Los Angeles Unified School District Office of the Inspector General Contract Audit Unit Contract Audit Report

Transcription

1 Los Angeles Unified School District Office of the Inspector General Contract Audit Unit Contract Audit Report Incurred Cost Audit Science Applications International Corp. Contract No CA November 16, 2007

2 November 15, 2007 Mr. Duane Johnson Chief Procurement Officer Procurement Services Group Los Angeles Unified School District 333 South Beaudry Avenue, 28 th Floor Los Angeles, California Dear Mr. Johnson: This is our report on the incurred cost audit of Science Applications International Corporation (SAIC), Contract No The report addresses the reasonableness of the costs claimed and whether the costs incurred, were allowable and adequately supported. The report also addresses the contractor s compliance with the terms of the contract. I appreciate your continued support for our contract audit services. Sincerely, /s/ Austin E. Onwualu, CPA, CIG Deputy Inspector General, Contract Audit

3 EXECUTIVE SUMMARY We audited the costs claimed by Science Applications International Corporation (SAIC) under Contract No (Contract) with the Los Angeles Unified School District (LAUSD) to determine whether the costs claimed by SAIC were incurred, allowable, adequately supported, and in compliance with the terms and conditions of the Contract. Our audit disclosed the following: SAIC billed $59,040 of direct labor charges for holidays, vacations, or time not spent working on this Contract. SAIC billed $3,660 of unsupported direct labor charges for a subcontractor s employee. SAIC s internal controls over direct labor timekeeping and invoicing, as well as contract requirement administration and compliance, were inadequate. SAIC utilized the services of two subcontractors to provide extensive direct labor services under this Contract without authorization from LAUSD. SAIC did not name LAUSD and the Los Angeles City Board of Education as additional insureds as required. SAIC was not in compliance with the felony background verification and certification requirement of the Contract. INTRODUCTION On March 30, 2003, LAUSD executed Master Information Technology Service and Support Agreement No (Contract) with SAIC with a retroactive effective date of January 31, It established general terms and conditions for the future provision of information technology services related to LAUSD s operations on a work order basis through June 30, Amendment No.1 dated March 24, 2004, revised several sections of the Contract, including the insurance requirements. Amendment #2 dated March 30, 2005, authorized the addition of a Data Center and Short Term Technical Services, and extended the Contract through June 30, The Contract did not specify a dollar amount, although the cumulative authorized value of the seven work orders issued through June 30, 2005 was $3,550,832. As of June 30, 2005, $1,566,438 remained unbilled. Work orders entered into between LAUSD and SAIC incorporated the Contract by reference. The mandatory format of each work order defined specific services for SAIC to perform along with provisions for payment, terms for performance, and other unique provisions. No subcontractors were authorized to perform any work under any of the work orders. The seven work orders with the amounts authorized, billed and unbilled, are detailed in the following table. 1

4 Table I-0 Schedule of Work Orders Authorized, Billed and Unbilled As of June 30, 2005 Work Order No. Amount Authorized Amount Billed Amount Unbilled 1 $ 435,200 $ 435,200 $ , , , ,346, , , , , , , , , ,792 47,564 6, ,800 52,800 0 Totals $3,550,832 $1,984,394 $1,566,438 SCOPE AND OBJECTIVE The purpose of the audit was to determine whether the costs billed were incurred, allowable, adequately supported, and in compliance with the terms and conditions of the Contract and whether SAIC complied with the terms and conditions of the Contract. The audit was conducted from June 15, 2005 through August 24, 2005, and covered costs billed through June 30, The audit was conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) and included tests of SAIC records and the performance of such other auditing procedures as were deemed necessary in the circumstances. METHODOLOGY We (i) reviewed bid documents and briefed the Contract obtain an understanding of the Contract requirements, (ii) interviewed LAUSD personnel to obtain an understanding of the contracting process, compensation requirements, and other non-cost provisions of the Contract, (iii) interviewed key SAIC personnel to obtain an understanding of their administrative competency, SAIC invoicing policies and procedures and the internal controls in effect, (iv) conducted entrance conferences with both LAUSD and SAIC management personnel, (v) conducted an exit conference with SAIC s local management personnel and discussed the findings generated by the audit, (vi) obtained SAIC s written response to the findings and incorporated them into the report, (vii) statistically selected a sample of 43 invoices (viii) verified the mathematical accuracy of the the selected invoices, and (ix) tested the number of hours and the labor rates used to calculate the labor charges to ensure each was accurate and prepared in accordance with the terms of the Contract. Because SAIC did not provide proof of payment of its employees direct labor hours, we performed alternative audit procedures consisting of interviewing the staff whose charges were selected for testing. Additionally, we asked said staff to complete a questionnaire that asked them to confirm that they worked the hours billed and were paid for those hours. Because we found a number of overcharges for holiday, vacation and sick leave hours, we judgmentally scanned other invoices not in our statistical sample and their supporting documentation to see if similar 2

