oversight

Performance Audit of Incurred Costs - Raytheon BBN Technologies

Published by the National Science Foundation, Office of Inspector General on 2017-09-14.

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

Performance Audit of Incurred Costs –
Raytheon BBN Technologies
REPORT PREPARED BY COTTON & COMPANY LLP




September 14, 2017
OIG 17-1-007
AT A GLANCE
Performance Audit of Incurred Costs – Raytheon BBN Technologies
Report No. OIG 17-1-007
September 14, 2017

AUDIT OBJECTIVE
The National Science Foundation Office of Inspector General engaged Cotton & Company LLP
(Cotton) to conduct a performance audit of incurred costs at Raytheon BBN Technologies (Raytheon
BBN) for the period October 1, 2012, to September 30, 2015. The audit encompassed more than $49
million comprising all costs claimed to NSF. The objective of the audit was to determine if costs
claimed by Raytheon BBN during this period were allocable, allowable, reasonable, and in conformity
with NSF award terms and conditions and applicable Federal financial assistance requirements. Cotton
is responsible for the attached auditor’s report and the conclusions expressed in this report. NSF OIG
does not express any opinion on the conclusions presented in Cotton’s audit report.

AUDIT RESULTS
Costs Raytheon BBN charged to its NSF-sponsored agreements did not always comply with Federal
and NSF award requirements. The auditors questioned $96,106 of costs claimed by Raytheon BBN
during the audit period. Specifically, the auditors found Raytheon BBN did not ensure that all costs
claimed by sub-awardees were allowable in accordance with the applicable cost principles and Federal
regulations before it charged the expenses to NSF. As a result, Raytheon BBN claimed $96,106 of
unsupported or unallowable costs incurred by sub-awardees.

RECOMMENDATIONS
The auditors included one finding in the report with associated recommendations for NSF to resolve
the questioned costs and to ensure Raytheon BBN strengthens administrative and management
controls.

AUDITEE RESPONSE
Raytheon BBN reviewed the findings and agreed to repay NSF the entire $96,106 of sub-awardee
questioned costs. Raytheon BBN recognized the importance of having the right administrative and
management oversight and proper controls in place to govern sub-awardees’ spending. Raytheon BBN
will continue to update and enhance its oversight and controls and take into consideration the
recommendations contained in the report for future process improvements in order to help ensure that
all costs are current, accurate, and complete. Raytheon BBN’s response is attached in its entirety to the
report as Appendix B.

FOR FURTHER INFORMATION, CONTACT US AT (703) 292-7100 OR OIG@NSF.GOV.
MEMORANDUM

TO:            Dale Bell
               Director
               Division of Institution and Award Support

               Jamie French
               Director
               Division of Grants and Agreements


FROM:          Mark Bell
               Assistant Inspector General
               Office of Audits

DATE:          September 14, 2017

SUBJECT:       Audit Report No. 17-1-007, Raytheon BBN Technologies

This memo transmits the Cotton & Company LLP (Cotton) report for the audit of costs totaling
approximately $49 million charged by Raytheon BBN Technologies (Raytheon BBN) to its sponsored
agreements with the National Science Foundation (NSF) during the period October 1, 2012, to
September 30, 2015. The objective of the audit was to determine if costs claimed by Raytheon BBN
during this period were allocable, allowable, reasonable, and in conformity with NSF award terms and
conditions and applicable Federal financial assistance requirements.

In accordance with Office of Management and Budget Circular A-50, Audit Followup, please provide a
written corrective action plan to address the report recommendations. In addressing the report’s
recommendations, this corrective action plan should detail specific actions and associated milestone
dates. Please provide the action plan within 60 calendar days of the date of this report.

