oversight

Audit of Controls over Government Property Provided under Federal Student Aid Contracts.

Published by the Department of Education, Office of Inspector General on 2002-03-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

     Audit of Controls over Government Property Provided
              under Federal Student Aid Contracts




                                 FINAL AUDIT REPORT




                                            ED-OIG/A19-B0001
                                               March 2002




Our mission is to promote the efficiency,                      U.S. Department of Education
effectiveness, and integrity of the                            Office of Inspector General
Department’s programs and operations.                          Operations Internal Audit Team
                                                               Washington, DC
  Statements that managerial practices need improvements, as well as other
               conclusions and recommendations in this report
represent the opinions of the Office of Inspector General. Determinations of
                corrective action to be taken will be made by
             the appropriate Department of Education officials.

 In accordance with Freedom of Information Act (5 U.S.C. § 552), reports
  issued by the Office of Inspector General are available, if requested, to
members of the press and general public to the extent information contained
              therein is not subject to exemptions in the Act.
                                    TABLE OF CONTENTS



                                                                                                            Page

EXECUTIVE SUMMARY...................................................................................... 1

AUDIT RESULTS ...................................................................................................2

        Finding No. 1 -- Improvements Were Needed in the Management of
              Government Property under Federal Student Aid Contracts .............. 2

                 Recommendations ............................................................................... 6

OTHER MATTERS.................................................................................................8

BACKGROUND......................................................................................................9

OBJECTIVES, SCOPE, AND METHODOLOGY...............................................10

STATEMENT ON MANAGEMENT CONTROLS .............................................11

ATTACHMENTS

        Attachment 1 -- Contractor Reports Issued .................................................13

        Attachment 2 -- Department of Education Response ..................................14
                                    EXECUTIVE SUMMARY

The objectives of our audit were to (1) determine whether computer equipment furnished to
Federal Student Aid (FSA) 1 contractors was properly accounted for and identified as Department
of Education (Department) property, and (2) evaluate procedures for identifying and controlling
the use of equipment furnished to FSA contractors.

At the start of our audit, we found that FSA was changing its approach to providing Government
property to its contractors. In the past, FSA had provided most computer equipment used under
its contracts. FSA was in the process of transitioning to a concept where contractors would be
responsible for any equipment needed. In March 2000, Contracts and Purchasing Operations
staff initiated a project to determine what property FSA contractors currently held. In April
2000, the Chief Information Officer for FSA informed contractors and Department staff that
equipment would no longer be provided except in special, isolated circumstances. Based on this
change in approach, we did not evaluate FSA's procedures for identifying equipment to be
furnished to its contractors.

We evaluated FSA's controls over Government property provided under three FSA contracts.
We found that improvements were needed in the management of Government property under
each of the contracts and that FSA officials did not effectively monitor Government property
held by the contractors. Specifically, we found that FSA staff did not ensure that contractors
accounted for all property and that contractors managed property in accordance with regulations.
Contractor records were not accurate or complete. Equipment was not appropriately identified
as Department property. We also found that some purchases were not utilized or disposed of
timely and that some equipment could not be found. As a result, Department property was at
risk for misuse or loss.

To correct these weaknesses we recommend that the Chief Operating Officer for FSA:

•     Develop and implement a plan for monitoring Government property, including clear
      definition of responsibilities.
•     Evaluate the utilization and disposition of property.
•     Evaluate the need for an inventory listing of contractor-owned equipment under the Federal
      Family Education Loan (FFEL) contract.
•     Conduct a physical inventory and reconcile the items listed as located at Department
      facilities with the contractor's listing and with the Department's asset management database
      to ensure equipment status is correctly reported and Department records are accurate.

The Department concurred with our findings and recommendations and the Other Matter
presented. The full text of the Department's response is included as Attachment 2 to this audit
report.

1
    As of March 6, 2002, Student Financial Assistance changed its name to Federal Student Aid or FSA.

ED-OIG/A19-B0001                                                                                  Page 1
                                     AUDIT RESULTS


Overall, we found that improvements were needed in the management of Government property
under Federal Student Aid (FSA) contracts. Our audit revealed that FSA officials did not
effectively monitor Government property held by FSA contractors. As a result, FSA was not
aware that contractors were not appropriately accounting for Government property. We found
that contractor records were not accurate or complete. Equipment was not appropriately
identified as Department property. We also found that some purchases were not utilized or
disposed of timely and that some equipment could not be found. As a result, Department
property was at risk for misuse or loss.

During our audit, we also identified a related issue involving property management. A vendor
provided ten complimentary laptop computers with a large delivery of Government property.
We found that FSA had not appropriately accounted for these computers. The OTHER
MATTERS section of this report contains additional information on this issue.



