, and it really--it is hard to make a general
conclusion in terms of the number of problems because there is
just such a wide range of different types of audits that we do
and different contractors. We do frequently find issues as we
go through contracts in terms of the same number. That is
really hard to answer.
Mr. Massie. In general though, were these--do you find this
across government? Is this an epidemic that we have?
Ms. Bales. When you say ``this,'' do you mean the----
Mr. Massie. The----
Ms. Bales. --management fee type issues or----
Mr. Massie. Yes, all of the things that you found in the
audits--that were found in your audits.
Ms. Bales. We do find--frequently we find problems with
accounting systems and we work through those. We find--often,
you know, one of the things is we are working through a lot of
proposals. We have a lot of inadequacies. As we talk with other
contractors, we say one of the things that you as the contract
community can really help us out in doing our job is making
sure that your proposals are adequate. So it is--different
inadequacies in proposals are common.
Mr. Massie. Well, let's talk about the proposals then. Is
it normal to audit a proposal and then have that proposal
accepted before the audit is finalized?
Ms. Bales. Normally, no, because again as--the purpose
behind----
Mr. Massie. Why was that done here then?
Ms. Bales. When we accepted the audit and in talking with
the NSF IG, there was still the ability--even though the
cooperative agreement had been awarded, there was still the
ability to have an impact on the price so they could go back in
and make an adjustment. But normally we would do that ahead,
before the negotiation happens on the issuance of a contract or
grant or an award because, as we look at that proposal and we
find different things to question or that aren't supported,
that provides the contracting officer or the grant manager the
ability to go into that negotiation with information that
allows them to really do a good negotiation to get a fair and
reasonable price. If the contract had been finalized and there
wasn't the ability to reopen and go in and make adjustments to
the price, then we really wouldn't have a value to add in
reviewing a proposal after it had been awarded. But there was,
as the IG indicated to us, an ability to go back in and affect
the amount of this cooperative agreement.
Mr. Massie. Okay. This question is for Ms. Lerner or Ms.
Bales or both. In reviewing the audits, what appears to be the
source of the issues? I mean is it that--is it NEON for not
doing a sufficient job of maintaining the books or is it the
NSF for not conducting the responsible oversight? Ms. Lerner,
would you care to answer?
Ms. Lerner. I think ultimately the costs proposed are
proposed by NEON and they were not supported in ways that they
should have been to be compliant with OMB's Circular A-122. I
would imagine that NEON would say that what they were doing was
compliant with NSF's Large Facilities Manual but, you know, the
Large Facilities Manual and the cost principles should both
support each other and not to be in conflict.
Mr. Massie. So to answer that question, you think it is
more on NEON's noncompliance with the standards for accounting?
Ms. Lerner. I mean ultimately it was their proposal.
Mr. Massie. Um-hum.
Ms. Lerner. So I think you have to--they have to be the
ones--they were the ones who made the proposal. NSF had a role
in providing guidance through the Large Facilities Manual but
it was NEON's proposal.
Mr. Massie. Thank you. And, Ms. Bales, what is your opinion
of that?
Ms. Bales. I would agree with Ms. Lerner. In terms of the
proposal, it is the responsibility of the service provider to
put together a proposal that can't, from our perspective, be
audited and allows the contracting officer or grant manager to
know what is coming in and be able to make a decision on.
Mr. Massie. Thank you. And I yield back 1 second.
Chairman Smith. Thank you, Mr. Massie.
My colleague from Texas Mr. Veasey is recognized for
questions.
Mr. Veasey. Thank you, Mr. Chairman.
I wanted to ask Ms. Lerner a question. Ms. Lerner,
according to the NSF, the agency sustained $20 million in
questioning cost from NEON's proposal. This contradicts the
statement that you made in your written testimony when you
implied that NSF upheld the full proposal in April 2014. NSF
further told us that they have been unable to take any steps to
reduce NEON's total budget accordingly because you escalated
your finding to the agency's audit follow-up official who must
now weigh in before any further action can be taken. Were you
aware that NSF in fact sustained nearly $20 million in question
costs?
Ms. Lerner. We are aware of that now.
Mr. Veasey. Okay. And also I wanted to ask you another
statement that was made a little bit earlier. I understand that
you feel very strongly about your views on contingency funds
and of course there has been some disagreement, you know, with
that. When you had the opportunity to make your case before the
OMB, it seems to me that you were overruled. Is there a
specific OMB regulation that you believe NSF to be in violation
of? And if--and I actually have a copy of the text if Members
would like to see it, but I just wanted to get your opinion on
that as well.
Ms. Lerner. If you look at the--are you speaking about the
new provision in the uniform guidance?