OIG Oversight of Audit

To fulfill our monitoring responsibilities, the Office of Inspector General:

   •   reviewed Cotton’s approach and planning of the audit;
   •   evaluated the qualifications and independence of the auditors;
   •   monitored the progress of the audit at key points;
   •   coordinated periodic meetings with Cotton, as necessary, to discuss audit progress, findings, and
       recommendations;
   •   reviewed the audit report prepared by Cotton to ensure compliance with generally accepted
       government auditing standards; and
   •   coordinated issuance of the audit report.
We thank your staff for the assistance that was extended to the auditors during this audit. If you have
any questions regarding this report, please contact Jeremy Hall at 703-292-7100.

Attachment

cc:
 John Anderson              Fae Korsmo                  Carrie Davison              Ken Lish
 John Veysey                Teresa Grancorvitz          Allison Lerner              Billy McCain
 Ann Bushmiller             Pamela Hawkins              Ken Chason                  Jeremy Hall
 Christina Sarris           Alex Wynnyk                 Susan Carnohan
 Joan Ferrini-Mundy         Rochelle Ray                Dan Buchtel
           RAYTHEON BBN TECHNOLOGIES


     PERFORMANCE AUDIT OF INCURRED COSTS FOR
       NATIONAL SCIENCE FOUNDATION AWARDS
FOR THE PERIOD OCTOBER 1, 2012, TO SEPTEMBER 30, 2015



           NATIONAL SCIENCE FOUNDATION
           OFFICE OF INSPECTOR GENERAL
                                                                TABLE OF CONTENTS
I.    BACKGROUND ................................................................................................................................................... 1
II. AUDIT RESULTS ................................................................................................................................................ 2
       FINDING 1: SUB-AWARD EXPENSES NOT ALLOCABLE TO NSF AWARDS .............................................................. 3
APPENDIX A: SCHEDULE OF QUESTIONED COSTS BY FINDING .............................................................. 7
APPENDIX B: RAYTHEON BBN TECHNOLOGIES RESPONSE ..................................................................... 9
APPENDIX C: OBJECTIVES, SCOPE, AND METHODOLOGY...................................................................... 12
                              NATIONAL SCIENCE FOUNDATION
                          PERFORMANCE AUDIT OF INCURRED COSTS
                              RAYTHEON BBN TECHNOLOGIES

I. BACKGROUND

The National Science Foundation (NSF) is an independent Federal agency whose mission is to
promote the progress of science; to advance the national health, prosperity, and welfare; and to
secure the national defense. Through grant awards, cooperative agreements, and contracts, NSF
enters into relationships with non-Federal organizations to fund research and education
initiatives and to assist in supporting its internal financial, administrative, and programmatic
operations.

Most Federal agencies have an Office of Inspector General (OIG) that provides independent
oversight of the agency’s programs and operations. Part of NSF OIG’s mission is to conduct
audits and investigations to prevent and detect fraud, waste, and abuse. In support of this
mission, NSF OIG may conduct independent and objective audits, investigations, and other
reviews to promote the economy, efficiency, and effectiveness of NSF programs and operations,
as well as to safeguard their integrity. NSF OIG may also hire a contractor to provide these audit
services.

NSF OIG engaged Cotton & Company LLP (referred to as “we”) to conduct a performance audit
of costs incurred by Raytheon BBN Technologies (Raytheon BBN). Raytheon BBN was
established in its current form in October 2009 when Raytheon, a for-profit company that
specializes in defense contracting, acquired BBN Technologies, a research and development
services firm. At the time of the acquisition, BBN Technologies had been awarded 11 NSF
awards (grants and cooperative agreements), and it received an additional seven NSF awards
after the acquisition. During our audit period of October 1, 2012, through September 30, 2015,
Raytheon BBN claimed more than $49 million in expenditures on Federal Financial Reports
(FFRs) and through the Award Cash Management $ervice (ACM$) related to nine NSF awards.
Figure 1 illustrates the costs claimed by budget category, based on the accounting data provided
by Raytheon BBN.




                                                                                           Page | 1
Figure 1: Costs Claimed by NSF Budget Category from October 1, 2012, to September 30,
2015




                     Salaries and Wages    Sub-awards     Other Direct Costs   Indirect Costs

Source: Auditor analysis of accounting data provided by Raytheon BBN.