Finding No. 1 – Improvements Were Needed in the Management of
                Government Property under FSA Contracts.

Improvements were needed in FSA's management of Government property provided to or
purchased by its contractors. We found that FSA staff -- Contracting Officers (CO), Contract
Specialists (CS), and Contracting Officer's Representatives (COR) -- did not make use of
available data and required reports to monitor Government property. Specifically, we found that
FSA staff did not:

•   Reconcile purchases of Government property with listings provided by the contractors to
    ensure all property was being accounted for appropriately;
•   Ensure that Department property was being managed under approved property control
    systems;
•   Ensure that required reports were submitted;
•   Ensure Government property was being utilized or disposed of timely; and
•   Provide updated information on the status of equipment purchased and installed at
    Department facilities.

Contracts and Purchasing Operations (CPO) management stated that once equipment is
transferred to the contractor, it is the contractor's responsibility to safeguard and account for the

ED-OIG/A19-B0001                                                                       Page 2
equipment. Further monitoring was not pursued until the end of the contract. We also found
ineffective communication between contracting and FSA staff on the purchase and monitoring of
Government property.

Federal Acquisition Regulation (FAR) §45.103(a) states "Contractors are responsible and liable
for Government property in their possession, unless otherwise provided by the contract." FAR
§45.102 states that if Government property is provided under a contract, "[A]gencies shall
require contractors to be responsible and accountable for, and keep the Government's official
records of Government property in their possession or control." The Government also has
responsibilities with respect to monitoring the use and management of Government property.
The Government's responsibility includes review and verification of contractor reports, review of
contractor property control systems, ensuring required reports are received, and ensuring proper
utilization and disposition of property.

Without effective monitoring, the FSA was not aware that contractors were not appropriately
accounting for Government property. We found the contractors' records were not accurate or
complete, and the contractors were not managing Government property in accordance with
regulations. Since the contractors' records are considered the Government's official property
records, the accuracy and completeness of these records is an important factor. At the end of a
contract, an inventory of Government property is to be provided to the Department. Without
effective monitoring of Government property throughout the term of the contract, FSA staff
would not be able to detect errors or omissions in the ending inventory submitted. If that
inventory is not accurate or complete, decisions made as to the disposition of property, or
allowances provided for that property, may not be appropriate. Without effective monitoring,
the Department's property is at risk for misuse or loss.


Government Property Purchases Were Not Reconciled with Property Listings

We found that Government property purchases were not reconciled with property listings. FAR
§42.1106(b) states:

       Contract administration offices shall review and verify the accuracy of contractor
       reports and advise the contracting officer of any required action. The accuracy of
       contractor-prepared reports shall be verified either by a program of continuous
       surveillance of the contractor's report-preparation system or by individual review
       of each report.

Two of the three contractors we reviewed provided FSA with regular reports of Government
property in their possession. The third contractor provided a listing of all Government property
held as of April 4, 2000. We found that FSA officials had not reconciled these reports to
available information regarding equipment provided to the contractor or purchased under the
contracts. In total, we found that the Government property listings provided by the three
contractors did not include 115 items of Government property and inappropriately classified 29
items that were not Government property under the contracts.


ED-OIG/A19-B0001                                                                   Page 3
We also noted ineffective communication related to the purchase of equipment for the
contractors and monitoring of the equipment.

•   Contracting staff was not informed of all the purchases of Government property made and
    provided to the contractors by program staff. Contracting staff did not have copies of all the
    purchase orders or other records of the equipment provided to two of the three contractors
    reviewed.

•   FSA Office of the Chief Information Officer (OCIO) staff purchased equipment and provided
    it to two of the contractors. However, FSA OCIO staff could not provide copies of purchase
    orders for all equipment provided. The COR for one contract was not involved in the
    purchases and did not have records of the equipment provided. For this same contract, the
    CO stated that the COR was monitoring Government property, and the COR stated that the
    CO was monitoring Government property.


Department Property Was Not Managed Under Approved Property Control Systems

FAR §45.104(b) states: "The contracting officer or the representative assigned the responsibility
as property administrator shall review contractors' property control systems to ensure compliance
with the Government property clauses of the contract."

The property control systems for each of the three contractors were reviewed and approved by another
Federal agency. FSA staff confirmed that each contractor had an approved system but were not aware
that property under the Department contracts was not being managed under these systems. As a result,
FSA had no assurance that the management system for its property was appropriate. In fact, we found
that 67 items were not appropriately marked as Government property, and records did not comply with
FAR requirements for unit costs for 705 items.