Mr. Veasey. The--okay. It was December 26.
Ms. Lerner. Yes, it is the uniform guidance.
Mr. Veasey. Yes, right, exactly.
Ms. Lerner. The change that was made there added a Section
B that speaks specifically about the ability to have
contingencies in budget estimates and that has never been the
concern of my office. Our concern has been with the final
provision of that section subpart C, which says payments made
by the federal awarding agency to the nonfederal entity's
contingency reserve or any similar payment made for events, the
occurrence of which cannot be foretold with certainty as to the
time, intensity, or with an assurance of their happening, are
unallowable.
What we see with contingencies at NSF is that they
accumulate them WBF level by WBF level into a large reserve,
and those--the contributions to that reserve, many of them
don't meet the certainty requirement that is set forth in that
subparagraph. And so that has been our concern, not--we have
never taken the position that you cannot have contingencies in
a budget, simply that when you make a contribution to a
reserve, there needs to be certainty as to the factors set
forth in the principal.
Mr. Veasey. Okay. All right. Okay. Well, let me just--can
I--if--do you mind, very quickly, if I can just read some of
this----
Ms. Lerner. Sure.
Mr. Veasey. --statement from you a little bit earlier. This
is--I am going to read directly. Let's see. ``Some commentators
recommended additional provisions for further clarity on the
types of costs that are allowable for contingencies and
recommended additional controls on how federal agencies provide
oversight over these funds. In particular, commentators
suggested adding a requirement to track funds that are spent as
contingency funds throughout the nonfederal entity's records.
The COFAR reviewed the language and concluded that it does
provide sufficient controls to federal agencies to manage
federal awards. The COFAR noted that through a diversity of
techniques that are available to establish contingency
estimates, the estimates must be based on broadly accepted cost
estimating methodologies. Budgeted amounts would be explicitly
subject to federal agency approval at time of award and funds
will be drawn down unless in accordance with all other
applicable provisions of this guidance. The actual costs
incurred must be verifiable from the nonfederal entity's
records. The COFAR considered this last requirement to be
sufficient for tracking the use of funds as contingency funds
should be most properly--should most properly be charged not as
contingency fund specifically but according to cost category in
which they naturally fall. The COFAR did not recommend any
changes to the proposed language.''
Ms. Lerner. Well, with respect to the statement of that the
contingencies have to be verifiable from the nonfederal
entity's records, that scenario of where we have had concern
because while we can look at a change log and see that the
awardee says that they are going to expend contingencies in
certain amounts on certain--for certain purchases, we can't
verify that those expenditures were actually made in the
financial records of the awardees, and so that has been an area
of great concern to us.
When you have 30--you know, $77 million worth of
contingencies that will be expended but we can't determine how
they are expended in the actual accounting records, that is an
area of risk because people can say that they are going to
expend it one way and then expend it another way and we won't
be able to tell. They can also hide, you know, cost schedules
with cost--cost overruns in ways that we won't be able to see.
So we do have concerns about the ability for the--to verify the
expenditures from the nonfederal entity's records.
Mr. Veasey. Thank you.
Thank you, Mr. Chairman.
Chairman Smith. Thank you, Mr. Veasey.
The gentleman from Arizona, Mr. Schweikert, is recognized.
Mr. Schweikert. Thank you, Mr. Chairman.
For many of us here, we start to delve into this and we are
concerned because we want to see NSF be successful. I mean this
isn't beating them up; this is sort of doing our constitutional
duty but also, you know, it is an organization that is
important when they--you know, when they hit their mark.
Ms. Lerner, Ms. Bales, how long have you been in shall we
say the auditing business?
Ms. Lerner. Well, I have been in the IG community since
1991.
Mr. Schweikert. Ms. Bales?
Ms. Bales. I have been auditing since 1984.
Mr. Schweikert. Okay. So you have sort of been doing it
forever?
Ms. Bales. Yes.
Mr. Schweikert. Nothing personal on that. I am actually
married to one of your kind so--should I at least be a little
bit surprised and maybe I just was a little sensitive to it,
some of the reaction of beat up the auditor, I mean how often
have you had that experience where instead of digging into
saying, okay, here is how we could fix this, it is, no, let's
beat up the auditor? I was just a little surprised at the tone
of both some of the questions but also some of the things I
have seen written. Has that been an experience in the past, I
mean shoot the messenger?
Ms. Bales. Well, having been an auditor forever----
Mr. Schweikert. It is nothing personal.
Ms. Bales. No, that is fine.
Auditors--I mean no one is comfortable when an auditor
comes into their house and so we do tend to be a target when
things--when people hear maybe what they don't want to hear. So
there have been times when, throughout my career, it was like,
well, you just don't understand. You don't have the expertise.