This performance audit, conducted under Contract No. D15PB00570, was designed to meet the
objectives identified in the Objectives, Scope, and Methodology (OSM) section of this report and
was conducted in accordance with Generally Accepted Government Auditing Standards, issued
by the U.S. Government Accountability Office. We communicated the results of our audit and
the related findings and recommendations to Raytheon BBN and the NSF OIG.

II. AUDIT RESULTS

As described in the OSM section of this report, this performance audit included obtaining
transaction-level data for all costs that Raytheon BBN claimed on NSF awards during the audit
period. We judgmentally selected a sample of 250 transactions totaling $2,832,138. This sample
included 50 transactions totaling $284,778 that we selected from Raytheon BBN’s general ledger
and 200 transactions totaling $2,547,360 that we selected from general ledger detail records that
Raytheon BBN’s sub-awardees provided to support amounts invoiced to Raytheon BBN.

Based on the results of our testing, we determined that Raytheon BBN did not always comply
with all Federal, NSF, and organization-specific requirements. As a result, we questioned
$96,106 in costs claimed by Raytheon BBN during the audit period. Specifically, we noted that
Raytheon BBN does not have sufficient policies and procedures in place to ensure that all costs
claimed by sub-awardees conformed to NSF award terms and conditions and applicable Federal
financial assistance requirements.



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We provide a breakdown of the questioned costs by finding in Appendix A of this report.

Finding 1: Sub-Award Expenses Not Allocable to NSF Awards

Raytheon BBN did not ensure that all costs claimed by sub-awardees were allowable in
accordance with the applicable cost principles and Federal regulations before it charged the
expenses to NSF. As a result, Raytheon BBN claimed $96,106 of unsupported or unallowable
costs incurred by sub-awardees. Specifically, we noted the following:

   •   NSF Award
       Langston University was unable to provide transaction-level detail to support $23,861
       that it invoiced Raytheon BBN for expenses incurred for the period from September 1,
       2008, to March 31, 2012. As the university was unable to support that the costs billed to
       Raytheon BBN were allocable to the NSF award in accordance with 2 Code of Federal
       Regulations (CFR) 220 and the NSF Award and Administration Guide (AAG), we were
       unable to determine the allowability of the claimed costs. We are therefore questioning
       the total invoice amount of $23,861.

   •   NSF Award
       The University of Houston included scholarship and fellowship expenses in the modified
       total direct cost (MTDC) base used to calculate indirect expenses for an invoice that the
       university submitted to Raytheon BBN for expenses incurred from October 1, 2011, to
       November 30, 2012. As 2 CFR 220 specifically states that scholarship and fellowship
       expenses should not be included in the MTDC base, we are questioning $1,158 of
       unallowable indirect costs.

   •   NSF Award
       ON.LAB’s invoices to Raytheon BBN for expenses incurred in October 2012 and
       February 2013 included $6,971 of costs associated with unsupported salary expenses.
       ON.LAB was unable to provide documentation to support that the costs incurred were
       allocable to the NSF award in accordance with 2 CFR 220 and the NSF AAG. We are
       therefore questioning $6,971 of unsupported salary expenses.

       Stanford University included personal travel expenses in an invoice submitted to
       Raytheon BBN for costs incurred during the period from October 1, 2009, to March 31,
       2012. As 2 CFR 220 and the NSF AAG require expenses to be allocable to the awards
       charged and the personal travel was not incurred for the purposes of this award, we are
       questioning $307 of unallocable travel expenses.

   •   NSF Award
       Wayne State University included unreasonable salary expenses in an invoice submitted to
       Raytheon BBN for work performed in June, July, and August 2012. Specifically, the
       university claimed $30,680 in salary expenses paid to a post-doctoral student for work
       performed during the 3-month summer period; however, the post-doctoral student’s
       annual salary, which was not established until after the summer period, was $30,000 for a




                                                                                          Page | 3
        12-month appointment. 1 As 2 CFR 220 and the NSF AAG require awardees to charge
        salary at a rate not in excess of the base salary divided by the period to which the base
        salary relates, paying this employee based on a higher rate caused the university to charge
        unallowable expenses to the award. We are therefore questioning $47,764 of salary,
        fringe, and indirect expenses inappropriately charged to this award.