Some Required Reports Were Not Submitted

FAR §42.302(a)(58) lists ensuring "…timely submission of required reports…" as a contract
administration function. Department of Education Directive, C:GPA:2-110, "Contract
Monitoring for Program Officials," dated January 12, 1987, section IX-E, includes "…Delaying
or failing to provide required reports or deliverables…." as a common contractor problem to
monitor.

During our review, we found that FSA staff did not ensure that contractors provided required
Government property reports. We found that contractors did not provide annual reports of the
value of Government property in their possession, nor did they provide reports of inventories of
Government property. These reports would have assisted FSA staff in monitoring the use of
Government property under the contracts.

•   FAR §45.505-14(a) requires contractors to provide an annual report on the total acquisition
    cost of Government property for which the contractor is accountable. CPO management

ED-OIG/A19-B0001                                                                    Page 4
    stated that they had not relieved contractors of this reporting requirement. However, they
    had not enforced the requirement since the Department's Office of the Chief Financial
    Officer had not asked for this information for the annual financial statements. None of the
    three contractors we reviewed had ever provided such a report2.

•   FAR §45.508 requires contractors to perform periodic physical inventories of all
    Government property in their possession or control. FAR §45.508-2 requires contractors to
    submit reports of the results of these inventories to the Government. None of the three
    contractors had provided such reports to FSA. In fact, we found that although the contractors
    were reviewing the status of some Government property, none of the three contractors
    performed periodic physical inventories of all Government property in their possession. At
    one contractor, 17 items of Government property could not be located.


Government Property Purchases Were Not Utilized or Disposed of Timely

Department of Education Directive, C:GPA:2-110, section X-L-1 & 2, states: "When
Government property is provided under a contract, the COTR3 is responsible for advising or
assisting the CO in:

•   Determining the necessity of providing Government property;
•   Determining the kind and quantity of property required and the period of use; and
•   Ensuring proper utilization and disposition of the property."

One of the contractors reviewed purchased Government property in excess of $279,000 to
upgrade a voice recognition unit established under the Federal Family Education Loan (FFEL)
program contract, but the equipment was never installed or used. Since August 1998, the
equipment has been stored at the contractor's facility awaiting disposition. FSA staff stated that
subsequent to the purchase of the equipment, FSA cancelled this requirement under the FFEL
contract and transferred the function to another contractor. The other contractor used a different
type of equipment, so the items purchased under the FFEL contract could not be transferred.
The vendor refused to take the equipment back and refund the cost since the equipment had been
delivered six months prior to FSA's request for return. At the time of our review, FSA had not
provided disposition instructions to the contractor. The COR stated that she plans to include the
equipment in an auction.


Status of Equipment Installed at Department Facilities Was Not Updated

One contract provided for the purchase of equipment to be used at Department facilities by FSA
staff to access the FFEL system. This equipment was included on the contract's component

2
  Although two of the three contractors were providing regular listings of the Government property in their
possession, these reports did not include costs that would satisfy the requirements of FAR 45.505-14(a).
3
  The term "COR," Contracting Officer's Representative, has replaced "COTR," Contracting Officer's Technical
Representative, in the Department's vernacular and in Government-wide use.

ED-OIG/A19-B0001                                                                               Page 5
inventory listing as was all equipment, Department and contractor-owned, used to manage the
FFEL system. We found, however, that FSA staff did not provide the contractor with updated
information on the status of this equipment.

As of December 31, 2000, the contractor listed 425 items as installed at Department locations.
We attempted to verify a random sample of 30 of the 156 items listed for the Department's
headquarters facility and determined that none of the items could be located. FSA staff did not
have any records of the disposition of these items. Only 3 of the 30 items were recorded in the
Department's asset management system. The COR stated that the items in our sample were
properly disposed of under the old Department inventory system before she took over as the
COR. She further stated that FSA should have updated the listing long ago.


Recommendations:

We recommend that the Chief Operating Officer for Federal Student Aid:

1.1    Ensure that contract management staff develop and implement a plan for monitoring the
       management of Government property, including clear definition of responsibilities. The
       monitoring plan should also include:

       a. Reconciling purchases of Government property with contractor-provided property
          records.

       b. Ensuring compliance with FAR requirements for Government property. Specifically,
          ensuring Department property is being managed under approved Government
          property systems, property records include all required data, annual reports of the
          value of Government property are submitted, and periodic inventories are conducted
          with results reported to FSA.

1.2    Reinforce COR responsibilities to determine the need for Government property and to
       ensure proper utilization and disposition. With respect to the unused voice recognition
       unit equipment purchased under the FFEL contract, provide prompt disposition
       instructions to the contractor.