5 problems existed. We reviewed each work order to determine the nature and timing of authorized work and the staff that was authorized to perform the work. We verified that SAIC maintained the required insurance coverage during the period under audit. We reviewed the certificates of insurance to determine that LAUSD and the Los Angeles City Board of Education were both named as additional insureds under the policies. We reviewed SAIC s compliance with the felony certification requirement of the Contract. We inquired of both LAUSD and SAIC s management personnel relative to the occurrence of fraud relative to this Contract and documented their responses. We inquired of key LAUSD management personnel relative to the satisfactory performance of the Contract work by SAIC and documented their responses. EVALUATION OF INTERNAL CONTROLS In connection with our audit, we examined SAIC s system of internal controls over the direct labor recording and reporting function. We also examined SAIC s system of internal controls over the contract administration and record keeping functions relative to this Contract. We found that SAIC s internal controls over the direct labor recording, reporting and invoice preparation functions were inadequate because during our testing we determined that SAIC billed for hours that were not worked and used individuals who were not authorized to work under one of the work orders. SAIC s policies and procedures over timesheet reporting did not require review by a supervisor on site where the work was performed. Other problems pertained to the invoice preparation function that did not follow an established monthly schedule; invoices did not always cover in general the same number of days, invoices billed for hours not worked on the LAUSD project, and other miscellaneous problems. We found SAIC s internal controls over the contract administration function inadequate because SAIC failed to advise LAUSD that it planned to use subcontractors to perform a substantial portion of the direct labor work and failed to obtain prior written approval for the use of subcontractors. We found that SAIC failed to meet the Contract requirements relative to the Department of Justice (DOJ) felony background verification and certification. SAIC also failed to name LAUSD and the Los Angeles City Board of Education as additional insureds on its Errors and Omissions (E&O) insurance certificates. PRIOR AUDIT COVERAGE We have not conducted any previous contract audits on SAIC. However, SAIC s local operations were audited by the Defense Contract Audit Agency (DCAA) and an external independent CPA firm. We reviewed a copy of the latest DCAA report. The DCAA report covered the Labor Accounting System Internal Controls. The report concluded that the labor accounting system and related internal control policies and procedures of SAIC were adequate. It also found that SAIC implemented adequate corrective actions regarding prior report findings relative to the report dated September 30,

6 RESULTS OF AUDIT 1. Claimed Costs, Questioned Costs, and Unsupported Costs Table I-1 Direct Labor, Mileage, Total Billed, Unsupported Cost and Questioned Cost Direct Labor Billed Mileage Total Paid Unsupported Cost Questioned Cost $1,984,394 $0 $1,805,855 $3,660 $59,040 SAIC billed a total of $1,984,394 for direct labor. It did not bill any mileage reimbursement. The audit questioned $59,040 and found $3,660 in unsupported costs. The details of these unsupported and questioned costs are provided in the Direct Labor section below. 2. Direct Labor SAIC billed LAUSD for direct labor costs by listing each direct labor charge on the invoices. However, SAIC did not submit any timesheets with the invoices. SAIC also was not required to submit a transcript of the hours worked by each employee each week with the invoices. Instead, the transcript that accompanied the invoices only reflected the total hours billed for each employee. As a result, LAUSD did not have a representation from SAIC of the daily or weekly hours actually billed under each invoice. SAIC also indicated that LAUSD allowed it to bill retroactively for hours worked but not billed in a timely manner, without having to provide on the invoices any information or detail about the retroactive billings. SAIC was also allowed to bill at will, without having to bill for a finite period of time such as for one month, or by a specified due date, contrary to Section 14.1 of the Contract requiring billings on a monthly basis. This resulted in SAIC billing for uneven time periods and in LAUSD having insufficient information as to the actual hours worked and billed each week. SAIC did not bill based on the total number of hours worked in a given month. It also did not bill from its timesheets. In fact, rarely were the hours billed equal to the hours worked. Frequently, SAIC chose not to bill all hours reported on the timesheets. SAIC indicated it made the business decision not to bill all hours to LAUSD and would not be billing for unbilled hours. SAIC maintained its timesheets in electronic format. Each SAIC employee remotely updated the timesheet and submitted it electronically to SAIC on a weekly basis on Fridays. The timesheets were incorporated into the SAIC permanent accounting and billing system the same day. The SAIC contract manager reviewed the timesheet on her screen, to ensure the employee was charging the correct project before sending the timesheet to the permanent accounting and billing system. The SAIC contract manager was not onsite at LAUSD all week. She visited LAUSD on Tuesdays and/or Wednesdays. There was no SAIC supervisor onsite at LAUSD who reviewed the employees time charges prior to the timesheets being submitted to SAIC on Fridays. This practice has led to several instances of time billed that was not worked, one of which was identified Infrastructure Project Management while others were detected during the audit. 4