        Indiana University included non-grant-related travel expenses in an invoice submitted to
        Raytheon BBN for costs incurred in August 2012. Specifically, the invoice included non-
        business travel expenses and travel expenses that should have been allocated to another
        agreement that the university had with Raytheon BBN at the time. As 2 CFR 220 and the
        NSF AAG require expenses to be allocable to the awards charged, and as the travel
        identified was not incurred for the purposes of this award, we are questioning $791 of
        unallocable travel expenses.

    •   NSF Award
        Indiana University included unreasonable salary expenses in an invoice submitted to
        Raytheon BBN for work performed in June 2015. Specifically, the invoice claimed
        $14,779 for salary provided as termination pay to an employee who underwent a change
        in appointment status during the sampled month. 2 The sub-awardee acknowledged that it
        had incorrectly allocated the termination pay to the project. As 2 CFR 220 and the NSF
        AAG require expenses to be allocable to the award charged, we are questioning $14,779
        of unallocable salary expenses.

        The Georgia Tech Research Corporation included tuition remission expenses in the
        MTDC base used to calculate indirect costs invoiced to Raytheon BBN for expenses
        incurred from November 1 to December 31, 2014. As 2 CFR 220 specifically states that
        tuition remission expenses should not be included in the MTDC base, we are questioning
        $475 of indirect costs that should not have been charged to this award.

Because Raytheon BBN was responsible for monitoring sub-award spending, it is responsible for
the unallowable costs identified above, per the policies and procedures outlined in NSF’s AAG.
Specifically, Chapter V, Section A of NSF’s AAG states that sub-awardees under NSF grants are
subject to those cost principles and procedures appropriate to the sub-award type, and that the
grantee organization is ultimately responsible for ensuring that all costs charged to NSF awards
meet the requirements of the applicable cost principles, grant terms and conditions, and other
specific award or program requirements.




1
  The sub-awardee stated that after hiring the post-doctoral student in June 2012, 9 months after the NSF
award became effective, it paid the individual the full amount of the Year One funding budgeted for this
position.
2
  When an employee of the sub-awardee undergoes a change in appointment status, the sub-awardee pays
out the accumulated leave balance to the employee as termination pay; this amount is allocated across
projects in accordance with the employee’s effort.


                                                                                                  Page | 4
Raytheon BBN’s invoice review process did not require sub-awardees to provide documentation
to support the total costs claimed on each invoice, and Raytheon BBN does not obtain or review
supporting documentation to identify unallowable costs billed by sub-awardees. As a result,
Raytheon charged NSF for costs that were not allocable, reasonable, or allowable with regard to
NSF awards. We are therefore questioning $96,106 of sub-award expenses charged to NSF, as
shown in Table 1:

                 Table 1: Questioned Sub-Award Expenses Charged to NSF
                   NSF Award No.        FYs       Questioned Costs
                                     2008-2012               $23,861
                                     2012-2013                 1,158
                                     2012-2013                 7,278
                                       2012                   48,555
                                       2015                   15,254
                  Total Questioned Costs                     $96,106
                 Source: Auditor analysis of non-compliant transactions.

Recommendations

We recommend that NSF’s Director of the Division of Institution and Award Support request
that Raytheon BBN:

   1. Repay NSF the $96,106 of questioned costs.

   2. Strengthen the administrative and management controls and processes related to sub-
      awardee invoices that are charged to Federal awards. Processes could include:

           a. Requiring sub-awardees to periodically provide documentation supporting the
              total costs invoiced during the period and requiring appropriate Raytheon BBN
              personnel to judgmentally review the supporting documentation for a sample of
              high-risk expenditures before approving the invoice for payment.

           b. Recalculating the appropriate amount of indirect costs billed in an invoice to
              ensure that the sub-awardee used the appropriate MTDC base.