1.3    Evaluate the continuing need for the component inventory listing under the FFEL
       contract, especially with respect to contractor-owned equipment and equipment located at
       Department facilities. If this information is not needed, modify the contract appropriately
       to delete this requirement, including any appropriate pricing adjustments. In addition, the
       FSA should:

       a. Conduct a physical inventory and reconcile the items at Department facilities on the
          contractor's listing to identify items that are no longer in use. Information should be
          provided to the contractor to correct the status of items purchased under the contract.



ED-OIG/A19-B0001                                                                   Page 6
       b. Reconcile physical inventory results with information in the Department's asset
          management database and update equipment status appropriately in that system.


Department of Education Comments

The Department concurred with our findings and recommendations and offered additional
comments regarding property not managed under the contractors' approved property control
systems. The Department cited the FAR § 45.104(a) requirement that "[t]he review and approval
of a contractor's property control system by one agency shall be binding on all other departments
and agencies based on interagency agreements." The Department further recommended that OIG
enter into appropriate agreements with the Defense Contract Audit Administration (DCAA) and
other Federal audit agencies. The Department also stated that the report fails to note that through
its oversight efforts, the Department came to question the adequacy of the contractors' property
management and asked the OIG to look into the matter during its review.

Office of Inspector General Comments

During the audit, we informed the Department that no interagency agreement was in place so the
FAR citation does not apply. With respect to the Department's recommendation concerning
establishing interagency agreements, that is the Department’s responsibility. Had the
Contracting Officer questioned the contractors, or required a certification that the contractors
manage the Department's property under their approved property management systems, this issue
would have been detected.

On the Department's second point, we provided information in the Background section of the
draft report that noted CPO's prior concerns and actions taken. That section remains unchanged
in this final report.




ED-OIG/A19-B0001                                                                    Page 7
                                  OTHER MATTERS



Laptop Computers Were Not Accounted for Properly
With a large delivery of Government property to an FSA contractor, a vendor provided ten
complimentary laptop computers. The computers were valued at $35,790. The contractor turned
the computers over to FSA upon receipt in May 1999. At the time of our initial review in March
2001, only 9 of the 10 computers could be located. In addition, only 2 of the 10 computers were
included in the Department's asset management database. As of September 21, 2001, only one
additional computer was recorded in the database, leaving six of the nine computers that could
be located unaccounted for in the Department's records. We also noted that information for two
of the three computers included in the database was inaccurate or incomplete.

This occurred because FSA staff did not appropriately account for the computers. FSA staff
recorded receipt of the laptops in an unofficial record and did not add the equipment to official
Department property records. Several FSA staff used the computers at their homes, so the
computers were not included in physical inventories.

As a result, equipment valued at $3,579 could not be located. Equipment valued at $21,474 was
not included in the Department's official property records and therefore was vulnerable to
undetected loss or misappropriation.

We recommend that FSA ensure the computers that could be located are accurately reflected in
Department property records.




ED-OIG/A19-B0001                                                                    Page 8
                                            BACKGROUND



Department of Education contract management staff include CO, CS, and COR. Generally, the
CO and CS are staff in CPO under the Department's Office of the Chief Financial Officer. The
COR is a member of the program office staff, in this case FSA. During our audit, the contracting
function for FSA was transferred from CPO, to Acquisitions and Contract Performance (A&CP)
in FSA. CO and CS staff from CPO were detailed to A&CP until additional staff were hired in
that section. FSA has authority to perform aspects of contracting for the information and
financial systems supporting its programs as a result of the 1998 amendments to the Higher
Education Act.4

The decision to provide property to a contractor is the responsibility of the program office. In
the past, FSA provided most computer equipment used under its contracts. At the time of our
review, FSA was moving to a strict service-contracting concept where the contractors are
responsible for any equipment needed. In April 2000, the Chief Information Officer for FSA
informed contractors and FSA staff that equipment would no longer be provided except in
special, isolated circumstances.

CPO staff had been concerned with the management of Government property provided to FSA
contractors. To determine what Government property was currently in the hands of FSA
contractors, CPO sent a request to all FSA contractors for a listing of all Government property in
their possession. The request, dated March 3, 2000, stated that the information should meet the
requirements of FAR §45.505-1, "Basic Information," and should be provided by March 15,
2000. CPO staff stated that they became aware of potential property management issues when
one contractor could not provide the requested information on a timely basis. During Fiscal
Year 1999 over $18 million in Government property was provided to this contractor.