You are coming in. So it is not unusual to hear that but then
it is our responsibility to go back and show this is how we
know what we are doing, this is our competence, these are the
regulations that we are following----
Mr. Schweikert. But if you have been doing it since the
mid-'80s, sorry, you have probably seen everything. And, Ms.
Lerner, have you ever sort of had this sort of personal sort
of----
Ms. Lerner. Well----
Mr. Schweikert. --pushback?
Ms. Lerner. --before I was wearing the audit hat, I was a
lawyer so I have experienced pushback----
Mr. Schweikert. Is that two strikes against you?
Ms. Lerner. Pretty much. One more I don't know what will
happen.
So you have to have a really thick skin and a strong
stomach to do what we do, and, you know, I----
Mr. Schweikert. But how do we convince----
Ms. Lerner. --you sign up for it.
Mr. Schweikert. --our brothers and sisters around here we
are actually doing this for love and success and protecting the
taxpayers and the agency, and sometimes we have got to have
these honest conversation?
Ms. Bales, okay, your specialty has been a lot of defense
contracts?
Ms. Bales. Yes. I have been with the Defense Contract Audit
Agency for about 3-1/2 years.
Mr. Schweikert. In modern defense contracts, as you review
their success, their compliance, what would happen if it was a
defense contractor that was spending money on alcohol and other
types--let's call them externalities? Would that be tolerated
in--on that side of the world?
Ms. Bales. If we were to audit a contract and see that
there was a cost that was reported that was alcohol, use that
as an example, we would question that cost as unallowable. And
this is one of the differences between FAR 31, which covers the
defense world and to kind of respond to the issue about our
competency to look at National Science Foundation contractors
because they are not defense. We do understand that FAR covers
much more in detail than what OMB A-122, which covers the
National Science Foundation contractors. But because A-122 does
not have that spelled out of what is expressly unallowable as
the FAR does, but OSD would respond to the FAR and it would say
alcohol is expressly unallowable and we would question that.
Mr. Schweikert. So this was nothing personal? It wasn't a
vendetta----
Ms. Bales. Absolutely not.
Mr. Schweikert. I mean this is just standard practice of
how you would do your job?
Ms. Bales. Correct.
Mr. Schweikert. In the way you designed your audit, okay,
you pointed out the number of sins and the misappropriations
and some of the failure to manage the contractor, but within
that, didn't you also provide a series of suggestions of how to
solve this problem in the future?
Ms. Bales. We did because one of the reasons because there
was a management fee and these expenses were covered by a
management fee, we did not question them as unallowable because
once the management fee has been awarded and there has been a
determination from management to attach an award fee--or a
management fee in that award, we have to audit to the terms of
that collaborative agreement contract grant, and because a
management fee was awarded, there are no restrictions on what
the management fee can be used for.
Mr. Schweikert. Well, Mr. Chairman, forgive me for going a
few seconds over. Did you audit in depth sort of the design of
the contract?
Ms. Bales. The design in terms of----
Mr. Schweikert. The reporting requirements, the design, the
protocols, the mechanics within the agreement?
Ms. Bales. I would say we don't audit that in depth because
our----
Mr. Schweikert. If you--from what you have seen, should we
go back and delve into those contracts and really break them
open and do a sort of a forensics within those contracts?
Ms. Bales. In terms of what costs were incurred, you know,
we would, at the end of any cost type contract, we would
advocate that a good oversight is to come in and do and
incurred cost audit that covers both indirect and direct costs
to make sure that the costs were in accordance with guidance
and in accordance with the agreement.
Mr. Schweikert. And so that is something we can look
forward to in the future?
Ms. Bales. We could.
Mr. Schweikert. All right. Thank you, Mr. Chairman.
Chairman Smith. Thank you, Mr. Schweikert.
The gentleman from Texas, Mr. Weber, is recognized.
Mr. Weber. Thank you, Mr. Chairman.
Actually, this is a question--well, first of all, let me
just say to Ms. Lerner and Ms. Bales, you all do this for a
living, is that right? Do they pay you to do this?
Ms. Lerner. Yes, sir.
Ms. Bales. Yes.
Mr. Weber. Okay. Do they take--and I don't mean to pry. Do
they take taxes out of your paycheck?
Ms. Lerner. Yes, sir.
Ms. Bales. Yes, they do.
Mr. Weber. Okay. And you are okay if they double the amount
they are taking out or would you rather government be run as
effectively and efficiently as possible to mitigate any taxes
they might take out of your paycheck?
Ms. Lerner. Well, you know, we are in the business of
trying to pursue an efficient government.
Mr. Weber. That is a simple yes.