7 a. Questioned Cost We questioned $59,040 of direct labor charges billed by SAIC, itemized in Table I-2 below. The disallowed costs ranged from charges for an employee who was not authorized to work under one of the work orders, hours billed for holidays, vacations, and hours not worked on the project. For complete details documenting the questioned costs, refer to Schedule A of this report. SAIC Invoice Date Table I-2 Schedule of Questioned Cost Direct Labor Hours Direct Labor Rate Total Direct Labor SAIC Invoice# WO# Employee 09/16/ Riboni (IES) $ $1,840 06/08/ Bowden (IES) ,680 06/08/ Bowden (IES) ,280 09/21/ Miller (IES) /21/ Kim (IES) /15/ Miller (IES) ,200 09/16/ Walker (IES) ,840 12/14/ Miller (IES) ,040 Total questioned costs $59,040 SAIC stated that, prior to July 2005, SAIC had 13 accounting periods and that their invoices include all hours that hit the accounting period, not the timecards that were issued during the accounting period. Since July 2005, SAIC billed on a calendar month basis instead of the SAIC accounting months. SAIC added that comments should have been placed on the invoice stating that the labor being billed included labor for the previous time periods. This was being rectified on the current invoices. However, we found a number of errors that were not caused by SAIC s using 13 accounting periods or the haphazard timing of SAIC s invoices. A number of timesheets provided by SAIC show that SAIC billed and was paid for an employee who was not authorized to work under one of the work orders. Other timesheets reflected direct labor charges for holiday hours, vacation hours, sick leave hours, or hours not worked on the Contract. The charges were clearly erroneous and should not have been billed. Schedule A of this report provides further details. Contractor Response: In its written response, dated October 9, 2007, SAIC stated that its internal accounting period is based on 13 financial periods per year and therefore does not align with calendar months. This lack of alignment caused the majority of disputed amount. The disputed billings were fully supported by materials subsequently provided to the District. SAIC has made a number of improvements in its tracking and reporting of time to the District including billing on the basis of the calendar months and the providing all supporting documentation with each invoice. 5

8 b. Unsupported Costs We determined that $3,660 of the direct labor cost billed was unsupported because SAIC did not provide the requested supporting documentation to show that it had paid a subcontractor for the hours SAIC billed LAUSD. Schedule B of this report provides further details documenting the unsupported costs. SAIC indicated that it would try to locate the cancelled check for the $3,660 in direct labor charges. Contractor Response: In its written response, dated October 9, 2007, SAIC stated that it had provided the services of the subcontractor s employee for a number of months. The subcontractor invoiced SAIC for the services and SAIC paid the invoices. 3. Unauthorized Use of Subcontractors SAIC used unauthorized subcontractors to perform approximately 64 percent of the work completed to June 30, 2005 under this Contract. SAIC entered into subcontracts with two vendors to provide contract labor for LAUSD, yet none of the seven work orders authorized the use of subcontractors. On some work orders, the names of authorized individuals were listed, while in other work orders, only the labor categories were shown. Approximately 64 percent of the labor charges submitted by SAIC resulted from labor performed by contract labor working as SAIC employees, rather than from labor performed by SAIC employees. SAIC indicated that these individuals were not considered term-to-perm, or ones who became SAIC employees after a certain period of time. The contract labor was strictly subcontractor staff. LAUSD s Director of IT Infrastructure Project Management and LAUSD s Director of Network Operations, who were responsible for the work orders, were unaware that SAIC used subcontractors to perform the work. They were under the impression that all proposed and approved staff were employees of SAIC. SAIC was not in compliance with Contract requirements because it did not notify LAUSD that it planned to use subcontractors to perform work and did not obtain prior written authorization from LAUSD to use subcontractors. The auditors did not question the amounts billed for the individuals whose names were preapproved by LAUSD even though LAUSD did not know they were unauthorized subcontractor employees, since the services were performed and the individuals (if not the subcontractors) were pre-approved by LAUSD. SAIC stated that it would notify LAUSD of its intent to use subcontractor staff prior to their utilization in the future. 6