Raytheon BBN Response: Raytheon BBN agreed to repay NSF the $96,106 of questioned costs
identified in Table 1 above and noted that it has already refunded the $14,778 in questioned costs
associated with the Indiana University sub-award. Raytheon also stated that it will take
Recommendation 2 into consideration as it continues to update and enhance its oversight and
controls to ensure that all costs are current, accurate, and complete.




                                                                                          Page | 5
Auditors’ Additional Comments: Our position regarding this finding does not change.


COTTON & COMPANY LLP




                                                                                      Page | 6
APPENDIX A: SCHEDULE OF QUESTIONED COSTS BY FINDING




                                                      Page | 7
                                                                      APPENDIX A


                        NATIONAL SCIENCE FOUNDATION
                             ORDER # D15PB00570
               PERFORMANCE AUDIT OF COSTS CLAIMED ON NSF AWARDS
                         RAYTHEON BBN TECHNOLOGIES

                      SCHEDULE OF QUESTIONED COSTS BY FINDING


                                                             Total Questioned Costs
Finding         Description            NSF Award No.       Unsupported Unallowable
                                                                $23,861
                                                                               $1,158
          Sub-Award Expenses Not
   1                                                                            7,278
          Allocable to NSF Awards
                                                                               48,555
                                                                               15,254
Total                                                           $23,861       $72,245




                                                                           Page | 8
APPENDIX B: RAYTHEON BBN TECHNOLOGIES RESPONSE




                                                 Page | 9
APPENDIX B




   Page | 10
APPENDIX B




   Page | 11
APPENDIX C: OBJECTIVES, SCOPE, AND METHODOLOGY




                                                 Page | 12
                                                                                       APPENDIX C


                           OBJECTIVES, SCOPE, AND METHODOLOGY

The NSF OIG Office of Audits engaged Cotton & Company LLP (referred to as “we” in this
report) to conduct a performance audit of costs that Raytheon BBN incurred on NSF awards for
the period from October 1, 2012, to September 30, 2015. The objective of the audit was to
determine if costs claimed by Raytheon BBN during this period were allocable, allowable,
reasonable, and in conformity with NSF award terms and conditions and applicable Federal
financial assistance requirements.

Our work required us to rely on computer-processed data obtained from Raytheon BBN and NSF
OIG. NSF OIG provided data on each award that Raytheon BBN reported on FFRs and through
ACM$ during our audit period, and Raytheon BBN provided detailed transaction-level data for
all costs charged to NSF awards during the period. This resulted in a total audit universe of
$49,586,697 in costs claimed on nine NSF awards.

We assessed the reliability of the data provided by Raytheon BBN by (1) reviewing costs
charged to NSF award accounts per Raytheon BBN’s accounting records and comparing them to
reported net expenditures, as reflected in Raytheon BBN’s quarterly financial reports and ACM$
drawdown requests submitted to NSF for the corresponding periods; and (2) reviewing the
parameters that Raytheon BBN used to extract transaction data from its accounting records and
systems.

Based on our assessment, we found Raytheon BBN’s computer-processed data to be sufficiently
reliable for the purposes of this audit. We did not review or test whether the data contained in, or
the controls over, NSF’s databases were accurate or reliable; however, the independent auditor’s
report on NSF’s financial statements for fiscal year 2016 found no reportable instances in which
NSF’s financial management systems did not substantially comply with applicable requirements.

Raytheon BBN management is responsible for establishing and maintaining effective internal
controls to help ensure that Federal award funds are used in compliance with laws, regulations,
and award terms. In planning and performing our audit, we considered Raytheon BBN’s internal
control solely for the purpose of understanding the policies and procedures relevant to the
financial reporting and administration of NSF awards, to evaluate Raytheon BBN’s compliance
with laws, regulations, and award terms applicable to the items selected for testing, but not for
the purpose of expressing an opinion on the effectiveness of Raytheon BBN’s internal control
over award financial reporting and administration. Accordingly, we do not express an opinion on
the effectiveness of Raytheon BBN’s internal control over its award financial reporting and
administration.