Ms. Lerner. It is.
Mr. Weber. Yes.
Ms. Bales. Efficiency, effectiveness, this is what we look
at.
Mr. Weber. Absolutely. So you have a vested interest when
you are doing this. And there is something called generally
accepted accounting principles--or what do you all call that,
GAAP?
Ms. Lerner. Yes.
Ms. Bales. Yes.
Mr. Weber. Okay. And so you all are experienced in that.
And so when you go in and you look at this way, it is kind of
like David Schweikert, my colleague over here said, you know,
we are doing this for the right reasons. We want to make sure
that our taxpayer dollars are expended in the wisest, best--
bestest use. That is probably not good English but that is what
we want. And so I appreciate you all doing that and I, too,
echo his comments. It saddens me that sometimes the messenger
gets shot in that endeavor, but thank you for doing that.
It seems as though it should be a standard operating
procedure for any federal agency that commits 400 or more
billion dollars to a construction project to have a cost
proposal audit and resolve those problems before that
construction begins and then also to have a post construction
audit of actual expenses. Now, that just seems to be a good
generally accepted accounting principle to me. I own an air-
conditioning company; I am a business guy. Would you all agree
with that?
Ms. Bales. I would. In terms of what we do our audits, we
think that we can add good value before the audit is awarded by
again providing information to the contracting officer to be
able to go in with a good negotiating position and then after
the fact to make sure that the costs were accurate and
allowable, reasonable, and allocable.
Mr. Weber. Okay. I may have misspoke, 400 million, I am
sorry.
Ms. Bales. Yes.
Mr. Weber. But go ahead. You know, 400--a billion here, a
billion there, it is real money. Ms. Lerner, what do you think?
Ms. Lerner. I agree. And we have made both of those
recommendations to the Foundation for its large, high-risk,
high-dollar construction agreements. You know, step up the--
both the pre- and the post-award oversight.
Mr. Weber. Are there plans to perform an incurred cost
audit for NEON and the other NSF major projects? Do you know?
Ms. Lerner. You know, do you mind if I look at my--we are
looking at management fee for this year----
Mr. Weber. Um-hum.
Ms. Lerner. --but I would assume that down the road we
would consider auditing--doing incurred cost audits in some of
these large construction agreements. But we aren't the only
ones. The Foundation can also do that. It is not just an
oversight responsibility; it is a management responsibility.
Mr. Weber. Are you making that request to them? Are you
making that a strong suggestion to them?
Ms. Lerner. We suggested in our alert memo on large
cooperative agreements that they do require incurred cost
submissions and that they undertake incurred cost audits for
those types of awards.
Mr. Weber. And hopefully if they haven't had too much
alcohol on the taxpayer dime they were able to read that and
digest it. Okay.
Question for Ms. Bales, if a preconstruction cost proposal
audit for a DOD project disclosed huge amounts of unsupported
and/or questionable costs to that particular project, what
happens to it?
Ms. Bales. We turn that information over to the contracting
officer and they use that information through negotiations. If
the proposal is grossly inadequate, they would probably go back
to the contractor and ask them to fix the proposal and fix the
inadequacies in it so it could be used to negotiate.
Mr. Weber. To they come back to you all for approval for
the changes they make or input--I guess I should say input by
you all?
Ms. Bales. They, the contractor?
Mr. Weber. Um-hum.
Ms. Bales. Yes, if they went back and redid their
proposal----
Mr. Weber. Um-hum.
Ms. Bales. --it would come back to us to audit again.
Mr. Weber. Okay. And then you have the ability to say that
looks better or it looks the same or worse?
Ms. Bales. Yes.
Mr. Weber. Okay. All right. And, Ms. Lerner, in answer to
your question, three strikes, I guess you could go to work for
the IRS. But I will leave that alone.
Thank you all for being here.
Chairman Smith. Thank you, Mr. Weber.
That concludes our questions. And let me thank both
witnesses for their insightful answers, which are very much
appreciated. And the responses that we got and your testimony
today was both informative, enlightening, and sobering.
And, clearly, problems within the National Science
Foundation have existed for many years. And let me say that the
new director has only been in office for 8 months. I believe
that she wants to correct these problems and I am hopeful that
they will be corrected. But--including the problems that have
been there for a long time, and as I say, I am hopeful of being
able to work with the director and being able to address some
of the deficiencies that you all have mentioned here today.
Thank you very much for your testimony and we will look
forward to staying in touch.
[Whereupon, at 11:21 a.m., the Committee was adjourned.]
Appendix I
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Answers to Post-Hearing Questions
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Appendix II
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Memorandum submitted by Ranking Member Eddie Bernice Johnson
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