9 Contractor Response: In its written response, dated October 9, 2007, SAIC stated that had provided and will continue to provide the District with an indication of what staff is employed by SAIC, and what staff is under subcontract to SAIC in support of the District. 4. Insurance SAIC maintained the insurance coverages required by the Contract. However, SAIC s E&O insurance certificates submitted by SAIC to LAUSD failed to name LAUSD or the Los Angeles City Board of Education as additional insureds, as required by the Contract. Therefore, SAIC did not comply with the insurance requirements of the Contract. Contractor Response: In its written response, dated October 9, 2007, SAIC provided a current certificate of insurance that named the LAUSD as the additional insured. 5. Felony Background Verification and Certification SAIC did not conduct the required DOJ felony background verification for Work Orders 1 through 5. Work Orders 6 and 7 did not require SAIC staff to go to schools. SAIC also did not provide the required certifications to LAUSD. The LAUSD Director of IT Infrastructure Project Management indicated that not all SAIC employees went to schools but that a number of them went to schools without LAUSD supervisors accompanying them. As a result, the auditors determined that SAIC was required to comply with the requirements of California Education Code Section , which required SAIC to conduct felony background verifications through DOJ to ensure the safety of the students in the schools where SAIC s personnel worked unsupervised at times while students were in attendance. Because there was a possibility that any of SAIC s staff members working on Work Orders 1 through 5 could have been asked to go to a school site, it was imperative that the felony background verifications be conducted prior to the commencement of the work by each member of SAIC s staff and SAIC s subcontractors staff. Therefore, SAIC was not in compliance with the requirements of California Education Code Section , as stipulated under the Contract. According to SAIC, the fingerprinting was not required for Work Orders 6 through 8. The fingerprinting requirement applied for Michael Miller who worked on Work Order No. 5. SAIC corrected the problem by requesting DOJ clearance for Michael Miller. Contractor Response: In its written response, dated October 9, 2007 SAIC stated that it has been consistent in obtaining and maintaining DOJ background checks whenever required. However, the District did not indicate that the checks would be required for the work order staff, as the staff would be located at the District Headquarters and would make no unaccompanied visits to locations where students might be present. 7

10 6. Satisfactory Performance of the Work At the pre-audit meetings and through written confirmations, LAUSD s Director of IT Infrastructure Project Management and the Director of IT Network Operations both expressed overall satisfaction with the work performed to date by SAIC on behalf of LAUSD. Both individuals indicated that SAIC had performed all work required by the Contract and had billed according to the terms of the Contract. CONCLUSIONS AND RECOMMENDATIONS 1. We questioned $59,040 of direct labor charges because the hours billed were clearly for unallowable charges, such as holidays, vacations, hours not worked or employees not authorized to work on this Contract. We recommend that the Procurement Services Group seek reimbursement of $59,040 from SAIC. 2. We found $3,660 of unsupported direct labor charges. We recommend that the Procurement Services Group obtain supporting documents of the charges or seek reimbursement of $3,660 from SAIC. 3. SAIC s internal controls over direct labor timekeeping and invoicing, as well as contract requirement administration and compliance were inadequate to support the requirements of this Contract. We recommend that the Procurement Services Group provide additional oversight of SAIC. 4. SAIC used unauthorized subcontractors on this project. We recommend that the Procurement Services Group require SAIC to always obtain prior written approval from LAUSD prior to utilizing subcontractors on LAUSD projects. 5. SAIC s E&O certificates of insurance failed to name LAUSD and the Los Angeles City Board of Education as additional insureds. We recommend that the Procurement Services Group require SAIC to immediately submit to the Procurement Services Group corrected copies of the E&O certificates of insurance that name both LAUSD and the Los Angeles Board of Education as additional insureds. 6. SAIC was not in compliance with the felony background verification and certification requirement of the Contract. We recommend that the Procurement Services Group monitor SAIC s compliance with this requirement. REPORT DISTRIBUTION This report is privileged, confidential and prepared solely for the Procurement Services Group. This report may not be released, in full or in part, to any entity outside LAUSD or to any internal department without the prior approval of the Office of the Inspector General. Nunez & Associates, Inc North Harbor Boulevard, Suite 800 Fullerton, California AUDIT TEAM 8