After confirming the accuracy of the data provided but before performing our analysis, we
reviewed all available accounting and administrative policies and procedures, relevant
documented management initiatives, previously issued external audit reports, and desk review
reports to ensure that we understood the data and that we had identified any possible weaknesses
within Raytheon BBN’s system that warranted focus during our testing.




                                                                                           Page | 13
                                                                                          APPENDIX C

We began our analytics process by reviewing the transaction-level data that Raytheon BBN
provided. We summarized the total costs claimed by NSF budget category and noted that sub-
award expenses represented    percent of the total direct costs claimed during our audit period.
We then summarized the total expenses by award number and determined that, for six of the nine
NSF awards, sub-award expenses represented more than percent of the costs claimed. The
table below shows sub-award costs claimed and total costs claimed for each of the nine NSF
awards.

                        NSF Award          Sub-Award             Total Costs
                           No.            Costs Claimed           Claimed
                                                                       $40,875
                                                                     1,456,401
                                                                     1,743,494
                                                                     1,785,564
                                                                        79,126
                                                                    12,620,235
                                                                    11,507,411
                                                                    15,193,083
                                                                     5,093,304
                  Source: Auditor analysis of accounting data provided by Raytheon BBN.

As sub-awards do not typically represent such a large portion of awardee expenses, we discussed
the audit population with NSF OIG and agreed to use different sample selection and testing
methodologies based on the amount of funding spent on sub-awards.

For the three awards that did not incur sub-award costs, we:

   1. Judgmentally reviewed all costs charged to the NSF award per Raytheon BBN’s general
      ledger and selected a sample of 50 expenses to test.

   2. Provided Raytheon BBN with a list of the sampled expenditures and requested
      documentation to support the sampled transactions.

   3. Reviewed the documentation that Raytheon BBN provided to support the sampled
      expenditures and requested additional documentation and justifications as necessary to
      evaluate whether the expenses were allocable, reasonable, and allowable with regard to
      the NSF awards charged.

For the six awards for which sub-award expenses represented more than 84 percent of the costs
claimed, we:

   1. Judgmentally reviewed all relevant sub-award transactions identified in Raytheon BBN’s
      general ledger and selected a sample of large-dollar sub-award expenses from a variety of
      sub-awardees. For each sub-award expense sampled, we requested that Raytheon:

           a. Provide documentation from the sub-awardee to support the total costs claimed
              per the general ledger, including the sub-awardee’s invoice.


                                                                                             Page | 14
                                                                                    APPENDIX C

           b. Contact the sub-awardee and request that it provide Cotton & Company with the
              general ledger data supporting the total cost claimed per the sampled invoice.

   2. Performed the following steps upon receiving the general ledger detail from the sub-
      awardees:

           a. Reconciled the general ledger amount to the total claimed per the sampled invoice
              and investigated all discrepancies identified.

           b. Verified that the sub-awardee appropriately applied all indirect costs to the
              invoiced expenses in accordance with the sub-awardee’s Negotiated Indirect Cost
              Rate Agreement (NICRA).

           c. Selected a sample of one or more transactions from the general ledger data
              provided until we had selected 200 transactions.

           d. Requested and reviewed all documentation provided by the sub-awardees to
              support the 200 sampled expenditures and requested additional documentation
              and justifications as necessary to evaluate whether the expenses were allocable,
              reasonable, and allowable with regard to the NSF awards charged.

At the conclusion of our fieldwork, we provided a summary of our results to NSF OIG personnel
for review. We also provided the summary of results to Raytheon BBN personnel to ensure that
they were aware of each of our findings and did not have any additional documentation available
to support the questioned costs.

We conducted this performance audit in accordance with Generally Accepted Government
Auditing Standards. Those standards require us to obtain reasonable assurance that the evidence
provided is sufficient and appropriate to support the auditors’ findings and conclusions in
relation to the audit objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.




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