Complete information on the total value of the equipment held by FSA contractors was not
available, as the Department had not enforced the requirement that contractors submit this
information on an annual basis. In fact, the information provided by the three contractors in
response to CPO's March 3, 2000, request did not include unit prices as requested by CPO. FAR
§45.505-1 cited in the request specifically includes unit price as part of the basic information
required in Government property records. (See Finding No.1 for further discussion of this
issue.)




4
    See sections 141 and 142 of the Higher Education Act of 1965, as amended.


ED-OIG/A19-B0001                                                                    Page 9
             OBJECTIVES, SCOPE, AND METHODOLOGY


The objectives of our audit were to (1) determine whether computer equipment furnished to FSA
contractors was properly accounted for and identified as the Department's property, and (2)
evaluate procedures for identifying and controlling the use of equipment furnished to FSA
contractors.

To accomplish our objectives, we obtained an understanding of the controls in place at the
Department over the monitoring of Government property. We reviewed the Federal Acquisition
Regulation, Departmental policies and procedures, and General Accounting Office Standards for
Internal Control in the Federal Government. We conducted interviews with CPO and FSA
management and officials involved in the contracts reviewed. We also reviewed contract files,
invoices, and other documentation available at the Department to evaluate the monitoring of
Government property.

To select individual contractors to be reviewed, we reviewed a listing prepared by CPO staff of
active FSA contracts that indicated for most contracts whether Government property was
included. We validated the completeness of the FSA contracts listed with a prior listing of FSA
contracts received from CPO for another assignment. In total, 59 active FSA contracts were
listed. We also reviewed listings of Government property submitted by the contractors in
response to the CPO request in March 2000. CPO did not have complete information for all
contracts, so we contacted individual Contracting Officers and Contract Specialists to determine
whether Government property was included in contracts for which information was not provided.
We determined that 31 of the 59 active FSA contracts included Government property. We
judgmentally selected three contracts with significant amounts of Government property for our
individual contractor reviews.

During our individual contractor audits, we validated listings of Government property that the
contractors provided to FSA with the actual physical equipment located at contractor facilities.
We also selected items at the contractor locations and traced those items back to the listings
provided FSA. Attachment 1 lists the individual contractor audit reports issued. Those reports
provide the details of data reviewed at each contractor.

We reviewed the Department's Government Performance and Results Act report, 1999
Performance Reports and 2001 Plans, to determine whether the Department had established any
performance indicators applicable to the management of Government property. While the report




ED-OIG/A19-B0001                                                                  Page 10
includes an indicator for evaluation of performance-based contracts,5 no indicator has been
established related to the management of Government property.

We performed our fieldwork at applicable Department of Education offices in Washington, DC,
during the period October 2000 through September 2001. We also visited contractor facilities in
Meriden, Connecticut; Rockville, Maryland; Falls Church, Virginia; and Greenville, Texas. Our
visits to the contractor facilities were made during the period December 2000 through May 2001.
An exit conference was held with Department officials on September 25, 2001. Our audit was
performed in accordance with Government Auditing Standards appropriate to the scope of the
review described above.




5
 Indicator 4.6b, "Evaluation of contracts will indicate that better than fully successful performance, including
quality, cost control, timeliness, and other factors, is being received by the Government and the taxpayer."

ED-OIG/A19-B0001                                                                                   Page 11
            STATEMENT ON MANAGEMENT CONTROLS



As part of our review, we assessed the system of management controls, policies, procedures, and
practices applicable to the management of Government property under FSA contracts. Our
assessment was performed to determine the level of control risk for determining the nature,
extent, and timing of our substantive tests to accomplish the audit objectives.

For the purpose of this report, we assessed and classified the significant controls into the
following categories:

•   Reconciliation of purchases of Government property;
•   Approval of contractor property management systems;
•   Review of required reports; and
•   Utilization and disposition of Government property.


Because of inherent limitations, a study and evaluation made for the limited purpose described
above would not necessarily disclose all material weaknesses in the management controls.
However, our assessment disclosed significant management control weaknesses that adversely
affected FSA's ability to manage Government property held by its contractors. These
weaknesses and their effects are fully discussed in the AUDIT RESULTS and OTHER
MATTERS sections of this report.




ED-OIG/A19-B0001                                                                    Page 12
             ATTACHMENT 1 -- Contractor Reports Issued


Audit of Controls over Government Property Furnished to Computer Sciences Corporation, ED-
OIG/A19-B0003, March 19, 2001


Audit of Controls over Government Property Furnished to Affiliated Computer Services, Inc.,
ED-OIG/A19-B0004, April 20, 2001


Audit of Controls over Government Property Managed by Raytheon Systems Company, ED-
OIG/A19-B0005, September 19, 2001




ED-OIG/A19-B0001                                                               Page 13