11 Schedule A SCIENCE APPLICATIONS INTERNATIONAL CORP. CONTRACT Schedule of Questioned Cost (a) (b) (c) (d) (e) (a x b) (c - d) Direct Direct Direct Direct Item Work Invoice Invoice Labor Billing Labor Labor Labor Labor No. Order Date Number Employee Subcontractor Category Period Hours Rate Billed Supported Difference Reason Questioned 1 1 6/8/ Bowden IES Project Management 1/5/04-4/25/ $ $ 4, $ - $ 4, Lawrence Bowden, an IES contract employee, was never authorized to work on Work Order No. 1. SAIC timecards do not show the labor category. SAIC provided timecards supporting hours worked on this Work Order /8/ Bowden IES Library Management 3 3 9/16/ Riboni IES Scheduling and Task Planning Lead 1/5/04-4/25/04 8/14/04-9/10/ $ $ 41, $ - $ 41, Lawrence Bowden, an IES contract employee, was never authorized to work on Work Order No. 1. SAIC timecards do not show the labor category. SAIC provided timecards supporting hours worked on this Work Order $ $ 18, $ 16, $ 1, Riboni reported 8.0 hours as sick during week ending 9/5/04, and 8.0 hours as holiday during week ending 9/12/ x $ = $1, /16/ Walker IES Network Engineer II 8/14/04-9/10/ $ $ 3, $ - $ 3, Walker reported no time worked on LAUSD project numbers on timecards for the billing period /21/ Miller IES Network Engineer I 6 6 9/21/ Kim IES Network Engineer II /141/ Miller IES Network Engineer I 8/14/04-9/10/04 8/14/04-9/10/04 11/6/04-12/3/ $ $ 10, $ 9, $ Miller reported 8.0 hours as holiday during week ending 9/12/ x $65.00 = $ $ $ 12, $ 11, $ Kim reported 8.0 hours as holiday during week ending 9/12/ x $80.00 = $ $ $ 10, $ 9, $ 1, Miller reported 16.0 hours as vacation during week ending 11/28/ x $65.00 = $1, /15/ Miller IES Network Engineer I 1/1/05-01/28/ $ $ 15, $ 10, $ 5, Miller reported hours as worked during the 4 weeks ending 1/30/05, yet SAIC billed hours x $65.00 = $5, TOTAL $ 59, Page 1 of 1

12 SCHEDULE B SCIENCE APPLICATIONS INTERNATIONAL CORP. CONTRACT NO Schedule of Unsupported Cost (a) (b) (c) (d) (e) (a x b) (c - d) Direct Direct Direct Direct Item Work Invoice Invoice Labor Billing Labor Labor Labor Labor No. Order Date Number Employee Subcontractor Category Period Hours Rate Billed Supported Unsupported Reason Unsupported 1 6 4/5/ Berger TEK Network Engineer II 1/29/05-2/25/ $ $ 3, $ - $ 3, SAIC did not provide proof of payment to TEK. Page 1 of 1

13 Know about fraud, waste or abuse? Tell us about it. Maybe you are a School District Call the Hotline: employee, or maybe you are a private citizen. Either way, you (213) are a taxpayer. or LAUSD-OIG Maybe you know something about fraud, or waste, or some Write to us: other type of abuse in the School District. Fraud Hotline Center 333 S. Beaudry Ave., 12 th Fl. The Office of the Inspector General Los Angeles, CA has a hotline for you to call. You can also write to us. If you wish, we will keep your identity confidential. You can remain anonymous, if you prefer. And you are protected by law from reprisal by your employer. Website: